Friday, April 7, 2017

WaterFix Economics Flop in Two Recent Federal Consultant Lists of National Infrastructure Priorities.

As the Trump administration gathers lists of national infrastructure projects, federal infrastructure consultants are finding that the California WaterFix project falls short of the state and Governor's claims about its economic performance.  That should come as no surprise to readers of this blog where I have been writing about WaterFix/BDCP/Delta tunnels lousy economics for nearly a decade.

The first report was conducted for the U.S. Treasury department and identifies 40 priority transportation and water infrastructure proposals in the U.S.  The intent of the report is to create "a list of significant transportation and water infrastructure projects that have been proposed but face challenges to completion" and have high economic benefits relative to their costs.  The high-profile tunnels project clearly hits all the screening criteria to have its benefits and costs evaluated for consideration for the list.  The screening criteria are:
  • significant (defined as >$300m)
  • estimates of capital and operating costs, and a basis for estimating benefits
  • completed a portion of environmental review
  • could be at least partially completed within 10 years
  • face a challenge to completion (technical, environmental, funding, etc.)
That is a list of project screening criteria that the WaterFix passes with flying colors.  While the WaterFix must have easily made the list of candidate projects, the Delta Tunnels are conspicuously absent from the final list of recommended projects.  Why?  Take a look a the selection criteria for the final list of 40 projects,

"The study team selected those projects for the final list which had significant net national or regional economic benefits based either on estimates of costs and benefits that had already been calculated using acceptable methods or on interim project outputs that could be converted to estimates of costs and benefits. Projects in the final list were chosen based on their net economic benefits... "

While I may have been the first, it is increasingly clear that I am not the only analyst to conclude that the WaterFix has a lousy benefit-cost ratio.  By the way, three California projects did make the final list of 40 recommended projects: 1) CA High-Speed Rail, 2) MTC managed lanes (HOV, express lanes) throughout the Bay Area freeway network, and 3) Sutter Basin flood control improvements (note, this assessment was done prior to the Oroville crisis).  Yes, it is true that high-speed rail has stronger economic justification than the Delta tunnels, although its financial viability is equally questionable.  Bottom Line: WaterFix failed to make the cut in a list of major infrastructure projects evaluated on their economic merit, while HSR and HOV lanes made it.

The second notable recent assessment was done by consultants for the Trump transition team, and looks at project financing, most notably its revenue potential for private investors, rather than its overall economic benefits and cost.  The WaterFix does make this list of 50 priority projects, but it is notable that the assessment finds that it needs a large taxpayer subsidy.  The consultants estimate that user revenue is only sufficient to pay 50% of project costs, in sharp contrast to a decade of statements by the state and water contractors that they would pay 100% of the projects costs.  As readers of this blog know, the WaterFix/BDCP/Tunnels have never issued a draft financial plan, and they suppressed their own economic consultants assessment that the project required a large taxpayer subsidy

Here is a list of the 5 California projects that made the transition team list, along with their estimated construction cost and the % of these costs that could be paid by facility users.
  1. I-405 Improvements, $1.9 billion, 50%.
  2. Veterans Health Research Institute, $1 billion, 90%.
  3. Cadiz Water, $250 million, 100%.
  4. Huntington Beach Desal, $350mil, 100%.
  5. CA WaterFix (Bay Delta Tunnels), $15 billion, 50%.
As I have mentioned frequently, WaterFix economics are much worse than desalination (frequently criticized for high costs) and it appears the transition consultants agree.  It is also interesting to compare the WaterFix to the other CA project that was assessed to have user revenue equal to 50% of costs, the I-405 project in Orange County.  Unlike the WaterFix, the I-405 project actually has a finance plan.  The I-405 finance plan clearly states that 2/3 of the $1.9 billion construction cost would be paid by taxpayer funds, and yet the transition team consultants give it the same 50% revenue/subsidy rating as the WaterFix.  That is probably because the I-405 finance plan estimates that revenue from the toll lanes will comfortably exceed what is necessary to pay 1/3 of the capital cost, so the transition team consultants evaluated its revenue potential at 50% rather than 33%. 

It amazes me that anyone still believes public officials who say the tunnels can be built without substantial taxpayer funds.  While it has taken a long time, the media and the public are slowly catching on.  And now it appears that infrastructure consulting firms working for the federal government, who have a strong incentive to promote mega-infrastructure projects, recognize that the project can not be financed as claimed by project proponents and that the overall economic justification is lacking.
There is a more general observation about these lists that should be of interest to water wonks and policy makers.  When it comes to water projects, the two lists recommend very different types of projects.

The Treasury list evaluates projects on economic merit, and flood control projects dominate the recommended projects.  It's true around the U.S., not just California.  However, the public good characteristics of flood control and constraints on accessing taxpayer funds makes flood control difficult to finance even when the economic merit is high.

In contrast, the Trump transition list evaluates projects on their revenue potential to attract private investment.  Water supply projects like Desal, Cadiz, and WaterFix rank high on the list of projects with private investor potential even though they can't make the previous list based on overall economic merit.  That's because water utilities have a lot of power to recover their investment costs from ratepayers, no matter how ill-advised those expenses may have been.

[This last section and a few general edits were added on 4/8.]