Sunday, November 04, 2007

Foreign control of Melbourne's water?

More suspect economics from Jason Dowling The Sunday Age.
HUNDREDS of millions of dollars of Victorian water profits will flow overseas because no local companies are capable of building and running Victoria's $3.1 billion desalination plant.
A strong field of international water companies is bidding for the plant, with the winner set to control a third of Melbourne's water needs after 2011....
Water bills will double in Melbourne in the next five years to pay the private firms for building and operating the plant.
If the bidding process for tenders is competitive, and there are no learning externalities that might come in handy for building further plants, then the project should go to the lowest cost tender irrespective of whether it is foreign or local. We should get rid of the ‘buy Australian’ ethic permanently and simply go for the best deal based on the principles of free trade.

This does not mean the desalination plant is a good idea. Indeed the problem with the daft economics expressed is that it deflects attention from issues that are important.

As I discussed last week there are alternative proposals for redirecting water from rural users and from building additional dams that should be considered. Purchasing water from irrigators on the Goulburn River and building a pipeline to pump it to the Sugarloaf dam would cost about ¼ the cost of providing water from a desalination plant (225 cents per kilolitre) and the cost of a new dam on the MacAlistair River would only be a bit more than the cost of irrigation water, according to the IPA. Robert Merkel, in comments, mentioned possible environmental problems in the Gippsland lakes as a consequence of another dam - an issue I am exploring.

As is well-known the most 'low value' water users in the state are rural irrigators:

Irrigated industries account for 77% of water used in Victoria. In 2004/5 the state’s irrigation industries – which take water from the Murray River System - used more than 5 times the volume of water consumed by the 3.5 million residents of Melbourne in the same year.
Moreover, desalination plants have significant environmental impacts on the marine environment. And the energy intensive character of such plants will add to climate change problems.

But these problems have nothing to do with the mercantilist fears being fostered by Dowling.

2 comments:

Anonymous said...

Harry:

You teach graduate business school, right?

Let's pretend there is a case study where the firm is masively profitable but the CEO doesn't want to expand the business despite all indications suggesting there is clear evidence that the increased supply will be met with high demand levels.

Should that CEO be sacked?

The answer is obviously he should.

That's our water business at the moment. Only now , in the face of savage rationing are we seeing the possibility of an increase in supply of water.


Look Harry, buying water from the Upper Victorian rural areas is all well and good. However we need increased capacity.

Believe it or not, they are actually growing the food that we eat.

Strange , hey?

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