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