Cost-Benefit Analysis of Burdekin Dam - Case Study Example

Cost Benefit Analysis of Burdekin Dam Student Name Institutional Affiliation Executive summary Water shortage is increasingly affecting the Australians, especially for the companies and agricultural activities. In addition, increase in population calls for sustainable water projects. Therefore, the need to solve domestic, agricultural and industrial problems calls for creation of a mega dam project on the Burdekin River. The project will support the growth of industries, urban water needs, and controlling of flood catastrophes in Dotswood area. This cost benefit analysis report considers developing a decision to building Burdekin dam using a strategic decision-making analysis. The CBA analysis suggests that Burdekin dam is viable even though the ethical issues pertaining to changing the natural habitat and affecting natural species does not have a readily available solution or justification. Description of the project Background Burdekin Dam will be built on Burdekin River. The select location is Dotswood area. The main purpose of building this dam is to maintain a constant supply of water in Dotswood area and surrounding regions that do not have any source of water. This dam will also be critical for irrigation purposes in order provide a mechanism for constant agriculture, which is important for the economy of Australia. According to this proposal, the Burdekin Dam is expected to hold approximately 1.86 million megalitres of water when full. The Burdekin River Irrigation Area was created in 1980 and is part of the Queensland’s largest water conservation scheme. This newly proposed dam is expected to serve approximately 103,000 ha of land spanning 200 kilometers from the dam location. The dam will provide water that will be used to grow various kinds of crops, but crop supported in the area include cotton, sugarcane and rice. Due to the multipurpose of the dam, this project will also be expanded to manufacture hydroelectricity due to the green the nature of the hydroelectric power. The dam will also support numerous other fresh water animals that are found naturally. Fish stocking, fishing and boating are also consider part of the economic benefits of the proposed dam. The surface flow of water through the Burdekin Dam and its associated usage are summarized in the material balance diagram below (See fig 1). This diagram demonstrates various process of inputs and outputs during and after the construction of Burdekin Dam. Impact Chart Figure 1: Impact chart of the construction of Burdekin Dam What is the problem? Australia as the rest of the world is experiencing growing population. The growing population demands of high level resources such as water hence the need to enhance a highly efficient water supply system. The current water supply for domestic usage and agricultural activities does not meet the growing demands in Australia. Additionally, the designated irrigation area within Burdekin River is underutilized suggesting that the newly proposed dam will solve the domestic and irrigation water problem in areas that are within 200 kilometer radius from Burdekin River and from the proposed Burdekin Dam. What are the proposal objectives? The objective of building Burdekin Dam is to ensure provision of enough water supply for domestic usage and for irrigation purposes among the population who are located 200 kilometers of Burdekin Dam. The Dam will be used to forecast the possibility of hydroelectric power generation that will add to the green energy supply chain. The other significant objective of building Burdekin Dam is to control flood downstream during wet weather. The comprehensive objectives of this project are summarized in the Logframe below (see table 1). Table 1: LogFrame Project Summary Indicators Means of Verification Risks/Assumptions Goal 1. Increasing the water supply in Australia 2. Controlling flood downstream 1. Positive average net present value 2. Positive net present value to Australians in drought prone areas 1. Cost Benefit Analysis 2. Distributional Analysis N/A Outcomes 1. Increased water supply 2. Reliable agricultural activities 3. Reduced drought impacts 1. Reduced water demand 2. Reduced flood impact downstream 1. FAC Annual Report 1. Extra water storage facility will increase agricultural activities 2. Additional water supply to South East Queensland Outputs Externality damages: pollution and ecosystem (Department of Homeland Security, 2016) 1. Air pollution during dredging 1. End of project report 1. Extra water available for increasing population 2. Increased agricultural activities Activities 1. Environmental impact statement 2. Dam construction 3. Dredging activities 4. Externality mitigation 1. Budget, people, costs, time, and materials 2. Consultancy services 3. Dredging equipment 1. EIA submission 2. Construction reports 3. FAC Annual Report 4. Australian EPA reports 1. Acceptance of EIA by the government 2. Feasible technology 3. Acceptable externalities 4. Meeting the construction standards What are the alternatives? The main alternatives to building a dam in Burdekin River is to invest in boreholes that will provide water for domestic and irrigation purposes within the target region. The other alternative is to expand water from the already supply system. However, the already supply system has shown evidence of not capable to increase the supply hence building of the Dam is the chosen