Water resource assessment for the Southern Gulf catchments Australia’s National Science Agency A report from the CSIRO Southern Gulf Water Resource Assessment for the National Water Grid Editors: Ian Watson, Caroline Bruce, Seonaid Philip, Cuan Petheram and Chris Chilcott ISBN 978-1-4863-2081-3 (print) ISBN 978-1-4863-2082-0 (online) Citation Watson I, Bruce C, Philip S, Petheram C and Chilcott C (eds) (2024) Water resource assessment for the Southern Gulf catchments. A report from the CSIRO Southern Gulf Water Resource Assessment for the National Water Grid. CSIRO, Australia. Chapters should be cited in the format of the following example: Philip S, Watson I, Petheram C and Bruce C (2024) Chapter 1: Preamble. In: Watson I, Bruce C, Philip S, Petheram C, and Chilcott C (eds) (2024) Water resource assessment for the Southern Gulf catchments. A report from the CSIRO Southern Gulf Water Resource Assessment for the National Water Grid. CSIRO, Australia. Copyright © Commonwealth Scientific and Industrial Research Organisation 2024. To the extent permitted by law, all rights are reserved and no part of this publication covered by copyright may be reproduced or copied in any form or by any means except with the written permission of CSIRO. Important disclaimer CSIRO advises that the information contained in this publication comprises general statements based on scientific research. The reader is advised and needs to be aware that such information may be incomplete or unable to be used in any specific situation. No reliance or actions must therefore be made on that information without seeking prior expert professional, scientific and technical advice. To the extent permitted by law, CSIRO (including its employees and consultants) excludes all liability to any person for any consequences, including but not limited to all losses, damages, costs, expenses and any other compensation, arising directly or indirectly from using this publication (in part or in whole) and any information or material contained in it. CSIRO is committed to providing web accessible content wherever possible. If you are having difficulties with accessing this document, please contact Email CSIRO Enquiries . CSIRO Southern Gulf Water Resource Assessment acknowledgements This report was funded through the National Water Grid’s Science Program, which sits within the Australian Government’s Department of Climate Change, Energy, the Environment and Water. Aspects of the Assessment have been undertaken in conjunction with the Northern Territory (NT) and Queensland governments. The Assessment was guided by two committees: i. The Governance Committee: CRC for Northern Australia/James Cook University; CSIRO; National Water Grid (Department of Climate Change, Energy, the Environment and Water); Northern Land Council; NT Department of Environment, Parks and Water Security; NT Department of Industry, Tourism and Trade; Office of Northern Australia; Queensland Department of Agriculture and Fisheries; Queensland Department of Regional Development, Manufacturing and Water ii. The Southern Gulf catchments Steering Committee: Amateur Fishermen’s Association of the NT; Austral Fisheries; Burketown Shire; Carpentaria Land Council Aboriginal Corporation; Health and Wellbeing Queensland; National Water Grid (Department of Climate Change, Energy, the Environment and Water); Northern Prawn Fisheries; Queensland Department of Agriculture and Fisheries; NT Department of Environment, Parks and Water Security; NT Department of Industry, Tourism and Trade; Office of Northern Australia; Queensland Department of Regional Development, Manufacturing and Water; Southern Gulf NRM Responsibility for the Assessment’s content lies with CSIRO. The Assessment’s committees did not have an opportunity to review the Assessment results or outputs prior to their release. This report was reviewed by Mr Mike Grundy (Independent consultant). Individual chapters were reviewed by Dr Peter Wilson, CSIRO (Chapter 2); Dr Andrew Hoskins, CSIRO (Chapter 3); Dr Brendan Malone, CSIRO (Chapter 4); Dr James Bennett, CSIRO (Chapter 5); Dr Nikki Dumbrell, CSIRO (Chapter 6); Mr Darran King, CSIRO (Chapter 7). The material in this report draws largely from the companion technical reports, which were themselves internally and externally reviewed. For further acknowledgements, see page xxviii. Acknowledgement of Country CSIRO acknowledges the Traditional Owners of the lands, seas and waters of the area that we live and work on across Australia. We acknowledge their continuing connection to their culture and pay our respects to their Elders past and present. Photo Saltwater Arm, a tributary of the Albert River. This view typifies the tidal rivers and estuaries along the southern coast of the Gulf of Carpentaria. Source: Shutterstock Part IV Economics of development and accompanying risks Chapters 6 and 7 describe economic opportunities for water development in the Southern Gulf catchments, and the accompanying constraints and risks: • economic opportunities and constraints (Chapter 6) • a range of risks to development (Chapter 7). Agricultural production in the Southern Gulf catchments is dominated by extensive grazing of beef cattle, valued at $240 million in 2020–21 and covers about 77% of the study area. Photo: CSIRO – Nathan Dyer 6 Overview of economic opportunities and constraints in the Southern Gulf catchments Authors: Chris Stokes, Shokhrukh Jalilov, Diane Jarvis Chapter 6 examines the types of opportunities for the development of irrigated agriculture in the catchment of the Southern Gulf riversFigure 6-1). 1, that is Settlement Creek, Gregory—Nicholson River and Leichhardt River, the Morning Inlet catchments and the Wellesley island groups, that are most likely to be financially viable. The chapter considers the costs of building the required infrastructure (both within the scheme and beyond), the financial viability of various types of schemes (including lessons learned from past large dam developments in Australia) and the regional economic impacts (the direct and flow-on effects for businesses across the catchment) ( 1 Only those islands greater than 1000 ha are mapped. Figure 6-1 Schematic diagram of key components affecting the commercial viability of a potential greenfield irrigation development "\\fs1-cbr.nexus.csiro.au\{lw-rowra}\work\10_Reporting\1_All\9_Graphics_artist\3_Vic and SoG\C Bruce Vic CR Chp6_8_2024.jpg" The chapter focuses on the costs and benefits that are the subject of normal market transactions, but it does not provide a full economic analysis. Commercial factors are likely to be among the most important criteria in deciding between potential development opportunities. Options clearly identifiable at the pre-feasibility stage as not being commercially viable could be deprioritised. More-detailed and project-specific agronomic, ecological, social, cultural and regulatory assessments could then focus on those opportunities identified as showing the most commercial promise. The non-market impacts and risks associated with any financially viable development opportunities, discussed in Chapter 7, must also be considered. 6.1 Summary 6.1.1 Key findings Scheme-scale financial viability New investment in irrigation development in the Southern Gulf catchments would depend on finding viable combinations of low-cost water sources, low-cost farming development opportunities, and high-productivity farms; finding opportunities for reducing cropping costs and attracting price premiums for produce; and managing a wide range of risks. Financial analyses have indicated that large dams in the Southern Gulf catchments are unlikely to be viable if public investors target full cost recovery at a 7% internal rate of return (IRR) and do not provide assistance, which would make water from the most cost-effective dam sites too expensive for irrigators. However, large dams could be marginally viable if public investors accepted a 3% IRR. On-farm water sources provide better prospects than large dams: where sufficiently cheap water development opportunities can be found, they could support viable broadacre farms and horticulture with low development costs. Horticulture with high development costs (e.g. fruit orchards) in the Southern Gulf catchments would be more challenging unless farm financial performance could be boosted by (i) finding niche opportunities for premium produce prices, (ii) making savings in production and marketing costs, and/or (iii) obtaining high yields. Farm performance can be affected by a number of risks, including water reliability, climate variability, price fluctuations, and the need to adapt farming practices to new locations. Setbacks that occur soon after an irrigation scheme has been established have the largest effect on scheme viability. There is a strong incentive for using well-proven crops and technologies when starting any new irrigation development, and for being thoroughly prepared for those agronomic risks of establishing new farmland that can be anticipated. Risks that cannot be avoided must be managed, mitigated where possible, and accounted for when determining the realistic returns that may be expected from a scheme and the capital buffers that would be required. Cost–benefit analysis of large public dams A review of recent large public dams built in Australia has highlighted some areas where cost– benefit analyses (CBAs) for water infrastructure projects that could be improved upon, particularly the need for more-realistic forecasting of the demand for water. This chapter provides information for benchmarking a number of the processes commonly used in such CBAs, including demand forecasting, which can be used to check when proposals for new dams are being unrealistically optimistic (or pessimistic). Regional economic impacts Any new irrigated agriculture development and its supporting infrastructure will have knock-on benefits to the regional economy beyond direct economic growth from the new farms and construction. The initial construction phase of a new irrigation development in the Southern Gulf catchments could provide an additional approximately $1.1 million of indirect regional benefits, over and above the direct benefits, for each million dollars spent on construction within the local region. The ongoing production phase of a new irrigation development could provide an additional (approximately) $0.46 to $1.82 million of indirect regional benefits for each million dollars of direct benefits from the increased agricultural activity (gross revenue), depending on the type of agricultural industry. The indirect regional benefits would be reduced if some of the extra expenditure generated by a new development was leaked to outside the catchment. Each $100 million increase in agricultural activity could create approximately 100 to 852 jobs. 6.2 Introduction Large new infrastructure projects in Australia are expected to be increasingly accountable and transparent. This trend extends to the planning and building of new water infrastructure, and the way water resources are managed and priced (e.g. Infrastructure Australia, 2021a, 2021b; NWGA, 2022, 2023), and includes greater scrutiny of the costs and benefits of potential large new public dams. The difficulty in accurately estimating costs and the chance of incurring unanticipated expenses during construction, and of not meeting the projected water demands and achieving revenue trajectories when completed, put the viability of developments at risk if they are not thoroughly planned and assessed. For example, in a global review of dam-based megaprojects, Ansar et al. (2014) found that the forecast costs were systematically biased downwards, with three-quarters of projects running over budget and the mean of the actual costs being almost double the initial estimates. This is typical for most types of large infrastructure projects, not just dams (see review in Section 6.4.1). Ultimately, economic factors are likely to be among the most important criteria in deciding the scale and types of potential development opportunities in the Southern Gulf catchments. An assessment of 13 agricultural developments in northern Australia found that, while the natural environments were challenging for agriculture, the most important factors determining the viability of developments were management, planning and finances (Ash et al., 2014). At the pre- feasibility stage, options that can be clearly identified as not being financially viable could be deprioritised. The expensive, more-detailed and project-specific agronomic, ecological, social, cultural and regulatory assessments could then focus on the more promising opportunities. This chapter aims to assist future planning and evaluation of investments in new irrigated agriculture developments by highlighting the types of projects that are more likely to be viable, and quantifying the costs, benefits and risks involved. It provides a generic information resource that is broadly applicable to a variety of irrigated agriculture development opportunities but does not examine any specific options in detail. The results are presented in a way that allows readers to identify the costs, risks, and farm productivity values specific to the project opportunities in which they are interested, to evaluate their likely financial viability. The information also provides a set of benchmarks for establishing realistic assumptions and the thresholds of financial performance required for water and farm developments, individually and in combination, to be financially viable. This chapter builds on earlier material in Chapter 4 (assessing the viability of new irrigated agriculture opportunities in the Southern Gulf catchments at the enterprise level) and in Chapter 5 (assessing the opportunities for developing water sources to support those farms). Section Rather than analysing the cost–benefit of specific irrigation scheme proposals, this chapter presents generic tables for evaluating multiple alternative development configurations, providing the threshold farm gross margins and water costs and pricing that would be required in order to cover infrastructure costs. These tables serve as tools that allow users to answer their own questions about agricultural land and water development. Examples of the questions that can be asked, and which tables provide the answers, are given in Table 6-1. Table 6-1 Types of questions that users can answer using the tools in this chapter For each question, the relevant table number is given, together with an example answer for a specific development scenario. More questions can be answered with each tool by swapping around the factors that are known and the factor being estimated. (All initial estimates assume farm performance is 100% in all years, i.e. before accounting for risks. See Table 6-3 for the supporting generalised assumptions.) QUESTION (WITH EXAMPLE ANSWER) RELEVANT TABLE 1) How much can various types of farms afford to pay per ML of water they use? Table 6-4 A broadacre farm with a gross margin (GM) of $4000/ha and water consumption of 8 ML/ha could afford to pay $135/ML while achieving a 10% internal rate of return (IRR). 