MICHAEL KEATING. National water reform- A REPOST from September 28,2017

According to the Productivity Commission’s draft report on National Water Reform, Australia is now viewed internationally as a world leader in water management. Nevertheless, these reforms continue to be challenged by special interests. In particular, the history of poor investment in irrigation continues, encouraged by the comfortable expectation that governments will not enforce the requirement to recover irrigators’ share of the costs through cost-reflective water pricing.

Australia is one of the driest countries in the world. Good water management is therefore especially important to Australia; indeed, water management is vital to life and the economy, and it ranks alongside climate change as one of the two big environmental challenges for Australia.

But Australia has not always been good at water management. Political pressures have encouraged the waste of water in uneconomic irrigation schemes and the excessive use of urban water.  For example, those of us who are old enough will remember the famous remark by the former modest member of Parliament, Bert Kelly, who smelt another dam coming on every time a new election was announced.

But water management in Australia changed after 1994 when the Council of Australian Governments (COAG) adopted a Water Reform Framework; subsequently extended in 2004 through the National Water Initiative (NWI).

In its recent draft review of the NWI, the Productivity Commission found that ‘There has generally been good progress implementing the NWI, and its objectives and outcomes have largely been met’.

Nevertheless, the Productivity Commission did find that we need to guard against bad habits re-emerging. In addition, the Productivity Commission made a number of recommendations for tidying up the water management system, of which I think by far the most important was to ensure the environmental sustainability and financial capability before committing to any new infrastructure investment.

In what follows, I will briefly summarise the Productivity Commission’s draft report, and offer a few comments of my own.

Key Elements of National Water Reform

The key features of water reform in Australia introduced over the last two decades have been the:

• introduction of cost-reflective pricing to encourage more efficient use of water and as a guide to future investment
• provision of secure water titles and the removal of barriers to trade in water to allow the transfer of water to where it can used most valuably and efficiently
• separation of water policy from the provision of water services to increase the transparency of investment decisions and promote more efficient pricing
• development of water accounting arrangements capable of meeting the information needs of different water systems for planning, monitoring, trading, environmental management and on-farm management
• return of overallocated or overused systems to environmentally-sustainable levels of extraction.

The Progress So Far

As a result of these reforms the Productivity Commission now finds that ‘Australia’s water sector is viewed internationally as a world leader in water management’.

The introduction of water entitlement and planning frameworks has created secure property rights and established transparent processes for deciding how water is shared between the environment and human/business consumption. These changes have also enabled water trading and the establishment of water markets, which have improved both the efficient use of water and environmental sustainability. In recent years over 50 per cent of irrigators in the Murray-Darling Basin have participated in water markets, giving these irrigators greater flexibility to respond to changes in commodity prices and water availability. In addition, most government buy-backs of water for environmental purposes have been achieved through trading in water markets.

Urban water is mostly priced at the levels required by the NWI, although there is some under-pricing, especially in Queensland, Western Australia and the Northern Territory. This introduction of cost-reflective pricing has in turn helped change consumer behaviour, with the median annual water consumption of Australian cities and towns falling substantially from 280 kilolitres per residential property in 2000 to 182 kilolitres in 2016.

The pricing of irrigation water is, however, a more mixed story. The Productivity Commission finds that ‘Cost-reflective pricing outcomes are generally being achieved for most existing irrigation infrastructure, but new irrigation infrastructure has tended to be underpriced’ (emphasis in the original). Frankly I suspect this assessment gilds the lily, as it can only be true for existing infrastructure if the value of the capital stock for irrigation is written down way below its replacement cost (see more below). Nevertheless, the irrigation pricing reforms do seem to have encouraged more efficient use of the water; for example, the Productivity Commission found that on-farm irrigation efficiency in the cotton industry increased from 57 to 70 per cent over the 10 years to the late 2000s.

