A balanced approach to the Murray-Darling Basin

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Introduction

With Australia locked in an
unprecedented drought, major cities facing strict water restrictions and the
nation’s water systems drying up, the Howard Government’s $10 billion National
Plan for Water Security looks like the perfect solution. Setting out ten action
points, the Plan focuses on massive infrastructure investment in irrigation and
irrigation technology, pipes, and water meters, and proposes an unprecedented
Commonwealth take-over of water management from the states. However, critics of
the plan argue that infrastructure investment and increasing regulatory red
tape is not the answer to Australia’s
water crisis. Water policy specialists, environmental groups, irrigators and
industry representatives all point out that water entitlement trading – a water
market – is needed to provide a long term solution for the Murray-Darling Basin.

The Murray-Darling
Basin is crucial to the long-term
water future of Australia.
Stretching over 3,370km and supplying 70 per cent of Australia’s irrigation water,[i]
water management of the Murray-Darling poses an unrivalled public policy
challenge. The number of interests in the Murray-Darling Basin
is enormous: state, federal, territory and local governments, irrigators and
agricultural groups, urban water users, industry, environmental groups, and the
tourism sector are all stakeholders. The need to consult and engage these
stakeholders and involve them in taking joint action, is central to the success
of any water governance plan.

Since the announcement of the
Plan on 25 January it has been stymied, most significantly by the refusal of Victoria to sign onto
the plan and refer water governance powers to the Commonwealth.[ii]
Additionally, there has been widespread criticism of the plan in the media from
irrigator groups, water policy makers, the Federal Opposition and environmental
groups. This criticism largely revolves around the failure of the Plan to
propose sustainable market-based solutions to water scarcity.

murray-darling basin salinity

Importance of the Murray-Darling Basin

The Murray-Darling Basin is
Australia’s largest river catchment, and extends from Roma in Queensland to
Goolwa in South Australia, and runs through New South Wales, Victoria and the
ACT.[iii]
Two million Australians rely directly on the Murray-Darling Basin, and a
further one million are heavily dependent on its resources.[iv]
Forty per cent of Australia’s gross value agricultural production is derived
from the Basin, which accounts for seventy per cent of Australia’s water usage.[v]

Australia is now
experiencing one of the most prolonged and severe droughts in its history,
which has seen the levels of the Murray River and Darling
River drop to record lows.[vi]
The Murray-Darling
Basin, as at June 2006, was
at sixty per cent of its previous minimum levels.[vii]
This drought has resulted in serious water shortages for agricultural use and
environmental flows, and has placed domestic use at great risk.[viii]

Until recently, most
environmental use of Australia’s
water resources has been seen by public policy makers as ‘wasted water’.[ix]
The water that runs from rivers into the oceans or evaporates in wetlands, was
viewed to have much more productive uses. The need for environmental flows as a
public good is now recognised: environmental flows help sustain vital
ecosystems that benefit society and the economy, such as the fishing and
tourism industry, and also help improve the quality of drinking water.[x]

Water management and governance in Australia

The Australian Constitution currently
assigns responsibility for Australia’s
waterways to the states.[xi]
Since 2004, the National Water Commission (NWC) has overseen Australia’s
waterways, after the signing by relevant states and territories of the National
Water Initiative (NWI). The NWC is a statutory authority which advises the
Australian governments on water policy and manages the Commonwealth’s Water
Fund. Water governance includes the policy areas of irrigator rights, domestic
(urban/industrial usage), and environmental flows. It therefore manages multiple
concerns and deals with multiple legislative frameworks: Federal, state, and
municipal.

The NWI set out as its
primary goal to ‘achieve a nationally
compatible market, regulatory and planning based system of managing surface and
groundwater resources for rural and urban use that optimises economic, social
and environmental outcomes’.[xii] It
sought to balance market-based governance options with vertical, bureaucratic
investment in infrastructure, regulatory and engineering solutions.