2) How much would the operator of a large off-farm dam have to charge for water? Table 6-6 If off-farm water infrastructure had a capital cost of $5000 for each ML/y supply capacity (yield) at the dam wall, the (public) water supplier would have to charge $537 for each ML to cover its costs (at a 7% target IRR). 3) For an on-farm dam with a known development cost, what is the equivalent $/ML price of water? Table 6-8 If a farm dam had a capital development cost of $1500 for each ML/y supply capacity (yield), water could be purchasable at a cost of $190 for each ML (given a 10% target IRR). 4) (a) What farm GM would be required in order to fully cover the costs of an off-farm dam? (b) What proportion of the costs of off-farm water infrastructure could farms cover? Table 6-5 If off-farm infrastructure had a capital cost of $50,000/ha to build, broadacre farms would need to generate a GM of $5701/ha in order to fully cover the water supply costs (while meeting a target 7% IRR for the water supplier (public investor) and a 10% IRR for the irrigator (private investor)). With the same target IRRs, a broadacre farm with a GM of $4000/ha could contribute the equivalent of $20,000 to $30,000 per ha towards the capital costs of building the same $50,000/ha dam (~50% of the full costs of building and operating that infrastructure). 5) What GM would be required in order to cover the costs of developing a new farm, including a dam or bores? Table 6-7 A horticultural farm with low overheads ($1500/ha) that cost $40,000/ha to develop (e.g. $30,000/ha to establish the farm and $10,000/ha to build the on-farm water supply for irrigating it) would require a GM of $6702/ha to attain a 10% IRR. QUESTION (WITH EXAMPLE ANSWER) RELEVANT TABLE 6) How would risks associated with water reliability affect the farm GMs above? Table 6-9 If an on-farm dam could fully irrigate the farm in 70% of years and could irrigate 50% of the farm in the remaining years, all farm GMs in the answers above would need to be multiplied by 1.18 (i.e. would be 18% higher), and the price irrigators could afford to pay for water would need to be divided by 1.18. For example, in Q4, the GM required in order to cover the costs of the farm development would increase from $5701/ha to $6727/ha after accounting for the risks of water reliability. 7) How would the risks associated with ‘learning’ (initial farm underperformance) affect estimates? Table 6-11 If a farm with a 10% target IRR achieved a GM that was 50% of its full potential in the first year, and gradually improved to achieve its full potential over 10 years, then the GMs above would need to be multiplied by a factor of 1.26 (i.e. would be 26% higher). For example, in Q6, the required farm GM would increase to $8476/ha after accounting for the risks of both water reliability and learning (a combined 49% higher than the value before accounting for risks). 6.3 Balancing scheme-scale costs and benefits Designing a new irrigation development in the Southern Gulf catchments would require balancing three key determinants of irrigation scheme financial performance to find combinations that might collectively constitute a viable investment. The determinants are: 1.farm financial performance (relative to development costs and water use) (Chapter 4) 2.capital cost of development, for both water resources and farms (Chapter 5 and Section 6.3.1) 3.risks (and the associated required level of investment return) (Section 6.3.5). The determinants considered have been limited to those with greater certainty and/or lower sensitivity, so that the results can be applied to a wide range of potential developments. A key finding of the irrigation scheme financial analyses is that no single factor within the above list is likely to be able to provide a silver bullet for meeting the substantial challenge of designing a commercially viable new irrigation scheme. Balancing the benefits to meet costs in order to identify viable investments would likely require contributions from each of the above factors and careful selection to piece together a workable combination. This section provides background information on the analysis approach used, to help readers understand how these factors influence irrigation scheme financial performance. 6.3.1 Approach and terminology Scheme financial evaluations use a discounted cashflow framework to evaluate the commercial viability of irrigation developments. The framework, detailed in the companion technical report on agricultural viability and socio-economics (Webster et al., 2024), is intended to provide a purely financial evaluation of the conditions required to produce an acceptable return from an investor’s perspective. It is not a full economic evaluation of the costs and benefits to other industries, nor does it consider ‘unpriced’ impacts that are not the subject of normal market transactions, or the equity of how costs and benefits are distributed. For the discussion that follows, the costs and benefits of an irrigation scheme were taken to include all those from the development of the land and water resources to the point of sale for farm produce. This section explains the terminology and standard assumptions used. A ‘discounted cashflow analysis’ considers the lifetime of costs and benefits following capital investment in a new project. Costs and benefits that occur at various times are expressed in constant real dollars (December 2023 Australian dollars), with a discount rate being applied to streams of costs and benefits. The ‘discount rate’ is the percentage by which future costs and benefits are discounted each year (compounded) to convert them to their equivalent present value. For an entire project, the ‘net present value’ (NPV) can be calculated by subtracting the present value of the stream of all costs from the present value of the stream of all benefits. The ‘benefit- to-cost ratio’ (BCR) of a project is the present value of all the benefits of a project divided by the present value of all the costs involved in achieving those benefits. To be commercially viable (at the nominated discount rate), a project would require an NPV that is greater than zero (in which case the BCR would be greater than one). The IRR is the discount rate at which the NPV is zero (and the BCR is 1). For a project to be considered commercially viable, it needs to meet its target IRR, and the NPV has to be greater than zero at a discount rate appropriate to the risk profile of the development and alternative investment opportunities available to investors. A target IRR of 7% is typically used when evaluating large public investments (with the sensitivity analysis set at 3% and 10%) (Infrastructure Australia, 2021b). Private agricultural developers usually target an IRR of 10% or more (to compensate for the investment risks involved). A back-calculation approach is used in the tables below to present the threshold GMs and water prices that would be required in order for investors to achieve specified target IRRs (the NPV would be equivalent to zero at these discount rates). The ‘project evaluation periods’ used in this chapter matched the ‘life spans’ of the main infrastructure assets: 100 years for large off-farm dams and 40 years for on-farm developments. To simplify the tracking of asset replacements, four categories of life spans were used: 15 and 40 years for farms and 25 and 100 years for off-farm infrastructure. It was assumed that the shorter-life-span assets would be replaced at the end of their life, and that their costs would have been accounted for in full by the actual year of their replacement. At the end of the evaluation period, a ‘residual value’ was calculated to account for any shorter-life-span assets that have not reached the end of their working life. Residual values were calculated as the proportional asset life remaining multiplied by the original asset price. The ‘capital costs’ of infrastructure were assumed to be the costs at completion (accounted for in full in the year of delivery), such that the assets commenced operations the following year. In some cases, the costs of developing the farmland and setting up the buildings and equipment were considered separately from the costs of the water source, so that various water source options could be compared on a like-for-like basis. Where an off-farm water source was used, the separate investor in that water source would receive payments for water at a price that the irrigator could afford to pay. The main ‘costs for operating’ a large dam and the associated water distribution infrastructure are (i)fixed costs for administering and maintaining the infrastructure, expressed here as percentageof the original capital cost, and (ii) variable costs associated with pumping water into distributionchannels. At the farm scale, fixed overhead costs are incurred each year, whether or not a crop is planted in a particular field that year. ‘Fixed costs’ are dominated by the fixed component of labour costs, but also include maintenance, insurance, professional services, and registrations. An additional allowance is made for annual operation and maintenance (O&M), budgeted at 1% of the original capital value of all assets (with an additional variable component in maintenance costs when machinery is used for cropping operations). A ‘farm annual gross margin’ (GM) is the difference between the gross income from crop sales and the variable costs of growing a crop each year. ‘Net farm revenue’ is calculated by subtracting the fixed overhead costs from the GM. ‘Variable costs’ vary in proportion to the area of land planted, the amount of crop harvested and/or the amount of water and other inputs applied. Farm GMs can vary substantially within and between locations, as described in Chapter 4. The GMs presented here are the values obtained before subtracting the variable costs of supplying water to farms; these water supply costs are, instead, accounted for in the capital costs of developing water resources. (The equivalent unit costs of supplying each ML of water are presented separately below.) The CBA analyses first considered the case of irrigation schemes built around public investment in a large off-farm dam in the Southern Gulf catchments and then considered the case developments using ‘on-farm’ dams and bores. Cost and benefit streams, totalled across the scheme, were tracked as separate components, allowing for both on-farm and off-farm sources of new water development. For farms, these streams were: (i) the capital costs of land development, farm buildings and equipment (including replacement costs and residual values), (ii) the fixed overhead costs, applied to the full area of developed farmland, and (iii) the total farm GM (across all farms in the scheme), applied to the mean proportion of land in production each year. If an ‘on-farm water source’ was being considered, then those costs were added to the farm costs. Farm developers were treated as private investors who would seek a commercial return. When an ‘off-farm water source’ (large dam >25 GL/year) was evaluated, its investor was treated as a separate public investor to whom payment was made by farmers for water supplied (which served as an additional stream of costs for farmers, and a stream of benefits for the water supplier, at their respective target IRRs). For the public off-farm developer, the streams of costs were: (i) the capital costs of developing the water and associated enabling infrastructure (including replacement costs and residual values), and (ii) the costs of maintaining and operating those assets. Threshold gross margins and water pricing to achieve target internal rate of return New irrigation schemes in the Southern Gulf catchments would be costly to develop, so many technically feasible options are unlikely to be profitable at the returns and over the time periods expected by many investors. The results presented below suggest it would be difficult for any farming options to fully cover the costs of a large off-farm dam development. However, there are greater prospects of viable developments using on-farm sources of water for broadacre and cost- efficient horticulture. The costs of developing water and land resources for a new irrigation development vary widely depending on a range of case-specific factors that are dealt with in other parts of this Assessment. These factors include the type and nature of the water source, type of water storage, geology, topography, soil characteristics, water distribution system, type of irrigation system, type of crop to be grown, local climate, land preparation requirements, and level to which infrastructure is engineered. The financial analyses, therefore, have taken a generic approach in exploring the consequences for the development costs of this variation, and other key factors that determine whether or not an irrigation scheme would be viable (e.g. farm performance and the level of returns sought by investors). The analyses used the discounted cashflow framework described above to back- calculate and fit the water prices and farm GMs that would be required for respective public (off- farm) and private investors (irrigators) to achieve their target IRRs. The results are summarised in tables showing the thresholds that must be met for a particular combination of water development and farm development options to meet the investor’s target returns. The tables allow viable pairings to be identified based on either threshold costs of water or required farm GMs. Financial