Synergies was engaged by Building Queensland to assist with the development of the Detailed Business Case for the Lower Fitzroy River Infrastructure Project. Synergies’ key task was completing an economic analysis of the proposed Rookwood Weir, which will be capable of supplying up to 76,000 ML per annum for urban, industrial and agricultural use. Synergies also assisted with the preparation of several other chapters of the business case, including the base case, public interest and sustainability chapters.
The construction of an additional water storage in the Lower Fitzroy region has been under consideration for several decades. In May 2016, the Commonwealth Government allocated funding for the preparation of a business case for the Lower Fitzroy River Infrastructure Project (LFRIP), in addition to committing $130 million for the construction of Rookwood Weir, the proposed water storage solution, subject to the outcomes of the business case process. Building Queensland was subsequently appointed to deliver a business case for the project.
Prior to the development of the Detailed Business Case, a range of options were considered to meet the future needs of urban, industrial and agricultural water users in the region. Rookwood Weir was subsequently identified as the reference project to be assessed against the base case. Two reference project options were identified – the full capacity (76,000 ML per annum) Rookwood Weir and a smaller Rookwood Weir (54,000 ML per annum). The weir will be capable of supplying urban water users in the Rockhampton and Livingstone Shire Council regions; the Gladstone Area Water Board (GAWB) (via the Gladstone to Fitzroy Pipeline), which supplies urban and industrial customers in the Gladstone region; and agricultural water users in the Lower Fitzroy region.
The economic analysis of the Rookwood Weir project was undertaken using the cost-benefit analysis approach, in accordance with Building Queensland’s Business Case Development Framework. Several issues were encountered in conducting the cost-benefit analysis of the reference project options, as set out below.
Defining the base case
The first complication arose in defining the base case. The base case represents the scenario against which the reference project options are assessed, being the circumstances anticipated to be most likely if the reference project does not proceed. Defining the base case for a bulk water project requires consideration of the future water supply-demand balance, economic value to be derived from water use, and water supply augmentation requirements over the study period.
The difficulty encountered in defining the base case arose in relation to the treatment of GAWB’s future augmentation requirements under the base case. Specifically, there was significant uncertainty regarding the timeframe over which GAWB’s augmentation trigger would be reached if the reference project did not proceed (noting that under both reference project options, the need for GAWB to incur costs in relation to a supply augmentation over the study period would be removed). This was a significant issue as the timing of GAWB’s augmentation under the base case (which likely would have included the construction of the 54,000 ML Rookwood Weir), had a significant impact on the economic benefits to be derived from the reference project options (i.e. the earlier that GAWB would be required to augment its supply under the base case, the greater the avoided cost and hence economic benefit attributable to the reference project).
A detailed assessment of all available studies and reports was undertaken, including GAWB’s 2013 Strategic Water Plan, to determine the most likely year in which GAWB would be required to augment supply (i.e. construct the Gladstone to Fitzroy Pipeline and the 54,000 ML Rookwood Weir) under the base case. Extensive scenario analysis was also undertaken to assess the impact of different base case augmentation years on the net economic impact of the reference project options.
Valuing the economic benefit of agricultural water use
The economic value to be derived from the use of water for agricultural production is one of the key economic benefits attributable to the Rookwood Weir project. The task of quantifying this benefit was complicated by the lack of certainty regarding the strength of demand for agricultural water use. While the demand assessment conducted prior to the development of the Detailed Business Case had identified several potential sources of agricultural water demand, the absence of binding contracts or an in-depth assessment of the feasibility of the potential demands made it difficult to establish a robust demand profile to be used to estimate the economic benefits from agricultural water use.
The Synergies team addressed this problem by working with Building Queensland and other project stakeholders to identify the ‘most likely’ demand scenario based on the information available. A range of other demand scenarios, including different takeup rates of water allocations and alternative crop mixes, were also identified and applied in scenario modelling.
Sensitivity and scenario analysis
The above discussion highlights the uncertainty associated with several important assumptions underpinning the quantification of the economic benefits attributable to the reference project options. This necessitated extensive sensitivity and scenario analysis being conducted on the results of the cost-benefit analysis to determine the impact of changes to key assumptions and parameters on the Net Present Value and Benefit Cost Ratio estimates derived for the reference project options. Scenario analysis was conducted on the timing of GAWB’s supply augmentation under the base case and the profile of agricultural water demand. Based on this analysis, a range of NPV and BCR estimates were established for the two reference project options. These estimates demonstrated the impact of the various scenarios on the results of the analysis and the significance of the agricultural water demand risk.