By 2006 it was clear that the NWI was largely
unsuccessful, with few of the Initiative’s proposals implemented. Declared a
failure by most irrigator stakeholders, scientists and environmentalists, the
NWI’s 2006 COAG report made special mention of the failure in developing water
trading and markets:

Markets
in permanent water entitlements (especially interstate), in derived water
products, and between urban and rural areas are still in their infancy. Water
entitlement holders are yet to enjoy the full and considerable benefits of
secure, tradable entitlements.[xiii]

The National Plan for Water Security

The Howard Government’s National
Plan for Water Security is one of the largest infrastructure investments in
recent Australian history, and focuses on massive irrigation infrastructure
‘modernisation’, and engineering solutions to leaky pipes and boring. Amazingly,
the Plan in its entirety was not taken to the Federal Cabinet before being
announced.[xiv]

Almost $6 billion has been
pledged to modernise the Murray-Darling Basin irrigation infrastructure both
on- and off-farm, with the aim to increase water efficiency. This will focus on
improving the efficiency of watering piping, improving the accuracy of water
meters, and reducing evaporation in water stores (dams, rivers, etc).[xv]

At the announcement of the
Plan, the Prime Minister stated that irrigators will benefit from multi-million
dollar infrastructure investment, but that to do so they will need to:

meet
strict new conditions. These include full compliance with the National Water
Initiative, acceptance of mandated metering standards, including the metering
of all bores and a new metered regime for stock and domestic use in priority
catchments and acceptance of an enforceable regime on the building of new farm
dams.[xvi]

This proposal reflects a
massive re-regulation of irrigation and an unprecedented (in recent times)
government intervention into the irrigation industry. This government
intervention is in two forms.

First, it spends public money
to invest in infrastructure for private use, thus creating market distortions. Under
a market entitlement trading system, water users would have an incentive to
invest private money into fixing inefficient irrigation and pipes.

Second, it creates ‘strict’
requirements for compliance on new government regulation in water use,
metering, dams, and so on. This intervention would create compliance costs for
irrigators, and without adequate compensation or subsidy may drive even
efficient water using irrigators out of business.

The problem of
over-allocation of water entitlements to irrigators is significant,
particularly in NSW. Water allocation and entitlements are managed under
property rights instruments, requiring governments to purchase
over-allocations. The Plan allocates $3 billion over ten years to do so, and
will also provide assistance to ‘relocate non-viable or inefficient irrigators,
or help them with exiting the industry’.[xvii]
There is confusion as to whether Commonwealth purchasing of entitlements would
be compulsory or not.[xviii]

The most contentious aspect
of the Plan is its ‘new governance’ arrangements. These would see the state and
territory governments of the Murray-Darling Basin cede their water management
powers to the Commonwealth’s reconstituted Murray-Darling Basin Commission.[xix]
Under the draft legislation however, the referral of powers is exceedingly
broad, with the result that almost any water-related matter would be overseen
by the Commonwealth.[xx]
The purpose of this element of the Plan is to resolve the intergovernmental uncertainty
about responsibility for management, legislation and jurisdiction of the Murray-Darling
Basin. Rather than six separate jurisdictions, this proposal would have a
single Commonwealth agency reporting to a single Commonwealth Minister.

Market governance: creating and expanding water markets

Water markets, particularly
water entitlement trading systems, are widely seen as the most efficient way to
get the best possible value – environmental and economical – from the Murray-Darling Basin.[xxi]
The current water trading regime is a confused state-by-state system that lacks
consistency or certainty for users and the environment.

There are four water market based
systems that have been considered recently in Australia:[xxii]

  • Purchase of
    entitlements
    : the most straightforward market transaction, based on existing
    entitlement and trade regulation;
  • Leaseback: involves buying
    an entitlement and then leasing some of the water allocation. There are two
    common types of leaseback: environmental leasebacks, and irrigator leasebacks;
  • Covenants: allows for
    permanent transfer of environmental use, this creates a condition as part of a
    purchase of entitlement, effectively creating a new entitlement with new water
    access conditions; and
  • Options
    arrangements
    : contractual arrangements between parties that determine who has rights
    to water under specified conditions or triggers. This can also include
    environmental flows. This option requires new market measures to operate
    effectively.

The water market proposal is
among the most widely supported governance system being proposed. Almost all
interest groups and stakeholders support the rapid introduction of a robust
water entitlement trading regime.

