Colin’s canal, again

My piece in today’s Fin, over the fold, brings together arguments about the Kimberley canal project, which has been debated here on the blog. As usual, I got a lot out of all the comments, whether or not this is obvious in the published article. Thanks to everyone who contributed to the debate.

Economic rationalists are often criticised, not entirely without reason, for lacking vision. Still, when confronted with a visionary project like the canal being advocated by WA Opposition leader Colin Barnett to bring water 3700km from the Kimberleys to Perth, we are reminded of that mirages are a kind of vision.

There aren’t many issues on which I agree with the Institute of Public Affairs. But I’m happy to join IPA Director Mike Nahan in suggesting that this is a project fraught with danger for WA taxpayers. It could easily join the Ord River fiasco as an illustration of what happens when developmentalist rhetoric trumps economic rationality.

Campaigning on the slogan ‘decisions not delays’, Barnett has promised to go ahead with the scheme without waiting for feasibility studies, environmental assessments or any of the other impediments of bureaucratic rationality. The evidence supporting the proposal appears to consist of some very slim documents proposed by project proponent Tenix.

Even a moment’s scrutiny of these documents indicates some obvious problems. For example, the feasibility of the project is supported by reference to the “1,065 km Californian Aqueduct’, built in the early 1900s. The Aqueduct’s own website states its length at 223 miles (less than 400 km).

But the real problems are with the economics. Barnett has promised to deliver water at $1 a kilolitre, but this can’t be done, even on the most optimistic assumptions. Taking Tenix’s claimed construction cost of $2 billion, and a very conservative EBITDA ratio of 10, the capital costs for the project would be $200 million a year. Even at the claimed maximum flow of 200 gigalitres a year, this would use up the whole $1/kl without allowing anything for pumping, maintenance, treatment or reticulation.

More plausible estimates for construction costs, including staging costs, are up to $4 billion, and a more likely estimate for total capital costs (return on capital, depreciation and amortisation) is 12.5 per cent, putting the capital costs alone at $2.50/kl. In addition, each kl of water is a tonne of matter that has to be pumped 3700km, with little help from gravity. That’s not going to be cheap. The WA Treasury has estimated the delivered costs at $6.50/kl, compared to current prices ranging from $0.41 to $1.50.

Then there’s the fact that the proposal is a BOOT scheme, with the illusory benefit of handing the project back to the public after 40 years. Of course, there is no free lunch here. The cost is built into prices, usually with a handsome profit margin built in.

It gets worse. The Tenix proposal is based on the assumption that all the water is sold to residential users, but Barnett has talked of diverting up to 80GL each year to irrigators. This will no doubt do wonders for the politics of the proposal but it will be awful for the economics. There’s no way irrigators will be able to pay any more than the pumping costs (if that). Even $1/kl is $1000 a megalitre, which would render most irrigated crops uneconomic. That means that all the capital and maintenance costs will have to be spread over, at most, 120 GL of residential use, so the costs for residential users could be as high as $10/kl. At this price, fanciful options like transporting icebergs from Antarctica start to look attractive.

But even at much lower prices, market forces would resolve the problem. A mere doubling of prices would induce a reduction in water use, and would bring forth alternative sources of supply, such as repurchase of water currently used for irrigation. Then there’s the backstop option of desalinisation, already under way on a relatively small scale.

It’s just possible that careful study could show that the kinds of problems raised above can be overcome, and that the canal option is a feasible one. But there’s no time for such a study before the election.

Unless he can present a better case than he has done so far, it seems quite likely that this proposal will cost Barnett an election he seemed to have in the bag. This episode, and Labor’s difficulties with Medicare Gold, provide a harsh lesson for Opposition parties. If you have a complex and innovative policy, it’s better to put it out for scrutiny well in advance of the election, and risk having the government steal it, than to try and defend it, perhaps unsuccessfully, in the heat of an election campaign.

