Tag Archives: #costbenefitanalysis

A Damming Idea

Tinaroo Dam Spillway (Source: ABC News)

Constrained water supplies in Far North Queensland are hindering economic development and can threaten water security of a number of towns. Inaction on supply has been driven by feasibility, concerns, funding gaps and worries about environmental sustainability. (1) In addition, politics focussing narrowly on dams as the supply solution runs the risk of missing other smart infrastructure and demand management opportunities to improve supply apart from just bulk storage. (2) Project proponents are also challenged often challenged by a user pay model required by the National Water Initiative. (3)

A strong evidence base of economically viable, financially feasible and prudently sustainable investments is needed to unlock these constraints. The balance between the public purse, private irrigator interests and environmental sustainability needs to be reset.

If considering just dams, what is an appropriate period of cost recovery? If an appraisal period is less than the economic life of the dam, usually an estimate of residual value would be included in the final year of the analysis. For example, a 25-year appraisal period for a 50-year asset, may include an asset value offset of up to 50% in the final appraisal year to ensure cost recovery over the appraisal period approximates around half of the expected use of the asset.

Similarly, where a dam is considered by policy makers to be a catalytic piece of infrastructure that supports and enables economic growth opportunities, an argument that there are economic externalities needs to be established. In effect, this means that not all the economic benefits are being captured by the users – providing a basis for partial public funding alongside expected user revenues. This externality argument is the logical basis for identifying the level of offset to user revenues. It presupposes both other uses for water as well as downstream benefits captured by non-users.

As a starting point, getting the evidence together to make the preliminary case for the residual value argument and a market failure argument around significant externalities is critical.

References:

  1. Parliamentary Library (Australia) Water Management https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook45p/WaterManagement
  2. For example, the Sustainable Rural Water Use and Infrastructure Program https://www.agriculture.gov.au/water/mdb/programs/basin-wide/srwuip
  3. National Water Initiative pricing principles (https://www.agriculture.gov.au/water/policy/nwi/pricing-principles)

A $7 Crossing

Kangaroo Point Pedestrian Bridge artist impression
Kangaroo Point Crossing, Artist Impression
Source: Brisbane City Council

Brisbane City Council has announced a program to construct five ‘green’ bridges across the Brisbane River. [See https://www.brisbane.qld.gov.au/traffic-and-transport/roads-infrastructure-and-bikeways/five-new-green-bridges-across-brisbane] Analysis of the crossing at Kangaroo Point appears most advanced.

There is a handy infographic on Council’s website. Unfortunately, details of how the benefits have been calculated are not publicly available.

What we do know is that Council intends to spend $190 million to build the bridge. Council believes trips per day will rise from 5,300 in 2021 to 6,100 in 2036.

Making a couple of assumptions, we can work out the level of benefit per trip required for this to cover the capital costs. First we assume a 25 year evaluation period (2020-2044) and a 7% real discount rate. We also assume the asset has a 50 year life and include an offset residual value on the capital cost. The capital cost attributable to the evaluation period is a present value of $172.5 million.

Then we extrapolate the average crossings, which rise on an annualised basis from 1.9 million trips in 2021 to 2.4 million trips in 2044. This implies some 54 million trips will take place (2021-2044). However, using trips as a stand in for benefits, a trip today has a stronger present value than a trip tomorrow. The present value of all the trips had they occurred today is 24.5 million.

The capital cost per trip is $3.18 undercounted. In discounted terms, this is $7.03.

Given ratepayers are paying for it, one would hope Council is confident benefits are at least $7.03 per trip in benefits.

Do you think that is the case?