Water markets have distinct
advantages for governance arrangements. They are flexible, allow for greater
choice and create competition, incentivise innovation and efficiency and
guarantee environmental flows.[xxiii]
Economists suggest that the expanded water markets would spur economic growth
as well as improve and protect the environment.[xxiv]
The discipline created by competition among irrigators and industry for water
entitlements would create incentives for inefficient water users to either to reform
their practices or leave altogether.

With the government
purchasing a proportion of the entitlements to ensure environmental flows, and
creating incentives for irrigators and industry to include environmental flows
in their own entitlement arrangements (such as covenant or option
arrangements), the health of the Murray-Darling Basin can be more assured.
Under this arrangement, the government would either buy entitlements to ensure
environmental flows, or reduce the number of entitlements available for sale
and trade to ensure that enough water is available for the environment. This
would of course require a robust compliance regime to prevent over-use. The
first option, although the more expensive, is the more likely, as governments
would be required to respect existing titleholders. Governments cannot simply
legislate away water entitlements, although they can buy them back. Compulsory
buy-back of entitlements would be less likely under a free-market entitlement
trading system, as inefficient water users would be able to get premium prices
for their entitlements from other (more efficient) water users.

Conclusion

There
are many options available for the governance of the
Murray-Darling Basin. The National Plan for Water Security proposed by the
Commonwealth seeks to solve the crisis facing the Murray-Darling Basin -
particularly the water crisis – through regulation and infrastructure
investment. A controversial policy, the Plan initially requires a wide-scale
referral of the states’ constitutional water management powers to the
Commonwealth in exchange for investment of $10 billion over ten years.

The
Commonwealth’s Plan is a major investment by the Commonwealth Government, and
its efforts are firmly entrenched in a particular form of governance -
bureaucratic, regulatory, massive infrastructure projects – with only token
efforts towards engaging with stakeholders (network), and a small proportion
devoted to the buy-back of water entitlements from irrigators to ensure
environmental flows.

The
Murray-Darling Basin urgently needs a comprehensive and robust water
entitlement trading system established. This trading system should set a firm
limit on the number of entitlements available for trade, so as to ensure
environmental flows. There is no need for a Commonwealth-takeover of the
Murray-Darling Basin as a whole, but intergovernmental cooperation led by the
Commonwealth is essential to the success of a water market, particularly in
managing and regulating the market.

 


Endnotes

[i] Daniel Connell, “Wrestling with Smoke: Coming to
Grips with the National Water Initiative”, ANU
Reporter 2007
, available online: http://info.anu.edu.au/mac/Newsletters_and_Journals/ANU_Reporter/096PP_2007/_02PP_Autumn/_international_water.asp,
accessed 31 May, 2007.

[ii] Selina
Mitchell and Sid Marris, “PM’s $10bn
water plan collapsing”, in The Australian, 24 May, 2007, available
online: http://www.theaustralian.news.com.au/story/0,20867,21785044-601,00.html,
accessed 31 May, 2007.

[iii] Richard Curtain, “Engaging Citizens to solve major
public policy challenges”, in Beyond the
Policy Cycle: the policy process in Australia
(Crows Nest, Allen & Unwin:
2006), p.133.

[iv] Richard Curtain, “Engaging Citizens to solve major
public policy challenges”, in Beyond the
Policy Cycle: the policy process in Australia
(Crows Nest, Allen &
Unwin: 2006), p.133.

[v] Richard Curtain, “Engaging Citizens to solve major public
policy challenges”, in Beyond the Policy
Cycle: the policy process in Australia
(Crows Nest, Allen & Unwin:
2006), p.133.

[vi] National Plan
for Water Security
, p.3, available online:
http://www.pm.gov.au/docs/national_plan_water_security.pdf, accessed 31 May,
2007.

[vii] Murray Darling
Basin Dry Inflow Contingency Planning: Overview Report to First Ministers
,
Department of Environment and Water Resources, April 2007, p.8, available
online: http://www.environment.gov.au/water/publications/mdb/pubs/dry-inflow-planning.pdf,
accessed 31 May, 2007.

[viii] Murray Darling
Basin Dry Inflow Contingency Planning: Overview Report to First Ministers
,
Department of Environment and Water Resources, April 2007, p.2, available
online: http://www.environment.gov.au/water/publications/mdb/pubs/dry-inflow-planning.pdf,
accessed 31 May, 2007.

