Rural water regulation - A case study in regulatory success and failure

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1 Rural water regulation - A case study in regulatory success and failure Mike Young Executive Director, The Environment Institute

2 Outline History Benefits to irrigators Costs to the Nation and communities Reform sequencing errors

3 History Limits to Murray Darling water allocation recognised in late 1980s Agreed to a interim cap (Diversion limit) in 1993/94 Competition policy came out at the same time Water trading enabled via separation of water licences from land Corporatisation of supply businesses Full cost pricing, etc Investment security New entitlement systems Unbundling started in 2000 Entitlements redefined as shares from 2000 Registers validated Living Murray Initiative (500 GL for environment as first step) National Water Initiative in 2004 Commitment to substantially complete plans to fix all over-allocation by end 2005 Water Act 2007 Vic sales water converted to a low security entitlement

4 Separating and unbundling Land Entitlement Shares in Perpetuity Single Title to Land with a Water Licence Tradable Right Bank-like Allocations Water Price Use licences with limits & obligations National Competition Policy 1993/94 Markets National Water Initiative 2004 & Unbundling

5 Cap plus separation of water and land enabled

6 Benefits of reform to individuals Entitlement registers established and validated Entitlements could be mortgaged Unbundling enabled low cost allocation trading Separation enabled new financial structures to emerge Entitlements moved to Private superannuation Trusts New business structures emerged (Inheritance) Separation enabled new risk management structures to emerge

7 Total returns - Median allocation and entitlement prices compared to capital growth, and the S&P ASX Accumulation Index Returns 50% Annual Return - Median 40% 30% 20% 10% Annual Return - Capital Growth Annual Return - S&P ASX 0% Jul-98 No v-98 Mar-99 Jul-99 No v-99 Mar-00 Jul-00 No v-00 Mar-01 Jul-01 No v-01 Mar-02 Jul-02 No v-02 Mar-03 Jul-03 No v-03 Mar-04 Jul-04 No v-04 Mar-05 Jul-05 No v-05 Mar-06 Jul-06 No v-06 Mar-07 Jul-07 No v-07 Mar-08 Jul-08 No v-08 Mar-09 Jul-09 Annualised Return 5 Year Holding Period Ending After Bjornlund & Rossini 2007

8 Innovation Voluntary closure of saline areas Dairy substituted water sales + rainfed cereals for irrigated fodder Total channel control made to work by Coleambally Irrigation Massive expansion of horticulture on state of the art drip irrigation Soil moisture monitoring became widespread

9 Bad news Cap on diversions not use 1995/96 to 2000/01 water use increased 29%! (Bryan and Mavanek, CSIRO, 2004) Groundwater + increased efficiency Flow reduced dramatically In November 2002, dredges where put in the mouth of the River Murray! Water accounting systems lacked hydrological rigor!

10 Securing 1,500 GL! The Environment Institute Increasing the area irrigated using savings from increasing water use efficiency by 15% in response to withdrawing 1,500 GL from consumption Removing market impediments and halving the gap between what is allocated and what is used Reduction in water yield as a result of tripling the area under forestry Increased salinity interception schemes removing flow -1,310 GL -655 GL -500 GL - 20 GL Erosion of CAP as a result of expanded use of groundwater Total Loss -175 GL -2,660 GL Add back 1500 GL sourced from irrigators to enhance environmental flows Net change in mean flows in the River +1,500 GL -1,160 GL

11 Use it or lose it because you can t save it! the loss in the economic value of water use in the Goulburn (as there is no storage market that allows carry forward) is of a larger magnitude than the economic rents currently generated on the spatial (within season) market, and is equivalent to around 8% of the rental value on current water entitlements. Donna Brennan (2007)

12 The cost? $3.1 billion on buying back water for the environment $5.8 billion on making savings of which half are to be transferred to the environment Total cash transfer from taxpayer to irrigation sector => (3.1b + 5.8b) = $8.9 billion 15,120 irrigators in MDB = $588,624 per irrigator

13 Sequencing In retrospect First, fix the plans used to determine how much is to be allocated to River flow and conveyance Water-dependent ecosystems associated with rivers and aquifers Users Then, open markets to facilitate dynamically efficient adjustment and investment

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