Paper to the 9th Annual Water Symposium, Sydney
27 February 2014
THE VALUE OF HAVING A VALUE
How reforms giving value and tradability to water have delivered benefits to Australia
Thank you very much Rod, it's a pleasure to be here.
I’ll begin by thanking the organisers for hosting this very important event. The Water Symposium provides a unique forum for key stakeholders in the Australian water industry to discuss, and prepare for, the legal, economic and environmental challenges we face.
Water reform in Australia is driven first and foremost by the need to make the most of scarce and unpredictable rainfall. This can be achieved by establishing a more efficient, and sustainable water industry and balancing the long-term needs of the community, industry and the environment.
We have made significant progress in this space, particularly since 2004 when the Howard Government, with the states, secured a national agreement on water reform that gave water a value, a price and also afforded water rights with the security required to underpin investment and trade in water markets.
By extending standard economic and sustainability principles to water pricing, planning and allocation, the National Water Initiative continues to drive water efficiency and water- related investment that benefits us all.
In a drought prone country like Australia, is it particularly important that water has a price that reflects its true value, providing maximum incentive for it use to equally reflect that value. It’s amazing what difference this simple principle has made in helping us to navigate our way through the worst of those dry times.
Fortunately, through the National Water Initiative, the right to access water is acknowledged nationally as having real value – a good that needed to be managed with extreme care.
This basic economic concept provided far greater certainty for investment, greater clarity for our environmental goals and improved our capacity to effectively deal with both expected and unexpected changes.
The National Water Initiative supported the principles of valuing water, preserving it, trading it, using it efficiently and seeking maximum utility from it.
We have, since 2004, come a long way.
Under the National Water Initiative, states are implementing comprehensive water plans that account for wide-ranging considerations – environmental, community and business. We have worked toward a clear definition of water rights, enabling the legal security of entitlements to water, as distinct from land.
Without acceptance of sound market principles the pathway to return the Murray-Darling Basin to sustainable levels of extraction would have been difficult to accomplish.
The Howard Government’s Water Act 2007 was based on the principles and requirements of the National Water Initiative, making the creation of the Murray-Darling Basin Plan a possibility, and its implementation a reality.
Successive Australian governments have supported the Plan’s focus on reducing over-allocation of water resources by investing in water security, modernising irrigation systems and securing environmental water.
Our Government is committed to implementing the Basin Plan on time and in full, as evidenced by the Prime Ministers signing of long awaited agreements with New South Wales and Queensland this morning.
We have already contracted 1,897 gigalitres towards the 2019 target of recovering 2750 gigalitres.
We will bridge the remaining gap in a balanced way, ensuring practical steps are taken to deliver a balanced outcome for the economy, for Basin communities and for the environment. After all, healthy rivers and healthy communities are complementary, not contradictory.
More broadly, water markets fostered under the National Water Initiative have delivered tangible benefits across the Murray-Darling Basin. The separation of water from land has been an important step in the development of water markets and increasing trade, allowing price signals to improve water market efficiency, supporting redistribution of water resources to areas where they will be used most productively.
Efficiently operating markets come into their own in times of scarcity, where a limited resource should flow to the highest value outcomes.
The water market certainly came into its own during the trials and stresses of the Millennium Drought. At its peak the proportion of water allocations traded in the Southern Murray-Darling increased – from 5 per cent in 2001 to over 30 per cent in 2007.
Many horticultural farming operations were able to keep permanent plantings alive to preserve investments that had taken many years to establish through the purchase of water allocations from broad acre farmers, who also benefited from trade.
Overwhelmingly, this created improved outcomes for both of the parties to the transactions that took place. Long term investments were able to be maintained and protected by buyers, while sellers reliant on annual crops were able to convert annual allocations often insufficient to plant and grow crops into income.
In the height of drought where incomes were diminishing and debt levels rising it didn’t feel like much of a win, but imagine how much worse conditions could have been were such effective trading not allowed and rights to use water had been stranded in locations where it was unable to be efficiently utilised.
Not only did market principles help to preserve a future for many farmers but they actually helped to maintain the value of agricultural production during the drought. From 2005-06 to 2007-08, the combination of trading and efficiencies driven by scarcity saw the amount of water used by irrigators fall by 57 per cent, yet the value of irrigated production fell by only 8 per cent.
With relatively well established markets across the Murray-Darling Basin irrigators now continue to make water trading decisions based on their watering needs, business objectives and financial circumstances, with the water market providing a major new tool for optimising their farm business operations.
A new development in water markets is the opening up of trade between environmental and consumptive users. Trade of Commonwealth environmental water has always been possible under the Water Act, but only where it will improve the capacity of the Commonwealth’s water holdings to meet environmental objectives across the Murray-Darling Basin.