[ix] J. Bennett, “Water and the Environment”, in Dry Water: Policy Briefs 3, R. Grafton,
J. Bennett and K. Hussey, ANU Crawford School of Economics and Government (The
Australian National University, 2007), p.6.

[x] J. Bennett, “Water and the Environment”, in Dry Water: Policy Briefs 3, R. Grafton,
J. Bennett and K. Hussey, ANU Crawford School of Economics and Government (The
Australian National University, 2007), p.6.

[xi] See the Australian
Constitution, Section 100
: ‘Nor
abridge right to use water: The Commonwealth shall not, by any law or
regulation of trade or commerce, abridge the right of a State or of the
residents therein to the reasonable use of the waters of rivers for
conservation or irrigation.’ Any Commonwealth attempt to create a centralised
national water management system must necessarily see the states cede their
water management powers.

[xii] Intergovernmental
Agreement on a National Water Initiative
, p.10-13, available online:
http://www.nwc.gov.au/nwi/docs/iga_national_water_initiative.pdf, accessed 31
May, 2007.

[xiii] Progress on
the National Water Initiative: A Report to the Council of Australian
Governments
, 1 June, 2006, p.6, available online:
http://www.nwc.gov.au/publications/docs/COAG_report_2006.pdf, accessed on 31
May, 2007.

[xiv] “Govt defends pushing water plan past Cabinet”, in ABC News Online, 13 February, available
online: http://www.abc.net.au/news/newsitems/200702/s1846177.htm, accessed 31
May, 2007.

[xv] National Plan
for Water Security
, p.4, available online:
http://www.pm.gov.au/docs/national_plan_water_security.pdf, accessed 31 May,
2007.

[xvi] John Howard, Address
to the National Press Club Great Hall, Parliament House
, 25 January, 2007,
available online: http://www.pm.gov.au/media/Speech/2007/speech2341.cfm,
accessed 31 May, 2007.

[xvii] National Plan
for Water Security
, p.4, available online:
http://www.pm.gov.au/docs/national_plan_water_security.pdf, accessed 31 May,
2007.

[xviii] David Rood, Ben Doherty and Peter Ker, “Water
Pressure”, in The Age, 13 April,
2007, available online:

http://www.theage.com.au/news/national/water-pressure/2007/04/12/1175971264511.html,

accessed 31 May, 2007. See also: Jewel Topsfield, “Farmers vow to play hard
ball on Murray takeover”, in The Age,
4 April, 2007, available online:

http://www.theage.com.au/news/national/farmers-vow-to-play-hard-ball-on-murray-takeover/2007/04/03/1175366241109.html,

accessed 31 May, 2007.

[xix] National Plan
for Water Security
, p.5, available online:
http://www.pm.gov.au/docs/national_plan_water_security.pdf, accessed 31 May,
2007.

[xx] AAP, with Dan Harrison, “Bracks pulls plug on
Murray-Darling plan”, in The Age, 23
May, 2007, available online:

http://www.theage.com.au/news/national/bracks-pulls-plug-on-murraydarling-plan/2007/05/23/1179601445732.html,

accessed 31 May, 2007.

[xxi] Blueprint for
a National Water Plan
, The Wentworth Group of Concerned Scientists (2003),
p.12.

[xxii] Market-based
water recovery
, Murray Darling Basin Commission, available online:

http://www.thelivingmurray.mdbc.gov.au/__data/page/195/TLMfactsheet-WaterRecoveryMarketMeasures.pdf,

accessed 31 May, 2007.

[xxiii] Market-based
water recovery
, Murray Darling Basin Commission, available online:

http://www.thelivingmurray.mdbc.gov.au/__data/page/195/TLMfactsheet-WaterRecoveryMarketMeasures.pdf,

accessed 31 May, 2007.

[xxiv] Daniel Connell, “Wrestling with Smoke: Coming to
Grips with the National Water Initiative”, ANU
Reporter 2007
, available online:

http://info.anu.edu.au/mac/Newsletters_and_Journals/ANU_Reporter/096PP_2007/_02PP_Autumn/_international_water.asp,

accessed 31 May, 2007.