Here’s a man…
…who won two of these things…
…in two of these things…
…which contained this much water…
5,000,000
litres
…which is enough for one of these…
…for this long…
…during which time 5000 of these will get
filled…
…and each bottle has a farm-gate value
of:
The Economics of the Ruataniwha Dam –
Is it the son of Clyde?
A paper for the New Zealand Agricultural and Resource
Economics Society Conference
Nelson
28-29 August 2014
PJ Fraser
BJ Ridler
WA Anderson
Contents
• Outline of the Ruataniwha Dam proposal
• Side-by-side comparison – Clyde and
Ruataniwha
• Project economics
• Farm economics
• Alternative for consideration
• Conclusions
What’s being proposed?
The scheme consists of a 96 million
m³ storage reservoir located in the
upper Makaroro River, storing water
during periods of high flow and over
winter.
Water from the scheme can then be
released improving river flows in the
Tukituki Catchment through summer
for aquatic life and other river users,
while at the same time providing
secure water to irrigators.
The scheme will be funded by both
the public and private sector.
Side-by-side comparison
Clyde
Ruataniwha
•
Without development, hydro
potential ‘wasted’ – zero price water
•
Water is going into the sea so ‘wasted’
– zero price water
•
Water – hydro power – aluminium
•
Irrigation – milk solids – powder
•
Boost export earnings
•
Boost export earnings
•
Stem the decline of Dunedin
•
Stop Hawkes Bay sliding to third world
status
•
But… an earthquake fault led to
massive cost overruns and delay
•
Hey – there’s an earthquake fault here
too
•
But… No buyer for the power
•
Hey – is there a buyer for the water?
•
But… Private sector pulled out
•
Hey - private sector already pulled out
•
And… project evaluation numbers
were awful
•
And… project evaluation numbers are
awful
Project evaluation summary
• >$600m scheme comprising a $300m dam construction cost
• -$27m NPV over 35 years using 8% discount rate (PSDR)
But let’s proceed anyway with building the dam
anyway…
Why did private investors walk?
• For investors to get a return means a water
price farmers can’t afford to pay
– $150m/$300m private (16%), $150m/$300 mpublic (8%)
means servicing cost of $36m per annum, and given 96m
cumecs means a water price of 37.5 cents cumec
• HBRC fixed water price at 27 cents cumec
– Assume 25 cents cumec is available for distributions – so
$24m in total. On a $300m project, exactly an 8% return
– Either private sector partner gets paid (while public sector
partner gets nothing) or the private sector investor walks
(and leaves financing of the dam solely to the public
sector)
Public Sector Funding Option
• Is there enough water?
– Need to issue 30 year take or pay contracts for the entire
96m cumecs to meet the PSDR of 8%
• Scenario based on ~85% of claimed capacity
– 83m cumecs means a 6.9% return
– Public sector walks too, unless it chooses to finance the
entire project at the PSRFR (5%)
– 1.9% spread permits debt to repaid over 26 years
• Better by farmers?
– A irrigation coop?
Farming economics 1
• Option 1: Irrigation as drought insurance
– Don’t need water every year but still have to pay for it
– If, for example, water is only required every second year
then effective water cost is 54 cents per cumec
– Cost of irrigated grass is >70 cents kgDM, but supplements
are only ~40 cents KgDM – so supplements are both
cheaper and more flexible
Farming economics 2
• Option 2: Irrigation to boost production
– Increasing per cow production or per HA
production?
– If latter, the constraint of an October-March
growing window bites, as there is a AprilSeptember feed deficit.
– Given supplements are cheaper than irrigated
grass (40 cents kgDM v. 70 cents kgDM) would be
cheaper and easier simply to build a feed pad.
Alternatives
• Enhanced drystock farming?
The key to change has been drought-proofing the property, not
with an expensive irrigation system, but a plant called lucerne.
"The plant shows you don't have to drain a river to run a
profitable farm.”
Conclusions
•
One of the key lessons from Clyde is there were ‘off-ramps’ that should have
been taken but were not – similar off-ramps are emerging with the RWSS
•
For investors to get a commercial return implies a water cost that is
unaffordable to farmers or the public sector takes a haircut – either way, at the
fixed water price offered the returns are too low, leaving the public sector to
finance the dam in its entirety
•
To meet the PSDR, 100% of claimed water must be subject to take and pay
contracts – this looks questionable
•
A more realistic – albeit lower – level of contracted water means the PSDR is
not met. However, the project is still possible if debt is secured at the PSFRF
•
Such a project is probably better led by farmers – as commercial incentives
regarding risk and reward are better aligned
•
However, irrigated grass is significantly more expensive than feeding out
supplements – so farmers are unlikely to sign the contracts in sufficient
numbers to make financing of the dam possible (even at ‘knock down’ rates)
•
Investigation of options such as lucerne may be a less risky, less disruptive and
more cost effective alternative