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Regional Economic Analysis - Uses of Water in the Waitaki Catchment

Acknowledgements

Executive summary

1. Background

2. Study objectives

3. Methodology

4. Cost benefit results

5. Regional economic impact results

6. Conclusion

7. Bibliography

8. List of interviewees and other contacts

Appendix A Technical discussion of the differences between CBA and EIA

Appendix B Agricultural assumptions used - base case

Appendix C Agricultural Assumptions Used - High Regional Development Scenario

Appendix D Regional economic model results

Appendix E Economic results sensitivity testing

Appendix F Methodology for regional economic impact analysis

5. Regional economic impact results

The economic impact analysis examined the expenditure patterns from the various options over a period of years (2006-2013). The input-output model shows how the initial (or direct) injection of expenditures from the various proposals gives rise to increases in full-time employment and value added in the region, over what would be expected in the absence of a particular proposal. The model also allows the calculation of economic multipliers that show the indirect effects of subsequent rounds of expenditure from that initial injection, on output, employment and valued added in the region. Each year a new direct injection occurs, with results that show the initial gain in the region over and above what would have occurred in the absence of the investment. In other words the results are cumulative: if in one year the effect is to create five new jobs and next year the result is eight new jobs, the net gain from year to year is three new jobs.

The purpose of this part of the study has been to develop an understanding of how the regional impacts of the different scenarios are incurred. The model produces regional economic structure, and changes in output, employment and added value (GDP) for both the capital and production changes [In national accounting, output is the value of production and value added is the difference between the value of outputs and the value of inputs in productive activity. Value added differs from private accounting concepts of profit and net surplus by including both labour costs and depreciation. It is the sum of factor incomes and can be thought of as comprising returns to various factor inputs: operating surplus (return to business owners), compensation of employees (return to labour), fixed capital consumption (return on existing capital assets) and indirect taxes net of subsidies received. It ignores direct taxes paid by any of these factors.]. Because of the sheer volume of data this information has not been all included in the report, but we have summarised the results in the graphs attached (Figures 3, 4 and 5).

5.1 Initial impacts

In broad terms, the impacts considered in this analysis can be categorised as one of two types: those arising from changes in agricultural capital spending and production, and those arising from changes in electricity generation capital spending and production. For each type of impact, a series of capital expenditures (on New Hydro or irrigation infrastructure) provides the basis for an increase in sectoral output and a requisite increase in input demands. The agricultural capital expenditures and increases in production are shown in Table 18.

Table 18. Agriculture initial impacts

View agriculture initial impacts (large table)

Similarly, Table 19 shows the initial impacts associated with the construction and ongoing operation of the New Hydro scheme. In addition to these, New Hydro also has a revenue stream which lifts to a peak level of $215.1 million post-commissioning.

Table 19 New Hydro initial impacts

Source: NZIER, Harris Consulting

5.2 The Waitaki Catchment economy

Figure 3 shows the broad composition of the Waitaki Catchment area economy in terms of both value added and employment in 2003. The importance of the rural economy is notable, with more than 30% of local value added and employment based in primary production and food processing. The utilities sector, comprising mainly electricity generation, transmission and distribution, contributes 3% of local value added, but only 0.2% of employment, reflecting its capital-intensive nature.

Table 20 shows the composition of the local economy in more detail, and includes the economy's composition in terms of output [Note that only regional employment data is available directly from Statistics New Zealand. Output and value added figures are estimates of the author.]. Amongst the rural producers, livestock and cropping farming makes the most significant contribution to local value added, and also provides input to the substantial meat processing sector.

Table 20. Study area economy

View study area economy (large table)

5.3 Aggregate results

Figures 4 and 5 show the total economic impact of five of the scenarios over the time period for which they take place, in terms of value added. Each scenario is characterised by a bulge in the early years, reflecting the capital spending associated with the irrigation development, or the hydro development in the case of New Hydro. In the case of irrigation development the peaks are likely to be ameliorated somewhat by staged development, where the assumptions used in this analysis assume all schemes commence development from year 2 onward.

The distinction between the figures is the exclusion of the value added created by energy generation through New Hydro in Figure 4. Conversely, in Figure 5, the New Hydro-only scenario includes the value added generated by energy. These two figures are presented because the value added created by energy through New Hydro has little engagement in the local economy as illustrated by its low employment impacts after the initial construction phase.

Of the irrigation scenarios examined, the 'all irrigation' scenario, would have the most profound impact on the local economy in terms of economy-wide changes in value added, raising the incremental value added per annum by $176 million for the period after the initial construction boost. The New Hydro-only scenario more than matches the 'all irrigation' scenario in terms of economy-wide impacts on value added. However, close to 99% of the value added of New Hydro - around $205m per annum - is estimated to represent the return on capital (including depreciation) of the original investment, which therefore accrues to the investors outside the region. The value added increase associated with increased agricultural production, however, represents a return to farmers on their entrepreneurial input and investment in land and farm machinery. Agricultural value added is thus the source of a significant income stream for farmers, and a considerable portion of this income is spent (and re-spent) in the local economy.

