Peter Fraser: Clyde Dam has lessons for RWSS

Peter Fraser

For many of us, the New Year is a time of reflection.

Hopefully this extends to the good folks at HBRC as 2014 was truly an annus horribilis for the much hyped Ruataniwha Water Storage Scheme (RWSS): investors walked away, farmers failed to sign up, advice from the council's own experts showed that the economics did not stack up, and the High Court dished out the legal equivalent of a short, sharp slap over the knuckles with a wooden ruler.

The RWSS's promoters would therefore do well to pause and consider the similarities between their proposal and the ill-fated Clyde High Dam - as it is a truism that those who fail to heed the lessons of history end up repeating the same mistakes. While it is now universally accepted that the Clyde project was an unmitigated disaster that should never have been built, it is less well understood that there was sufficient information available at the time that clearly showed the project should be abandoned. Unfortunately, a combination of egos, politics, and sheer pig-headiness meant that these 'off-ramps' were ignored - a situation that looks eerily similar today.

So what were the 'off-ramps'?

The first off-ramp was that the economic evaluation of the Clyde High Dam and proposed smelter at Aramoana showed that it did not meet the hurdle rate necessary to justify public sector investment - which, in 'normal speak', means the project was a dud. Amazingly, the RWSS is in an even worse position: it is a $600 million project that produces net benefits of negative $27 million dollars.

That is a truly jaw-dropping result: it means HBRC would be better off simply putting $600 million on a bonfire and burning it, because as least the result is only nothing. It also implies that claims that the RWSS is some type of economic circuit-breaker are simply illusionary.

The second off-ramp was when investor Alusuisse pulled out of the project - which indicated that private sector investors had also done the numbers and concluded it did not stack up either. The comparison with Trustpower and Ngai Tahu pulling out of the RWSS is therefore telling - especially given the former has considerable hydro expertise.

The third off-ramp was building the Clyde dam in the knowledge that there were no customers for the power generated - as the proposed Aramoana Aluminium Smelter had long since been cancelled. The fact that only about 5 per cent of the RWSS's capacity has been contracted to farmers - despite repeated extensions, exhortations, and discounting - indicates a similar lack of customers.

Critically, the recent High Court ruling makes an already dire situation even worse - as the limitations on agricultural intensification may well mean the scheme cannot retain its existing customer base let alone find a home for the other 95 per cent of the water. This implies that even an argument based on the economics of Kevin Costner ('build it and they'll come') does not apply to the RWSS as no one is likely to come.

The result is what economists call a 'stranded asset' - and what ordinary folk call a 'white elephant'.

This is arguably the fatal blow - because without farmers buying water the scheme has no cash flow, and without cash flow there will no dividends, and without dividends there are no investors, and without investors there is no money to finance it.

Logic suggests that this is likely to also extend to debt funding from Crown Irrigation Limited (CIL) - because without cash flow, CIL cannot get its money out either (meaning CIL is unlikely to want to invest in the first place).

One does not have to be Nostradamus to predict where this is going. It is therefore time to 'call time' on this project and start to consider alternative economic development options for the Bay. However, rather than facing the inevitable reality that the project is simply not viable, the risk is the RWSS morphs into a 'zombie dam', continuing to devour ratepayers' money as it stumbles around in ever diminishing and increasingly incoherent circles. Indeed, maybe this is what the project supporters mean when they declare that Ruataniwha is a 'no brainer'.

-Peter Fraser is a Wellington-based economist.

-Business and civic leaders, organisers, experts in their field and interest groups can contribute opinions. The views expressed here are the writer's personal opinion, and not the newspaper's. Email: editor@hbtoday.co.nz.