6. Conclusion
This report combines two separate, but complementary, types of economic analysis of the likely consequences of different scenarios of water allocation and use in the Waitaki Catchment. An economic impact analysis traces the effects of new activity (irrigation and/or new hydro development) through a model that provides static snapshots of effects on regional output, value added and employment at different phases in each scenario, to give a sense of the distribution of impacts through the local economy. A cost benefit analysis compares the stream of benefits and costs that are expected to flow over an extended period under each scenario, to arrive at an estimate of net present value derived from each scenario.
Regional impact analysis
The economic impact results indicate significant change in the economy of the study area. Irrigation produces enduring changes felt widely across the regional economy, with a relatively small boom during construction. Hydro development produces large impacts in the short term, but with little in the way of ongoing increase in economic activity outside the energy sector.
In terms of economy-wide impact on value added, the New Hydro-only scenario more than matches the 'all irrigation' scenario. However, more than 90% of the New Hydro scenario's value added increase is a return on capital, which largely accrues to owners outside the region. To the extent that farm businesses are more likely to be owned by local residents, agricultural value added increases are more likely to be spent and re-spent in the local economy.
The economic impact methodology has limitations because of its inability to distinguish real trade creation from trade diversion effects in the region, identify the effects on resource input prices and resource demands on other parts of the economy, and to track dynamic effects over time. However, these limitations are common to all the options considered in this study, so the impact analysis is still informative of the relative outcome across the different scenarios.
Regional cost benefit analysis
The regional cost benefit analysis results show significant concurrence between the national and regional effects in terms of those matters quantified, but significant differences between the national and regional in terms of the unquantified environmental, social, recreational and tourism matters. The key points from the regional analysis are discussed below.
New Hydro shows a large positive outcome in the regional cost benefit analysis under those items quantified, and the positive nature of this outcome appears relatively insensitive to the assumptions used. However New Hydro has a number of negative unquantified outcomes. Of these:
- The environmental outcomes are mostly negative and mostly national, with significant regional impacts such as groundwater, flooding and erosion changes.
- The recreational impacts are mixed, but there are a number of negatives which are disproportionately borne by the regional community, because of limited substitutes at the regional level.
- The social impacts are significant and mostly negative and are all borne by the regional community. There will be benefits from direct and indirect employment generated by hydroelectric development, but the magnitude of those benefits will be reduced at the regional level if a large proportion of the workforce comes from outside the region. Population impacts associated with this employment will also be short term and may cause more complications than benefits for the host communities and their social services, in the absence of mitigation measures to accompany that development.
- The economic impacts are primarily value added through energy, with limited engagement in the regional economy, and very limited employment creation. Economic impacts in the construction phase are significant but not enduring.
The quantified irrigation regional outcomes are largely positive at the lower discount rates in the without-New Hydro scenarios. However when New Hydro is added to the system, the quantified results become largely negative because of the additional costs of losing water to the hydro-generation system. The irrigation takes also produce some unquantified outcomes. Of these:
- The environmental outcomes are mixed, with some positives in terms of soil erosion and groundwater, but negatives in terms of water quality, landscape and potentially some impacts in the braided river ecosystems. These impacts are of mixed national and regional incidence.
- The recreational outcomes are largely neutral, and those impacts which do occur are of mixed regional and national incidence, with some bias toward regional.
- The social outcomes are significant and positive, although there are some short term impacts as community structure changes and management of change strategies may be required at the regional and local levels. These benefits are all experienced regionally.
- The impacts on the regional economy are significant and ongoing. Employment creation is expected to be significant, and the economy is expected to be larger and possibly more diverse post development.
The analysis at the regional level presents a contrast of two types of proposal. The New Hydro scenario is a robust proposal in terms of the monetary CBA outcomes but has significant and negative social, recreational and environmental impacts and limited regional economic impacts. The irrigation proposals are more marginal in terms of monetary CBA outcomes because they are very sensitive to assumptions, and while they may have some environmental impacts there are significant and positive social impacts in the region and significant and on-going regional economic impacts in terms of changes to the regional economy size and structure.
A key point is the fact that the irrigation proposals are viable without New Hydro but not with New Hydro at the lower discount rates. So crucial considerations from a regional perspective are whether New Hydro is likely to proceed in the near future, and what form it will take, as this will determine the size of the net benefit (or cost) of irrigation takes. If New Hydro is not to proceed then from a regional point of view allocation to irrigation is desirable in most respects at the lower discount rate used in this study (7.5%). Applying the higher discount rate of 10% irrigation does not appear to be sufficiently worthwhile to outweigh the losses from diverting water from existing generation plant.
If a New Hydro project were to proceed, allocation to irrigation becomes less desirable in terms of monetary CBA outcomes apart from those proposals that are integrated with hydro development. However irrigation has such positive regional social and economic impacts decision makers may still wish to include it in the allocation mix.
6.1 Caveats
These conclusions have some significant caveats. The costs for New Hydro have been based on a Project Aqua type development. That Project Aqua did not proceed probably indicates that the costs were higher or the benefits lower than have been projected here. Similarly capital costs for irrigation projects appear to have increased over the last year with changes in fuel and steel prices, and the capital cost assumptions in that regard may be lower than is currently experienced.
The agricultural assumptions have been based on ranges of estimates rather than single figures, and as a general comment tend to be higher than published survey data applicable to the land use types. The actual outcomes in these areas will be determined by a combination of factors such as land use change, discount rate choices by investors, changes in management, and changes in technology which are difficult to predict in an average sense. Furthermore there are other unquantified reasons why landholders undertake irrigation beyond issues such as reduction in risk and stress, maintenance of lifestyle, and amenity which have not been included as benefits despite perhaps being important parts of the decision making process.
This study has revealed limitations in both cost benefit analysis and economic impact analysis in addressing the question of how best, from a regional perspective, to allocate and use water. As these limitations are common to all the options examined here, the results can be considered more indicative of the relative ranking of different options than of the absolute levels that any particular option is likely to realise.
