The recent draft report from the Australian Productivity Commission on the National Water Initiative cautioned that it "is common for the costs of major water infrastructure projects to increase substantially between early feasibility work and final construction. In an Australian context, Petheram et al. (2019) found that the median and mean cost overruns (relative to immediate pre construction estimates) were 49% and 120% respectively for a sample of 40 historical projects where sufficient data was available." 

If this were applied to Emu Swamp Dam, it would mean the $84m price tag in early feasibility studies could ultimately end up with a final cost of $125m to $185m.  Looks scary for a Council even at this point, doesn’t it? 

But wait, there’s more ... in the absence of any further federal or state government contributions, the cost overruns will be payable solely by the investors, and so will result in much more than the 49%-120% quoted above.  For every $23.4m over budget this will be a 100% (i.e. double) increase in investor contributions.  To put this in hard numbers a 49% cost overrun would mean Council paying $9.65m instead of $3.5m.  And a 120% cost overrun would mean Council paying $18.65m instead of $3.5m.

While cost overruns of this magnitude may still be palatable for commercial irrigators, are they an appropriate risk for Council?  Particularly for what has been described by the Council as a short-term solution.

If you’re prone to magical thinking, you might believe that there will be more government grants, though you would be worried that the recent federal budget had no further allocations for Emu Swamp Dam (see the Queensland Farmers Federation media release).  Or that the irrigators would pay Council’s share of the cost overrun (though this seems too optimistic even for magical thinking; the irrigators are business people, not charitable donors).

And construction cost overruns are not the end of the uncertainty.  The Water Sales Documents on the GBIP website (see our analysis) outline the following potential additional costs which might be payable by Council:

• Higher annual charges.  These may vary significantly from those estimated, and may increase over time (see Clause 10.6 of the Water Sales Deed).  There is no cap on SDRC’s liability for additional annual charges (see Clause 6.27 of the Information Memorandum).

• If one or more investors do not pay the full amount of their contributions, GBW can ask the remaining investors (including SDRC) to meet any shortfall.  The Information Memorandum states that “In the event of unremedied default or the insolvency of any [investor](s), Charges may need to be increased to remaining [investors] to cover any shortfall.”

• The cost of purchasing an additional 600 ML of water allocations to improve reliability.  This cost will be recovered through an additional fixed annual charge and may be recovered over a number of years (see Item 3(6) of the Annual Water Charging Manual).  At a market rate of approx $3,400 per ML, this would be an additional cost after construction of $2.04m.  If SDRC has to pay its proportion of this cost (15%) it would be an additional $306,000.

• The cost for purchasing another 1,700 ML of water allocations to guarantee reliability.  GBW’s projections indicate this could be required by 2070. Again, at a market rate of approx $3,400 per ML, this would be an additional cost after construction of $5.78m.  If SDRC has to pay its proportion of this cost it would be an additional $867,000.

There are so many opportunities for substantial cost overruns in the construction and operation of the dam that it is very hard to see how this is an appropriate investment for Council.  They may as well dig a big hole and hurl millions of dollars of ratepayers’ money into it.  Which is, in a way, what they’re proposing to do.