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RICHARD DE NEUFVILLE: Right.

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So it's about this
particular plant here,

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which is a desalination plant.

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I prefer to call it desalting,
because salination implies

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that you're actually going
to the effort of putting salt

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in the water, which
you don't have to.

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So it is a huge plant.

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It's one of the largest
desalting/desalination

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plants in the world.

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And it was built
in Victoria, which

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is a southern
state of Australia,

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whose capital is Melbourne.

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And it is a mega plant.

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It has a capacity of 150
billion liters a year.

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And interestingly, it was
built in three modules.

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So the modules here
are 50 billion a year,

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but they were built all at once.

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The capital cost was 3.5
billion Aussie dollars,

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which is something
around $2.5 billion US.

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It's a big project, started
in 2009, completed in 2012.

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And it was what they call a
public/private partnership.

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That is, it was built
by private investors who

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fronted up the capital.

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And it's designed to
guarantee supply through 2039.

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So it was built with a
30-year forecast in mind.

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So this is an example of a
massive initial investment

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to meet maximum
forecast over 30 years.

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Maximum forecast-- driven
by two things, generally.

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One is by the increasing
population of Melbourne itself,

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as a very attractive and
interesting city, very lively.

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I recommend a visit to anyone.

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I worked for the airports there.

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And also because of increasing
effect of climate change

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leading to plausible
increased periods

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of drought and low
water in the reservoirs.

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So a 30-year forecast.

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Now, let's think about
the economics about this.

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So what happens is,
they build the plant.

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And they keep it on tap.

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They maintain it.

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But they don't deliver any water
until the water authorities

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of the state of Victoria
and the water board

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that they have
there ask for some.

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So in 2016-- that is 4
years after the opening--

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they placed an order
for 50 billion.

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Liters that is 1/3
of the capacity.

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Two years later, they put in an
order for less than 50 billion.

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And just this year--

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that is, starting in
April, but basically

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into the summer season, which is
what we think of fall, winter,

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and spring--

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they wanted 50 more billion.

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So here, what you have
is a huge investment that

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is-- so nothing,
there's no return

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on the first three
years, because it's

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under construction.

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Then, for the next four
years, nothing happens.

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The first order is for
1/3 of the total capacity.

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The next 2 orders are for
at least 1/3 the capacity,

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but we haven't gotten anywhere
near the full capacity.

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So it poses the question--

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should they have phased
the modules over time?

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So far, only 2/3
the Capex has not

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been needed for a
decade, roughly speaking.

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So what do you think?

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What are your reactions to this?

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Now, they could say,
well, a crisis could occur

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any time, et cetera, et cetera.

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But what do you think?

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Any thoughts or
comments about this?

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OK, yes, go ahead.

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AUDIENCE: Oh.

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It's not a question.

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I was just going to say
that that's an example of,

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the forecast is always wrong.

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RICHARD DE NEUFVILLE:
Well, I don't

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know if the forecast was wrong.

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Because the forecast
wasn't timed.

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They basically forecast the
maximum possible demand.

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And we don't know
if that was wrong.

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But it's uncertain.

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So they knew it was uncertain,
but the implications

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might have been, well, if
it's going to go up to a need

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150 over all that
time, maybe they

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should have done
it incrementally.

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The forecast might be right.

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They might need as much as
the maximum at some time.

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So hard to say.

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Just like fire
escapes or emergency

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exits from a building,
they may never be used.

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Doesn't mean it
wasn't a good idea.

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So having extra
capacity you don't use

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is not necessarily bad.

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But there's money
involved in this.

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And there are other ways to
deal with low water levels.

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Having a desalting plant
is a pretty special thing.

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There's water rationing
and other kind of things.

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So it's an issue.

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Was this a good
investment, is the question

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I'm throwing out there.

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Joshua, go ahead.

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AUDIENCE: Hey.

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Good morning, Professor.

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So are you saying that they have
capacity for 96 billion liters,

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but they're only really
using 50 billion liters?

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RICHARD DE NEUFVILLE:
I said they

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had capacity for 150 billion.

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AUDIENCE: Oh, after
construction this year in 2020?

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RICHARD DE NEUFVILLE:
No, the capacity

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was all built, as you
can see on the slide now.

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That was opened in 2012.

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For the first four years,
this thing didn't do a thing.

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That's not necessarily bad.

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I have life insurance,
and I haven't died yet.

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So I'm pretty happy about that.

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But still, it was a very large--

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and for the first decade,
depending on when you start--

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that is, until
2020-- they've only

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used up to 1/3 of
it, which happens

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to be just one of their
module's capacity.

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Are we talking the same
language, or am I--

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AUDIENCE: We are.

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I thought it was construction
that they built it,

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but they still only had a
need for 50 billion liters.

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But I would agree.

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I think that they probably
overshot and could

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have built
incrementally and saved

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a considerable amount of money.

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RICHARD DE NEUFVILLE: At least
in terms of net present value

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terms.

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Yes.

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That's what I'm thinking of.

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Now, it turns out
that the investors

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aren't having a hard time,
because they're getting paid.

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The city is paying
for them, because they

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have invested all that money.

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And it's also possible
they'll never use the water.

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So they had a deal where
the city actually pays them

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about 600 million a year
just to keep the plant alive,

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and to pay for the interest,
and the depreciations,

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and so forth.

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So the investors haven't hurt.

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But if it's too
much construction,

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it means that the
city of Melbourne

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and the state of
Victoria have overpaid.

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So too much is investment.

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But the private investors,
I think, are doing fine.