viability for these threshold values was defined and calculated as investors achieving their target IRR (or, equivalently, that the investment would have an NPV of zero and a BCR of one at the target discount rate). Assumptions The first analyses considered the case of irrigation schemes built around public investment in a large off-farm dam in the Southern Gulf catchments. The analyses then considered the case of developments using on-farm dams and bores. To keep the results as relevant as possible to a wide range of different development options and configurations, the analyses here do not assume the scale at which a water development would be undertaken. Instead, all costs are expressed per hectare of irrigated farmland and per ML per year of water supply capacity, facilitating comparisons between scenarios (which can differ substantially in size). To illustrate how this slightly abstract generic approach can be applied to specific development projects, three worked examples show the indicative off-farm infrastructure costs that would be involved in development of the most cost-effective dam sites in close proximity to soils suitable for irrigated agriculture identified in the Southern Gulf catchments (Table 6-2). Table 6-2 Indicative capital costs for developing three irrigation schemes based on the most cost-effective dam sites identified in the Southern Gulf catchments FSL = full supply level. For more information on this figure, table or equation please contact CSIRO on enquiries@csiro.au To enhance like-for-like comparisons across the various development scenarios, a set of standard assumptions have been made about the breakdown of development costs (by life span) and associated ongoing operating costs (Table 6-3). Three indicative types of farming enterprise represent different levels of capital investment, associated with the intensity of production and the extent to which farming operations are performed on-farm or outsourced (Table 6-3). The capital costs and fixed costs are higher for horticulture than for broadacre farming, but the more expensive irrigation systems used (such as drippers) apply water more precisely and efficiently to crops. The indicative ‘Broadacre’ farm could, for example, represent hay or cotton farming using furrow irrigation on heavier clay soils. The indicative capital-intensive ‘Horticulture-H’ farm could, for example, represent high-value fruit-tree orchards with high standard on-farm packing and cold room facilities, and include accommodation for seasonal workers travelling to very remote Southern Gulf catchments farms. The indicative less-capital-intensive ‘Horticulture-L’ farm option could, for example, represent a row crop, such as melons, with packing directly to bins and use of off-farm accommodation for seasonal workers (which reduces the upfront capital cost of establishing the farm, but increases the ongoing costs for outsourced services, which reduces farm GMs). Table 6-3 Assumed indicative capital and operating costs for new off- and on-farm irrigation infrastructure Three types of farming enterprise represent a range of increasing intensity, value and cost of production. Indicative base capital costs for establishing new farms (excluding water costs) allow on- and off-farm water sources to be added and compared on an equal basis. Annual operation and maintenance (O&M) costs are expressed as a percentage of the capital costs of assets. The Horticulture-H farm, with higher development costs, includes on-farm packing facilities, cold storage, and accommodation for seasonal workers. The Horticulture-L farm, with lower development costs, does not include these assets and would have to outsource these services if required (reducing the farm gross margin). IRR = internal rate of return. SCHEME COMPONENT ITEM VALUE UNIT O&M COST (% capital cost/y) Off-farm infrastructure development capital and operating costs (large dam and enabling infrastructure) Capital costs Total capital costs (split by life span below) Indicative >50,000 (analysed range: 20,000 to 150,000) $/ha Longer life span infrastructure (100 y) 85 % 0.4 Shorter-life-span infrastructure (40 y) 15 % 1.6 Operating costs O&M (by life span categories) % capital cost $/ha/y Off-farm water source pumping costs ~2 (additional) $/ML/m Target IRR Base (with sensitivity range) 7 % Farm development capital and operating costs Broadacre Horticulture-L (low capital) Horticulture-H (high capital) Capital costs Base (excluding water source) 9,000 25,000 70,000 $/ha Water source (on- or off-farm) Indicative >4,000 (analysed range: 3,000 to 15,000) $/ha Longer-life-span infrastructure (40 y) 50 50 50 % 1.0 SCHEME COMPONENT ITEM VALUE UNIT O&M COST (% capital cost/y) Shorter-life-span infrastructure (15 y) 50 50 50 % 1.0 Operating costs O&M (by life-span categories) % capital cost $/ha/y Farm water source pumping costs ~2 (additional) $/ML/m Fixed costs 600 1,500 6,500 $/ha/y Water use Crop water use (before losses) 6 6 6 ML/ha/y On-farm water use efficiency 70 90 90 % Gross margin Indicative gross margin 4,000 7,000 11,000 $/ha/y Target IRR Base (with sensitivity range) 10 10 10 % For consistency, all costs of delivering water to the farm at the level of the soil surface are treated as the costs of the water source (so the costs of the various water source options can be compared on a like-for-like basis). Subsequent farm pumping costs of distributing and applying the supplied water to crops are treated as part of the variable costs of growing crops and are already accounted for in the crop GMs presented in Chapter 4. The pumping costs for the water supplier are highly situation-specific for the various water sources. In particular, these pumping costs are affected by the elevation of the water source relative to the point of distribution to the farm: for example, the height water needs to be pumped from a weir to a distribution channel, or from a farm dam to a field; or the dynamic head required to lift bore water to the field surface. For this reason, water source pumping costs have not been included in the summary tables of water pricing, but should be added separately as required at a cost of approximately $2 per ML per m dynamic head. This is mainly a consideration for groundwater bores, but also applies when water needs to be lifted from rivers or irrigation channels. For more information on water infrastructure costs, see Chapter 5 (and the companion technical reports referenced there). For more information on crop GMs, see Chapter 4 (and the companion technical reports referenced there). The analyses presented below consider (i) the case of irrigation schemes built around a large dam and its associated supporting off-farm infrastructure (Section 6.3.3); (ii) the case of self-contained, modular farm developments with their own on-farm source of water (Section 6.3.4). For both cases, the water price that irrigators can afford to pay provides a useful common point of reference for identifying the most affordable water sources for various types of farm developments (Section 6.3.2). The initial analyses assumed that all farmland was in full production and performed at 100% of its potential (and assumed 100% reliable water supplies) from the start of the development. Section 6.3.5 provides a set of adjustment factors that quantify the risks of various sources of underperformance that can be anticipated. 6.3.2 Price irrigators can afford to pay for a new water source Table 6-4 shows the price that the three different types of farms could afford to pay for water, while meeting a target 10% IRR, for three different levels of farm water use and productivity. For prices to be sustained at this level throughout the life of the water source, the associated farm GM (in the first column of Table 6-4) would also need to be maintained over this period. The table is, therefore, most useful when assessing the long-term price that can be sustained to pay off long- lived water infrastructure (rather than temporary spikes in farm GMs during runs of favourable years). The lowest GM in the first column of Table 6-4 for each farm type is the value below which the farm would not be viable, even if water was free. This does not necessarily mean that such GMs could readily be achieved in practice: for the capital-intensive Horticulture-H farm, in particular, it would be challenging in the Southern Gulf catchments to reach the $17,000 per ha per year GM to cover the farm’s other costs, even before considering the costs of water. Table 6-4 Price irrigators can afford to pay for water, based on the type of farm, the farm water use and the farm annual gross margin (GM), while meeting a target 10% internal rate of return (IRR) Analyses assume water volumes are measured on delivery to the farm gate or surface: pumping costs involved in getting water to the farmland surface would be an additional cost of supplying the water (indicatively $2 per ML per m dynamic head), while pumping costs in distributing and applying the water to the crop are considered part of the variable costs included in the GM. Indicative GMs that the three types of farms could attain in the Southern Gulf catchments are $4000 and $7000 per ha per year for Broadacre and Horticulture-L farms, respectively (blue-shaded rows), and $11,000 per ha per year for Horticulture-H (Table 6-3, Chapter 4). Note that the Horticulture-H farm cannot pay anything for water until it achieves a GM above $17,000 per ha per year. GROSS MARGIN PRICE IRRIGATORS CAN AFFORD TO PAY ($/ha/y) ($/ML at farm gate/surface) Farm water use (ML/ha, including on-farm distribution and application losses) 4 5 6 7 8 9 10 12 Broadacre ($9,000/ha development costs, $600/ha/y fixed costs, 70% on-farm efficiency) 2,000 25 20 17 14 12 11 10 8 2,500 86 69 57 49 43 38 34 29 3,000 147 118 98 84 74 65 59 49 3,500 209 167 139 119 104 93 83 70 4,000 270 216 180 154 135 120 108 90 5,000 392 314 262 224 196 174 157 131 Horticulture-L ($25,000/ha development costs, $1,500/ha/y fixed costs, 90% on-farm efficiency) 5,000 39 31 26 22 19 17 16 13 6,000 241 193 161 138 121 107 97 80 7,000 444 355 296 254 222 197 178 148 8,000 646 517 431 369 323 287 259 215 10,000 1051 841 701 601 526 467 421 350 12,000 1456 1165 971 832 728 647 583 485 Horticulture-H ($70,000/ha development costs, $6,500/ha/y fixed costs, 90% on-farm efficiency) 17,000 203 162 135 116 101 90 81 68 20,000 810 648 540 463 405 360 324 270 25,000 1823 1458 1215 1042 911 810 729 608 30,000 2835 2268 1890 1620 1418 1260 1134 945 40,000 4860 3888 3240 2777 2430 2160 1944 1620 These water prices are likely to be most useful for public investors in large dams, because the sequencing of development creates asymmetric risks between the water supplier and the irrigators. Irrespective of the planned water pricing for a dam project, once the dam is built, irrigators have the choice of whether to develop new farms; they are unlikely to act to their own detriment by making an investment if they cannot do so at a water price that will allow them to obtain a commercial rate of return. These water prices, together with estimates of likely attainable farm GMs (available in Chapter 4), provide a useful benchmark for checking assumptions about any potential public dam developments in the Southern Gulf catchments. For on-farm water sources, these water prices can assist in identifying water development options that cropping operations could reasonably be expected to afford. The tables in the next sections allow comparisons of irrigation development options by converting the capital costs of developing on- and off-farm water sources to volumetric costs ($/ML supplied). All water prices are based on volumes supplied to the farm gate or surface (after losses in transit) per metered ML supplied. 6.3.3 Financial targets required in order to cover full costs of large, off-farm dams The first generic assessment considered the case of public investment in a large dam in the Southern Gulf catchments and whether the costs of that development could be covered by water payments from irrigators (priced at their capacity to pay). The public costs of development include the cost of the dam and water distribution, and of any other supporting infrastructure required. Costs are standardised per unit of farmland developed, noting that for the same outlay, a smaller area could be developed for a crop with a higher water use (i.e. the water development costs per hectare would be higher). Target farm gross margins for off-farm public water infrastructure Table 6-5shows what farm annual GMs would be required for various costs of water infrastructure development at the public investors’ target IRR. As expected, higher farm GMs are required in order to cover higher capital costs and/or to attain a higher target IRR. The tables in this section can be used to assess whether water development opportunities and farming opportunities in the Southern Gulf catchments are likely to combine in financially viable ways. Indicative farm GMs that could be achieved in the Southern Gulf catchments are approximately $4000, $7000 and $11,000 per ha per year for Broadacre, less-capital-intensive Horticulture-L (including penalising GMs if outsourcing occurs) and capital-intensive Horticulture-H, respectively (Table 6-3). A dam and supporting infrastructure would likely require at least $50,000/ha of capital investment (Table 6-2). None of the three farming types is likely to be viable at these farm GMs and water development costs (at a 7% target IRR for the public investor). However, Broadacre and Horticulture-L farming might be marginally viable at a 3% target IRR for the public investor. Broadacre and lower-cost Horticulture-L could both achieve a target 10% IRR for the farm investments while contributing $20,000 to $30,000 per ha (40%–60%) towards the cost of a dam that cost $50,000/ha to build (including enabling infrastructure and ongoing O&M costs). That is a higher proportion of costs than irrigators have historically contributed towards irrigation schemes in some other parts of Australia (typically approximately a quarter of capital costs (Vanderbyl, 2021)), and would involve a decision by the Australian Government and the NT and Queensland governments based on their expectations, priorities, and investment criteria. 