Economics, Policy, Politics, Water

40 – Fresh water for Perth 2: the State Opposition’s attempts

The State Opposition parties in Western Australia have staked their electoral prospects on their unconditional support for a water channel from the Kimberly to Perth. Their willingness to place politics above responsible economic management deserves the deepest condemnation.

In PD#39 I was highly critical of decisions about water supply and pricing in Western Australia made by the current Labor State Government. However the State Opposition (a Liberal/National coalition) has managed to trump the Government with an even worse approach to the issue during the current election campaign.

The biggest concern is their promise to build a covered channel to move water 3700km from the Kimberly to Perth. The State Government had cynically set up a feasibility study to examine the proposal. They knew full well that it wasn’t nearly a viable proposition, as almost revealed by the Premier Geoff Gallop in his passionate reaction to the Opposition’s announcement.

Knowing they were behind in the polls, Opposition Leader Colin Barnett decided they needed to take some risks, in the form of bold and “visionary” decisions. He announced a decision to go ahead with the channel without waiting for the feasibility study to be completed. When pushed, he asserted that the decision was absolutely unconditional; they would build the channel no matter what it cost.

There are all sorts of problems with this promise.

  1. It is an affront to responsible decision making. Committing to such a huge project without anywhere near all the facts is absolutely reckless. All sorts of uncertainties and concerns have been raised in the ensuing debate, including economic, technical, social and environmental issues.
  2. The information that the Opposition had to make the decision seems seems to have been highly inaccurate. The claimed construction costs ($2 billion) are clearly much too low. According to the Government, the Water Corporation of WA has costed it at $4.6 billion, not including the costs of acquiring land, providing power, building roads and treating the water.
  3. Barnett claimed that water would be delivered to Perth for $1/kilolitre(KL). John Quiggin, writing in the Australian Financial Review of 10 Feb 2005 pointed out that the claimed construction costs alone would be enough to account for $1/KL. Once one accounts for more realistic construction costs and includes things like pumping, maintenance, treatment and reticulation, the realistic delivery cost would be much higher. State Treasury’s rough estimate was $6.50/KL. According to one correspondent to, “an independent consultant came up with a cost of $9.5-12.4 billion and $6.10 per kilolitre for a pipeline back in 2002” (although I haven’t seen that report). Current water prices for most domestic and industrial water users and all irrigators are under $0.75. The Opposition refuses to concede that their costs are wrong, so there has been no announcement by them of how the difference would be funded. But it would be funded by the community one way or another. We can’t know what the costs would really be without a lot more analysis (that’s part of the point!) but the opposition’s numbers are obviously fanciful.
  4. Beyond those financial costs, there are uncosted environmental and social impacts, which have raised the ire of many.
  5. There is an assumption that around 40% of the water will be used for irrigation. If that happens, I don’t imagine that irrigators will be charged anything like the real cost of the water they use (currently in the south-west they are charged about $0.03/KL). If irrigators were again given favourable pricing, either the Government would have to subsidise that directly, or it would require an even greater price to domestic and industrial users. Quiggin suggests that “the costs for residential users could be as high as $10/KL. At that price, fanciful options such as transporting icebergs from the Antarctic start to look attractive.”
  6. Even more importantly, at that price, if it were to be charged to water consumers, there would be a massive contraction of demand. It seems certain that demand for water would fall so much that the water from the channel would not be needed. It would be too embarrassing if the channel was built but then nobody wanted the water. For that reason it is highly likely that the government would provide massive subsidies on water prices to all users, not just irrigators, to make the water attractive enough to use. The community of WA would still pay far more than the water is worth, but in a way that was hidden and unrelated to their water consumption. The Government would have to take public money away from hospitals, education, the environment, and so on to pay for water that costs more to provide than it is worth to us.

This raises the obvious question, why not use pricing to reduce demand as the first option? If there is still excess demand for water after prices have been increased 10 fold, (or 200 fold in the case of irrigators), then it might be reasonable to reconsider the channel. If there is not excess demand at those prices, it shows that the community’s valuation of the water is less than the cost of providing it. The implication is obvious.

Perhaps the most depressing thing about the whole appalling saga was the community response. At least initially, polls found 70% support for the plan. (I’m not sure what has happened to public opinion since. There has been so much criticism of the idea that people may have gone cool on it. I certainly hope so.) Are people really so susceptible to such simplistic, politically cynical, economically irresponsible promises? Apparently they are.

David Pannell, The University of Western Australia