as the best alternative. Also, there is no alternative to controlling floods downstream hence this dam is the best alternative (Office of enviroment Heritage, 2016). Cost Effectiveness Analysis $ Million per ML GL pa Burdekin Dam 4 41 Burdekin River 7 22 Recycling water 8 18 Water mining (borehole) 28 23 The cost effective analysis shows the present value of the cost of supplying 1 ML of treated water per year from different sources of water supply. The cost includes capital costs and the present value cost. Note: Water mining and water recycling is the use of small scale water treatment works which are attached to the sewer mains. Proposal Description The Burdekin Dam proposal outlines the cost effective analysis of the construction and operation of the proposed dam in Burdekin River. The dam will be built in near Ingham with an elevation of 620 m. The dam will be the main property of the State of Queensland and will serve North and Far North Queensland areas for domestic and irrigation water needs. The construction of Burdekin dam is expected to begin in 2018 and would last for four year hence will be complete in 2022. The physical characteristic of the dam will be: a height of 70 meters and will span a length of 4 kilometers up stream of the location of construction. The first usage of Burdekin dam water project for irrigation and domestic purpose is expected to begin in 2021. The one year early than the expected project completion time is set to observe whether the project is meeting its objectives. After completion, several feasibility studies will be initiated and that would last for ten years to determine the extent to which this dam can be used to maximize its utilization as well as the develop the safety measures during extreme weather conditions. Top on the study feasibility is the possibility of using this dam to produce hydroelectric energy that will add to the growing production of green energy in the country. The relationship between the Burdekin dam project’s inputs and outputs are summarized in the Logframe table 1. The relationship of the inputs and the outputs show that the project is having a logical relationship between the inputs, project activities, outputs, purpose and goals. The Logframe for this project describes the impact of the project in the narrative summary column. The rank of the narratives is developed according to casualty of the project. The measurable indicators column describes how the impacts of the project will be measured. The means of verification column indicates where the measurement information will be sourced while the italics indicates indicate the valuation technique that will be used for cost benefit analysis. The valuation technique includes the market price, shadow prices and general contingent valuation. The project’s Logframe would summarize the assumption that underpin the logical relationship between inputs and outputs. The assumptions are also included in the log frame. These assumptions are useful in determining the activities that can be considered wrong within the project and the issues that include the risk of the sensitivity analysis. The assumptions are also useful in representing the possibility of misevaluation of the natural resources such as water level during extreme weather and the human controlled resources such as construction cost overruns, falls in per capita water consumption and higher environmental costs. For the cost benefit analysis of Burdekin dam project, the Logframe is created to identify the costs of construction and operations of the dam while benefits are identified as sufficient clean water supply for the target community, supply of significant water for irrigation throughout the year and eliminating disaster downstream, which is associated with flooding water disasters (Moran, 2015). Identifying the impacts (the costs and the benefits) This project uses the construction and operational planning resources, human resources in the form of labour, material resources, and natural resources in the form of land and water (Comerasamy, 2013). At the time of constructing the Burdekin dam, the list of resources identified above are not available for other uses. At this process, it presents an opportunity cost to the society. Also, the project has some direct impact to the environment associated with both the construction and operations of the project. The environmental impacts that have been identified include impacting the water flow, erosion, habitat lost in bot terrestrial and aquatic and increase of waste water (Munier, 2012). There will also be a risk of invasive water species due to habitat change that may create conditions that are appropriate for invasive species. The project’s impacts are also identified and presented in the impact chart (see fig 1). Stakeholders The Burdekin dam lists stakeholders who are involved in the project. In the cost benefit analysis it is important to understand the role that each stakeholder play in the project, their point of view, their objectives and their impacts contributes to determining the incidents, the cost and the usage of the project (see table 3) (Triantis, 2015). The costs and benefits for stakeholders are also summarized in the financial vs cost impact and planning balance sheet table 4 and 5 below. Table 3: Stakeholders who are involved in the Burdekin dam project Stakeholder Point of view Objective Government (decision-maker) State • Maximize social and