Investment decisions in water resource management
“How sophisticated should water resource management be?”
Presentation to National Water Forum, 11 November 2016, Adelaide
Martin van Bueren
www.synergies.com.au
2 Investment decisions in water resource management
© Synergies Economic Consulting 2016
The growing complexity of water management –what’s changed?
Pre 1990 Now
� Water resources undergoing development phase
� Water licences issued with minimal checks and balances
� Water licences bundled with land title
� Limited or no water trading
� National population of 17 million in 1990
� Environmental issues known to science, but low community awareness
� Nil holdings of environmental water
� Most systems fully allocated
� Unbundling of water rights from land
� Establishment of secure, perpetual Water Access Entitlements to a consumptive pool
� Water sharing plans
� Water market turnover at $4 billion per annum
� National population of 24 million
� Increasing rainfall variability
� Heightened community awareness of environmental impacts
� 2000 GL of held environmental water
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Drivers for greater sophistication
Increasing scarcity of
water
� High reliability water now trading
at around $2,500/ML
The need to protect integrity of water access
entitlements
� Water accounting
� Metering extractions
� Compliance and enforcement
Protection of 3rd
party interests
� Approval to trade
� Environmental impacts from water take
� Surface water – groundwaterinteractions
Monitoring sustainability and adaptive management
� Assessment of consumptive pool
� Groundwater monitoring
Technological advances
� Internet of things
� Satellite remote sensing
� Drone technology
Decentralisedand integrated supply systems
� Urban water supply systems
� Water recycling
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But there are limits….
� New technology, practices, processes can be costly
� Constrained State budgets and competing priorities
� Water users’ acceptance of higher charges
� Economic regulators demanding evidence of the benefits
� Central question is how much sophistication and investment in water resource management is economically efficient?
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Six principles to guide investment
Diminishing benefits at the margin
Increasing sophistication could cost a lot and yield
relatively little
80:20 Rule
Often 80% of the benefit can be
delivered with an unsophisticated
solution
Cost effectiveness not the same as efficiency
Activities may be cost-
effective but inefficient if the target is wrong
Marginal Benefit = Marginal
Cost
Invest to the point where
marginal benefit equals marginal
cost
The false promise of
new technology
Implementation costs may
exceed benefits and there is a risk of redundancy
Perfect information is
rarely attainable
Good decisions can be made with less than full information
MB=MC
80:20
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Objectives and benefit valuation
Policy and management
Better farm business decisions
Behaviouralchange
Service delivery efficiency
WRM Objective
� Sustainability
� Environmental flows
� 3rd party impacts
� When to water
� When to trade
� Water use efficiency
� Compliance
� Capex and Opextrade-offs
Examples
� Avoidance of costly decisions
� Option value
� Drive system harder
� Environmental outcomes
� Enterprise profitability
� Business confidence to invest
� Value of water savings
� Compliance protects value of entitlement
� Budgetary savings
Benefit valuation
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Other elements of the framework
Establishing the counterfactual
Stress testingStress testingCustomer
engagementCustomer
engagement
Monitoring & evaluation of investment
Monitoring & evaluation of investment
� Risk and cost of making wrong decision? - e.g. making wrong call on an approval to trade
� Explore multiple options for delivering a solution
� Various service levels
� Water resource management is a monopoly service
� Water user preferences and trade offs
� What’s working, what’s not
� Benchmarking against other providers
� Reallocate resources accordingly
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CASE STUDIES
Metering bulk water extraction
Compliance and enforcement
Management of sewerage overflows
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Metering water extractions in NSW
• Diminishing marginal benefits• 80:20 rule• Competing technologies
ExemplifiesExemplifies
• Prior to 2009, most extractions from unregulated rivers were not metered• Introduced a target of metering 95% of licensed extractions and
upgrading existing meters to telemetry• Estimated to require over 4000 additional meters• Commonwealth funded installation of 2000 meters
Nature of problem and
initial response
Nature of problem and
initial response
• Initial response found to be cost prohibitive ($1200-4500 per meter p/a)• Now a policy of only installing telemetry and meters on larger pumps• 20% of sites with larger pump sizes accounted for 80% of extraction• Extraction on small pumps assumed to be full available allocation
Revised strategyRevised strategy
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Compliance and enforcement - NSW
• Assessing the optimal level of compliance effort• Marginal Benefit = Marginal CostExemplifiesExemplifies
• $4m spent on compliance activities annually• Between 2%-4% of licence holders audited each year• 98% compliance rate• Use of satellite remote sensing being considered
Current strategyCurrent strategy
• Invest in prevention or enforcement?• Is 2% audit rate optimal?• What level of compliance is optimal?• Limited or no comparative benchmarking
Is it efficient?Is it efficient?
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Managing sewerage overflows in NSW
• Disparity between cost effectiveness and efficiency• The need for risk-based assessment• Inefficiency of uniform targets when marginal abatement costs and benefits
vary across sites
ExemplifiesExemplifies
• Wastewater overflows during storm events• Alternative preventative solutions = storage tanks, bigger pipes, pumps• EPA regulations require Sydney Water to reduce frequency of overflow• Uniform targets to be met by 2021 (no account of volume or location)• Estimated to cost $5.5 billion using “cost effective” technology
Nature of problem and
initial response
Nature of problem and
initial response
• Target engineering works to those sites that are high risk of overflow and high impact cost (recreation, health and environment)
• Same or better outcomes (overall)
Revised strategyRevised strategy
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Conclusion
• An ever-increasing demand for sophistication
– How much is optimal?
• No market discipline to guide investment decisions
– Markets lacking because WRM activities are monopoly services (mostly)
– No competition to promote efficiency
• Why does evaluation and cost-benefit analysis matter?
– Investments are large
– Opportunity cost of poor investments
– Loss of customer and community trust in service providers
• More sophistication is not always better
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