Cost and benefit analysis report

5. Your task
You are required to undertake a comprehensive BCA (Project/Private
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, Efficiency and
Referent Group analysis), with a view to advising the State government on the desirability or
not of retaining the existing water saving regulations. (For the purpose of the analysis and
report, you should undertake a CBA of retaining the existing regulations rather than
removing them.) You are encouraged to consider and comment on the distribution of the
regulation’s costs and benefits by stakeholder, and any related potential policy implications
that could be considered at all levels of government.

As this is not an investment project the Project and Private CBAs can be merged, provided it is possible to
show the net benefit stream for each major stakeholder separately. (See template spreadsheet.)

Referent groups
For the purpose of this analysis assume that the stakeholders of interest to your client are all
those located in Queensland, including the costs and benefits to Queensland State and Local
Government. However, as the Regulatory Impact Statement of which this CBA forms part is
to be submitted to the ACCC, and, as the regulation has budgetary implications for Federal
Treasury, you should also consider the implications for Federal Government. Furthermore,
as Brisbane City Council is a stakeholder with major responsibility for the supply of water
and the health of the city’s waterways and Moreton Bay, your analysis should also consider
the regulation from BCC’s perspective. The disaggregated Referent Group analysis should
also include the costs and benefits to property developers and subsequent property owners,
as well as the Queensland public at large.

Sensitivity testing
As part of your case study you are required to undertake and report on the following:

A. A detailed sensitivity analysis and scenario analysis in which you test the robustness of
your results and conclusions to variations in the value of selective variables/parameters. Your
sensitivity analysis should test each variable listed below, individually and then jointly with a
view to describing three scenarios: most pessimistic; best guess; and, most optimistic. This
should include the following variables:

(i). discount rate for the base case: 2% and 6%
(ii). tank yield 30 and 90 kl/annum
(iii). import duties/taxes on tank cost 0% and 30%
(iv). externalities varied by 25 percentage points above and below their estimated
non-market values; ie. if the given estimate of an externality is equivalent to 50% of
the cost at market prices, you should vary this between 25% and 75% market cost,
and so on.
B. Discuss whether you believe any other variable is of sufficient relevance and uncertainty
for inclusion in a sensitivity analysis, with a clear and concise justification for your opinion.
C. You are also required to identify and discuss any other efficiency costs or benefits not
included in the analysis, which you believe should be taken into account, with a clear
statement justifying your position.
D. As part of your sensitivity analysis you should also identify the respective threshold
values for each individual variable selected for sensitivity testing, at which the NPV of the
efficiency net benefit is zero. This should also include calculation of the threshold value for
the Other Unrecorded Efficiency Benefits identified by you under C above. You should also
comment on the likelihood of each threshold value being within a feasible range of values for
that variable.

1. Background
Water Saving Regulations
Queensland had in place regulations under which new buildings in most areas must
achieve certain water savings targets, and rainwater tanks (RWTs) are generally the
means selected to achieve these targets. Compliance costs were considered by various
stakeholders in the community to be excessive and in September 2012, the State
Government ordered an analysis of a proposed repeal of water savings regulations
which. A rudimentary CBA was undertaken by a government department, followed-up by a more comprehensive CBA by a local consulting company of

maintaining an
existing regulations on water savings targets through the installation of RWTs in new
property developments. This case study is based on their analysis, and much of this
document draws directly from it.

You are now required to undertake an even more comprehensive analysis in
which you are to introduce two additional dimensions into the analysis: (i) the
use of shadow (efficiency prices) where relevant; and, (ii) undertaking a Referent
Group analysis showing how the costs and benefits of maintain the existing
regulations CBA are distributed across the various stakeholder groups. More
details as to what is required follow in the rest of this document.

Stormwater Quality Regulations
The Queensland State Government also has in place a State Planning Policy
governing the quality of stormwater run-off, which requires a reduction of pollutants
from untreated stormwater before it enters the waterways. A range of actions can be
used to meet these requirements, including evaporation, reuse and infiltration to native
soils, or filtration through a soil and plant stormwater ‘bio-retention’ treatment system.
These actions add to the costs of urban developments, through capital, operating and
land costs, and are sized to achieve the required levels of pollutant required.
Bioretention systems can be placed on public and private land, however tend to be
placed on area already designated for public land (road reserve, drainage reserve or
park land). Once completed, bioretention areas arguably have little aesthetic difference
to other areas of public open space.

