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Through the study it has become clear there are two different allocation issues on the Waitaki River. The first of these is specific to the catchment area upstream of theWaitaki Dam. With increasing irrigation demands upstream of the Waitaki Dam, the existing consent allocation process makes it difficult to issue new consents or reallocate existing consents.

Downstream of the Waitaki Dam, there is a question as to whether additional allocations are warranted given the prevailing environmental and social attributes along the Waitaki River and surrounding areas. If it can be demonstrated that economic benefits of these applications outweigh the costs (including those of environmental and social values), then the decision becomes that of selecting the portfolio of consents which provide the greatest net benefit from the water allocation.

Through this project, an economic methodology for the estimation of the national costs and benefits was developed. The conclusions drawn on the net economic benefit to the nation of the various proposals will be limited by significant information gaps identified in the process of developing assumptions.

The ability to rank various allocation alternatives for the purpose of water allocation is limited by the lack of a standard consent item that relates to actual usage (or share) of Waitaki River and tributary inflows. Because this definition does not exist, then the economic contribution of various uses cannot be compared to the amount of resource allocated.

Even with the data limitations, considerable insight can be drawn from the economic modelling and the sensitivity tests performed. The economic modelling was completed for the following scenarios, and compared to the base case.

• Project Aqua with no additional irrigation
• All possible irrigation demands without Project Aqua
• All irrigation demands with Internal Rate of Return greater than 5% without Project Aqua
• Additional irrigation above Waitaki Dam at the following locations:
  • upstream of Tekapo,
  • upstream of Ohau
  • upstream of Benmore.
• Additional irrigation below Waitaki
• Additional irrigation below Waitaki integrated Project Aqua

It was assumed for each of these scenarios that the new developments were technically feasible, and financially viable. The methodology did not include confirmation of these criteria as part of the study.

The economic modelling compared the economic outcomes for each of the scenarios with a base case that assumed all existing consents were renewed, and existing hydroelectric plant continued to operate at current capacity.

The results from the economic analysis are presented in Table 17 below. The results indicate that if additional water allocations were made to Project Aqua in isolation with no additional irrigation development in the catchment, this would return a value of $329.1m to the economy assuming a discount rate of 7.5% and a 30-year analysis period.

The results also show that integration of the lower schemes with Project Aqua would deliver a net benefit for the nation of $39.0 (the difference between "Project Aqua" and "Integration with Project Aqua & Below Waitaki"). While the net benefits some irrigation demands upstream of the Waitaki Dam improve with Project Aqua, these results aggregate the benefits that may be in part be attributed to Project Aqua.

a) This table presents 7 different scenarios which combine Project Aqua with irrigation takes and assumes that Project Aqua is viable for each. At some point, however, irrigation takes would mean that Project Aqua would not be financially viable. The point where this would occur has not been calculated in this analysis and it is assumed that a reduction in flow through existing or proposed turbines is simply calculated on the cost of providing an alternative electricity supply.

b) A coarse estimate of financial viability was used to identify those irrigation schemes that were able to return sufficient funds to represent a commercial loan, and thus encourage private enterprises to pursue development. A first-order filter was applied to schemes that could return a positive NPV at a real pre-tax discount rate of 5% (representing a commercial loan in the order of 7% p.a. in nominal terms). The estimated irrigation area satisfying this rule is approximately 76,250ha. However, tests of financial viability are far more complex given that individual enterprises must realise gains from irrigation development. This result cannot be developed using the aggregate of the demands presented subsequent.

The results for Project Aqua in isolation are sensitive to the potential changes in the capital cost of the investment. If the costs were to increase by 20% in real terms, it is expected that the proposal would reduce the net benefits by approximately $150 million. The opposite result (i.e. an increase of approximately $150m) is observed if the alternative generation sequence increases in cost by 20%.

By comparison, the overall contribution from irrigation development appears most sensitive to reductions in the gross margins adopted as part of the modelling. Gross margin data should be confirmed with primary data and case studies that capture the basic land and climatic variances for the irrigation demands under investigation.

With further refinement of assumptions, it is possible that irrigation development has potential to deliver greater benefits than existing hydroelectric generation, especially in the regions that include Benmore, Benmore to Waitaki Dam, and below Waitaki Dam.

Conclusions to be drawn from the sensitivity tests performed upon irrigation scenarios suggest:

• While irrigation demands sourced from the Tekapo region could potentially deliver net benefit to the nation, a review of the assumptions relating to irrigation contribution for the agricultural profiles and varied climatic regions should be undertaken to confirm this result. The major hurdle is the opportunity cost of water, which is estimated to cost this option a present value (7.5%, 30yrs) of $111.5m.
• The economic viability of irrigation transition may improve in the Benmore region, provided the overall cost of accessing the water is low and the prevailing agricultural productivity is closer to the Mackenzie Basin estimate.
• In the areas below Waitaki Dam, opportunity exists for small developments to extend from existing irrigation canals, in addition to new reticulation proposals to irrigate the North Otago region. There are demonstrable economic benefits in integration of the schemes downstream of Waitaki Dam of $39.0m.