The agriculture high output scenario, if it could be realised, would increase local agricultural value added by a little over $450 million at its peak, which is reached in 2022. It hinges on the same development of irrigation infrastructure as the 'all irrigation' scenario, but assumes more radical land use transformation and production growth in outer years.

Table 21 shows the summary results for each of output, employment and value added, and compares the total change with the current level in the economy. For each scenario results are reported both for the 'peak' year (ie the year in which the scenario has the greatest impact) and the year at which incremental output (or employment or value added) stabilises at a particular level. Changes presented reflect the total increase in output (or employment or value added) associated with each scenario's initial increase in activity (whether it be a lift in capital expenditure or production). These total increases comprise both the direct impacts of an increase in production (which arise as additional demands are placed on suppliers to the affected producer) and on the indirect, or flow-on impacts, that occur as these and subsequent additional demands filter through the economy.

Several observations can be made of these results. First, the increases in output, value added and employment are relatively similar for each scenario. This largely reflects the input-output methodology in which expansions in output (and therefore in requisite inputs) occur in a linear fashion; effectively, the base year ratios of employment:output and value added:output, for each sector, are assumed to be constant as output expands (or contracts). The assumptions used in input-output analysis and their implications are discussed fully in Appendix F.

The incremental increases in output under some of the scenarios represent significant changes above current levels, and caution should be exercised when viewing these results. Further to the input-output modelling assumption that all inputs and outputs expand (or contract) linearly is the related assumption that the factors of production (namely, labour and capital) are available in unlimited supply. This assumption becomes more problematic (i) the smaller the regional economy under consideration (since the local supply of surplus labour is less likely to be able to meet an expansion in labour demand); and (ii) the larger the size of the shock (ie exogenous increase in production) being applied [For these reasons, input-output analysis is designed for investigation of a marginal increase in demand - that is, an exogenous demand increase of a single unit. The assumptions noted become weaker as the size of the exogenous change increases and it becomes non-marginal.]. In particular, the increases in activity associated with the 'all irrigation', Irrigation with IRR>5% and the Agriculture High Output scenarios should be considered to stretch the applicability of the input-output methodology. For instance, under the agriculture high output scenario, regional output increases 29.2 % above the 2003 level, with associated lifts in employment and value added of 38.8% and 29.2%, respectively. The respective levels of total impact of these scenarios should be treated as upper bounds that could not be realised in practice without increasing price of local labour, diverting labour from other sectors, or importing labour from outside the region, with consequences for the local housing market.

Table 21. Input-output scenario analyses: Summary results

View input-outpit scenario analyses: Summary results (large table)

However, the figures in Table 21 should not be thought redundant. The assumptions noted apply across all scenarios, not just those with the largest impacts. Thus, although the levels of total impact for each scenario may overstate the actual 'true' impact, the ranking of the various options should be left unaffected. This analysis therefore represents a valid means of comparing the various options relating to the use of the Waitaki River's water.

5.4 Sectoral impacts

The aggregate impacts presented in Table 21 are sums of the underlying changes in sectoral output, employment and value added. Each scenario gives rise to a different pattern of sectoral impacts, depending on the size and the nature of the initial impact.

Table 22 shows the upstream impacts of the increases in agricultural production in value added terms. Upstream impacts are those effects that occur as agriculture demands increased inputs so that it can lift its level of production. Downstream effects, on the other hand, occur when an increase in production lifts the level of downstream processing required in order to add value to that extra production; in the case of agriculture, the increase in agricultural output (eg raw milk, lambs, wool) requires additional processing by the primary processing sectors, which in turn will lead to further downstream effects. Table 24 and Table 25 show the sectoral increases in value added that arise from the initial injection of capital into irrigation and hydro developments, respectively.

These tables show that the impacts of increased agricultural production are spread throughout the economy. While the most marked changes are in the agricultural sector, the services sector (finance, insurance etc), wholesale and retail trade and manufacturing all experience significant increases.

Table 22. Upstream sectoral impacts of increased agricultural production

View upstream sectoral impacts of increased agricultural production (large table)

Table 23. Downstream sectoral impacts of increased agricultural production

View downstream sectoral impacts of increased agricultural production (large table)

Table 24. Sectoral impacts of irrigation capital expenditure

View sectoral impacts of irrigation capital expenditure (large table)

Table 25. Sectoral impacts of New Hydro development

View sectoral impacts of New Hydro development (large table)

5.5 Social impacts

Key social statistics for the study area are shown in Table 26 below. These show that the region is suffering a declining population, and that the population is ageing, with relatively fewer young people and more old people that the national average.

