A balanced approach to the Murray-Darling Basin

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.

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.