economic welfare • Increase dividends from Holding Company Company increase sales and profits Farmers Individuals profits, way of life Recreationalists Individuals consumption, preservation of environment Water consumers Individuals, companies, Govt agencies consumption Construction firms Company profits Local community Individuals quality of life Table 4: Financial vs. economic impacts of constructing the Burdekin dam Affect Financial (money) Economic (real) Costs Labour Labour Time wastage Materials Market going prices Next best Options Usage) Water quality Commercial fishing lost fish, retained inputs Benefits More water supply Extra pay more output Improved human life $ savings Alternative use of water (Reduced water shortage) Improve environmental $ savings More water, good Health (Barkle, 2004) (Reduced medical payments) Table 5: Planning balance sheet of the Burdekin dam Burdekin Dam: Incidence of costs and benefits Participant group COSTS BENEFITS Government Build costs Add taxes Local community destroy ecology Recreational destruction of the habitats Water consumers water rate Cheap water prices Local businesses Increase power support Increase the irrigation area Environment The local climate change change law of precipitation and water resources distribution Flood control Farmers lost land Increase employment got the land compensation Construction industry Materials used Become a tourist attraction tickets from construction Valuation techniques Benefits Passenger time savings Devoid of the new source of water, the demand for water will grow leading to poor quality of human life because of water shortage and costly water price that will exist which many may not afford. By getting rid of water shortage, the construction of Burdekin dam will free citizens from water shortage and ensuring that every person gets the cheaply available water. Water shortage Devoid of the Burdekin dam, the growth in the demand for clean and constant supply of water will lead to poor living standard and poor sanitation. By ensuring that there is constant supply of water, it will save life by ensuring that every gets sufficient and quality water at a cheap price. Valuation techniques The number of water users is multiplied by the effect of water shortage and is appraised at 10/litre. As a result, water shortage factor was included. The shortage is different between people and class of people in the country, which increase as the demand for water increase and water supply decline as result of non-constant supply of water. The assumption about the new project is that the construction of new dam will ensure that there is constant supply of cheap and affordable water at every one at all time. The number of water uses is estimated to grow. The present value of the project is estimated to be $307,039,000. Time is 10years, Project discounting factor is 10%, Estimated Initial outlay is $246000, 000,Estimated Net benefit of the project is $815000, 000 Therefore, the estimated project Cost and Benefit for the project is as follows: Table 6: Estimate of project Cost and Benefit of the project Years 1 Years 2 Years 3 Years 4 Years 5 Years 6 Years 7 Years 8 Years 9 Years 10 Total Total cost $ 45,000 $ 35,500 $ 33,000 $ 28,500 $ 25,000 $ 22,500 $ 18,000 $ 15,500 $ 12,500 $ 10,500 $ 246,000 Total benefit $ 95,000 $ 40,000 $ 50,000 $ 60,000 $ 70,000 $ 80,000 $ 90,000 $ 100,000 $ 110,000 $ 120,000 $ 815,000 Net benefit $ 50,000 $ 4,500 $ 17,000 $ 31,500 $ 45,000 $ 57,500 $ 72,000 $ 84,500 $ 97,500 $ 109,500 $ 569,000 Discount factor (10%) $ 0.9091 $ 0.8264 $ 0.7513 $ 0.6830 $ 0.6209 $ 0.6209 $ 0.5132 $ 0.4665 $ 0.4241 $ 0.3855 NPV $ 45,455 $ 3,719 $ 12,772 $ 21,515 $ 27,941 $ 35,703 $ 36,947 $ 39,420 $ 41,350 $ 42,217 $ 307,039 From the above NPV Analysis of the project, it is evident that the construction of Burdekin dam would lead to positive NPV of $307,039. The implication is that the construction of the dam is viable since, it will bring more benefit to the society like constant supply of clean water for basic needs and improved living standards of the people leaving around. As a result, the project must be implemented since, the benefits of contracting the dam is more than the cost. Costs Construction of the dam The resource employed in the construction of Burdekin dam depicts some alternative use that is lost to the community when the asset is employed in the dam construction. Valuation technique: market prices The construction assets are existing in a competitive market, which are ideal appraisal of the societal worth. In this regards, the market price employed in financial forecasting for the project are used. Table 6: Approximates cost of dam construction and associated facilities ($ millions April 2016 dollars) Item Year of outlay Total   Years 1 Years 2 Years 3 Years 4   Reclamation - $ 48,000 $ 5,500 - $ 53,500 Pavements - $ 8,590 $ 25,500 $ 9,500 $ 43,590 Drainage - $ 5,670 $ 3,580 - $ 9,250 Fencing-perimeter road - $ 4,500 $ 1,450 - $ 5,950 Electrical-airfield lights - $ 1,250 $ 2,000 $ 2,500 $ 5,750 Control tower-navigation aids - - $ 11,500 $ 13,500 $ 25,000 Staffing Office • hangars - - - $ 36,500 $ 36,500 • car park - - - $ 2,000 $ 2,000 • apron - - $ 7,200 - $ 7,200 • access road-bridge $ 1,250 - - - $ 1,250 Rescue-fire fighting - - $ 3,200 $ 1,500 $ 4,700 Relocations $ 35,000 - - - $ 35,000 Design $200,000 - - - $ 200,000 Contingency $ 5,000 $ 11,500 $ 12,500 $ 1,500 $ 30,500 Total $241,250 $ 