Martin van Bueren - Investment decisions in water resource ...€¦ · Investment decisions in...

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




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




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?




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




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




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




CASE STUDIES

Metering bulk water extraction

Compliance and enforcement

Management of sewerage overflows




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


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




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?




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


initial response


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




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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