390 | Water resource assessment for the Southern Gulf catchments Table 6-5 Farm gross margins (GMs) required in order to cover the costs of off-farm water infrastructure (at the supplier’s target internal rate of return (IRR)) Assumes 100% farm performance on all farmland in all years, once construction is complete. Costs of supplying water to farms are consistently treated as costs of water source development (and not part of the farm GM calculation). Risk adjustment multipliers are provided in Section 6.3.5. Blue-shaded cells indicate the capital costs that could be afforded by farms with GMs of $4000 (Broadacre), $7000 (Horticulture-L) and $11,000 (Horticulture-H) per ha per year. Blue-shaded column headers indicate the most cost-effective dam development options in the Southern Gulf catchments (Table 6-2). TARGET IRR FARM GROSS MARGIN REQUIRED IN ORDER TO PAY FOR OFF-FARM WATER INFRASTRUCTURE (%) ($/ha/y) Total capital costs of off-farm water infrastructure ($/ha) 20,000 30,000 40,000 50,000 70,000 100,000 125,000 150,000 Broadacre ($9,000/ha development costs, $600/ha/y fixed costs, 70% on-farm efficiency) 3 2,604 3,016 3,428 3,840 4,664 5,900 6,930 7,960 5 2,977 3,569 4,160 4,751 5,933 7,707 9,185 10,663 7 3,359 4,139 4,920 5,701 7,263 9,605 11,558 13,510 10 3,941 5,013 6,085 7,157 9,301 12,516 15,196 17,876 12 4,333 5,601 6,869 8,137 10,673 14,478 17,648 20,818 Horticulture-L ($25,000/ha development costs, $1,500/ha/y fixed costs, 90% on-farm efficiency) 3 5,584 5,996 6,408 6,820 7,645 8,881 9,911 10,941 5 5,985 6,576 7,167 7,759 8,941 10,715 12,193 13,671 7 6,370 7,150 7,931 8,712 10,274 12,616 14,569 16,521 10 6,952 8,024 9,096 10,168 12,312 15,528 18,208 20,887 12 7,345 8,613 9,881 11,149 13,685 17,489 20,659 23,829 Horticulture-H ($70,000/ha development costs, $6,500/ha/y fixed costs, 90% on-farm efficiency) 3 16,618 17,068 17,518 17,967 18,867 20,217 21,342 22,467 5 17,164 17,789 18,413 19,038 20,288 22,162 23,724 25,286 7 17,610 18,416 19,222 20,027 21,638 24,055 26,070 28,084 10 18,215 19,301 20,387 21,472 23,644 26,901 29,615 32,330 12 18,607 19,884 21,161 22,438 24,992 28,823 32,015 35,207 Target water pricing for off-farm public water infrastructure Table 6-6 shows the price that a public investor in off-farm water infrastructure would have to charge to fully cover the costs of development of off-farm water infrastructure, expressed per unit of supply capacity at the dam wall. Pricing assumes that the full supply of water (i.e. reservoir yield) would be used and paid for every year over the entire lifetime of the dam, after accounting for water losses between the dam and the farm. It can be challenging for farms to sustain the high levels of revenue over such long periods (100 years) to justify the costs of building expensive dams. For these base analyses, the water supply is assumed to be 100% reliable; risk adjustment multipliers to account for reliability of supply are provided in Section 6.3.5. For example, in the Southern Gulf catchments some of the most cost-effective dam opportunities would cost approximately $5000 per ML per year of supply capacity at the dam wall, including the cost of the required supporting off-farm water infrastructure (Table 6-2). This would require farms to pay $537 per ML extracted to fully cover the costs of the public investment (at the base 7% target IRR for public investments, Table 6-6). Comparing this figure with what irrigators can afford to pay (Table 6-4) shows that it is unlikely any farming options could cover the costs of a dam in the Southern Gulf catchments at the GMs farms are likely to be able to achieve (Table 6-3, Chapter 4). When a scheme is not viable (BCR < 1), the water cost and pricing tables can be used to generate approximate estimations of the BCR and the likely proportion of public development costs that farms would be able to cover. For example, a Broadacre farm that uses 8 ML/ha (measured at delivery to the farm) and has a GM of $4000 per ha per year could afford to pay $135/ML extracted (Table 6-4), which would cover 25% ($135/$537) of the $537/ML price (Table 6-6) required to cover the full costs of the public development. The BCR would, therefore, be 0.25 (the ratio of the amount the net farm benefits can cover to the full costs of the scheme). As for the example in Table 6-5, the proportion of the capital costs of infrastructure projects they would realistically expect to recover from users would be a decision for the public investor. Table 6-6 Water pricing required in order to cover costs of off-farm irrigation scheme development (dam, water distribution, and supporting infrastructure) at the investors target internal rate of return (IRR) Assumes the conveyance efficiency from dam to farm is 70% and that supply is 100% reliable. Risk adjustment multipliers for water supply reliability are provided in Table 6-9. Pumping costs between the dam and the farm would need to be added (e.g. ~$30/ML extra to lift water ~15 m from the weir pool to distribution channels). ‘$ CapEx per ML/y at dam’ is the capital expenditure on developing the dam and supporting off-farm infrastructure per ML per year of the dam’s supply capacity measured at the dam wall. Blue-shaded cells indicate $/ML cost of water. Blue- shaded column headers are indicative of the most cost-effective large dam options available in the Southern Gulf catchments (Table 6-2). TARGET IRR WATER PRICE THAT WOULD NEED TO BE CHARGED IN ORDER TO COVER OFF-FARM INFRASTRUCTURE COSTS (%) ($/ML charged at farm gate) Capital costs of off-farm infrastructure ($ CapEx per ML/y at dam) 3,000 4,000 5,000 6,000 8,000 10,000 12,000 14,000 16,000 3 162 215 269 323 431 538 646 754 861 5 239 319 399 479 638 798 958 1117 1277 7 322 429 537 644 859 1073 1288 1502 1717 10 448 598 747 897 1196 1495 1794 2093 2392 6.3.4 Financial targets required in order to cover costs of on-farm dams and bores The second generic assessments considered the case of on-farm sources of water. Indicative costs for on-farm water sources, including supporting on-farm distribution infrastructure, vary between $4000 and $15,000 per ha of farmland. Costs depend on the type of water source, how favourable the local conditions are for its development, and the irrigation requirement of the farming system. Since the farm and water source would be developed by a single investor, the first analyses considered the combined cost of all farm development together (without separating out the water component). 392 | Water resource assessment for the Southern Gulf catchments Target farm gross margins required in order to cover full costs of greenfield farm development with water source Table 6-7 shows the farm GMs that would be required in order to cover various costs of farm development at the investor’s target IRR. Note that private on-farm water sources are typically engineered to a lower standard than public water infrastructure and have lower upfront capital costs, higher recurrent costs (higher O&M and asset replacement rates) and lower reliability. Based on the indicative farm GMs provided earlier (Table 6-3) and a 10% target IRR, a Broadacre farm with a $4000 per ha per year GM could cover total on-farm development capital costs of approximately $20,000/ha. A lower-capital-cost Horticulture-L farm with a GM of $7000 per ha per year could afford approximately $40,000/ha of initial capital costs, and a capital-intensive Horticulture-H farm with a GM of $11,000 per ha per year could pay approximately $30,000/ha for farm development (Table 6-7). This indicates that on-farm water sources may have better prospects of being viable than large public dams in the Southern Gulf catchments, particularly for broadacre farms and horticulture with lower development costs, if good sites can be identified for developing sufficient on-farm water resources at a low-enough cost. Table 6-7 Farm gross margins (GMs) required in order to achieve target internal rates of return (IRR), given various capital costs of farm development (including an on-farm water source) Assumes 100% farm performance on all farmland in all years, once construction is complete. Risk adjustment multipliers are provided in Section 6.3.5. Blue-shaded cells indicate the capital costs that could be afforded by farms with GMs of $4000 (Broadacre), $7000 (Horticulture-L) and $11,000 (Horticulture-H) per ha per year. TARGET IRR FARM GROSS MARGIN REQUIRED IN ORDER TO ACHIEVE THE FARMER'S TARGET IRR (%) ($/ha/y) Total capital costs of farm development, including water source ($ CapEx/ha) 10,000 15,000 20,000 30,000 40,000 50,000 70,000 100,000 Broadacre ($600/ha/y fixed costs, 70% on-farm efficiency) 5 1,516 1,957 2,398 3,279 4,160 5,042 6,804 9,449 7 1,669 2,181 2,694 3,718 4,742 5,767 7,815 10,888 10 1,923 2,554 3,185 4,447 5,709 6,972 9,496 13,282 12 2,105 2,821 3,537 4,968 6,400 7,832 10,696 14,991 15 2,389 3,238 4,087 5,785 7,483 9,181 12,578 17,672 20 2,882 3,963 5,044 7,206 9,368 11,530 15,854 22,340 Horticulture-L ($1,500/ha/y fixed costs, 90% on-farm efficiency) 5 2,469 2,909 3,350 4,231 5,113 5,994 7,757 10,401 7 2,637 3,149 3,661 4,685 5,710 6,734 8,783 11,856 10 2,915 3,546 4,177 5,439 6,702 7,964 10,488 14,274 12 3,114 3,830 4,546 5,978 7,409 8,841 11,705 16,001 15 3,424 4,273 5,122 6,820 8,519 10,217 13,613 18,708 20 3,962 5,043 6,124 8,286 10,448 12,610 16,934 23,420 TARGET IRR FARM GROSS MARGIN REQUIRED IN ORDER TO ACHIEVE THE FARMER'S TARGET IRR (%) ($/ha/y) Total capital costs of farm development, including water source ($ CapEx/ha) 10,000 15,000 20,000 30,000 40,000 50,000 70,000 100,000 5 7,760 8,201 8,642 9,523 10,404 11,286 13,048 15,692 7 8,012 8,524 9,036 10,060 11,085 12,109 14,158 17,231 10 8,427 9,058 9,689 10,951 12,213 13,475 15,999 19,785 12 8,720 9,436 10,152 11,584 13,016 14,448 17,312 21,607 15 9,177 10,026 10,875 12,573 14,271 15,970 19,366 24,461 20 9,963 11,044 12,125 14,287 16,449 18,611 22,935 29,421 Volumetric water cost equivalent for on-farm water source Table 6-8 converts the capital cost of developing an on-farm water source (per ML of annual supply capacity) into an equivalent cost for each individual ML of water supplied by the water source. The table can be used to estimate how much a farm could spend on developing the required water resources by comparing the costs per ML with what farms can afford to pay for water (Table 6-4). For example, a Broadacre farm with a GM of $4000 per ha per year, an annual farm water use of 8 ML/ha, and a target 10% IRR could afford to pay $135/ML for its water supply (Table 6-4), which would allow capital costs of approximately $1000 for each ML/year supply capacity for developing an on-farm supply (Table 6-8). Approximate indicative costs for developing on-farm water sources range from $500/ML to $2000/ML (based on the range of per hectare costs above). This alternative approach confirms that there are likely to be viable farming opportunities using on-farm water development in the Southern Gulf catchments. Table 6-8 Equivalent costs of water per ML for on-farm water sources with various capital costs of development, at the internal rate of return (IRR) targeted by the investor Assumes the water supply is 100% reliable. Risk adjustment multipliers for water supply reliability are provided in Table 6-9. Pumping costs to the field surface would be extra (e.g. ~$2 per ML per m dynamic head for bore pumping). Blue-shaded cells indicate $/ML cost of water. TARGET IRR WATER VOLUMETRIC COST-EQUIVALENT UNIT FOR VARIOUS CAPITAL COSTS OF WATER SOURCE (%) ($/ML) Capital costs for on-farm water infrastructure ($ CapEx per ML/y at farmland surface) 300 400 500 700 1000 1250 1500 1750 2000 3 22 29 37 51 74 92 110 129 147 5 26 35 44 61 87 109 131 153 175 7 31 41 51 72 102 128 154 179 205 10 38 51 63 89 127 159 190 222 254 12 43 58 72 101 144 180 216 252 288 15 51 68 85 120 171 213 256 299 342 20 65 87 109 152 217 271 326 380 434 6.3.5 Risks associated with variability in farm performance This section assessed the impacts of two types of risks on scheme financial performance: those that reduce farm performance through the early establishment and learning years, and those occurring periodically throughout the life of the development. The effect of these risks is to reduce the expected revenue and expected GMs. Setbacks that occur soon after a scheme is established were found to have the largest effect on scheme viability, particularly at higher target IRRs. There is a strong incentive to start any new irrigation development with well-established crops and technologies, and to be thoroughly prepared for the those agronomic risks of establishing new farmland that can be anticipated. The analyses showed that delaying full development for longer periods than the learning time had only a slight negative effect on IRRs, whereas proceeding to full development before learning was complete had a much larger impact. This implies that it is prudent to err on the side of delaying full development (particularly given that, in practice, it is only possible to know when full performance has been achieved in retrospect). An added benefit of staging is the limiting of losses when small- scale testing proves initial assumptions of benefits to be overoptimistic and indicates that full- scale development could never be profitable (even after attempts to overcome unanticipated challenges). For an investment to be viable, farm GMs must be sustained at high levels over long periods. Thus, variability in farm performance poses risks that must be considered and managed. GMs can vary between years because of either short-term initial underperformance or periodic shocks. Initial underperformance is likely to be associated with learning, as farming practices need to be adapted to local conditions and to overcome initial challenges in order to reach their long-term potential. In addition, unavoidable periodic risks are associated with water reliability, climate variability, flooding, outbreaks of pests and diseases, periodic technical or equipment failures, and fluctuations in commodity prices and market access. Unreliability of water supply, is less easy to avoid than other periodic risks. Risks that cannot be avoided must be managed, mitigated where possible, and accounted for in determining the realistic returns that can be expected from an irrigation development. Such accounting would include having adequate capital buffers for survival through challenging periods. Another