Colin’s canal, again

by John Q on February 10, 2005

Apologies to readers for the rather odd post below, which was meant for my own blog. Since people have made comments, I’ll leave it in place, and add a few notes of explanation. The post refers to a state election campaign in Western Australia, which the incumbent Labor government was, at the outset, expected to lose. A major issue in the campaign is the water supply problems facing Perth, the capital city where the great majority of the population lives. Issues include the traditional Australian ideology of developmentalism, and the role of public-private partnerships

My piece in today’s Australian Financial Review, over the fold, brings together arguments about the Kimberley canal project, which has been debated here on the blog on my 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.

{ 14 comments }

1

Andrew McManama-Smith 02.10.05 at 1:55 am

Did Tenix already get $5mm from the government for that feasiblity “study”?

2

Giles 02.10.05 at 3:05 am

“3700km”

That is more than the distance from Sydney to Perth so your figure can’t be right – the correct distance is I think 1700-2300km (not that it makes any difference to the economics!)

3

John Quiggin 02.10.05 at 5:39 am

Quite a few sources give it as 3700km, Giles. here for example. The feasible routes aren’t straight lines (or great circles).

4

Mill 02.10.05 at 8:06 am

But John! Battlers chattering classes chardonnay socialists battlers battlers! Struggle street our way of life battlers? Battlers! Their own children! Battlers battlers! And why SHOULD he say sorry?!

There, now we’re back at the usual level of Australian political discourse.

5

dsquared 02.10.05 at 12:18 pm

Campaigning on the slogan “decisions not delays”

Oh god no … “Measure once, cut twice” on the grand scale.

6

Steve LaBonne 02.10.05 at 5:52 pm

Off topic, but as long as the post is here: can someone please explain to me why the party is “Labor” when AFAIK Australians spell the word “labour” in every other context?

7

Andrew McManama-Smith 02.10.05 at 6:32 pm

Steve, from the ALP website:

‘During the early years of the ALP, the Party was referred to by various titles differing from colony to colony. It was at the 1908 Interstate (federal) Conference that the name “Australian Labour Party” was adopted. In its shortened form the Party was frequently referred to as both ‘Labor’ and ‘Labour’, however the former spelling was adopted from 1912 onwards, due to the influence of the American labor movement.’

8

Steve LaBonne 02.10.05 at 6:48 pm

Very interesting, glad I asked. Thanks!

9

jet 02.10.05 at 9:14 pm

$10 per kiloliter is crazy. Nuclear desalination can provide water for less than $1 per cubic meter. And it is proven techonology, not a pipe dream.

10

Giles 02.11.05 at 2:59 am

The figure from the water corporation is “1800 km”

pg 2

“The most favored option was found to comprise three, long distance
(around 1800 km), large diameter (1400 mm) pipelines, seven high-capacity, gas powered pumping
stations and a very large dam on the Fitzroy river at Dimond Gorge with a downstream barrage
constructed to provide a suitable water supply off take point.”

3700km is more than the distance by road so unless the wiggles are somehow need to push the water, I think this is a transcription error thats just been repeated by newspapers quoting each other.
http://www.watercorporation.com.au/publications/12/Kimberley_Pipeline_Project_Review.pdf

11

grumpymatt 02.11.05 at 5:09 am

Of course, there’s the more derisory explanation for the spelling of Labor:

Labor — the party that forgot u.

12

John Quiggin 02.11.05 at 7:01 am

Giles, the pipeline and canal are different versions of the project. The pipeline was costed at $11bn and the canal proponents claim $2 bn. I assume the routes also differ.

13

Giles 02.11.05 at 3:25 pm

Yes but its hard to see that the canal is going to be 2 times as long as a pipleline – especially since there is a greater incentive to have straight canals since you get errosions and all sorts of other problems. I mean get an encarta out and try to trace out a route thats 3800km it leads to aburd routing.

I think you should be warry about a common negotiating technique where the proposer makes a mistake, the opposer and proposer argue over unit costs – and meet in the middle, at which point the proposer then says there was a mistake and he only needs half as many units.

And given that this canal doesn’t look like an entirely cards on the table proposal, I wouldnt discount the possibility.

14

Giles 02.11.05 at 3:27 pm

Yes but its hard to see that the canal is going to be 2 times as long as a pipeline – especially since there is a greater incentive to have straight canals since you get erosions and all sorts of other problems. I mean get an Encarta out and try to trace out a route that’s 3800km it leads to absurd routing.

I think you should be wary about a common negotiating technique where the propose makes a mistake, the oppose and propose argue over unit costs – and meet in the middle, at which point the propose then says there was a mistake and he only needs half as many units.

And given that this canal doesn’t look like an entirely cards on the table proposal, I wouldn’t discount the possibility.

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