Finally, the Productivity Commission has found that

• ‘Water metering, accounting and compliance systems are in place in all jurisdictions’,
• ‘The provision of water for the environment is also a key achievement of the reforms’, and
• ‘progress has been made on rebalancing overallocated systems’

Again one wonders if the Productivity Commission might be guilty of gilding the lily somewhat.  The Productivity Commission report fails to acknowledge

• the evidence of major cheating of the metering system,
• the transfer of money intended for buy-backs of water by the present government, to finance improvements in water reticulation, although this transfer is uneconomic and will help some up-stream irrigators, not the environment, nor even those irrigators farming down-stream
• the reality that some regional irrigation authorities are acting to prevent the permanent sale of water rights to irrigators in other regions. There are willing sellers of these water rights, who would be better off quitting irrigated farming, but the regional water authorities fear the loss of income and population if their number of irrigators declined.

Further Reforms

Given the Productivity Commission’s overall favourable assessment of the water reforms and their implementation to date, it is not surprising that their recommendations for further reform mostly involve completion of what has been achieved so far, plus some tidying up.

I personally generally agree with the Productivity Commission’s new additional recommendations, but I would particularly like to emphasise a few recommendations.

First, and most importantly, vigilance will be required to preserve the present system of water management and to prevent bad policy habits from re-emerging. Already the transfer of responsibility for water to Barnaby Joyce and the National Party has resulted in some back-sliding, especially on environmental management, investment, and pricing.

Second, investment in irrigation has almost never been justified by any proper analysis, and as a result irrigated farming has enjoyed massive subsidies that are paid for by the taxpayer. For example, in NSW – and I don’t think the situations differs materially in other states – because of the write-down of past poor investments, in 2006-07 the regulatory asset base used to set water prices was only valued at $340 million of which the irrigators’ notional share was a mere $84 million. Furthermore, if the irrigators’ share of the cost of the promised new investment under the National Water Plan were fully recovered, then it was estimated at the time that water prices paid by NSW irrigators could rise by as much as a massive 30 times[i]. Clearly this investment was not warranted. It involved a further massive subsidy to irrigation, and this new investment would never have been undertaken if the irrigators were not confident that the authorities would not enforce the requirement for cost-reflective pricing.

In future, as the Productivity Commission recommends, new irrigation infrastructure should only be supported if:

• An independent analysis has already been conducted of the economic and financial viability of the new infrastructure, which quantifies the benefits and the recipients, and assesses the users’ willingness to pay their share of the costs
• To this end, governments should not provide grant finance for infrastructure or part of that infrastructure that is of benefit to private irrigators. Grants should instead be limited to projects or parts of projects that deliver a clearly articulated and evaluated public good, and
• The financial risk of new infrastructure should be reduced by requiring the pre-sale of water entitlements as a precondition for commencing construction.

Establishing these pre-conditions for new irrigation investment is urgent. The Australian Government has over $4 billion of grants and loans available for irrigation infrastructure projects, with additional funding from State and Territory Governments. There is a substantial risk that the poor decisions and outcomes of the past will be repeated. Indeed, much of this planned infrastructure spend is planned for northern Australia, despite the poor track record of such schemes as the Ord River scheme.  Furthermore, the three jurisdictions that have still to introduce most of the water reforms are Queensland, Western Australia, and the Northern Territory.

Conclusion

The Productivity Commission has produced a very useful assessment of the National Water Reforms introduced since the mid-1990s. Contrary to the critics of ‘neo-liberalism’, these market-based reforms have proved to be of benefit to both the economy and the environment. Indeed, the real challenge is to make them stick, and to avoid the huge waste of money that has resulted from so many irrigation projects. Money that could have been used for other much more worthwhile projects.

[i] See Keating, M., 2008, ‘Infrastructure: What is Needed and How Do We Pay for It?’, The Australian Economic Review, vol. 41, no. 3, pp. 231-8.

Dr Michael Keating, as Head of the Department of Prime Minister & Cabinet was heavily engaged in the development of the Water Reform Framework agreed by COAG in 1994. Subsequently, in the 2000s, he chaired the Tribunal that determined urban and irrigation water prices in NSW during those years.

Michael Keating

Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations. He is presently a visiting fellow at the Australian National University.

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