Squeezing the best out of every last drop
Australian Financial Review - SPECIAL REPORT - Water and Energy
Trading allows water to flow to its most efficient uses, but there are concerns, says Miriam Hechtman.
Water is an important commodity, particularly in the Murray−Darling Basin, and increasingly governments are turning to market mechanisms to ensure proper allocation of this resource. But while the parties involved broadly agree that water trading is the way to go, they are still finding their way around the water market’s peculiar characteristics. These include the social problems that may arise in selling water rights permanently, transferring water out of certain areas, and the fixed costs involved in distribution.Sorting out these problems in the Murray−Darling Basin is vital.
According to the Murray−Darling Basin Commission, this catchment area generates about 40 per cent of the nation’s agriculture and grazing production.Increasing quantities of water diverted for irrigation in the basin, coupled with the effects of drought, have altered flows, triggering concern for the rivers’ health, the surrounding environment and the sustainability of the communities dependent on the resource. MDBC director of water policy co−ordination Bob Douglas says average annual use of surface water across the basin is about 11,600 gigalitres a year, while there is an additional 1200 gigalitres of ground water use.“Ninety−five per cent of it goes to agriculture, the other 5 per cent of the basin goes to urban water use or domestic water use.”
To improve conditions, water diversions have been capped and government funds injected into the Living Murray Initiative, which aims to restore 500 gigalitres of water to the river each year until 2009, as part of its “first step” decision. Allocation and buying and selling of water in the region have been contentious issues. “When anything is scarce, the best allocation mechanism is through the market,” says Ken Matthews, chairman of the National Water Commission. As part of its role to drive national reform, the NWC is responsible for implementing the National Water Initiative, a blueprint signed by all governments.Water trading is central to the initiative, Matthews says, and will encourage water to flow to its best and most efficient use. It will also make the system automatic. So instead of long administrative processes, there will be short, customary market processes between buyers and sellers.
He also notes the opportunities for investment in new agriculture, horticulture and irrigation systems if trading opens up. “A really important advantage of water trading is that it sets a price because the market will determine the price and governments don’t have to guess at it.“It makes automatic the setting of prices to reflect what economists call scarcity value.”
The Australian Conservation Foundation’s healthy rivers campaigner, Arlene Buchan, says “governments should buy water to redress the balance”. “Using the market is the most efficient and cost−effective way of recovering water for the environment, and it’s fair to farmers, who can choose whether or not they want to sell their water.”
Parliamentary secretary to the Prime Minister, Malcolm Turnbull, who has responsibility for water policy, says the main benefit of trade is that it allows water to be allocated to its most efficient uses. “An open, well−functioning water market provides greater flexibility for water users to adjust to changes in water availability and changes in product markets.”
Water trading occurs in two ways: the trading of water entitlements, similar to the sale of land; and the sale of the annual right to the entitlement, similar to leasing land. Murray Irrigation holds Australia’s largest private water licence and diverts up to 1.6 million megalitres from the Murray River on behalf of about 2500 farmers in southern NSW. General manager George Warne says farmers have recently started trading their water entitlements, selling them forever because they’re running out of money. “Typically, most farmers have realised that water entitlements are going up in value much faster than their other assets, but they’re very liquid, in every sense.”
Stranded assets are among the fears surrounding the water trading market. “We’ll get left with assets that no longer deliver the full quantity of water. They’ll deliver, say, half the water,” Warne says. “And while it would be okay if all the water disappeared, theoretically − because you wouldn’t have any costs − when you’re delivering half the water, it’s not half the cost. It costs you about 7/8 of the money to run the water in the channel as it did when it was running at full capacity, but you’ve lost your revenue base.”
The loss of irrigation potential for the region once a water entitlement has been sold is also of concern, as when assets such as rural roads, bridges and schools are sold. While Warne agrees markets can be successful, opening one up is not simple. “Purist economists and others need to understand the physical constraints of transferring water, and they need to understand some of the implications, social and economic, of a free and open market.”
Who will trade water in future is also an issue. “There has been rising interest from corporate investors, trusts and diverse fund managers looking for something that’s a new asset class − and clearly water has become a new asset class,” Warne says.“It’s much more bankable and predictable than it was, say, 10 years ago. And that makes us a bit nervous.”
Liquidity issues
* Allocation and buying and selling of water have been contentious issues.
* Stranded assets are among the fears surrounding trading.
* The loss of irrigation potential once an entitlement has been sold is also of concern.
