Economists say review of Sask. irrigation megaproject shows cost would exceed return to provincial government
Professor says pitch wouldn't even make Dragon's Den broadcast
A Saskatchewan government funded report analyzing the costs and benefits of the proposed Lake Diefenbaker Irrigation Project reveals it is a risky venture that offers, at best, modest gains, according to economists who reviewed the report for CBC.
A spokesperson for the Saskatchewan government told CBC the 31-page KPMG report, released late last month, shows the project is "economical."
"We believe the project can move forward in a way that it could be economical for the province and the producers who are going to participate," said Patrick Boyle from the Water Security Agency, which is leading the initiative.
"So we're going to continue down that path."
Boyle echoed Saskatchewan Party Leader Scott Moe's commitment to begin construction next year. The province has already spent or committed almost $30M to this project, mostly on studies and engineering reports.
But Peter Phillips, a recently retired economics professor for the University of Saskatchewan's Johnson-Shoyama School of Public Policy, said the report is vague and based on shaky assumptions.
He said any private investor considering this project would walk away after reading the first few pages.
"I don't see anything there that I'd see anybody put private capital up for," he said. "If the public is willing to take the risk and front-end load it with public capital, there's a possibility we will get a modest increase in economic activity in one part of the province."
Ross Hickey, an associate professor of economics in UBC's faculty of management, was more blunt, saying if this project was pitched to the CBC's Dragon's Den program, "I don't think it would make it to broadcast."
He said that while the report does indicate the project would increase provincial GDP, which would benefit some people in the province, "it's not making money for the Government of Saskatchewan, in particular."
"[The project] costs today, in real terms, more money than the future lifetime value of benefits that come from the project," he said. "Which means why bother?"
'We're not getting all the money back'
The report analyzes the province's $1.15-billion proposal to create infrastructure that would irrigate 90,000 acres (35,000 hectares) near Lake Diefenbaker.
The 'base case" presented in the report says that, over a 50-year period, the project will create $5.9 Billion in GDP for Saskatchewan, resulting in a total of $410 Million in tax revenue for the province during that same period.
That means that the project would cost far more today — $1.15 billion — than it would return to taxpayers over the next 50 years — $410 million.
"We're not getting all the money back out at the end of the day," Phillips said. "We're going to be paying a subsidy into this space."
He said the government and taxpayers need to ask a hard question about that $1.15-billion price tag.
"Is this the best place you can put this to improve the economy in Saskatchewan? I'm not convinced this is the best one."
Patrick Boyle said taxpayers won't foot the whole bill. He said farmers who participate in the program will pay an as-yet-unspecified portion of that $1.15 billion.
He pointed out that, in addition to the base case, the report also offers an "optimistic" projection of what might happen with this project — projecting an total of $770 million in tax revenue to the province.
Boyle said the government believes that scenario "is what's going to happen."
He said the province still hopes Ottawa may be willing to help fund the project, but that it's affordable even without that support.
"This is just the beginning of where the greater project could go."
Phillips said governments around the world generally don't do a good job planning megaprojects like this. He said research shows they, "tend to underestimate costs and time to completion, and overestimate benefits."
He said that, on average, government-led water projects have seen a 20 per cent cost overrun globally.
"That's a problem with these kinds of projects is that we lock into, 'This is going to change the world,' and then we make the story fit the desire."
Crucial unanswered questions
Phillips, who from 1983 to 1996 analyzed projects like this for the Saskatchewan government, said this report is vague, leaving critical questions unanswered.
"This wouldn't be enough to get out of my office as a decision," he said, referring to his days as a senior economic advisor. "There's just not enough information here for me to be confident."
He said he has reviewed many cost/benefit reports over the years, including several produced by KPMG. He said there are a few things that strike him as unusual about this report.
He said it is missing information that would typically be included in a KPMG report, like the names of the authors and detailed tables showing how the researchers came to their conclusions.
It "raises red flags when I can't see their work," he said.
The most surprising omission for him is that this cost benefit analysis report doesn't offer an answer to the question, "Do the benefits outweigh the costs?"
"They never say that the benefit cost ratio was 'X,' which is usually what we hone in on," he said. "Which makes you think that it's low enough, they don't want to create a summative number like that."
If you build it, will they come?
Phillips noted that the report is built on a key assumption that increased irrigation would lead to an increase in crop production, which would in turn lead to an increase in food processing facilities.
Of the $5.9 billion in projected GDP growth over 50 years, almost half of it, $2.7 billion, is projected to come from value-added food processing.
Phillips refers to this expectation as "a hope and a prayer."
"I think there's a lot of hope that if we build this they will come. And I'm never convinced that's a great strategy," he said. "Might work in movies, but not in real life."
Phllips pointed out that, based on current crops in the Lake Diefenbaker area, the majority of crops being produced with the new irrigation would likely be wheat, canola and lentils.
He said it's unlikely that a bit of extra production of those commodities would lead to new processing facilities. He said Saskatchewan already produces more wheat, canola and lentils than it processes, but that hasn't incentivized new investment in processing in the province.
Ultimately, he said, the government is hoping that a few thousand additional acres of irrigated crops will attract new processing facilities for high value crops like potatoes.
However, he said that would almost certainly mean additional investment of tax dollars.
"A lot of these investments will require somebody to put up some risk capital," he said.
"The public sector is often the only group willing to take that order of risk."
Subsidizing 50 farmers
The report says the project will cost $12,800 for each of the 90,000 acres it targets.
Phillips said the average farm in Saskatchewan is about 1,800 acres, which means this would likely benefit about 50 farmers.
He said the KPMG report assumes that every one of those farmers will "immediately and completely irrigate their fields." He said that's unlikely, because those farmers would have to spend millions to buy irrigation equipment and pay a portion of the $1.15-billion cost of the project to tap into the infrastructure.
Phllips said the report's estimates are based on the assumption that 73 per cent of the crops grown on the newly irrigated acres would be wheat and canola. The report says irrigation doubles the yield for those crops, on average.
The report also indicates that irrigated crops are six times more profitable than dryland crops when taking into account the yield and cost of production.
However, Phillips said it is not clear that that additional revenue would justify the huge expense of installing irrigation systems.
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