15 December, 2018
Economic assessment of bulk water infrastructure and valuing water use for agricultural and industrial production
Synergies was engaged by Queensland Treasury Corporation (QTC), on behalf of the Department of Natural Resources, Mines and Energy (NRME), to develop a methodology to assess the economic value derived from the productive use of water from bulk water infrastructure in regional Queensland. The methodology was also applied to two water supply schemes – the Proserpine River and Nogoa Mackenzie Water Supply Schemes.
The allocation of significant capital funding for the assessment of bulk water infrastructure under the National Water Infrastructure Development Fund (NWIDF) has emphasised the importance of ensuring that project proposals are subject to robust evaluations. NRME engaged QTC to develop and apply a methodology for retrospectively assessing the feasibility of bulk water infrastructure in regional Queensland. Synergies was subsequently engaged to develop and apply a methodology for estimating the economic value derived from regional bulk water infrastructure.
Firstly, Synergies developed a detailed methodology paper setting out our proposed approach to assessing the economic contribution of bulk water supply infrastructure to economic growth in regional Queensland. The methodology paper set out the approach to:
The methodology paper also set out the approach to estimating the regional economic impacts (i.e. regional output, value added, factor income, employment) derived from the productive water use based on the application of rules of thumb determined by applying the non-linear input-output modelling approach in previous project assessments. Finally, the paper set out qualitative factors to be considered in assessing the overall socioeconomic impact of bulk water infrastructure.
The methodology was then applied to two bulk water supply schemes (WSS) – Proserpine River and Nogoa Mackenzie.
For the Proserpine River WSS, the analysis involved assessing the impact of irrigation water use on sugarcane crop yields in the region, as the water sourced from the dam by agricultural producers is only used as a supplementary supply source. The impact of irrigation water use on crop yields was established by reviewing historical rainfall, water use and crop production data and by incorporating the results of studies that have assessed the variability in sugarcane crop yields at different rainfall and irrigation intensities.
Having estimated the crop yield attributable to the bulk water infrastructure since the commencement of the scheme in 1990/91, cost modelling was undertaken to derive estimates for the net value of sugarcane production in each year. These estimates reflect the net economic value derived from the productive use of water from the bulk water infrastructure.
The case study also assessed the economic benefits derived from the flood mitigation properties of the Peter Faust Dam. The assessment found that the construction of the dam has significantly reduced the frequency and severity of floods in the region. The benefits of the dam’s flood mitigation properties include reduced costs of business interruptions, lower infrastructure and insurance costs, and increased property values. Finally, the case study report assessed the economic value that has been derived from recreational fishing, the key recreational activity at the Peter Faust Dam.
The Nogoa Mackenzie WSS is a considerably more complex scheme than the Proserpine River WSS. The scheme, which has been in operation since 1972, holds over 200,000 ML of water allocations, which are held by irrigated crop producers (including cotton, cereal crops, lucerne and other broadacre crops, citrus, table grapes); intensive animal producers (i.e. feedlot operators); and mining companies.
One of the key challenges faced in estimating the economic value derived from irrigated crop production was establishing assumptions in relation to the change in crop mix over time. Crop mix assumptions have a significant impact on the estimates of the economic value of production, particularly in schemes such as the Nogoa Mackenzie WSS, in which the value of production varies considerably across the different crop types (i.e. economic value of table grape and citrus production is significantly higher than cereal broadacre crops). Whilst the data available on the crop production profile in the region is relatively robust for recent years, the data is less robust going back several years.
Data was collected and aggregated from a range of sources to inform the development of the crop mix and hence irrigation water use profile. Synergies also consulted with agronomist consultants in developing the historical crop production profile for the region.
As was the case for the Proserpine River WSS case study, once the crop production and water use profiles were established, modelling was then conducted to firstly estimate the total value of production derived from the irrigation water and then estimate the net economic value of production. Available data on costs of crop production (pre-harvest, harvest and post-harvest costs) was applied in developing the crop models.
The robustness of any evaluation of the socioeconomic impact of an infrastructure project, especially over longer timeframes, is always subject to the availability and quality of the data and information. Limited data availability was the most significant constraint in applying the methodology to the two schemes, particularly for the Nogoa Mackenzie WSS.
These challenges were overcome by focusing the assessment on the past 20 years, for which robust data was available, and using the available data to draw inferences for key parameters over the life of the scheme.
To date, cost-benefit assessments of bulk water infrastructure conducted under the NWIDF have been forward-looking in nature. While this is the accepted approach for prospective infrastructure projects, the development of this retrospective methodology, and its application to two bulk WSS, provides a different perspective in the economic assessment of bulk water projects.
Key takeaways relate to the uncertainty surrounding changes in water use and crop mix (e.g. from low to high-value) over time; the scenarios to be assessed in relation to the economic benefits from agricultural water uses; the key factors that can impact on the economic benefit derived from productive water uses over the lifetime of water supply infrastructure; and the need for careful consideration when estimating the value derived from other water uses.
“The Synergies team has a deep and extensive knowledge of the agriculture sector and regional economies across the State, extremely strong data analytics capabilities, and a gift for easy engagement with a broad set of stakeholders.”
Greg Tonks - Principal, QTC