Economic evaluation of the Burnett River to Howard Water Supply Pipeline Project

The Issue

The Maturing the Infrastructure Pipeline Program is a $30 million infrastructure planning program.

Water supply security modelling conducted by Wide Bay Water Corporation and the Queensland Government revealed issues with the long-term water supply security for the Hervey Bay region. Specifically, the tightening water supply-demand balance is expected to increase the incidence and severity, and hence economic costs, of urban water restrictions in the region over the short to medium term. Furthermore, an opportunity was identified to secure additional water supplies from the Burnett River (Paradise Dam) to enable an expansion of irrigated agricultural production in the region.

The Fraser Coast Regional Council secured funding under the Queensland Government’s Maturing the Infrastructure Pipeline Program to prepare a business case on the proposed Burnett River Pipeline. The purpose of the business case was to identify the options available to the Fraser Coast Regional Council to meet its long-term water supply needs and to assess the technical, environmental financial and economic feasibility of the various options. Synergies was engaged to undertake the economic assessment of the shortlisted project options using the cost-benefit analysis technique.

Our Solution

Approach

The approach adopted to undertaking the cost-benefit analysis were as follows:

• defining the base case and modelling relevant cashflows, particularly in relation to the cost of future water supply augmentations and the economic cost of water restrictions, having regard to the urban water supply-demand balance;
• identifying and quantifying the economic benefits and costs under the three reference project options under consideration, being the avoided economic cost of water restrictions and the economic value derived from the use of water for agricultural production;
• a cost-benefit model was developed to conduct cashflow modelling for each option relative to the base case over a 30-year study period. Net Present Values and Benefit Cost Ratios were calculated for each reference project option; and
• sensitivity and scenario analysis were conducted to test the impact of changes to key assumptions (e.g. uptake of water for agricultural production) and parameter inputs (e.g. economic cost of urban water restrictions) on the results of the analysis.

The economic cost of urban water restrictions

One of the key economic benefits of the reference project options was the avoidance of the economic cost of water restrictions as a result of the provision of an additional water supply source. Estimating the economic cost of water restrictions requires estimates to be established for the incidence and severity of water restrictions under the various scenarios (i.e. the base case and the three reference project scenarios) and the economic cost incurred by urban water users as a result of the implementation of water restrictions.

The expected incidence and severity of urban water restrictions were derived based on the outcomes of hydrological modelling conducted in developing the Hervey Bay Regional Water Supply Security Assessment. A detailed review of previous studies of the economic cost of water restrictions was undertaken. The circumstances of each study were assessed against the project scenarios to identify the estimates most appropriate to be used in the cost-benefit analysis. The cost estimate was then applied to the incidence and severity parameters to estimate the economic cost of water restrictions under each scenario, which enabled the estimation of the economic benefit of the avoided economic cost of water restrictions under the reference project scenarios.

Economic benefit derived from increased agricultural production

The reference project options also involved the supply of water allocations to irrigated agricultural producers in the region. Models were developed for each crop identified in the stakeholder consultation process to estimate the net economic value derived from the use of irrigation water for crop production. The key parameters in these models include irrigation application rates, crop yield, crop prices, crop establishment costs, pre-harvest costs, harvest costs, and post-harvest costs.

Outcomes

A report was prepared setting out the approach applied in undertaking the economic assessment, the base case against which the reference project options were assessed, the assumptions and parameter estimates underpinning the quantification of economic benefits and costs, and the results of the cost-benefit analysis.

The results of the cost-benefit analysis were incorporated into the overall business case for the Burnett River Pipeline Project. The results of the analysis are to be used by Wide Bay Water Corporation in its future water supply planning.