13 Sep 2010

How bad projects get built

RM sent me the "Review budget for Bay Delta Conservation Plan and Delta Habitat Conservation and Conveyance Program" [pdf] that the Metropolitan Water District of Southern California (Met) has prepared.

I was interested to see that Met assumes it will pay less than 25 percent of short- and long-term project costs.

So who's going to pay the other 75 percent? Farmers who participate in the CVP and SWP and take 75 percent (let's assume) of the water from those two projects.*

Now, I don't know about you, but I don't have many examples of farmers paying the full cost of water infrastructure.

What if they don't pay? Well, then Met will pay the difference. Does that make sense? Yes, it does to Met, since their 25 percent share of the water is worth far more than 25 percent of the value of that water in use. In other words, Met will probably end up paying a larger share of the total cost because Met gets more value from the water.**

So here's my thought: If Met's directors believe these estimates and fund this project, and the project gets going, then they will have a hard time NOT spending more money when it comes time to pay a larger-than-25 percent share. That's because it's hard to shut projects down once they get started.

If Met's Directors knew this today, they may not agree to initial funding, since the cost-benefit of a project with higher costs would be less favorable.

What would they do instead? Conserve water (via better prices and markets) and get more supplies from desalination and reclamation.

Would Met's pursuit of efficiency and self-interest be welcomed? Not by farmers counting on cross-subsidies from Met, and not by rural politicians who want urban water users to subsidize their constituents.

Bottom Line: Make sure you know all the costs before you spend the first dollar. If those costs are too high, look for alternatives. (Bumper-sticker version: Don't spend $5 for something worth $2.)
* Why are contractors paying for the Delta restoration? Because a restoration that excludes water exports would hurt them. For more on conflicting restoration choices, read my paper on the Delta [pdf].
** Water markets would make this guesswork unnecessary, but politicians and bureaucrats prefer to control water allocation.