Table 26. Regional population statistics

The social impacts will be driven largely by the changes in employment, which in turn drives population and demographic changes. Both hydro-electricity construction and irrigation will have substantial employment impacts at the regional level. The major difference is that hydro-electricity impacts follow a classic boom-bust scenario, peaking at a total of 1,900 full time equivalent (FTEs) (net direct and indirect regional impact) between 2008 and 2012 but reducing rapidly thereafter. Population impacts associated with this employment will also be short term and will be likely to cause more complications than benefits for the host communities and their social services. It should be noted that these impacts do not include the impact of mitigation packages associated with New Hydro development. While this is consistent with the methodology adopted by this report and the SKM approach, the mitigation on its own may have significant impacts which would need to be offset against the social and other impacts incurred by the project.

On the other hand, irrigation has a smaller total employment impact but this impact will be sustained over time. The SKM report estimates that for the Waitaki Valley each 1,000 heactares of irrigated land will bring another 68 residents to the area. Based on 17 full-time equivalents generated per 1,000 hectares of irrigated land, this estimate appears to use a population multiplier of 4.0. A safer figure would be 40-45 new residents per 1,000 hectares of new irrigation based on a multiplier of 3.5 per married person FTE, and allowing for a proportion of new employees who are younger people with no dependants (multiplier of 2.5 in total). These estimates of population change associated with the increased irrigation are shown in Table 27. The figures show the ongoing operational phases of the irrigation scenarios, after the bulk of the capital and construction activity has been completed.

As a change in population these figures are significant for the study region - up to 13% more than the current population additional under the all irrigation scenario. For the 'regional high impact' scenario this figure is +38%, which demonstrates the upper limit of potential impacts of irrigation on the study area. Population impacts of this order in small rural communities have the potential to boost demand for struggling services such as small rural schools, health services, sports clubs and other community activities. They will also create a demand for housing.

Some caution should be taken with these figures, because the employment estimates are likely to be overstated due to the limitations of the model, and the estimates of population to employment changes are also rough. Furthermore the 'high impact' scenario has no basis in any solid projection, and demonstrates potential rather than actuality. For all that, however, the figures do demonstrate that the 'with irrigation' scenario will be markedly different in population terms than the projections without irrigation. The scenarios with larger irrigation areas appear to have the potential to stabilise the population over the longer term, and even the smaller irrigation scenarios have the potential to mitigate some of the population loss in the study area.

Table 27. Irrigation scenarios - hectares and additional direct and indirect employment -2009 year

View irrigation scenarios - hectares and additional direct and indirect employment -2009 year (large table)

While it is not the intention of the study to undertake a sub-regional breakdown, the impacts from the irrigation will tend to be concentrated on the lowland parts of the region. The higher employment impact for above Tekapo and below Waitaki is because these schemes will have dairying and other high return land uses, compared to use of water in the Mackenzie Basin primarily for sheep and beef pastoralism. There is also the location of the major centres of Timaru and Oamaru to consider, as these tend to represent the major destination of farm working expenses as demonstrated in a survey of expenditure patterns (56% in South Canterbury [Agriculture New Zealand, 2001. Report Prepared for MAF Policy]). However, small rural centres also tend to gain significantly from increases in expenditure, with 36% of farm working expenses occurring in these centres. Capital expenditure tends to be more directed to the large centres of Timaru and Oamaru, and personal expenditure directed more toward the smaller centres.

Because expenditure patterns tend to drive employment, and employment drives population, we expect that based on this information gathered, there will be significant gains in population in the smaller centres as well as in the Timaru and Oamaru areas. In aggregate we would expect this to represent a significant proportion of the community, and for the larger schemes this could reverse regional declines in population over the long term.

While there are no detailed social impact assessments prepared for the specific irrigation schemes, it can be assumed that there will be distinct social impacts at the local level. As noted these impacts will involve some changes in land ownership and newcomers coming to the district. Where dairying takes place on irrigated land this will result in demographic changes as dairy farming families are often in their lower to middle life cycle, share milkers are frequently young couples or couples with young families, and dairy farm workers are often young and single.

5.6 Wealth and consumer surplus social impacts

The results from the cost benefit analysis in Section 4 indicate that within any given net present value, there are some parties who gain and others who lose. In particular, the establishment of irrigation results in a transfer of wealth from the existing energy asset holder to landholders undertaking irrigation. In a CBA sense it is appropriate that we look at the overall distribution, but these transfers have social impacts which should be included in this part of the analysis. In a distributional sense with the current ownership structure, these social impacts accrue largely outside the region to the taxpayer owners of Meridian Energy Ltd.

In addition to the wealth transfer impacts there are consumer surplus changes which also have significant social impacts. The net result of the New Hydro scenario is a reduction in the price of electricity of up to 0.9c/kWh over several years. This results in a significant benefit to consumers of electricity who pay lower prices than they were otherwise prepared to pay. Most of these consumer surpluses have not been included in the national analysis, and it has to be inferred that they were excluded on the basis that they represent transfers from a producer surplus. This transfer represents a significant social impact in itself, which should be taken into account as a factor in decision making on hydro development in the river. Most of these social impacts will be national rather than regional but the local community will still experience a proportionate share in them.