5. Results and Summary

5.1 Present value of costs

The uptake of water-measuring devices under the status quo and the proposed NES is modelled over a 36-year time horizon. Figure 5 details the timing of the costs associated with the capital purchase of measuring devices, ongoing costs (five-yearly calibration and annual reporting), replacement cost at year 20 and consent review costs associated with the two scenarios.

A discounted cash flow approach (discount rate of 10 percent) has been used to derive the present value (PV) of the cost of the two scenarios. The additional costs attributable to the proposed NES equate to the difference between the present value (PV) of the costs of the individual scenarios:

PV cost of NES = PV costs proposed NES minus PV costs status quo.

The present value of capital, ongoing, replacement and consent review costs of the proposed NES is estimated to be $42.3 million (Table 18). Approximately 57 percent of the PV10%⁴² of cost is associated with the measurement of takes of less than 20 L/s. These takes account for just 8 percent of the estimated unmeasured annual allocation (see Figure 6). The large proportion of cost (34 percent) associated with takes of less than 5 L/s arises because of the large number of consents and the assumption that under the status quo currently unmeasured takes of this size are exempt by many councils from the requirement to instal measuring devices.

Table 18: PV cost of NES by take rate – capital, ongoing, replacement and consent review costs

On a regional basis, the Canterbury region (ECan) accounts for 36 percent of the cost of the proposed NES and 49 percent of the total unmeasured annual allocation (Table 19). The Hawke’s Bay and Otago regions each account for 12 percent of the cost. This reflects both the number of consented water takes and the current situation with regard to the uptake of water-measuring devices in these regions. The West Coast region features relatively prominently (5 percent of the cost of the NES) because it is assumed under the status quo that there is no uptake of measuring devices.

Table 19: PV10% cost of NES by region – capital, ongoing, replacement and consent review costs

The additional cost of the implementation package proposed by the Ministry for the Environment adds approximately $1.2 million to the total cost of the proposed NES. The total PV10% cost of the proposed NES is therefore estimated at $43.5 million. Ninety-six per cent ($41.8 million) of the cost will be incurred by existing consent holders, while regional councils and central government will incur 3 percent ($1.1 million) and 1 percent ($0.6 million) respectively (Table 20).

Table 20: PV10% cost of NES, by stakeholder group

5.2 Potential benefit

A number of important benefits arising from the NES have been identified through discussions with stakeholders, including the following.

• There is almost universal agreement among stakeholders that the measurement of actual consented water take will improve the management of New Zealand’s freshwater resource. The potential for improved management of the resource through knowledge of consented water take is delayed under the status quo. Existing studies indicate that New Zealand residents can place high value on the protection of the natural environment, and on this basis it is reasonable to assume that improvements in the management of freshwater resources and environmental flows will be accorded a high value by New Zealand residents.

• Compliance monitoring and enforcement in the absence of water-measuring devices is so imprecise and inaccurate as to only be useful for blatant non-compliance, such as that occurring during times of restriction. The NES does not require the monitoring of take rate, and in some situations this may limit the extent to which it assists in improved compliance monitoring.

• There will be improved confidence in water resource management that is informed by the measurement of consented water take. The value of improved public confidence may result in reduced transaction costs in resource decision-making.

• The proposed NES will improve the ease and effectiveness with which actual water take can be reported. Measurement of take is an important condition for achieving and demonstrating improved efficiency at all levels (individual, industry, regional and national). At a national level, the proposed NES will allow for the compilation of complete physical water accounts within five years of the regulation being gazetted. This will assist in the understanding of the effects of environmental policy on the economy, and economic policy on the environment. It will also help the nation to meet its international obligations to report the status of and changes to its natural environment.

• Technical efficiency gains accruing to existing consent holders from enhanced systems performance monitoring and management have not been quantified. Stakeholder interviews and the cited literature suggest that there can be benefits derived by consented water users monitoring actual water taken, which in some situations may offset the cost of installing and maintaining a water-measuring device.

• There is the potential for allocative efficiency gains resulting from the knowledge of actual consented water take. Such benefits only arise where water is scarce. In the absence of data describing actual take, the determination of reasonable needs of consented water users is based on relatively simple models, and the degree to which a resource is allocated is often based on these same models. Because the models used for estimating take are reasonably coarse, the availability of data describing actual take creates significant potential for allocative efficiency gains. Such gains may arise through:

  • identification of un-utilised allocation
  • refinement of estimates of the degree of effective catchment allocation
  • improved resource understanding, allowing for less conservatism in the setting of allocated volume at the catchment level.
  The refinement of allocation through the knowledge of actual take − implementation mechanisms aside − has the potential to free up water in catchments that are considered to be highly allocated.

5.2.1 Present value of the potential allocative efficiency gain

The potential for allocative efficiency gains resulting from the knowledge of actual consented water take have been identified. Allocative efficiency gains only arise where water is scarce. They do not arise where water is abundant, because water users can simply apply and gain consent to take water for consumption.