* Prepared by Richard Brown, School of Economics, University of Queensland. This case study is based on the
report Assessment of Proposed Repeal of Water Saving Regulations prepared for Queensland Competition
Authority by Marsden Jacob Associates (MJA, 2012), some sections of which have been reproduced in this
document. This study has been prepared and amended for training purposes and differs from the actual MJA
study in a number of respects. MJA and QCA are acknowledged for allowing us to use their report and
spreadsheets.
2

However, RWTs reduce stormwater runoff in urbanised areas by intercepting rainwater and
thus reducing pollutant loads before it reaches the stormwater system. The addition of
rainwater tanks in new property developments therefore reduces the extent of other actions that
would be required to meet the prescribed water quality standards. Accordingly, one of the
main benefits to be included in a CBA will be the avoided costs of meeting the stormwater
quality requirements. Expert opinion is that these avoided costs are most likely to arise from a
reduction in required investment in bioretenion infrastructure, and the ongoing operating and
maintenance costs. (A brief technical description of a bioretention system is given in Box 1.)

Box 1: Bioretention systems

Bioretention systems are an aspect of Water Sensitive Urban Design (WSUD) which seek
to maintain near-to natural flow levels and pollutant loads of stormwater into receiving
waters (creeks and streams) in urbanised areas.

The objective is to minimise the impacts of
urbanisation on receiving waters. Urbanisation increases the proportion of impervious
surfaces (such as roofs, roads, footpaths), which increases runoff from rainfall events,
depositing pollutants into nearby waterways and affecting waterway health.

Bioretention systems operate by filtering stormwater runoff through densely planted surface
vegetation and then percolating runoff through a filter media. During percolation, pollutants
are retained through fine filtration, adsorption and some biological uptake.

Source: MJA, 2012.
Bioretention systems combine various WSUD treatment types in one ‘treatment train’. The system is
designed to carry out primary and/or secondary treatment processes of stormwaters and retard flows.
This retention or retardation can enable sediments to precipitate out of the water taking along with it
some pollutants. The use of biological processes to ‘treat’ stormwater while facilitating conveyance and
retention gives rise to the title of bioretention.

2. Identified Components of Cost and Benefit
MJA (2012) identified the following components of cost and benefits for inclusion in the
CBA, acknowledging that there could well be others not included here.

Table 5: Costs and benefits included in the MJA CBA model

Costs and benefit items Description

Benefits / avoided costs

Deferred augmentation capital costs The benefit to the State Government (Department of
Energy and Water Supply, DEWS) from deferring the
need to augment bulk water infrastructure (e.g. a
desalination plant or a dam) due to the use of water from
RWTs. This is the benefit estimated by the Queensland
Water Commission (QWC). Similar to the QWC, we only
consider the deferral of one augmentation within the
analysis.

Avoided augmentation fixed OPEX The fixed component of operating water supply
infrastructure, borne by DEWS, that is deferred and
potentially avoided by the use of RWTs.

Avoided variable OPEX This is the avoided variable OPEX associated with the
lower required volume of water for distribution to users
by BCC once the RWTs become operative.

Bioretention CAPEX savings The savings to property developers from reducing the area
of construction of bioretention areas for residential
developments due to the installation of RWTs.

Bioretention OPEX savings This is the avoided cost of maintaining bioretention areas
in residential developments (e.g. weeding, keeping
vegetation healthy, etc) over and above the cost of
maintaining public open space; assumed to be borne 50%
by Brisbane City Council, and 50% by property owners.

Costs

Capital cost of tanks The cost to property developers of the RWT including
installation.

Operating costs Energy and maintenance costs to property owners
associated with RWTs.

Abatement cost if tanks not replaced This is to cover the additional abatement costs to Brisbane
City Council for the biological nutrient removal through
wastewater treatment that may be incurred to mitigate any
degradation in waterway health due to stormwater that is
no longer mitigated by RWTs that are not replaced after
the end of their lives.

Source: Adapted from MJA, 2012.

One essential task is to provide a realistic estimate of how many additional RWTs would be
installed with the regulations in place versus a situation where the regulations are repealed
(without regulation), bearing in mind that some developers and property owners will elect to
install RWTs on a voluntary basis. The alternative scenarios are depicted in Figure 1.

Figure 1: Policy change relative to baseline

No.

2012

Source: MJA, 2012.

Baseline dwellings with RWTs (with regulations)
Voluntary RWT installations
Dwellings with RWTs if regulations repealed

3. Costs and Benefits at Market Prices
1

Table 1 provides the estimates of the quantities and prices for the various items of costs and
benefit.

4. Taxes, Subsidies and Externalities
2

Taxes and subsidies
Table 2 provides relevant details of import duties, taxes and subsidies included in market
prices, and the relevant level of government affected.
Table 2:

Import Duties/Taxes/Subsidies
Cost/Benefit Item % Type Stakeholder
Cost of tank and pump 15% import duties Fed Treasury
Tank energy and maintenance costs 20% subsidy State Govt
Bioretention Capital costs /tank 40% subsidy Fed Treasury
Bioretention Operating costs /tank 40% subsidy Fed Treasury
Abatement cost if tanks fail 10% taxes Fed Treasury