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Other comments,
did you say, Indra?

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AUDIENCE: Yeah.

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There are quite a few.

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Ali next.

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AUDIENCE: Yeah, Professor.

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So I was thinking of the
trade-off between first,

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building the flexibility
and then the exponent

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that is a variable for
the economies of scale.

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So about just the
economics-- but then,

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as you said, sometimes,
for big infrastructure,

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we're being paid for
just having the capacity.

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RICHARD DE NEUFVILLE: Yes.

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AUDIENCE: So but also, there
can be political reasons

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behind it, et cetera.

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So this is way
beyond the economics.

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RICHARD DE NEUFVILLE:
Well, that's right.

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The at the drought
when they ordered this,

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about 15 years ago,
the local minister,

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the leader of the state
saw this as a good thing.

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He was being very prudent.

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And those jobs-- and a lot of
people were happy about it.

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The press, until about
2014, was very against,

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because there was
this huge investment.

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For a relatively small area,
this is a huge amount of money.

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And it was absolutely
in mothballs,

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or it was just
maintained, kept alive

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at a cost of over
600 million dollars

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a year paid by the citizens
of Melbourne and Victoria

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for this.

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So they were less
happy with that.

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Yeah, I can't give you
more of the details.

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But I'm just posing
the question.

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Here it is.

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And what's remarkable about
this case from my perspective

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is that in fact, the
modules of 50 billion

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were part of the design.

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These are some of the
most massive desalting

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plants available at the time.

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So they felt they
were already pushing

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the capacity for the-- it's
a reverse osmosis approach.

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So you could easily
think that maybe building

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100 billion capacity in the
first phase might be good.

00:10:30.360 --> 00:10:34.860 align:middle line:84%
And then, if you really were
getting more demands for it,

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maybe you have another
module later on.

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So that's the question I
wish to put out on the table.

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I think I'll take
one more question.

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Then, we'll go to
the presentation.

00:10:45.860 --> 00:10:46.360 align:middle line:90%
Indra?

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AUDIENCE: We have Jeff next.

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RICHARD DE NEUFVILLE:
Jeff, go ahead.

00:10:48.882 --> 00:10:50.400 align:middle line:90%
This is the last one.

00:10:50.400 --> 00:10:52.780 align:middle line:84%
I'm glad to talk
about it later on,

00:10:52.780 --> 00:10:54.750 align:middle line:90%
but for now, Jeff, go ahead.

00:10:54.750 --> 00:10:56.590 align:middle line:84%
AUDIENCE: Yeah I just
have two thoughts.

00:10:56.590 --> 00:11:00.512 align:middle line:84%
One is, I've been thinking
about this previously, too--

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and I don't know how it works
in the Australian government.

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But the federal
contracting process

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is so long and tedious that I
feel like building flexibility

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to add onto a project
later on might

00:11:16.950 --> 00:11:20.340 align:middle line:84%
be a preventative measure,
and just building the capacity

00:11:20.340 --> 00:11:22.830 align:middle line:90%
all up front makes more sense.

00:11:22.830 --> 00:11:26.040 align:middle line:84%
And the second is, if they
built the big capacity,

00:11:26.040 --> 00:11:28.440 align:middle line:84%
it could have been
dependent on how

00:11:28.440 --> 00:11:30.240 align:middle line:84%
the environmental
factors were, then--

00:11:30.240 --> 00:11:33.665 align:middle line:90%
a drought in 2008 or whenever.

00:11:33.665 --> 00:11:34.790 align:middle line:90%
RICHARD DE NEUFVILLE: Yeah.

00:11:34.790 --> 00:11:38.640 align:middle line:84%
Well, I have a number of
former students working

00:11:38.640 --> 00:11:40.640 align:middle line:84%
in the government,
particularly in the military,

00:11:40.640 --> 00:11:41.750 align:middle line:90%
for procurement.

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And part of their
design is this.

00:11:44.330 --> 00:11:49.220 align:middle line:84%
So right now, one of our
students, Jason Bartholomay,

00:11:49.220 --> 00:11:54.620 align:middle line:84%
who's running a huge
missile project out in Utah,

00:11:54.620 --> 00:11:59.180 align:middle line:84%
is basically setting
up the whole program

00:11:59.180 --> 00:12:03.590 align:middle line:84%
with having the bidders
right at the start

00:12:03.590 --> 00:12:05.930 align:middle line:84%
bid on the project in
terms of demonstrating

00:12:05.930 --> 00:12:06.860 align:middle line:90%
their flexibility.

00:12:06.860 --> 00:12:10.490 align:middle line:84%
So they're baking it into
it rather than coming at it

00:12:10.490 --> 00:12:13.820 align:middle line:84%
and rethinking the
procurement process in 5 or 10

00:12:13.820 --> 00:12:16.940 align:middle line:84%
years of making that a
condition from the start.

00:12:16.940 --> 00:12:20.990 align:middle line:84%
And I think that's an important
part of having the flexibility,

00:12:20.990 --> 00:12:23.240 align:middle line:90%
is that you bake it into it.

00:12:23.240 --> 00:12:27.200 align:middle line:84%
And for those who're
taking the full semester

00:12:27.200 --> 00:12:29.870 align:middle line:84%
course, that will be one of the
issues we want to deal with.

00:12:29.870 --> 00:12:32.420 align:middle line:84%
How do you go from
having a good idea

00:12:32.420 --> 00:12:34.960 align:middle line:90%
to implementing it properly?

00:12:34.960 --> 00:12:47.000 align:middle line:90%