32 thoughts on “Colin’s canal, again

  1. Even cheaper proposal than desalination and Col’s canal : move Mohamed to the mountain .i.e second or third cities in W.A. This would also be a result of allowing market forces to determine water prices ; but that is not a politically allowable solution because of all the stakeholders ; not least being a politcally uneducated public . i.e. the public are lead to believe that government solutions come at very little cost to themselves . A fine example of this is the Perth to Mandurah railway ( the train to nowhere ) which this current Labor government initiated and is putated to cost $2 bill.

  2. I suspect a lot of people have independently come to the same conclusion as B O’S, at least as a preliminary conclusion. I was even thinking of using the same cliche myself. But I suspect that his insights point us to the idea of more and smaller states – with the same systemic problems of getting there from here.

  3. Yes, nice piece John. I particularly like your line about visions and mirages – “nation building” has a lot to answer for.

  4. John, I agree with the general spirit of your piece. I have a question though; when you say:

    But even at much lower prices, market forces would resolve the problem. A mere doubling of prices would induce a reduction in water use, and would bring forth alternative sources of supply, such as repurchase of water currently used for irrigation.”

    Do you mean that the current cost of water is being subsidized and withdrawing the subsidy could result on double the price? Or is that you are proposing to interfere with the market and tax water hoping to reduce consumption?

  5. doctor k, it can happen that markets get imperfections all by themselves, even before government interference. Sometimes government intervention improves things (though that’s not the way to bet). Intervention is not always distortion.

  6. Anthony are you seriously asserting that the Perth to Mandurah railway line is not an example of government over engineering. I sthere a huge demand from commuters in the Mandurah-Rockingham area for high speed commuting to the city ? The money could have better spent on more train services in the inner metropolitan area or even better more urban design.

  7. I have 2 points to make. Despite what you may have heard Perth’s climate is not getting drier (CSIRO recently concluded there is no significnt trend in SW WA rainfall). However there is far less water in Perth’s dams. So where has all the water gone? To the best of my knowledge the reason is a decision to stop cutting brush in the catchment areas 20 or so years ago. This has resulted in a dramatic reduction in runoff into the dams.

    In a cost discussion, brush cutting as a way to increase water supplies wins hands down.

    My second point is developmental infrastructure costs are rarely justifiable based on existing demand. Its the new demand and economic activity they generate that is the reason for building them. Its clear that water supply is and will increasingly in the future limit growth and economic development in WA (not just in Perth but all the way up the coast). Your cost arguments are persuasive but I would like to see the same calculation for the next 40 years growth factoring in the cost of water from different sources. In an ideal world we would have a free market in water and that would tell us whether this project is justified.

  8. Bill
    I’m asking yes or no because I’m curious to know what it is about a politically educated man that would cause him to use an anachronistic falsehood as his main argument. Then maybe we can get to which specific insights you have on people south of the river that makes a well justified train line along a significant area for housing growth to two major urban centres, so over-engineered? More so when compared to new far north cities, train services for some unspecified and needy part of the inner metropolitan area, or this canal.

  9. Phil Bradley, could you provide evidence for your claim about SW WA not getting dryer? My job requires me to interview climatologists frequently, and one of thier main topics of research seems to be “why is SW WA getting dryer?”. Not one has suggested to me that it isn’t. In fact one top climatologist told me that the wettest year the region has had in the last 25 was still below the long-term average prior to that.
    It’s true run-off has fallen faster than rainfall, but that’s always the case – a certain amount gets absorbed by the soil and so a certain fall in rain gives a much larger fall in run-off. The brushcutting may contribute, but I’d be very surprised if it is more than a few percent of the drop.

  10. John,
    Just a few difficulties I am having with your analysis. You say an EBITDA of 10 is conservative. I would have thought that, for an infrastructure project of this size it would be extreme – 1 would be more realistic. As the EBITDA does not have to pay for interest, tax, depreciation or amortisation (the ITDA part) the whole calculation becomes nonsense.
    If we look at it again the interest cost on a $2b spend (with an implicit or explicit AAA government guarantee) at around base funding rate (say 5.5% to allow a margin) would be about $110m p.a. However it has already been indicated that the WA State Government will be paying around $350m of the cost. If we assume this is an NPV figure (not always the case in government figures), the annual funding costs drop to $90.75m, leaving a net funding overhead of about $110m on these figures.
    On the 40 year BOOT component. Again, if you NPV almost any amount out 40 years the result is very small, particularly compared to the current value. NPV $2b out 40 years leaves barely 11% of the current value.
    While I am not a great fan of the canal project – I remain to be convinced that it can be done for $2b, the economics do seem to stack up if you use the correct method of calculating them.

