Premier John Brumby’s $3.1 billion desalination plant, the cornerstone of his plan to drought-proof Melbourne, appears to be in trouble as major project finance dries up around the world.

Banking sources say the project faces a funding gap of between $1 billion and $2 billion. Some in the infrastructure industry say a mere $300 million to $500 million is available from banks for all major projects across the country.

The shortfalls confront the Brumby and Rudd governments with either finding the money to bail out the controversial plant, along with a string of other projects across the country, or shelving it.

There’s something that doesn’t add up here. The credit crunch is all too real, sure. But there are still loans being made. And, on the information publicly available, lending money to build a desal plant for Melbourne looks like one of the financially safer loans a bank could offer.

The winning bidder will have a contract with the monopoly distributor of water in Melbourne. And, given the low storage levels, even if rainfall returns to something closer to the historical average, the re-establishment of gardens and letting the reservoirs refill should mean that the desalination plant will be running at full capacity for years to come. If the government so desires, it could even turn off the controversial Goulburn pipeline as an “environmental measure”, and instead use the desal plant.

Obviously, there are other risks to this project that a bank would have to consider before putting up its money. But the nature of this project means that perhaps the single biggest risk – the risk that nobody will buy the product it produces – is largely taken care of. So why can’t they get it financed?

The behind-the-scenes Government debate centres on the role of tanks in light of last year’s contentious decision to spend almost $5 billion on big water projects such as desalination.

It has intensified as the Government finalises its new-look green building code. Existing five-star rules require that all new homes must have a tank or solar hot water system.

Senior bureaucrats with the ear of Water Minister Tim Holding are arguing that, with the desalination plant set to come on line in 2011, tanks should be left to personal choice.

The Age article reports on two studies by Peter Coombes, which argue that the contribution that water tanks can make to Melbourne’s water supply has been substantially underestimated by Melbourne Water. Instead of something in the order of 50 gigalitres per year, Coombes estimates something closer to 120 GL per year, if every Melbourne household was fitted with a tank. The discrepancy apparently comes because Melbourne Water’s studies are based on rainfall statstics from Melbourne Airport, on the city’s dry north-western fringe. Melbourne’s eastern and south-eastern suburbs are considerably wetter, and thus tanks would supply a lot more water there. That said, both numbers are highly artificial. The context of this debate is fitting water tanks to new houses, not retrofitting; retrofitting tanks to existing houses (specifically, plumbing them in to toilets and hot water services) is extremely expensive. Given that, the amount of water that can be realistically collected in tanks is an order of magnitude lower, nowhere near enough to avoid building new water infrastructure of some kind or another.

But there’s more to it than that. In new houses, plumbing is at its easiest, finding a spot for the tank can be done on the drawing board, and, most importantly, in new developments other water and stormwater infrastructure can be resized to take advantage of the use of tanks – not to mention the environmental benefits of avoiding the artificial peaks of stormwater flow into rivers and creeks. But even with those, the strict financial case for tanks varies from “marginal” to “throwing away money”.

Anyway, the debate on the appropriateness of mandating tanks for new houses will continue. But it’s largely a sideshow on the question of where Australia’s cities will get their water, and it’s even more irrelevant to the question of where Australia’s irrigators will get their water.

UPDATE: An op-ed by Coombes, noting the conflict the monopoly supplier and regulator motivations of water authorities. However, I’d make one nitpick – contrary to Coombes’s comments, desalination clearly can supply essentially unlimited amounts of water. Whether that is a good idea or not is another question.