perceived risk for investors is the potential of future policy changes and delays in regulatory approvals. Reducing this, or any other sources of risk, in the Southern Gulf catchments would help make marginal investment opportunities more attractive. The results of the analyses of both periodic and learning risks are shown below. Right to farm and other sovereignty risks, especially with regard to access to water, may become key factors in future years, based on experience from elsewhere, but these are not the subject of the risk discussion presented here. Throughout this section, farm performance in a given year is quantified as the proportion of the long-term mean GM a farm attains: 100% performance is when this level is reached, and 0% equates to a performance where revenues only balance variable costs (GM = zero). Risks from periodic underperformance The analyses considered periodic risks generically, without assuming any of the particular causes listed above. To quantify their effects on scheme financial performance, the periodic risks were characterised by three components: • reliability – the proportion of ‘good’ years, in which ‘full’ 100% farm performance was achieved, with the remainder of years being termed ‘failed’ years, in which some negative impact was experienced • severity – the farm performance in a ‘failed’ year, in which some type of setback occurred • timing – in ‘early’ timing (in relation to a 10-year cycle), the ‘failed’ years came early in each 10- year cycle (e.g. 80% reliability meant that ‘failed’ years occurred in the first 2 years of the scheme and in the first 2 years of each 10-year cycle after that). In ‘late’ timing, the ‘failed’ years came at the end of each 10-year cycle. In ‘random’ timing, each year was allocated the long- term mean farm performance of ‘good’ and ‘failed’ years (frequency weighted). Table 6-9 summarises the effects of a range of reliabilities and severities for periodic risks on scheme viability. Periodic risks had a consistent proportional effect on target GMs, irrespective of development options or costs, so the results were simplified as a set of risk adjustment multipliers. The multipliers can, therefore, be applied to the target farm GMs in Section 6.3.2 (the GMs required in order to cover the capital costs of development at the investor’s target IRRs at 100% farm performance) to account for the effects of various risks. These same adjustment factors could be applied to the water prices that irrigators can afford to pay (Table 6-4), but would be used as divisors to reduce the price that irrigators could pay for water. Table 6-9 Risk adjustment factors for target farm gross margins (GMs), accounting for the effects of the reliability and severity (level of farm performance in ‘failed’ years) of the periodic risk of water reliability Results are not affected by discount rates. ‘Good’ years = 100% farm performance; ‘failed’ years = <100% performance. ‘Failed year performance’ is the mean farm GM for years in which some type of setback is experienced, relative to the mean GM when the farm is running at ‘full’ performance. FAILED YEAR PERFORMANCE (%) RISK ADJUSTMENT MULTIPLIER FOR TARGET FARM GROSS MARGINS (VS BASE 100% RELIABILITY TABLES) (unitless ratio) Reliability (proportion of ‘good’ years) 1.00 0.90 0.85 0.80 0.70 0.60 0.50 0.40 0.30 0.20 85 1.00 1.02 1.02 1.03 1.05 1.06 1.08 1.10 1.12 1.14 75 1.00 1.03 1.04 1.05 1.08 1.11 1.14 1.18 1.21 1.25 50 1.00 1.05 1.08 1.11 1.18 1.25 1.33 1.43 1.54 1.67 25 1.00 1.08 1.13 1.18 1.29 1.43 1.60 1.82 2.11 2.50 0 1.00 1.11 1.18 1.25 1.43 1.67 2.00 2.50 3.33 5.00 As expected, the greater the frequency and severity of ‘failed’ years, the greater the impact on the scheme viability and the greater the increase in farm GMs required in order to offset these impacts. As an example, the reliability of water supply is one of the more important sources of unavoidable variability in the productivity of irrigated farms. Water reliability (proportion of ‘good’ years, in which the full supply of water is available) is shown as ‘reliability’ in Table 6-9, and the mean percentage of water available in a ‘failed’ year (in which less than the full supply of water is available) is shown as the ‘failed year performance’ in For crops for which the quality of the produce is more important than the quantity, such as horticulture, the approach of reducing the planted land area in proportion to the available water in ‘failed’ years would be reasonable. For perennial horticulture or tree crops, it may be difficult to reduce (or increase) areas on an annual basis. Farmers of these crops would, therefore, tend to opt for systems with a high degree of reliability of water supply (e.g. 95%). For many broadacre crops, deficit irrigation could partially mitigate impacts on farm performance in years with reduced water availability, as could carryover effects from inputs (such as fertiliser) in a ‘failed’ year that reduce input costs the following year (see Section 4.3.4). Table 6-10 shows how the timing of periodic impacts affects scheme viability, providing risk adjustment factors for a range of reliabilities for an impact that had 50% severity with late timing, early timing and random (long-term frequency, weighted mean performance) timing. These results indicate that any negative disturbances that reduce farm performance will have a larger effect if they occur soon after the scheme is established, and that this effect is greater at higher target IRRs. For example, at a 7% target IRR and 70% reliability with ‘late’ timing (in which setbacks occur in the last 3 of every 10 years), the GM multiplier is 1.13, meaning the annual farm GM would need to be 13% higher than if farm performance were 100% reliable. In contrast, for the same settings with ‘early’ timing, the GM multiplier is 1.23, meaning the farm GM would need to be 23% higher than if farm performance were 100% reliable. The impacts of early setbacks are more severe than the impacts of late setbacks. Table 6-10 Risk adjustment factors for target farm gross margins (GMs) accounting for the effects of reliability and the timing of periodic risks Assumes 50% farm performance during ‘failed’ years, in which 50% farm performance means 50% of the GM at ‘full’ potential production. IRR = internal rate of return. TARGET IRR (%) TIMING OF FAILED YEARS RISK ADJUSTMENT MULTIPLIER FOR TARGET FARM GROSS MARGINS (VS BASE 100% RELIABILITY TABLES) (unitless ratio) Reliability (proportion of ‘good’ years) 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 3 Late 1.00 1.05 1.10 1.16 1.22 1.30 1.39 1.50 1.63 Random – no bias 1.00 1.05 1.11 1.18 1.25 1.33 1.43 1.54 1.67 Early 1.00 1.06 1.13 1.20 1.28 1.37 1.47 1.58 1.70 7 Late 1.00 1.04 1.08 1.13 1.19 1.26 1.35 1.46 1.59 Random – no bias 1.00 1.05 1.11 1.18 1.25 1.33 1.43 1.54 1.67 Early 1.00 1.07 1.15 1.23 1.32 1.41 1.51 1.62 1.74 10 Late 1.00 1.03 1.07 1.12 1.17 1.24 1.32 1.42 1.56 Random – no bias 1.00 1.05 1.11 1.18 1.25 1.33 1.43 1.54 1.67 Early 1.00 1.08 1.16 1.25 1.35 1.45 1.55 1.66 1.77 Risks from initial ‘learning’ period Another form of risk arises from the initial challenges of establishing new agricultural industries in the Southern Gulf catchments; it includes setbacks from delays, such as gaining regulatory approvals, and adapting farming practices to conditions in the Southern Gulf catchments. Some of these risks are avoidable, provided investors and farmers learn from past experiences of development in northern Australia (e.g. Ash et al., 2014), avoid previous mistakes and select farming options that are already well proven in analogous northern Australian locations. However, even well-prepared developers are likely to face initial challenges in adapting to the unique circumstances of a new location. Newly developed farmland can take some time to reach its productive potential, when soil nutrient pools have been established, soil limitations ameliorated, suckers and weeds controlled, and pest and weed management systems established. ‘Learning’ (used here to broadly represent all aspects of overcoming initial sources of farm underperformance) was assessed in terms of two simplified generic characteristics: •initial level of performance – the proportion of the long-term mean GM that the farm achievesin its first year •time to learn – the number of years taken to reach the long-term mean farm performance. Performance was represented as increasing linearly over the learning period from the starting level to the long-term mean performance level (100%). The effect of learning on scheme financial viability was considered for a range of initial levels of farm performance and learning times. As described above, learning had consistent proportional effects on target GMs, so the results were simplified as a set of risk adjustment factors (Table 6-11). As expected, the impacts on scheme viability are greater the lower the starting level of farm performance and the longer it takes to reach the long-term performance level. Since these impacts, by their nature, are weighted to the early years of a new development, they have more impact at higher target IRRs. To minimise the risks of learning impacts, there is a strong incentive to start any new irrigation development with well-established crops and technologies, and to be thoroughly prepared for those agronomic risks of establishing new farmland that can be anticipated. Higher-risk options (e.g. novel crops, equipment or practices that are not currently in profitable commercial use in analogous environments) could be tested and refined on a small scale until locally proven. Table 6-11 Risk adjustment factors for target farm gross margins (GMs), accounting for the effects of learning risks Learning risks were expressed as the level of initial farm underperformance and the time taken to reach full performance levels. Initial farm performance is the initial GM as a percentage of the GM at ‘full’ performance. IRR = internal rate of return. TARGET IRR (%) INITIAL FARM PERFORMANCE (%) RISK ADJUSTMENT MULTIPLIER FOR TARGET FARM GROSS MARGINS (VS BASE 100% RELIABILITY TABLES) (unitless ratio) Learning time (years to 100% performance) 2 4 6 8 10 15 3 85 1.01 1.02 1.03 1.03 1.04 1.05 75 1.02 1.03 1.04 1.05 1.07 1.10 50 1.04 1.06 1.09 1.12 1.14 1.21 25 1.06 1.10 1.14 1.19 1.23 1.35 TARGET IRR INITIAL FARM PERFORMANCE (%) RISK ADJUSTMENT MULTIPLIER FOR TARGET FARM GROSS MARGINS (VS BASE 100% RELIABILITY TABLES) (unitless ratio) 7 85 1.02 1.03 1.04 1.05 1.05 1.07 75 1.03 1.05 1.06 1.08 1.09 1.13 50 1.06 1.10 1.13 1.17 1.21 1.29 25 1.09 1.15 1.22 1.28 1.35 1.51 0 1.12 1.21 1.31 1.41 1.52 1.83 10 85 1.02 1.03 1.05 1.06 1.07 1.09 75 1.04 1.06 1.08 1.10 1.11 1.15 50 1.08 1.12 1.17 1.21 1.26 1.35 25 1.12 1.20 1.28 1.36 1.44 1.65 0 1.16 1.28 1.41 1.55 1.69 2.10 As indicated in the examples above, the influence of each risk individually can be quite modest. However, the combined influence of all foreseeable risks must be accounted for in planning, and the cumulative effect of these risks can be substantial. For example, the last question in Table 6-1 shows that the combined effect of just two risks requires farm GMs to be approximately 50% higher than they would be without the risks. See Stokes and Jarvis (2021) for the effects of a common suite of risks on the financial performance of a Bradfield-style irrigation scheme. 6.4 Cost–benefit considerations for water infrastructure viability 6.4.1 Lessons from recent Australian dams CBA is widely used to help decision makers evaluate the net benefits likely to arise from implementing a proposed project, particularly for investments in large-scale public infrastructure. Despite this wide usage of CBAs, there are a few examples for which the estimated costs and benefits used to justify the project have been revisited at a later date. Such ex-post evaluations allow the outcomes of completed projects to improve planning, management and risk mitigation in future projects (Infrastructure Australia, 2021a). The few examples in which water infrastructure CBAs have been evaluated have focused on exploring the accuracy of the forecast capital costs. An international study of large water infrastructure projects showed that actual construction costs exceeded contracted costs by a mean of 96% (Ansar et al., 2014). Similarly, an Australian-focused study found mean cost overruns of 120% (Petheram and McMahon, 2019). There is evidence of a systematic tendency across a range of large infrastructure projects for proponents to substantially under estimate development costs (Ansar et al., 2014; Flyvbjerg et al., 2002; Odeck and Skjeseth, 1995; Wachs, 1990; Western Australian Auditor General, 2016). Ex-post evaluations of project benefits are even scarcer. One international study found that large dam developments frequently underperformed, whereby ‘irrigation services have typically fallen short of physical targets, did not recover their costs and have been less profitable in economic terms than expected’ (World Commission on Dams, 2000). In particular, this study highlighted inaccurate and overestimated forecasting of future irrigation demand for water from dam developments. Review of recent Australian dams The Roper River Water Resource Assessment technical report on agricultural viability and socio- economics (Stokes et al., 2023) conducted a systematic review of the five most recently built dams in Australia (Figure 6-2, Table 6-12) to address the gap in the ex-post evaluations. The goal was to assess how well Australian dam projects have achieved their anticipated benefits and to make the learnings available for future planning. These lessons provide a context for interpreting CBAs from project proponents and independent analysts, and the financial analyses provided in the previous section. The key lessons from that review are summarised below, and the full details are reported in Webster et al. (2024). Locations of five dams used in costing review map \\FS1-CBR.nexus.csiro.au\{lw-rowra}\work\5_Agriculture_economics\2_Victoria\1_GIS\1_Map_docs\Se-V-503_Map_Australia_and_river_basins_new dams_V1.mxd For more information on this figure please contact CSIRO on enquiries@csiro.au Figure 6-2 Locations of the five dams used in this review The dams are numbered in blue as 1: New Harvey Dam, 2: Paradise Dam, 3: Meander Dam, 4: Wyaralong Dam and 5: Enlarged