  11. economist john , thanks for your enlightening figures .will the pollies ever see them ?? as for the water and the river, leave the bloody thing alone…. for the great big barramundi , along with the rest of the unique species that use and inhabit its waters and shores . keep the water and river pristine and wild ,for the fishermen and women, [everyone fishes in the kimberleys ], the tourists, and for most of all the Aboriginal people to whom it is not a commodity but a sacred object of immense importance and of immense size . the proposition should be rejected on all grounds . every perth house supply outlet and tap should be converted to low pressure and every garden and lawn converted to local native plant species [for starters].its a most immoral proposal .

  12. Any project looks good if you throw in enough free government capital (not allowed under NCP, by the way). And the assumption that Tenix would accept the government bond rate is not reasonable.

  13. John,
    The “free” government capital bit is the same for any desalination plant.
    I do not understand your argument here btw. Are you saying that Tenix would have to pay 10% interest to get funding? A roughly 475bp spread to the current funding rate would be a touch excessive for a major capital works scheme.

  14. Andrew, under NCP government investments are supposed to get a standard commercial rate of return to capital (typically about 8 per cent plus depreciation). I’ve not heard any suggestion of capital grants for the desalination plant, but if you have any info please point to it.

    Tenix would want at least 8 per cent WACC, and depreciation/amortisation of more than 2 per cent, so I’ve been very conservative/.

  15. Actually, PML, I think this is the random output of a (mental) 12-year old abusing one of his playmates, rather than machine-generated spam.

  16. There is enough rainfall and water in the tropical north of Australia for up to 150 million people. It is possible one day Australia might have that many people.

    Good long term planning would dictate that the economics and feasibility of getting the water to flow south warrants a feasibility study at least. (maybe not to Perth but the Eastern States)

    The Nile flows over 6000 km with over 4000km flowing with just 400 metres of fall. See flow direction:

    http://www.mbarron.net/Nile/fctfl_nf.html

    We would only need to get the water up 400 metres to get it to flow to 4000km. (The topography on the eastern states might make it easier to obtain natural falls to get it top flow long distances at minimal costs).

    Even though it would be a mammoth undertaking it is worth a look.

  17. However let us remember the Nile is a natural feature with ecosystems that have grown up with it and adapted to the local conditions. Also in the Nile are natual systems that keep the water clean and reduce evaporation.

    None of this would be in an artificial canal unless we were to dig it and then wait a couple of thousand years for the ecosystems to grow. I don’t think that there would be a very good ROE on this proposal.

    All the water from all canal projects can be obtained simply by water conservation. Building canals and totally disrupting natural ecosystems to allow us to water golf courses and green lawns in the driest continent on Earth is the height of stupidity.

  18. I understand where you are coming from Ender, but to totally disregard the option is putting yourself on par with Barnett, who “promised to go ahead with the scheme without waiting for feasibility studies, environmental assessments or any of the other impediments of bureaucratic rationality”.

    Remember man is also a natural feature that is part of the ecosystem.

  19. I have long considered the following scheme engineeringly practical, if not economically.

    Build a long low earth dam across the southern pert of the gulf country, starting with bulldozers and finishing with earth dredged up behind it and moved to it by barge as it fills. When the level is high enough, cut a small canal through to the basin south of there, and gradually move the flow slantwise with distribution canals. Provide feeder canals from northwest and northeast as dam construction progresses. During construction, divert some of the water energy to help with construction and offset costs – much of the dam top work can be assisted that way, and some power could be sent to places like Weipa (or make the aluminium processing come to the dam).

