Election 2007: Water policy

John Quiggin

Australia is running short of water. This isn’t because of the fact, once taught to every schoolchild, that Australia is the world’s driest continent. In fact, although we may not get much rainfall per hectare, our low population density means that there is more than enough water in Australia to support our current population and agricultural industries. Part of the problem is that much of the water is in the wet tropics, while most of the population is located in along the eastern and south-eastern coast. But the real difficulty is that we have not made good use of the water we have.

In particular, despite rhetoric about the importance and scarcity of water, we have, until recently, treated water as if it was a free good, available in unlimited supply. Allocations of water for irrigation have, in many cases, exceeded the maximum amount that can be extracted from catchments on a sustainable basis (Living Murray Initiative 2003). Meanwhile, the price of water for urban use was, until recently too low to provide any serious incentive to conserve water, and too low to justify substantial new investment in water supply.

There is more than enough water in Australia.

Prices for urban users have now risen substantially, and, along with restrictions on specific water uses, have reduced water consumption in most cities. A recent report claimed that Brisbane now has lower water use per person than any other city in the developed world. Nevertheless, with growing populations access to additional water supplies is essential. None of the available options is particularly attractive. Desalination and recycling are costly and energy-intensive. New dams are problematic, since most good sites have already been exploited. More importantly, there is, in aggregate a need to return water to the environment, rather than to extract more for human use. The Scientific Review Panel of the Living Murray Initiative concluded that an environmental flow of 1,500 gigalitres (GL) a year was needed to achieve even moderate ecological improvements (Jones et al. 2002).

Among policies that have not been exploited to any significant extent, the most appealing option is for governments to buy back water rights from irrigators, and use the water to meet the needs of the environment and urban users. In addition to environmental flows of 1,500 GL, it would be desirable to increase the availability of water for urban users by up to 500 GL a year. Current policies are unlikely to release more than a small fraction of this flow, suggesting the need to pursue the option of repurchase.

It might be objected that, having issued allocations free of charge, the public should not have to pay to reduce those allocations to sustainable levels. Whatever the merits of this view, it has been rendered irrelevant by the conversion of water licences into tradeable property rights, one of the less fortunate aspects of the enthusiasm for market-oriented reform that prevailed during the 1990s. Many irrigators have paid substantial amounts for water rights, and must be compensated if these rights are to be withdrawn or reduced. The most that can be done is to share the risk of reductions in water availability as has been done in the National Water Initiative agreed between the commonwealth and state governments at the Council of Australian Governments meetings in 2003 and 2004 (Council of Australian Governments 2003, 2004).

Currently public policy is focused on subsidies to projects aimed at reducing water losses in irrigation systems or through on-farm projects to improve the efficiency of water use. Some projects of this kind have merit, but many of those funded so far have achieved very modest savings at high cost, and are sometimes offset by associated losses elsewhere in the system. For example, laser-levelling of fields improves efficiency on a single farm, but reduces the volume of water that flows back into the system.

Resistance to the
idea of repurchasing water rights remains strong.

What is needed here is the cost benchmark associated with a market purchase option. If water-savings projects are required to deliver savings at a cost no greater than the cost of purchasing the associated water savings in the open market, such projects will proceed if the value to society of the water saved exceeds the cost of the project, but not otherwise.

Despite widespread agreement that repurchase of water rights from irrigators (or rather repurchase by the governments that initially issued them) is an essential element of any cost-effective and sustainable policy, political resistance to the idea remains strong and, so far, highly effective.

One set of argument against allowing the repurchase of water rights involves ‘asset stranding’. The central idea is that the group of irrigation users in a given catchment has an obligation to maintain the irrigation infrastructure in that region and perhaps to deliver a return to owners of capital (in many cases, a co-operative owned by some group of users). If some users sell their water entitlements to users in another catchment, the costs of the infrastructure will be spread over the remaining users. Either unit charges will rise or the owners of capital will incur a loss.

On the other hand, some advocates of reform have argued that the extent of over-allocation is such that a voluntary repurchase plan is unlikely to be adequate, and have proposed compulsory acquisition of water rights. However, such a proposal is unattractive on general constitutional grounds and politically highly problematic, because irrigators would rightly reject such a policy.

The policy problem, then, is to design a purchase option that would attract willing sellers and permit a cost-effective long-term solution to the problem of over-allocation.

THE PROPOSAL

My proposal is the purchase of renewal or reversion rights. The idea is that holders of water rights would be offered a payment now, in return for which those rights would be returned to the public at some point in the future, say ten years from now.

Current water shortages reflect policy mistakes going back many decades.

Such a delay would have a number of advantages. Most obviously, farmers facing financial stress as a result of severe drought conditions would receive an immediate cash payment, which could be used to repay debt and finance new investments. By allowing farmers a substantial period of time to plan for reduced water allocations or a shift out of irrigated agriculture, purchase of reversion rights would reduce the adjustment costs. More significantly perhaps, the increased predictability of future demand would facilitate planning of investment in irrigation infrastructure and thereby mitigate the problem of stranded assets.

The same considerations imply that the delayed repurchase plan would be fairly cost-effective for the public. Comparison of prices for temporary and permanent trades of water suggests that the value attached by irrigators to rights is higher in the short run than some years in to the future (Quiggin 2006).

The main drawback with the proposal is the delay in resolving the problem of allocation, in restoring adequate environmental flows, and in allowing urban water users access to a relatively low cost source of water. This is, I believe, a manageable problem. While the need for additional environmental flows is acute in some locations, other problems such as increasing salinity levels are projected to develop over a longer period. Hence, under a policy that allowed for a gradual, predictable increase in the allocation available to the environment, acute needs could be addressed first, and other needs later.

Our current water shortages reflect policy mistakes going back many decades. It will take at least a decade to resolve the resulting problems. A policy of delayed repurchase of water rights could form part of a cost-effective solution.

Professor John Quiggin is Australian Research Council Federation Fellow in the School of Economics and School of Political Science and International Studies at the University of Queensland. Research for this paper was supported by an ARC Federation Fellowship.

REFERENCES

Council of Australian Governments 2003, Communiqué, 29 August [Online], Available: http://www.coag.gov.au/meetings/290803/index.html [2004, Aug 17].

Council of Australian Governments 2004, Communiqué, 25 June [Online], Available: http://www.coag.gov.au/meetings/250604/ [2004, Aug 17].

Jones G., Hillman T., Kingsford R., McMahon T., Walker K., Arthington A., Whittington J. & Cartwright S. 2002, Independent Report of the Expert Reference Panel on Environmental Flows and Water Quality Requirements for the River Murray System, Report to the Murray-Darling Basin Ministerial Council, Cooperative Research Centre for Freshwater Ecology, February.

Living Murray Initiative 2003, Towards a healthy, working river, Murray Darling Basin Commission [Online], Available: http://www.thelivingmurray.mdbc.gov.au/background/healthyriver [2007, Sep 11].

Quiggin, J. 2006, ‘Repurchase of renewal rights: A policy option for the National Water Initiative’, Australian Journal of Agricultural and Resource Economics, vol. 50, no. 3, pp. 425–435.

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