79,510 $ 72,430 $ 67,000 $ 460,190 Multiplier flow-on to Sydney 17200 62900 86500 47500   Employment (no. of jobs) Dam construction 55000 16500 25000 21500 Multiplier flow-on to Sydney 47500 15400 28500 22900   Value: Present value in 2016 dollars is $307,039 million. Loss of fisheries The search for materials employed to fill the dam will pollute the water and hence affect the aquatic life. Less fish will be caught in the river in which the dam will be constructed. The loss of assets is because of the construction of the dam by blocking part of the river to save on water. Valuation technique: market prices Estimates of annual loss to fisheries Value per Professional Amateur Percentage Loss to Loss Species kg catch catch loss commercial to amateur fishery fishery ($) (kg) (kg) (%) ($) ($) Yellow-finned bream 5750 22,500 15,500 50 35,582 25,600 Tarwhine 3500 2,500 450 450 3,317 521 Luderick 850 19,500 5,500 950 13,414 3,560 Trumpeter whiting 2540 3,200 350 190 1,250 90 King prawns 14500 59,600 350 660 45,600 550 Total 99,163 30,321 Value: Present value in 2016 dollars is $ 650,000. Discounting The costs and benefits that have been identified and valued in table 6 will accrue of the period from 2015-2035. During CBA, the future values are expected to be expressed in the present value in order to make comparison with future project costs (Henry, 2011). Discounting the future value to the present value will use information within the society in terms of financial rate and time preferences. The cost and amount of future consumption is also presented in the present value. The capital market is used as a guide to develop discounting value with interest rates and risk rewards for inflation. Due to the nature of the dam, risk is considered less relevant because Burdekin dam is a government project that will improve the social and economic welfare of the citizens. Decision criteria The cost benefit analysis values of the impacts (costs and benefits) of the Burdekin dam are presented in terms of economic and social impact of the society and the way the project will improve the social welfare of the society. The discounting process aggregate the benefits of the project while showcasing trade-off between current and future consumption functionality, (Taylor, ‎2010). For Burdekin project, the benefit cost ration will be used to make decisions of whether the project is viable. The benefit cost ratio takes the present value of the total benefits and dividing this value by the present value of the total costs. During this ratio analysis, a ratio greater than 1 signifies net benefit to the society and the project should be taken. For Burdekin dam project cost estimates, the PV of total benefits will be divided by PV of the total costs as follows: $815 million/$307,039 million= 2.6. The total cost of PV divided by the total benefits of PV bring a benefit cost ratio of positive 2.6 suggesting that the decision criteria shows that the project is worth supporting on economic and social grounds. Sensitivity analysis This project is sensitive to changing conditions. The changing conditions that are taken into account include errors in assumptions of water consumption value for domestic and irrigation usage as well the risk of underestimating construction and environmental costs. The water consumption for domestic usage has a low rate of return on investment and the irrigation consumption profitability is not yet known, (Sokowski, 2015). This suggests that it the returns for the usage of the dam may not sustain its maintenance will require constant government budgeting to maintain the dam. Distribution For this dam project, losers and gainers are identified in the incident and stakeholder tables, (Dennis, 2005). The major gainers are water consumers for domestic usage and irrigation and the companies taking the construction project. Other gainers are the state and national government because of the total value of the dam asset project. Major losers of the project may be the natural state of habitat and loss of indigenous fish that will affect career fishermen. Conclusion The cost benefit analysis of the Burdekin project show that the dam project is likely to be constructed. Once complete, the project will contribute positively to economic and social welfare of people where the dam will be located. However, environmental damages and compensation for the natural damages has not yet been analysed hence raising ethical issues as to who is defending the project’s natural participants. References Barkle, B. 2004. Project Risk Management, London : Cingage learning. Comerasamy, H. (2013). Doing a Research Project in Nursing and Midwifery: A Basic Guid, Sydney: Springer. ‎Dennis, E.F. 2005. Practice of Project Management - Page 353, london: Springer. Henry, A. 2011. Understanding Strategic Management, London: Cingage Learning. Moran, K. 2015. 'Floodplain needs work', Argus. Munier, N. 2012. Project Management for Environmental, Construction and Manufacturing, London: John Wiley's & Son's. Office of Enviroment Heritage. 2016. 'Project summaries - Restoration and Rehabilitation - community grants', office of enviroment Heritage. Sokowski, D. 2015. Mastering Project Management Integration and Scope, New York: Cingage Learning. Taylor, ‎. 2010. Project Management Communications Bible - Page 388, New York : John Wiley & Son's. Triantis, J. 2015. Navigating Strategic Decisions: The Power of Sound Analysis , London Read More