  20. Econowit –
    Man was a natural part of the ecosystem until he removed himself from it and decided he could tame the it for his own benefit and in doing so forgot how dependant on nature he really was.

    This is the same argument as energy use. Do we cut our resource use and live within our means or do we build grandiose projects so that we can continue to waste as much as we like?

    If I were in financial trouble would you advise me to spend heaps, don’t economise, got to restuarants and live high on the hog even if my income could not cover it? As an economist or accountant I don’t think that this would be the advise you would give me. In fact people who do this, like John Eliot recently, are considered fools.

    However when it comes to the same argument with water or energy substitued for money suddenly spending water or energy in the same fashion is OK. This is where economics externalising environmental costs and considering resources as infinite really bites.

    Why is money more important than water or energy? Money and wealth do not exist other than in the mind of humans. If money ceased to exist nothing on Earth other than humans would even notice. If water ceased to exist I think that humans and animals and plants and in fact everything would notice. The same goes for the environment that we destroy to make our energy.

    There is an old saying, you do not appreciate anything properly until you lose it. Disrupting ecosystems and dredging huge canals across the land just so we can keep a few lawns green and farm without considering water because it is too expensive to change to me is the height of folly. We need to use what we have, where we have it better before we consider stealing it from other regions.

  21. Extract Wikipedia:

    “An ecosystem may be of very different size. It may be a whole forest, as well as a small pond. Different ecosystems are often separated by geographical barriers, like deserts, mountains or oceans, or are isolated otherwise, like lakes or rivers. As these borders are never rigid, ecosystems tend to blend into each other. As a result, the whole earth can be seen as a single ecosystem, or a lake can be divided into several ecosystems, depending on the used scale.” In other words the earth is an ecosystem containing smaller ecosystems.

    The last time I looked most people were still living on earth and as such are part of the ecosystem. An ecosystem is a dynamic and complex whole, interacting as an ecological unit. Man is merely interacting. Unlike other life forms man has the option of how he interacts. He can live naked under a tree and hope he has everything that he needs at hand or he can build a house and reap the benefits of his technologies and developments (I choose the latter). This interaction can have negative or positive out comes. Like everything in this world it is not perfect but I don’t think things are as bad some environmentalists make out.

    It is mans “nature” to use his intellect to structure his ecosystem to his advantage- this is what differentiates us from other life forms. We are at present the dominant life form on this planet. If it is true? as you and other environmentalists say and we are living beyond our means, then this would not be structuring things to our advantage. The consequence of this might be to bring forward the time of our extinction, but by how much or if at all is anybody’s guess. This is because a large proportion of environmentalists don’t quantify anything they just make broad qualifications of doom.

    Where are the shortages of water or energy?

    To run out of water we would have to stop the Water cycle (a difficult task). Water recycles itself in the Water cycle so I can not see it running out in the near term. It just changes its state in the cycle.

    There are many different sources of energy that are available for us to use- hydro, solar, crops for methanol and geothermal to name a few. They are not widely used as it is not economical at present, but allot of them are renewable so I can not see them running out in the near future. When required we could use them.

    Whether you move water across a continent, dam a local river or get it from the ocean, we still have to make a proper assessment of our actions and how they might impact on our ecosystem and economy.

  22. Ender

    Extract Wikipedia:

    “An ecosystem may be of very different size. It may be a whole forest, as well as a small pond. Different ecosystems are often separated by geographical barriers, like deserts, mountains or oceans, or are isolated otherwise, like lakes or rivers. As these borders are never rigid, ecosystems tend to blend into each other. As a result, the whole earth can be seen as a single ecosystem, or a lake can be divided into several ecosystems, depending on the used scale.” In other words the earth is an ecosystem containing smaller ecosystems.

    The last time I looked most people were still living on earth and as such are part of the ecosystem. An ecosystem is a dynamic and complex whole, interacting as an ecological unit. Man is merely interacting. Unlike other life forms man has the option of how he interacts. He can live naked under a tree and hope he has everything that he needs at hand or he can build a house and reap the benefits of his technologies and developments (I choose the latter). This interaction can have negative or positive out comes. Like everything in this world it is not perfect but I don’t think things are as bad some environmentalists make out.