Trade opportunities for the independent Commonwealth Environmental Water Holder arise because sometimes the annual allocations associated with permanently held entitlements are not needed in one part of the system, yet more is needed in another part of the system.
Such trade flexibility has recently been demonstrated in the tender overseen by the Commonwealth Environmental Water Holder selling 10 gigalitres of regulated water allocation in the Gwydir catchment.
Importantly, the proceeds from the sale will be quarantined until such time as a purchase of water for greater environmental benefit, within either the Gwydir or elsewhere in the Murray-Darling Basin, is identified.
Once again, this has provided a real world example of an effective market delivering a positive outcome to all participants to a trade in water.
The sale of a modest tranche of water allocations on the Gwydir was a good outcome for the environment as it allowed the Commonwealth Environmental Water Holder to obtain $3.2 million in funds to, at an optimal time in the future, purchase water for greater environmental benefit in the Murray-Darling Basin.
The sale was also a good outcome for irrigators experiencing drier than expected seasonal conditions in the Gwydir, who purchased ten billion litres of water to help deliver millions of dollars in agricultural output.
The trading framework released by the Commonwealth Environmental Water Holder outlines how they will learn from the first trade and manage the water portfolio with the primary aim of environmental benefit, while optimising the social and economic outcomes that may be achieved through their involvement in the water market.
In an effective water market, water property rights combined with the ability to trade, open up more options for irrigation businesses to manage their changing circumstances.
Market principles have also driven an enormous productivity drive across the Murray-Darling. Acknowledgment of scarcity through a market driven value attached to water has helped provide incentive for billions in investment to improve the efficiency of irrigation farms.
It is now just as common to hear irrigation farmers discussing their yield per megalitre as it is their yield per hectare as they seek to maximise the production associated with every drop of water used.
Many irrigators have utilised the market to sell surplus water to help fund improvements in on-farm irrigation efficiency.
Increasing on-farm irrigation efficiency is also adding to the flow of economic benefits from the government’s water programs.
The Sustainable Rural Water Use and Infrastructure Program (SRWUIP) is the key mechanism for delivering:
? Our guarantee that we will implement the Murray-Darling Basin Plan on time and in full;
? Our commitment to give priority to water recovery through infrastructure investment;
? And, the Government’s election commitment to implement the original 10 point National Plan for Water Security.
Our Government will focus on infrastructure and water efficiency as the primary means of water recovery to bridge the gap. In finalising implementation of the Murray-Darling Basin Plan we will have invested over $4.9 billion in measures to make irrigation farms more efficient, irrigation systems more efficient and the delivery of environmental water more efficient.
A further $1.6 billion has been allocated for further water recovery through additional irrigation efficiency measures and related activities through the Water for the Environment special account.
Across the country, Sustainable Rural Water Use and Infrastructure projects are demonstrating improved farm scale productivity benefits such as increased crop rotation ability, increased crop water use efficiencies, improved soil management, reduced maintenance and reduced weed control requirements.
And it is not just irrigators who see the benefits of such investments. At the local level, benefits flow-on to other local businesses and services.
These irrigation infrastructure upgrades not only improve on-farm water use efficiency and maintain or increase productive capacity, but ultimately result in the transferring of a share of the saved water to the Australian Government for ongoing environmental use.
The productivity dividends of these incentives to invest in improved efficiency are diverse. An irrigator who converted to a lateral move irrigation system reported that it has saved him six hours a day in labour costs.
Another farmer constructed a new storage dam and reuse system with a lateral move irrigator to maximise production during dry periods. As a result of the upgrade, the farmer saved 3.7 megalitres of water per hectare of production.
Some expect their crop production to increase by 10-20 per cent as a result of improved irrigation scheduling. Other irrigators are able to ‘do more with less’ by converting from sprinklers to drip irrigation and irrigating during the night.
Modernisation of major irrigation systems in the Basin to reduce delivery losses have meant that farmers in these systems can now receive and use water for irrigation in dryer times than before.
An example is the Trangie-Nevertire Irrigation Scheme near Dubbo, where a $115 million Australian Government investment in irrigation infrastructure funding has modernised the scheme.
Installation of automated real-time water metering, automated gates, new rubber lining for channels and improved telemetry to provide greater control over water use has ensured that secure and reliable water is available to farmers when they needed it … weather and rain patterns permitting!
This security means more dependable income for farmers, which in turn also means more secure and reliable trade for local communities.
With results like these it is easy to see why our Government is prioritising water infrastructure programs over water buybacks.
Not only are we committed to implementing the Basin Plan on time and in full but we also want to see the Murray-Darling’s food and fibre industries remain vibrant and sustainable, and know that the river system on which they rely is being restored to good health for the long term.