Cotter Dam. Table 6-12 Summary characteristics of the five dams used in this review The documents reviewed for each dam are cited in the companion technical report on agricultural viability and socio- economics (Webster et al., 2024). CBA = cost–benefit analysis. NEW HARVEY DAM PARADISE DAM MEANDER DAM WYARALONG DAM ENLARGED COTTER DAM State/territory WA Qld Tas Qld ACT Date completed 2002 2005 2008 2011 2012 Capacity (GL) 59 300 43 103 78 New dam or redevelopment of existing dam? Replaces Harvey weir (built 1916, extended 1931), capacity of ~10 GL New New New Replaces original Cotter Dam (built 1915, extended 1951), capacity of ~4 GL Primary use(s) proposed for water from dam Irrigated agriculture Irrigated agriculture, water supply Irrigated agriculture, environmental flows, hydro- electric power Water supply to South East Queensland Water supply for Canberra Type of key project documents used for this review Proposed water allocation plans (no CBA available) CBA and economic impact assessment CBA Environmental Impact Statement (EIS) (no CBA available) EIS (which included CBA information, but the actual CBA report was unavailable) Summary of key issues identified This review highlighted a number of issues with the historical use of CBAs for recently built dams in Australia and suggested how CBAs could be more rigorously addressed (Table 6-13). These issues arise because of the complexity of the forecasts and estimates required in planning large infrastructure projects and because of pressures on proponents that can introduce systematic biases. However, this report acknowledges that flaws with the use of CBAs in large public infrastructure investment decisions are not unique to regional Australia or to water infrastructure – they are systemic and occur in relation to many different types of infrastructure globally. Under such circumstances, it would be inequitable to apply more rigour to CBAs only for some select investments, geographic regions, and infrastructure classes before the same standards are routinely applied in all cases. And there is no incentive for individual proponents to apply more rigour to CBAs if their proposals would suffer from unfavourable comparisons with alternative or competing investments with exaggerated cost-to-benefit ratios (CBRs). In the short term, the main value of the information provided here is to enable more critical interpretation and evaluation of CBAs so that more-informed decisions can be made about the likely viability (and relative ranking) of projects in practice. In particular, it highlights several aspects of CBAs regarding which the claims of proponents warrant critical scrutiny. The longer term value of this analysis is that it has identified many issues similar to those raised in past review cycles of Infrastructure Australia’s CBA best-practice guidelines and in the recommendations that are being progressively added to those guidelines to improve how large public investments are evaluated (Infrastructure Australia, 2021a, 2021b). Table 6-13 Summary of key issues and potential improvements arising from a review of recent dam developments KEY ISSUE POTENTIAL IMPROVEMENTS 1 There is a lack of clear documentary evidence regarding the actual outcome of dam developments compared with the assumptions made in ex-ante proposals, Environmental Impact Statements (EISs) and cost– benefit analyses (CBAs). Ex-post evaluations or post- completion reviews have either not been prepared or not been made publicly available. Conducting ex-post evaluations of developments and making these publicly available (as recommended by 2021 guidance from Infrastructure Australia (Infrastructure Australia, 2021a, 2021b) and in the 2022 National Water Grid Investment Framework (NWGA 2022)) would enable lessons learned to be shared and benefit future developments. 2 Predicted increases in water demand from specific developments generally do not appear to arise at the scale and/or within the time frame forecast. While the reasons for this are varied and context-dependent, there does appear to be a systematic bias towards overestimation of the magnitude and rate at which new benefits would flow. Recognising the tendency towards a systematic bias of overstating benefits and understating costs, CBAs in project proposals could be improved by: (i) further efforts to present unbiased financial analysis (e.g. independent review) and ensuring appropriate sensitivity analysis is included in all proposals, (ii) developing broadly applicable and realistically achievable benchmarks for evaluating proponents’ assumptions and financial performance claims, (iii) using past experiences and lessons learned from previous projects with a similar context to inform the analysis presented in the proposals (building on Issue 1 above), and (iv) presenting a like-for-like comparison of cost-to-benefit ratios (CBRs) for the proposed case vs standard alternatives (such as water buybacks or a smaller dam, possibly better matched to realistic future demand). 3 The systematic bias towards optimism in proposals is exacerbated by mismatches between forecast demand and the full supporting infrastructure required to enable this demand to be realised, resulting in additional capital investment (pipelines, treatment plants, etc.) being required that was not costed in the original proposal. The same improvements as for Issue 2 in recognising and addressing inherent bias apply here. 4 Developments are justified based on a complex mix of multiple market and non-market benefits, many of which are hard to monetise and capture in a single net present value (NPV) figure. CBAs could be improved by presenting clear information on the full portfolio of benefits (and costs and disbenefits) anticipated to arise from a project. While the quantitative part of the CBA would analyse the easily monetised costs and benefits (with metrics such as CBR and NPV), benefits that are hard to monetise could also be formally presented in whatever form is most appropriate to the magnitude and nature of the particular benefit. This presentation would enable the relative importance of each element of the mix to be weighed and given appropriate consideration, rather than attention being focused on a single NPV figure, which may have omitted key elements of the project. 5 Improved water security and reliability of supply is often the most important benefit offered by dam developments, while also being the hardest to monetise. Dams provide a form of insurance against the risk that water may not be available when needed in the future. Assessing the value of this insurance requires consideration of the cost of lack of water supply when needed and the likelihood that this could occur. CBAs could be improved by providing clear information on exactly how the development will serve to improve water security, the likelihood that such insurance will be required (i.e. an estimate of the risk), and the estimated social and economic impacts if the insurance was not there when required. Such information could be presented alongside, and given equal prominence with, other information regarding the proposal, including the estimated NPV. This is preferable to attempting to ‘force’ the benefit into an NPV calculation that is ill-equipped to deal with such a benefit. 6.4.2 Demand trajectories for water use For irrigated agriculture to expand in the Southern Gulf catchments, additional water will be required. Forecasting that growth in demand is essential, both for planning new water infrastructure and for evaluating individual water infrastructure proposals. This will ensure assumed demand trajectories for water, and the associated value that can be generated from irrigated agriculture to justify the costs of that infrastructure, are reasonable. Australian Bureau of Statistics data series on historical agricultural production and water use were analysed to derive trends and relationships for benchmarking realistic growth trajectories in Queensland ( (a) Australia (b) Queensland Trend in gross value of ag production, Aust \\FS1-CBR.nexus.csiro.au\{lw-rowra}\work\5_Agriculture_economics\4_S_Gulf\4_Data\3_Economic\SoGWRA-Charts_Economic.xlsx For more information on this figure please contact CSIRO on enquiries@csiro.au 010,00020,00030,0001981-901991-002001-102011-21GVAP ($M) DecadeCrops (horticulture)Crop (other)Livestock Trend in gross value of ag production, Qld \\FS1-CBR.nexus.csiro.au\{lw-rowra}\work\5_Agriculture_economics\4_S_Gulf\4_Data\3_Economic\SoGWRA-Charts_Economic.xlsx For more information on this figure please contact CSIRO on enquiries@csiro.au 020004000600080001981-901991-002001-102011-21GVAP ($M) DecadeCrops (horticulture)Crop (other)Livestock Figure 6-3 Trends in gross value of agricultural production (GVAP) in (a) Australia and (b) Queensland over 40 years (1981–2021) Data points are decade averages of annual values. The ‘Crop (other)’ category is predominantly broadacre farming. Source: (ABS, 2022) Horticultural produce is typically perishable and expensive to store and transport, and must meet stringent phytosanitary (plant health) standards for export, so most Australian horticultural produce (~70%) is sold domestically for consumption shortly after harvest. Growth in horticultural industries is, therefore, constrained by growth in demand from local consumers. The current rate of growth in the value of Australian horticulture is $2.7 billion per decade (step changes in gross value of agricultural production (GVAP) from 1981–90 to 2011–21 are shown in Figure 6-3). Any new irrigated development would compete for some share of that growth, providing a benchmark guide for the scale of new horticulture that could realistically be included in any new irrigation scheme. It also provides a benchmark for the trajectory at which high-value horticulture (and the associated demand for high-priority water) could grow towards the ultimate scheme potential. In addition, the scale of new horticultural expansion for any single crop is limited by seasonal gaps in supply, so the horticulture in any single location is typically a mix of products that fill the niche market gaps that the location can supply (usually dictated by climate, but sometimes a result of other factors, such as backloading opportunities; see Chapter 4), rather than being a monoculture of the most valuable crop alone. Data on how the value of irrigated agriculture has increased with increasing irrigation water availability over time provide an indicative benchmark of how much gross value such a mix of new agricultural activities could generate for each new GL of irrigation water that becomes available (Figure 6-4). Based on the trendlines in Figure 6-4, each extra new GL of water use could produce: • between $2.1 and $3.7 million of gross value from mixed fruit industries • between $5.6 and $10.3 million of gross value from mixed vegetable industries • between $2.5 and $5.0 million of gross value from mixed horticulture (combined), or • between $0.8 and $1.7 million of gross value from a typical mix of agriculture overall. Growth trends in the value of broadacre crops are stronger than those for horticulture (Figure 6- 3); they are a combination of increases in both product volumes and the value per unit product. Unlike horticultural crops, bulk broadacre commodities are stored and traded on large global markets (with multiple competing international buyers), which could easily absorb the scale of increases in production that would be possible from the Southern Gulf catchments. However, supply chains, rather than markets, pose a challenge for new broadacre production. Despite northern Australia being geographically closer than southern Australia to many key markets, the supply chains for northern Australian produce are longer, because most agricultural exports leave through southern ports. For example, the Port of Townsville currently does not handle bulk food- grade containers (for either import or export). The challenge is to develop transport and handling capacity for exports and balance that with compatible imports to avoid the added cost of dead freighting empty containers (CRCNA, 2020). (a) Fruits (c) Fruits and vegetables combined (b) Vegetables (d) Total agriculture Trend in gross value of irrigated ag with water applied, fruit \\FS1-CBR.nexus.csiro.au\{lw-rowra}\work\5_Agriculture_economics\4_S_Gulf\4_Data\3_Economic\SoGWRA-Charts_Economic.xlsx For more information on this figure please contact CSIRO on enquiries@csiro.au Trend in gross value of irrigated ag with water applied, fruit and vegetable \\FS1-CBR.nexus.csiro.au\{lw-rowra}\work\5_Agriculture_economics\4_S_Gulf\4_Data\3_Economic\SoGWRA-Charts_Economic.xlsx For more information on this figure please contact CSIRO on enquiries@csiro.au Trend in gross value of irrigated ag with water applied, vegetable \\FS1-CBR.nexus.csiro.au\{lw-rowra}\work\5_Agriculture_economics\4_S_Gulf\4_Data\3_Economic\SoGWRA-Charts_Economic.xlsx For more information on this figure please contact CSIRO on enquiries@csiro.au Trend in gross value of irrigated ag with water applied, total agriculture \\FS1-CBR.nexus.csiro.au\{lw-rowra}\work\5_Agriculture_economics\4_S_Gulf\4_Data\3_Economic\SoGWRA-Charts_Economic.xlsx For more information on this figure please contact CSIRO on enquiries@csiro.au Figure 6-4 National trends for increasing gross value of irrigated agricultural production (GVIAP) as available water supplies have increased for (a) fruits, (b) vegetables, (c) fruits and vegetables combined, and (d) total agriculture Source: (ABS, 2022) 6.4.3 Costs of enabling infrastructure A range of infrastructure would be required to support the development of a new irrigation scheme in the Southern Gulf catchments, both within the scheme itself and beyond. Any infrastructure that is not included in the initial water development contract but is required to enable the new water resources to be used effectively (and to achieve their anticipated benefits) will require construction after the contracted project is complete, often at public expense. The types of infrastructure addressed here are those that would not typically be included in a formal CBA or be built by the water infrastructure developer or farmers. Within the context of a large irrigation development, such enabling infrastructure can be considered ‘hard’ or ‘soft’, which can