    It is mans “nature” to use his intellect to structure his ecosystem to his advantage- this is what differentiates us from other life forms. We are at present the dominant life form on this planet. If it is true? as you and other environmentalists say and we are living beyond our means, then this would not be structuring things to our advantage. The consequence of this might be to bring forward the time of our extinction, but by how much or if at all is anybody’s guess. This is because a large proportion of environmentalists don’t quantify anything they just make broad qualifications of doom.

    Where are the shortages of water or energy?

    To run out of water we would have to stop the Water cycle (a difficult task). Water recycles itself in the Water cycle so I can not see it running out in the near term. It just changes its state in the cycle.

    There are many different sources of energy that are available for us to use- hydro, solar, crops for methanol and geothermal to name a few. They are not widely used as it is not economical at present, but allot of them are renewable so I can not see them running out in the near future. When required we could use them.

    Whether you move water across a continent, dam a local river or get it from the ocean, we still have to make a proper assessment of our actions and how they might impact on our ecosystem and economy.

  23. Yes there is plenty of water but none of it fit to drink. This is the driest continent on earth and rainfall is not guaranteed. Climate change could change our weather patterns drastically.

    Renewable energy can only work if we cut our demand by about 50%. Crops for methanol goes back on the water, fertiliser, oil, salinity merry-go-round.

    Please read the Millennium Ecosystem Assessment at
    http://www.millenniumassessment.org/en/Products.Synthesis.aspx

  24. Colin’s canal might have a future after all, if someone wants to build it in NSW rather than WA. The Carr government is going to relax the environmental asssessment and approval requirements for big projects, and exempt them from the “stop the clock” provisions whereby such projects can be halted if adverse environmental impacts are discovered during construction. The story is at:

    http://www.smh.com.au/news/National/States-largest-projects-to-bypass-green-laws/2005/05/12/1115843315642.html?oneclick=true

    As I’ve written in a letter to the Herald, big projects are precisely the ones which shouldn’t be exempt from exhaustive and transparent environmental assessment and approvals processes. This is because:

    1. The adverse environmental, economic and social impacts of a mistakenly approved project will be greater, the larger the project is.

    2. Large projects are likely to be more complex, both intrinsically and in their interaction with the surrounding environment and human society. There is therefore more scope for “weak links”, i.e. small and mundane but potentially crucial aspects of their design, operation and economics which, if not properly assessed, evaluated and potential weaknesses addressed, could lead to the project failing or causing adverse impacts. Consequently there is a greater need for exhaustive assessment with the maximum amount of information and “social intelligence” brought to bear through ample provisions for public participation in the approvals process.

    3. Proposals for large projects (and Colin’s Canal is a case in point) are most likely to attract the support of powerful bureaucratic, political and corporate interests, and the barracking of an intellectually lazy media, for self-interested and/or megalomaniacal reasons which have little to do with whether the project is a prudent, feasible and cost-effective solution to whatever problem it’s intended to solve. Indeed, such proposals often originate as “solutions in search of a problem” in the bowels of some reverse-adapted bureaucratic-technocratic empire such as the Tasmanian Hydro-Electric Commission or the Queensland Main Roads Department. For this reason they must be subject to the most rigorous and transparent assessment and approvals process to cut through the boosting and the barracking.

    By weakening the initial assessment requirements and the provisions for public participation, the NSW Government is increasing the likelihood of erroneous (if not corrupt) approval of ill-conceived big projects. By eliminating the “stop the clock” provisions, the NSW Government will make it impossible to reverse or correct mistakes once they’ve been detected.

  25. Paul,

    The real scary thing is letting Craig Knowles get all that power. Look at what went on in Liverpool.

    Oh well it will be good for the labour parties finances with all those developer donations.

  26. This argues for a large project economic research unit attached to a University . I’d say U.Q. is the most likely candidate. How you would structure it so that outside interests can’t meddle in it would be interesting. Murdoch Uni rolled over on the trainline to nowhere.

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