Audit says Adelaide desal expansion failed cost/benefit test

The awarding of two federal grants totalling Aus$ 328 million (US$ 333 million) for the Adelaide Desalination Plant (ADP) in South Australia has been heavily criticised in report published on 7 May 2013 by the Australian National Audit Office (ANAO).

The decision to double the plant’s size ignored a finding by Infrastructure Australia, an independent advisory group set up to assess projects based on cost and benefits, that the project was not supported by robust cost-benefit analysis and, in any event, the benefit cost ratio calculated for the project was too low, such that it did not offer a net economic benefit.

The audit report says that when considered against the guidelines of the National Urban Water & Desalination Plan (NUWDP), neither of the Adelaide desalination grants demonstrably satisfied the program’s merit criteria.

“Although the first (Aus 100 million (US$ 102 million)) grant (which related to the election commitment) was assessed against program criteria, the second (Aus$ 228 million (US$ 232 million)) grant was awarded through a truncated process that did not accord with the grants administration framework established by the Government, nor the NUWDP program guidelines,” says the report.

A factor not effectively addressed by the Department of the Environment, Water, Heritage & the Arts (DEWHA) in its assessment of the initial grant proposal related to the amount of water the ADP was expected to contribute to Adelaide’s water supply, says the ANAO.

“The flexible operational model adopted for the ADP was intended to allow a high degree of control over how much water the plant produces, which in turn was to provide flexibility to shut down the plant or reduce production when ‘cheaper’ water supplies are available or storages are sufficiently full,” says the report. However, this situation was not addressed in DEWHA’s assessment of the application against two merit criteria, the level of contribution to enhancing water supply and the cost-effectiveness of the project.

DEWHA advised the then minister that a plant with a 50 million m³/year capacity would be able to provide more than one quarter of Adelaide’s water needs in a ‘normal’ year and up to 32% during a drought year. These figures were premised on the plant operating at full capacity each and every year.

This ‘normal’ year figure drawn by DEWHA from the funding application overstated the contribution the ADP was expected to make to Adelaide’s water supply as it was intended that the ADP would only be used when cheaper water sources were not available, which was not expected to be the case in average years.

The assumption that the plant would operate at maximum capacity each year meant that the cost of water to be produced was understated in the funding application. In addition, the assessment advice provided by DEWHA made no reference to the cost of water that would be produced, notwithstanding that the published guidelines had indicated that this was a key measure of project cost-effectiveness, and that data on the cost of water had been included by SA Water in its funding application.

The plant is due to be put into standby mode at the start of 2015, because other resources are currently abundant.

“The shortcomings in respect to the second grant are more significant,” says the report. “In particular, this grant was awarded through a process that was inconsistent in a number of respects with the requirements of the government’s grants administration framework.”

Basically, despite the warnings of Infrastructure Australia, it was approved by a small federal cabinet committee.

The ANAO says that the size of the second grant (representing 50% of the estimated project costs) was significantly greater than permitted under the program guidelines, which limited NUWDP funding contributions to 10% up to a maximum of Aus$ 100 million.

The proposal also failed demonstrably to satisfy three of the five merit assessment criteria.

Firstly, constructing a 100 million m³/year plant provided increased water security/insurance compared with that provided by a 50 million m³/year plant. However, the Adelaide expansion was expected to provide increased insurance for the long-term (2025-2050) water security but was not expected to be needed in the short-term either in average years or drought years.

To this could be added its failure to pass a cost/benefit test, while the ANAO report also criticises the fact that South Australia did not offer to commit to provide any environmental benefits in return for Australian Government funding of the proposal.