be broadly defined as follows: • Hard infrastructure refers to the physical assets necessary for a development to function. It can include water storage, roads, irrigation supply channels, energy, and processing infrastructure, such as sugar mills, cotton gins, abattoirs and feedlots. • Soft infrastructure refers to the specialised services required for maintaining the economic, health, cultural and social standards of a population. These are indirect costs of a development and are usually less obvious than hard infrastructure costs. They can include expenses that continue after the construction of a development has been completed. Soft infrastructure can include: – physical assets, such as community infrastructure (e.g. schools, hospitals, housing) – non-physical assets, such as institutions, supporting rules and regulations, compensation packages, and law enforcement and emergency services. New processing infrastructure and community infrastructure are particularly pertinent to large, remote, greenfield developments, and these costs to other providers of infrastructure can be substantial, even after a new irrigation scheme has been developed. For example, a review of the Ord-East Kimberley Development Plan (for expansion of the Ord irrigation system by ~15,000 ha) found additional costs of $114 million to the WA Government beyond the planned $220 million state investment in infrastructure already provided to directly support the expansion (Western Australian Auditor General, 2016). This section provides an indication of the additional public and private infrastructure required to support a new irrigation development (once the main water infrastructure and farms are built) and the costs of the additional investments required. The intention is to highlight potentially overlooked costs of infrastructure that is required to realise the benefits of development and population growth in a region, rather than to diminish the potential benefits. Costs of hard infrastructure Establishing new irrigated agriculture in the Southern Gulf catchments would involve the initial costs of land development, water infrastructure (which could include distribution and re- regulation or balancing of storages), and farm set-up (for equipment and facilities on each new farm). It may also involve costs associated with constructing processing facilities, extending electricity networks, and upgrading road transport. The costs of water storage and conveyance are provided in Chapter 5. Indicative costs for processing facilities are provided in Table 6-14, and indicative costs for roads and electricity infrastructure are provided in Table 6-15. Indicative costs for transporting goods to key markets are listed in Table 6-16. All table data are summaries of information provided in the companion technical report on agricultural viability and socio-economics (Webster et al., 2024). Table 6-14 Indicative costs of agricultural processing facilities ITEM CAPITAL COST OPERATING COST COMMENT Meatworks $35 million $340/head Operational capacity 100,000 head/y Cotton gin $32 million $1.1 million/y plus $24 to $35 per bale Operational capacity of 1,500 bales/day Operating costs depend on the scale of the gin, and the source of energy Sugar mill $409 million $34 million/y Operational capacity of 1000 t cane/h, 6-month crushing season Basic mill producing sugar only (no electricity or ethanol) Table 6-15 Indicative costs of road and electricity infrastructure ITEM CAPITAL COST COMMENT Roads Seal dirt road $0.31 to $2.4 million per km Upgrade and widen dirt road to sealed road New bridges and floodway $27.4 million Costs of bridges and floodways vary widely Electricity New generation capacity may also be required Transmission lines $0.34 to $1.57 million per km High-voltage lines deliver bulk flow of electricity from generators over long distances Distribution lines $0.22 to $0.49 million per km Lower-voltage lines distribute power from substations over shorter distances to end users Substation $1.3 to $12.2 million Transformers and switchgear connect transmission and distribution networks Table 6-16 Indicative road transport costs between the Southern Gulf catchments and key markets and ports The top section of the table gives trip costs from Mount Isa to key destinations. The bottom section gives distance- based costs of getting goods from within the catchment to Mount Isa (on unsealed roads) and approximate distance- based costs of getting goods from Mount Isa on sealed roads to other destinations (not specifically listed). DESTINATION TRANSPORT COST Unrefrigerated Refrigerated Cattle Transport costs from Mount Isa ($/t) Adelaide 404 480 364 Brisbane 295 337 266 Cairns 181 235 163 Darwin 242 293 218 Fremantle 748 793 673 Karumba 87 103 78 Melbourne 423 467 380 Port Hedland 505 612 455 Sydney 398 426 358 Townsville 143 161 129 Wyndham 285 344 257 Transport costs by distance ($ per t per km) Properties to Mount Isa 0.28 0.32 0.25 Mount Isa to key markets/ports 0.16 0.18 0.14 Costs of soft infrastructure The availability of community services and facilities would play an important role in attracting people to (or deterring them from) living in a new development in the Southern Gulf catchments. If local populations increase as a result of new irrigated developments, then the demand for public services would increase, and provision of those services would need to be anticipated and planned for. Indicative costs for constructing a variety of facilities that may be required for supporting population growth are listed in Table 6-17. Each 1000 people in Australia require 2.3 (in ‘Major cities’) to 4.0 (in ‘Remote and Very remote areas’) hospital beds, served by 16 full-time equivalent (FTE) hospital staff, and $3.5 million/year funding to maintain current mean national levels of hospital service (AIHW, 2023). Health care services in remote locations generally focus on providing primary care and some secondary care. More specialised tertiary services tend to be concentrated in referral hospitals, which are generally located in big cities but also serve the surrounding area. Primary schools tend to be smaller and more widespread than secondary schools, which are larger and more centralised. Table 6-17 Indicative costs of community facilities Costs are quoted for Darwin as a reference capital city for northern Australia. Costs in remote parts of northern Australia, including the Southern Gulf catchments, are estimated to be approximately 30% to 60% higher than those quoted for Darwin. School costs were estimated separately based on a number of locations across northern Australia. See the companion technical report on agricultural viability and socio-economics (Webster et al., 2024) for details. ITEM CAPITAL COST COMMENT Hospital $0.2 to $0.5 million per bed Higher-end costs include a major operating theatre and a larger hospital area per bed School $27,000 to $35,000 per student Secondary schools tend to be larger and more centralised than primary schools House (each) $585,000 to $850,000 Single- or double-storey house, 325 m2 Unit (each) $230,000 to $395,000 Residential unit (townhouse), 90 to 120 m2 Offices $2400 to $3450 per m2 1 to 3 storeys, outside central businesses district The demand for community services is growing, both from population increases in Australia and rising community expectations. New infrastructure would be built to service that demand, irrespective of any development in the Southern Gulf catchments. However, if new irrigation projects encourage people to live in the Southern Gulf catchments, this could then shift the locations at which some services would be delivered and the associated infrastructure built. The costs of delivering services and building infrastructure are generally higher in very remote locations like the Southern Gulf catchments. The net cost of any new infrastructure built to support development in the Southern Gulf catchments is the difference in the cost of shifting some infrastructure to this very remote location (rather than the full cost of the facilities (Table 6- 17) which would otherwise have been built elsewhere). 6.5 Regional-scale economic impact of irrigated development New irrigated development in the Southern Gulf catchments could provide economic benefits to the region in terms of both increased economic activity and jobs. The size of the total economic benefit experienced would depend on the scale of the development, the type of agriculture that was established, and how much spending from the increased economic activities occurred within the region. Regional economic impacts are an important consideration for evaluating potential new water development projects. It was estimated that each million dollars spent on construction within the Southern Gulf catchments would generate an additional $1.06 to $1.09 million of indirect benefits ($2.06 to $2.18 million total regional benefits, including the direct benefit of each million dollars spent on construction). It was estimated that each million dollars of direct benefit from new agricultural activity would generate an additional $0.46 to $1.82 million in regional economic activity (depending on the particular agricultural industry). The full, catchment-wide impact of the economic stimulus provided by an irrigated agriculture or aquaculture development project extends far beyond the impact on those businesses and workers directly involved in either the short term (construction phase) or the longer term (operational phase). Businesses directly benefiting from the project would need to increase their purchases of the raw materials and intermediate products used by their growing outputs. Should any of these purchases be made within the surrounding region, this would provide a stimulus to those businesses from which they purchase, contributing to further economic growth within the region. Furthermore, household incomes would increase as a result of the employment of local residents as a consequence of the direct and/or production-induced business stimuli. As a proportion of this additional household income would be spent in the region, economic activity within the region would be further stimulated. Accordingly, the larger the initial amount of money spent within the region, and the larger the proportion of that money re-spent locally, the greater the overall benefits that would accrue to the region. The size of the impact on the local regional economy can be quantified by regional economic multipliers (derived from I–O tables that summarise expenditure flows between industry sectors and households within the region): a larger multiplier indicates larger regional benefits. These multipliers can be used to estimate the value of increased regional economic activity likely to flow from a stimulus to particular industries, focusing on construction in the short term and various types of agriculture in the longer term. It is also possible to estimate the increase in household incomes in the region, and then estimate the approximate number of jobs represented by the increased economic activity, including both those directly related to the increase in agriculture and those generated indirectly within other industries in the region. Not all expenditure generated by a large-scale development will occur within the local region. The greater the leakage (i.e. the amount of direct and indirect expenditure occurring outside the region), the smaller the resulting economic benefit enjoyed by the region. Conversely, the greater the retention of the initial expenditure and subsequent indirect expenditure within the region, the greater the economic benefit and the number of jobs created within the local region. However, a booming local economy can also bring with it a number of issues that can place upward pressure on prices (including materials, houses and wages) in the region, negating some of the positive impacts of the development. If some of the unemployed or underemployed people within the Southern Gulf catchments could be engaged as workers during the construction or operational phases of the development, this could reduce pressure on local wages and reduce the leakage resulting from the use of fly-in fly-out (FIFO) or drive-in drive-out (DIDO) workers, retaining more of the benefit from the project within the local region. However, the current low unemployment rate within the Southern Gulf catchments (Chapter 3) suggests there may be difficulties in sourcing local workers from within the region. The overall regional benefit created by a particular development depends on both the one-off benefits from the construction phase and the ongoing annual benefits from the operational phase. The benefits from the operational phase may take a number of years to reach the expected level, as new and existing agricultural enterprises learn and adapt to making full use of the new opportunities presented by the development. It is important to note that the results presented here are based on illustrative scenarios incorporating broad assumptions, are derived from an I–O model developed for an I–O region that is much larger than the Southern Gulf catchments study area, and are subject to the limitations of the method. 