1
All values are in constant 2012 prices. These are not the same as the estimates on which the MJA (2012) study
was based.
2
This information is purely hypothetical and intended only for illustrative, training purposes and is not intended
to reflect in any way the actual situation with respect to taxes, subsidies and externalities, nor the division of
costs and benefits among the various stakeholders identified.
Table 1:            Input Data for RWT CBA
Assumed length of retained regulation                                            25 years (2012=0)
Discount rate (real) 4%
Tanks installed with regulation (units p.a.)   25,000
Tanks installed without regulation (units p.a.)   5,000
Tank yield (KL p.a.)     50
Cost of tank and pump     $4,500
Energy and maintenance costs per tank/annum (from yr.1) $40
Bioretention Capital Costs avoided per new tank $820
Bioretention Operating Costs avoided per new tank (from yr.1) $15
Abatement cost if tanks fail (p.a. from year 10 onwards ) $1,500,000
Delayed augmentation capital cost (from 2034 to 2037) $1,000,000,000
Avoided annual augmentation operating costs (2035-37) $30,000,000
Variable operating costs for water supplied ( $/KL)   $0.60
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External costs
In addition there are various external, environmental costs that will be avoided if the water
saving regulations and RWTs are to be retained. Those that have been identified and
quantified for this study, using appropriate non-market valuation methods include the
following:
A. The future construction of the dam in 2034 to augment the bulk water supply is
estimated to generate significant environmental costs in terms of losses of both
agricultural output and ecosystem services produced by the land that will be inundated
by the dam, and the corridor running through private and state-owned land along the
75 km route of the pipeline from the dam to the water treatment plant. This includes
sections of valuable rainforests and pristine sections of the river catchment. Moreover,
the operation and maintenance of the pipeline and pumping stations to transport the
water will generate further externalities through both the maintenance of the pipeline,
and the high energy requirements to operate the pumping stations. A team of
environmental economists from the university has estimated that the external costs of
the dam and pipeline construction will amount to a further 75% of the dam’s
construction costs at market prices, and the external costs associated with the annual
operating and maintenance costs of the dam and pipeline will be approximately 50%
of the augmentation operating costs at market prices.

B. The treatment and delivery to consumers of the additional water from the
augmentation dam are also expected to generate substantial external environmental
costs, primarily in the form of air pollution from the additional energy required for the
water treatment plant and delivery of the treated, potable water, and the safe disposal
of the chemicals and other toxic residuals produced at the water treatment plant. The
same team of environmental economists estimates that these external costs will
amount to a further 125% of the variable operating costs of supplying water to the
consumers.

6. Report format
In constructing your spreadsheets you are required to use the template Excel spreadsheet
downloadable from Blackboard. You should not change the structure of the template
spreadsheet unless requested by an instructor to do so. All analysis should be conducted in
2012 prices in whole dollars with no decimal places.
You are required to enter your name and student ID number in the space provided at
the top of the template spreadsheet.
Your written report should not be more than 12 pages in length, including executive
summary and tables. It should be on A4 size pages (portrait orientation only) in PDF format,
12-point Times New Roman font, 1.5 spacing, and 2.5 margins on all sides. Penalties apply
for excessive length. See course profile for details.
The report should begin with an executive summary of no more than one page. Results of
the sensitivity and scenario analyses should be reported in summary tables included in the
text, and where necessary, in more detailed tables in an Appendix (not included in 12 pages).
Do not attach printed copies of spreadsheets (e.g. in PDF) to your main report, although
sections showing summary results can be cut and pasted into the report.
Your report (in PDF format) plus your Excel file should be submitted electronically via
Blackboard (BB) by 4pm 30 October 2014. (Maximum 2 submissions allowed.)
You may submit only one Excel workbook file, containing all relevant spreadsheets, with the
tab beneath each sheet clearly labelled. The Excel workbook containing all spreadsheets for
the base case, sensitivity and scenario analysis should be formatted in landscape in normal
view, and left unlocked so all calculations and sensitivity testing can be checked.
Your Excel file must be named: RWT_[your family name]_[your student ID number]
You are also required to submit a hard copy of the report (PDF) only (i.e. without the
spreadsheets) by the same time at the Faculty Collaborative Learning Centre (FCLC,
Colin Clark Building, Level 1) along with a completed cover sheet.
PLEASE ALSO NOTE:
A. Late penalties: See course profile for further details of the marking criteria and weights
and the severe penalties for late submission.
B. Feedback on work in progress:
(i) Electronic files containing work-in-progress in spreadsheets should not be e-mailed or
brought to instructors for uploading to their PCs. We can provide assistance during
the lab sessions or we can comment on spreadsheet files (in the template format only)
which are printed out or are accessible on student’s own laptop computers during
consultation times; and,
(ii) We will not agree to read and comment on draft reports before the submission dates;
however, general guidance on the direction and structure of the reports will be
provided, including the lecture scheduled for early October (see course profile).
Richard Brown, School of Economics, University of Queensland, 2014

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