If the adopted measure of economic efficiency is NPV, then Project Aqua presents the most efficient use of water in the catchment below Waitaki Dam. Alternative methods of ranking are limited because of uncertainty in the calculation of economic contribution and the absence of a hydrology model. Even so, basic calculations would show that the Lower Waitaki irrigation demands are able to deliver up to 42.7% of the net economic benefit of Project Aqua, using less than 5% of the annual water volume required by the hydroelectric scheme.

This becomes an important consideration as the demands are not mutually exclusive in that it is technically feasible for the Waitaki River to supply both demands albeit with environmental and social consequences.

If a hypothetical scenario were considered where the abstractions for both uses are permitted in the Lower Waitaki River, the integration of Project Aqua and some irrigation schemes downstream of Waitaki Dam would increase the overall benefits to the nation. The increase in flows through the Project Aqua canal may also cause additional in-stream environmental impact through reduced flows in the section of the Waitaki River from Kurow to Black Point.

It is estimated that this last increment of flow could represent a decrease of 10% of the remaining flow if Project Aqua was to proceed. The hydrological impacts are hard to assess with confidence, as comprehensive hydrology information is not available for this particular option. Therefore conclusions with regard to the incremental impact upon instream values cannot be made, except to say that it is likely the environmental risks would increase.

Anecdotal evidence supplied to the project team has suggested that an option to integrate the Irrigation North Otago schemes with Project Aqua remains as one of the few alternatives for viable community scheme irrigation from the Waitaki River. Precluding the additional irrigation development on the premise of increased environmental risk could result in lost opportunity for community development outcomes that might be associated with an irrigation development of this magnitude.

The above discussion aims to highlight the impact of decisions across the economic, social and environmental criteria. The arguments do not make any recommendation as to whether any consent application should proceed.

The competing uses of water also extend to commercial manufacturing uses, and analysis of this sector was considered separately from the uses above due to the relatively small volumes of water forecast. It is estimated that the value of water to commercial manufacturing uses is well in excess of that of hydroelectric generation and irrigation demands.

Social and environmental impacts associated with further development of irrigation and hydroelectric generation have been included in the national cost benefit analysis using qualitative indicators. A summary of the qualitative assessment is provided in Table 18 below.

Notes: See Table 16.

In the catchment areas upstream of Waitaki Dam, it is expected that reallocation will have some environmental benefits, as well as additional risks associated with land intensification and increased abstraction. For tributaries of the Waitaki River, increased irrigation demands may place greater stress on remaining environmental values, and localised impacts from land intensification that would not be material on larger sections of the river must also be considered.

If the risks of agricultural intensification were managed appropriately, the transition to irrigation may allow existing dryland enterprises to retire more sensitive landscapes in the region while maintaining overall viability. It is likely that the re-allocation to agriculture will have positive social implications for the region.

Remedies to the major information gaps identified during the investigations are discussed below:

1. The omission of existence value information relating to environmental attributes is significant. It is recommended that preparation of a separate study of the environmental existence values of the Waitaki Catchment, in economic value terms, be completed.
2. The absence of a single independent hydrological model for the Waitaki River and tributaries makes the most fundamental assumptions of catchment hydrology useful for economic analysis relatively unsubstantiated. This information would enable the communication of supply security to existing consent holders under different scenarios, and possibly reduce or eliminate consent applications whose sole purpose is to mitigate future risk to security of supply. It is recommended that this modelling be undertaken.
3. Seeking a greater amount information should from applicants for irrigation consents so as to better understand the nature of each development including: the current agricultural profile of the consent, the likely transition, the period over which this transition might be achieved, and the actual annual volume of water required.
4. Comprehensive farm economic data for irrigated properties is not available in the Waitaki catchment. If data are not available from consent submissions, farm economic model case studies at key locations within the catchment should be undertaken to improve assumptions to support irrigation transition assumptions.
5. The potential "flow-on" contribution of irrigation transition to the national economy is unknown at present, and the economy wide impacts of changes in electricity generation prices have been undertaken using relatively coarse analysis. It is recommended that a general equilibrium model be constructed to understand these impacts with greater confidence.

Even with the inclusion of the information listed above, the economic modelling does not capture several variables discussed below. Should the following information be in a form useful for economic modelling, its impact should be reported in the final analysis. Outstanding values relate to:

• river management impacts including bank erosion, and infrastructure damage relating to fluctuations in river flows
• values attributed to environmental services e.g. habitat and angling
• the economic impacts associated with increased public investment in services such as road, power and environmental administrative services to manage increases in water allocations in the long term
• the capital investment required of water treatment systems as a result of declines in river water quality
• the economic risks associated with reducing any future allocations to ensure critical environmental values are maintained.