6.5.1 Estimating the size of regional economic benefits To develop regional multipliers for the Southern Gulf catchments, it was necessary to use the available information and models for the Queensland section of the Southern Gulf catchments I–O region. The regional I–O table developed by the Office of the Government Statistician of the Queensland Government provided coverage for the north-west region of Queensland (Office of the Government Statistician, Queensland Government, 2004 (Figure 6-5)). These results can be considered broadly applicable to the NT component of the Assessment area, noting the caveats for the I–O model below. For more details, see the companion technical report on agricultural viability and socio-economics (Webster et al., 2024). Data are presented to show how the economic circumstances of the Southern Gulf catchments compare with those of the I–O region (Table 6-18). The I–O model covers a much wider geographic scale than the Southern Gulf catchments (307,082 km2 for north-west Queensland, compared with 108,097 km2 for the Southern Gulf catchments). However, the regionally important city of Mount Isa falls within both regions. Both geographic scale and degree of urbanisation can affect the relative complexity of the economic structures in each region. There are wide variations in the size of the multipliers for the various industries within the Queensland and north-west Queensland I–O regions. Industries with larger local regional multipliers would be expected to benefit more from development within the I–O region. For example, agricultural industries generated smaller multipliers than mining and construction for both I–O models. However, a simple comparison of I–O multipliers can be misleading when considering the different benefits from regional investment, because some impacts provide a short-term, one-off benefit (e.g. the construction phase of a new irrigation development) while others provide a sustained stream of benefits over the longer term (e.g. the production phase of a new irrigation scheme). A rigorous comparison between specific regional investment options would require NPVs of the full cost and benefit streams to be calculated. Extent of regional input models map \\FS1-CBR.nexus.csiro.au\{lw-rowra}\work\5_Agriculture_economics\4_S_Gulf\1_GIS\1_Map_docs\Se-S-506_Map_Australia_and_economic_regions_v1.mxd For more information on this figure please contact CSIRO on enquiries@csiro.au Figure 6-5 Queensland’s north-west region used in the input–output (I–O) analyses relative to the Southern Gulf catchments Assessment area Table 6-18 Key 2021 data comparing the Southern Gulf catchments with the related I–O analysis region SOUTHERN GULF CATCHMENTS† NORTH-WEST QUEENSLAND I–O REGION‡ Land area (km2) 108,097 307,081.5 Population 22,493 30,377 Percentage male 51.74 52.11 Percentage Indigenous 27.28 27.03 Median age 31 32 Median household income $109,429 $104,312 Contribution of agriculture, forestry and fishing to employment in the region 2.67% 8.56% Major industries of employment – top three industries in region (by % of employment 2021) Largest employer in region Mining Mining 2nd largest employer in region Health care and social assistance Health care and social assistance 3rd largest employer in region Education and training Public administration and safety Gross value of total agriculture in region§ $243 million $945 million † Statistics for the Southern Gulf catchments region (ABS, 2021) have been estimated using the weighted mean of ABS 2021 census data obtained by SA2 statistical region, with weighting based on the proportion of relevant ABS SA2 statistical regions falling within the catchments region. ‡ ABS 2021 census data (ABS, 2021). § ABS value of agricultural commodities produced 2020–21 by region, report VACPDCASGS202021 (ABS, 2022). I–O = input–output. 6.5.2 Indirect benefits during the construction phase of a development Initially, building new infrastructure (on-farm and off-farm development, including construction of related supporting infrastructure, such as roads, schools and hospitals) comes at a cost. But the additional expenditure within a region (which puts additional cash into people’s and businesses’ pockets) would increase regional economic activity. This creates a fairly short-term economic benefit to the region during the construction phase, provided that at least some of the expenditure occurs within the region and is not all lost from the region due to leakage. The regional impacts of the construction phase of potential developments were estimated using a scenario approach for the scales of development. The analyses modelled regional impacts for five different indicative sizes of developments in the Southern Gulf catchments. Total capital costs, including costs of labour and materials required by the project, ranged from $250 million to $4 billion. The smallest scale of development in Table 6-19, with a capital cost of $250 million, broadly represents approximately 20 new farm developments with their own on-farm water sources enabling approximately 10,000 ha of irrigation for horticulture and broadacre farming (based on costing information from the companion technical report on agricultural viability and socio-economics (Webster et al., 2024)). The second-smallest scenario, with a $500 million capital cost, could represent a similar development to the first but with 20,000 ha of new irrigated farmland; this level of investment could also include a new processing facility (such as a cotton gin) required by (and supported by) this scale of agricultural development. Alternatively, the $500 million development could represent a large off-farm water infrastructure development (e.g. see Table 6-2) and related farm establishment costs. The larger scales of development, at $1 billion or $2 billion, shown in Table 6-19, indicate outcomes from combining potential developments in various ways (such as one large off-farm dam and multiple on-farm water sources). They also include investment in indirect supporting infrastructure across the region, such as roads, electricity and community infrastructure (see indicative costs in Section 6.4.3). Table 6-19 Regional economic impact estimated by I–O analysis for the total construction phase of an irrigated agricultural development based on estimated Type ll multipliers determined from the north-west Queensland I–O models Estimates represent an upper bound, because some assumptions of I–O analysis are violated in the case of such a large public investment in a region where existing irrigated agricultural activity is so low. Leakage to other regions and other countries is accounted for by reducing the proportion of expenditure (and benefits) within the I–O region. I–O = input–output. DEVELOPMENT CAPITAL COST ($ billion) TOTAL REGIONAL ECONOMIC ACTIVITY WITHIN I–O REGION AS A RESULT OF THE CAPITAL COST OF THE DEVELOPMENT ($ billion) Southern Gulf catchments based on north-west Queensland I–O model Proportion of total scheme-scale capital cost made locally within the I–O region 65% 50% 35% 0.250 0.26 0.20 0.14 0.500 0.53 0.41 0.28 1.000 1.06 0.81 0.57 2.000 2.11 1.63 1.14 4.000 4.23 3.25 2.28 The proportion of expenditure during the construction phase that would be spent within the region depends on the types of costs, including labour, materials and equipment. It is likely that wages would be paid to workers sourced both from within the region and from elsewhere. The likely proportion of labour costs for each source of workers would depend on the availability of appropriately skilled labour within the region. For example, a highly populated region (more than 100,000 people) with a high unemployment rate (more than 10%) and a skilled labour force is likely to be able to supply a large proportion of the workers required from within the region. However, a sparsely populated region like the Southern Gulf catchments is more likely to need to attract many workers from outside the region, either on a FIFO or DIDO basis or by encouraging migration to the region. Similarly, some regions may be better able to supply a large proportion of the required materials and equipment from within the region, whereas construction projects in other locations may not be able to source what they need locally and instead need to import a significant proportion into the region from elsewhere. The low representation of the required supplying industries in the Southern Gulf catchments means that most construction supplies would be likely to be sourced from other parts of Australia (and internationally). A review of five large dam projects across the country showed that the proportions of local construction expenditure sourced within a region (as opposed to being imported, with no impact on the local regional economy) varied significantly. Thus, the analyses considered three levels for the proportion spent locally: 65% (i.e. low leakage), and 50%, and 35% spent locally (i.e. high leakage). However, note that leakage might be higher (i.e. <35% spent locally) for a very remote region like the Southern Gulf catchments. In cases of high leakage, the knock-on benefits would instead occur in the regions supplying the goods and services (a large proportion of which are likely to be elsewhere in the state). Table 6-19 shows estimates of the regional economic benefit for the construction phase of a new development for five scales of scheme capital cost ($0.25 billion to $4 billion) and the three levels of leakage described above. Clearly, the proportion of scheme construction costs spent within the region has a significant impact on the size of the regional economic benefit experienced. If a large proportion of the initial expenditure in the Southern Gulf catchments leaked outside, the benefit of the initial construction investment would be less concentrated in the local Southern Gulf catchments’ economy and would spread to those locations supplying the goods and services. 6.5.3 Indirect benefits during the operational phase of a development Regional impacts of irrigation development are presented for scenarios using four indicative scales of increase in GVAP ($25, $50, $100 and $200 million per year, indicative of potential outcomes). At the low end ($25 million/year), this could represent 10,000 ha of new plantation timber, while the high end ($200 million/year) could represent 10,000 ha of mixed broadacre cropping and horticulture (based on farm financial estimates for the various crops presented in Chapter 4), with other crop options falling in between. Estimated regional impacts are shown as the total increased economic activity (Table 6-20) and the associated estimated increases in incomes and employment (Table 6-21) for each category of agricultural activity (beef cattle, agriculture excluding beef cattle, and aquaculture, forestry and fishing. As can be seen from the economic impacts (Table 6-20), an irrigation scheme that increases the output of the beef cattle industry could have a larger impact on total regional economic activity than a scheme that promotes agriculture excluding beef cattle, while the smallest regional economic benefit would derive from a development focused on aquaculture, forestry and fishing. Table 6-20 Estimated regional economic impact per year in the Southern Gulf catchments resulting from four scales of direct increase in agricultural output (rows) for the different categories of agricultural activity (columns) using the I–O model for north-west Queensland Increases in agricultural output are assumed to be net of the annualised value of contributions towards the construction costs. Estimates are based on Type ll multipliers determined from the I–O model for each year of agricultural production. Estimates represent an upper bound, because some assumptions of I–O analysis are violated in the case of such a large public investment in a region where existing agricultural activity is so low. Leakage to other regions and other countries is accounted for by reducing the proportion of expenditure (and benefits) within the region. DIRECT INCREASE IN AGRICULTURAL OUTPUT PER YEAR NET OF CONTRIBUTION TO CONSTRUCTION COSTS ($ million) TOTAL ANNUAL VALUE OF INCREASED ECONOMIC ACTIVITY IN I–O REGION – DIRECT, PRODUCTION-INDUCED AND CONSUMPTION-INDUCED ($ million) Southern Gulf catchments based on north-west Queensland I–O model Type of agricultural development Beef cattle Agriculture excluding beef cattle Aquaculture, forestry and fishing 25 46 38 33 50 91 76 66 100 182 152 132 200 364 303 265 The results for employment (Table 6-21) are closely related to those for impacts on regional economic activity, but the two measures do reveal some differences. Additional FTE jobs arising in the region may require additional community infrastructure (e.g. schools, health services) if workers move to fill these jobs from other parts of the country, resulting in population growth. However, additional infrastructure would not be necessary should these additional jobs be filled by currently unemployed or underemployed local people. Estimates of the expected increases in incomes were divided between Indigenous and non-Indigenous households, using methods outlined by Jarvis et al. (2018), with most increases expected to flow to non-Indigenous households (Table 6-21). For example, if new irrigation development in the Southern Gulf catchments directly enabled an extra $100 million of cropping output per year, the region could benefit from an extra $152 million of economic activity recurring annually (Table 6-20) and generate approximately 294 new FTE ongoing jobs, depending on the type of agriculture (Table 6-21). Table 6-21 Estimated impact on annual household incomes and full-time equivalent (FTE) jobs within the Southern Gulf catchments resulting from four scales of direct increase in agricultural output (rows) for the various categories of agricultural activity (columns) Increases in agricultural output are assumed to be net of the annualised value of contributions towards the construction costs. Estimates are based on Type ll multipliers determined from two independent I–O models for each year of agricultural production. Estimates represent an upper bound, because some assumptions of I–O analysis are violated in the case of such a large public investment in a region where existing agricultural activity is so low. Leakage to other regions and other countries is accounted for by reducing the proportion of expenditure (and benefits) within the region. DIRECT INCREASE IN AGRICULTURAL OUTPUT PER YEAR NET OF ANY CONTRIBUTION TO CONSTRUCTION COSTS ($ million) TOTAL ANNUAL VALUE OF INCREASED ECONOMIC ACTIVITY IN I–O REGION – DIRECT, PRODUCTION-INDUCED AND CONSUMPTION-INDUCED ($ million or FTE) Southern Gulf catchments based on north-west Queensland I–O model Type of agricultural development Beef cattle Agriculture excluding beef cattle Aquaculture, forestry and fishing Additional incomes expected to flow to Indigenous households from development ($ million) 25 0.2 0.1 0.1 50 0.4 0.1 0.1 100 0.8 0.3 0.3 200 1.6 0.6 0.6 Additional incomes expected to flow to non-Indigenous households from development ($ million) 25 3.5 5.0 2.9 50 7.0 10.0 5.9 100 14.0 20.1 11.8 200 28.0 40.2 23.5 Additional jobs estimated to be created (FTE) 25 53 73 43 50 107 147 87 100 213 294 174 200 427 588 347 6.6 References ABS (2021) Water account, Australia, 2019–20 financial year. Australian Bureau of Statistics, Canberra. 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