While the conversations about benefits of water reform quite obviously tend to focus on rural and regional improvements, there have been some gains and remain some opportunities to harness effective use of market based principles in the urban water sector.
The development of an urban water pricing signal has produced a pricing regime that is more transparent and cost reflective. There are now independent regulators determining urban water prices in five states and the ACT.
Economically, sound pricing of water to reflect the true costs of supply sends the right signals to consumers to value the water supplied to their businesses and their houses, and to use water wisely.
Other ways of demonstrating the value of water have been established. For example the Water Efficiency Labelling and Standards Scheme is one such example.
WELS (the star rating that I am sure you have all seen on fridges and dishwashers), is administered by the Australian Government Department of the Environment, and has encouraged the increased use of water efficient appliances across the nation.
According to a report from the Australian Bureau of Statistics, national domestic water consumption dropped from 103 kilolitres per capita in 2004-5 to 76 kilolitres seven years later (by 2011-12).
While the drought and water restrictions were significant drivers of this change, the sustained decrease in the average amount of water consumed by Australian households can also be linked to WELS.
Research suggests that our outdoor water use – generally a more discretionary decision – is considerably more responsive to a given water price than water used within our houses.
Over a longer period of time, a consistent rise in the price of water has influenced our behaviour more fundamentally. Today, we are far more inclined to spend money investing in water efficient household appliances along with actively planting more drought-resistant gardens.
The sense of responsibility that all Australians have for our water resources has increased, with a much better understanding of the scarcity of water and the importance of conservation.
Applauding increased water use efficiency and improvements in placing a true value on water in both rural and urban settings should not be confused with applauding increased prices. A properly functioning market should see downward pressure on prices wherever possible.
In the urban water landscape we continue to generally see monopoly providers, deliverers and retailers of water. While the nature of storing and piping water to its end use in urban settings presents as a natural monopoly it is important for the states to consider all avenues to make urban water markets more efficient, driving prices down wherever possible.
In the spirit of the National Water Initiative consideration should be given to opening up competition or contestability for components of urban water delivery in ways that can enhance the efficient operation of water markets and provide commensurate benefits to residential and business users, as well as the overall economy.
Our government recognises that electricity is a major input cost for many businesses and is seeking to apply downward pressure on electricity prices to enhance Australia’s competitiveness through the abolition of the Carbon Tax, review of the Renewable Energy Target and development of a new energy white paper.
Water is also a key input cost for many businesses. Where further market innovation can be applied to reduce prices, or at least reduce the rate of price rises, then it should be.
We have learnt, and continue to learn, valuable lessons from adoption of the National Water Initiative ten years ago and its ongoing implementation. These lessons, including those learnt from our reforms in the Murray-Darling Basin, must be applied to future developments in both urban and rural settings.
The economic, social and environmental challenges the Government has faced in seeking a more sustainable balance between productive and environmental needs in the Murray-Darling Basin are highly relevant to the consideration of new water and agricultural developments in northern Australia.
The Australian Government is committed to realising the full potential of northern Australia.
We have commissioned a White Paper on the development of northern Australia that will define policies for developing the north through to 2030. The Government’s White Paper, a key election commitment, is due to be released at the end of the year.
Consideration of water capture, storage and use should be a critical component of White Paper consultations because the nature and behaviour of hydrological systems in the north are unlike anywhere else in Australia.
Development will necessitate innovative and sustainable solutions. Full attention must be paid to setting sustainable limits on water use and avoiding losses to downstream industries such as fisheries that are dependent on end of system flows.
In accordance with the National Water Initiative sound principles of cost recovery, price transparency and tradability must be applied to ensure new water infrastructure and irrigation development is commercially viable into the future and achieves the maximum economic return for the water used.
I’ll end my remarks by suggesting that our national challenge, whether in cities or towns, as farmers, local community leaders, academics or state and federal policy makers, is to work within the realities of our unpredictable natural environment, to get the best outcomes for both our rivers and the communities that rely upon them.
While the Millennium Drought was declared over in 2012, we again see many Australian farmers looking at bare paddocks and failed crops.
Water reform will not stop droughts and all of the inevitable associated problems. However, the application of sound market principles to our use of water does mean that both our farmers and our river systems are more robust and better able to face the tests of droughts.
As we approach the tenth anniversary of the adoption of the National Water Initiative later this year we should redouble our commitment to its important principles, to using the power of markets to get the best returns from our scarce water resources and to recognising the value of our water resources having a true value applied to them.
Thank you very much for your time today, the opportunity to make these remarks and for your efforts in the effective management of a lifeblood of our nation.