Affordability key to Wairarapa dam plan

The bottom line seems to be the Tividale option is a complete dud and Black Creek is barely marginal.

An Open Letter

The Wairarapa Water Use Project (WWUP) report hasn't taken into account whether farmers can afford the water. Given the core of my argument is that capital costs to build dams means a water price farmers can't afford to pay, I suspect is something of an oversight. I've therefore undertaken two scenarios - with water at 10 cents and 15 cents m3 respectively.

My reasons for choosing these two prices are:

Ten cents is the price calculated that Ruataniwha farmers can pay for water - and given the Butcher analysis assumes large scale dairy conversion I don't think this is unreasonable.

I note, however, this figure is high - as there's higher annual rainfall in Wairarapa, so the response rate to water is lower. I am therefore being generous.

Fifteen cents is basically just a sensitivity based on 10 cents. Note: given the weak demand from Ruataniwha farmers I don't think one can assume more than 15 cents per cubic metre of water price and be remotely credible.

Let's look at Tividale first:

I note that Michael Bassett-Foss rates this project as a two out of five - with one being the lowest and five the highest. It also scores extremely poorly environmentally (one out of five). This is hardly an auspicious start.

Tividale is a single dam with a capacity of above 30 million cu m and irrigates 9800ha (one third by run-of-river and the other two thirds by 24km of piped distribution).

The cost is $71-$105 million with a midpoint of $82 million.

I find it incredible they can build a dam and a distribution scheme for no more than $105 million.

As I noted, regarding the Mangatarere scheme, I would have thought the dam alone would cost $75-$100 million and - based on the Ruataniwha - the distribution scheme potentially an extra $100 million.

However, I'll give him the benefit of the doubt here.

Based on 30 million cu m capacity and selling water at 10 cents cu m, that's maximum revenues of $3 million a year.

To keep things simple, let's not count annual running costs, assume all the water is fully sold on day one, and assume a project finance rate of 5 per cent (rather than the 6-8 per cent I normally use). This means the cashflows can sustain a $60 million build, which isn't much help as the dam costs at least $71 million.

Now, let's repeat with 15 cents - this is enough to fund a $90 million build, so it looks like we're in.

However, the problem comes with the third of the capacity that is simply run-of-river - as the dam company can't charge irrigators for drawing water from the river as they can only charge for the piped water. This shrinks the $90 million revenue down to $60 million - and you are back in infeasible territory.

For completeness, if I used 10 cents and six per cent (rather than five per cent) I get exactly $50 million as predicted ...

In short, this project should be abandoned now - with an off ramp based on water being unaffordable to farmers.

Now let's look at Black Creek:

Mr Bassett-Foss rates this one as a four out of five - so much better.

This is a two dam solution and will have a combined capacity of 67 million cu m and will irrigate 19,700ha (so is, as I expected, at least 65million cu m in capacity). It is distributed by 89km of pipes.

Cost is $138-205 million, midpoint $161 million.

The dam costs look very light especially with a distribution system attached - remember, HBRIC reckon it will cost $150 million just to lay the pipes over 15,000-20,000ha, so I don't know how WWUP can build two dams and a distribution system for what they claim.

At 10 cents a cu m, and employing the same assumptions as above, the cashflows can sustain a $134 million build. This is just below the $138 million lower-end estimate, which makes it infeasible at 10 cents.

At 15 cents things are a little better - it can sustain a build cost of $201 million which, potentially, makes it a goer.

However:

I've been very very generous with my assumptions and the WWUP numbers look somewhat heroic.

I, therefore, think this one is likely to struggle too - so it's a marginal call whether to look much further.

I think the critical question is whether funding can be found at 5 per cent - as I suspect that that may be challenging too.

The bottom line seems to be the Tividale option is a complete dud and Black Creek is barely marginal.