The quantification of the benefit arising from allocative efficiency gains has been carried out for a scenario whereby irrigators are able to increase their level of consumptive take. The potential for allocative efficiency gains may not accrue solely to irrigators, however. Other potential beneficiaries include municipal water supplies, industrial users and the environment. The level of benefit identified is illustrative only and cannot be attributed solely to the installation of water-measuring devices (Table 21). The implementation approach taken is also critical to realising the benefits claimed. The allocative efficiency benefit enabled by the proposed NES results from benefits arising earlier than they otherwise might.

Table 21: PV10%of potential benefit resulting from improvement in allocative efficiency

The results suggest that if the installation of water-measuring devices enables a 3.4 percent increase in consumptive take for irrigation purposes in what are currently considered highly allocated regions, the benefits will outweigh the costs of the proposed NES. The benefits illustrated would accrue to existing irrigators who can exploit the knowledge (e.g. through increasing irrigable area) that they are not fully utilising their consented allocation, or to potential irrigators seeking consents in catchments that are considered to be highly allocated. However, the increased use of water for consumptive purposes may have some offsetting costs for in-stream values, water quality and green-house-gas emissions due to the intensification of land use.

Allocative efficiency gains could equally arise as environmental flows. Under this scenario, councils will have determined that the value of water as environmental flows is equal to or greater than its value as consumptive use.

5.3 Sensitivity analysis

Stakeholder interviews have consistently raised two themes in relation to the implementation of the proposed NES:

• whether there is a need for the comprehensive measurement of consented water take (all takes measured in all situations)

• the logistical challenge of installing in excess of 14,200 measuring devices in the proposed five-year time frame in the face of human resource constraints.

Several regional councils and other parties have submitted that regional councils should maintain discretion as to when and where measuring devices are required. They maintain that little benefit is to be gained by requiring measurement in regions/catchments where consented abstraction is a small proportion of the total available resource. Some councils have suggested that small takes only require measurement where a resource is highly allocated, or where the cumulative effect of smaller takes is significant.

For example, the West Coast Regional Council maintains that their region has an abundant water resource and that demand pressure is low in relation to the extent of the available resource. There is provision in their regional plan for requiring the installation of a water-measurement device if deemed necessary by the council. It is estimated that 5 percent of the cost (PV10% cost $2.2 million) of the proposed NES is associated with the West Coast region. (See Annex III for further detail.)

The cost of the proposed NES is sensitive to an assumed threshold for measurement. On a national basis, it is estimated that 44 percent of the cost (PV10% cost $19 million) of the NES is associated with take rates of less than 10 L/s and that these takes account for 4 percent of the total unmeasured annual allocation by volume. The large proportion of the total cost (34 percent) associated with takes of less than 5 L/s arises because of the large number of consents and the assumption that under the status quo many councils currently exempt unmeasured takes of this size from the requirement to instal measuring devices. Approximately 57 percent of the cost is associated with the measurement of takes of less than 20 L/s. These takes account for just 8 percent of the estimated unmeasured annual allocation.

Submissions and key informant interviews have repeatedly raised concern regarding the industry’s ability to instal approximately 14,200 water-measuring devices over a five-year period. The concerns raised focus on constraints on physical infrastructure and on trained and competent staff. Submitters and key informants believe that in the face of these constraints and a lack of industry accreditation/certification, quality issues in relation to measuring devices and installation are likely to compromise the accuracy standards sought under the proposed NES. If the proposed timeframe for achieving comprehensive measurement of consented water takes was extended to 10 years following gazetting of the regulation, the PV10% cost would be reduced by 34 percent from ≈$43.5 million to ≈$28.6 million.

The Ministry for the Environment has raised the prospect that the bulk supply of measuring devices the proposed NES might necessitate could lead to a reduction in the cost of these devices. Interviews with suppliers suggest that although significant discounts could be possible, they are reluctant to disclose the extent of any discount at this stage of the proceedings.

The sensitivity of costs and benefits to changes in key inputs is described in Table 22 and 23 respectively.

Table 22: PV cost of NES, $million – sensitivity to changes in key inputs

The level of benefit identified is illustrative only, and cannot be attributed solely to the installation of water-measuring devices.

Table 23: PV benefit, $million – sensitivity to changes in key inputs

5.4 Summary

Table 24 provides a summary of the costs and benefits identified, along with their magnitude.

5.5 Data qualifications

The analysis presented has relied on the water allocation consent database prepared for the Ministry for the Environment by Aqualinc (2006a, 2006b, 2006c). This database describes all consented water takes in terms of take rate, annual allocation, outlet type, primary use, consent expiry date, etc. The database does not, however, describe whether or not an individual consent is subject to measurement. This is achieved through the analysis “of the number of consents without measuring devices and assumes that the current distribution of metered consents is similar to the distribution of take rates” (Aqualinc, 2006b). Time and resources allocated to the preparation of the cost−benefit analysis did not allow for this limitation to be addressed. Although the Ministry consents database represents the best available information at the time of writing, Harris Consulting can not accept any responsibility for data limitations associated with this database.