Date created: 15/5/07
Last modified:15/5/07
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John Quiggin

Water remedy clear as mud

John Quiggin Australian Financial Review

1 February 2007

With record-breaking drought continuing in much of southern Australia, the gradualist reform process envisaged in the National Water Initiative of 2004 has been overtaken by events. Even with unprecedently severe rationing, and the recently announced decision of the Queensland government to implement water recycling without waiting for a referendum, there is a significant possibility that Brisbane’s water supply will be unable to meet demand for ordinary household uses by 2008. Adelaide is similarly facing the possibility of inadequate supply from the Murray River, and planning is under way for emergency measures to meet this contingency.

The National Plan for Water Security announced by Prime Minister Howard last week marks a shift from an institutional reform process centred (at least in theory) on market-oriented reforms, to a multibillion dollar program of government intervention. The shift in focus is remarkable. The 24-page plan mentions markets only twice, suggesting that use of market-based policy instruments is being treated as an afterthought or even as a last resort.

To some extent this makes sense. Market solutions work best when the price mechanism has time to influence investment decisions and long-term consumption habits, but time is in short supply. Nevertheless, the government is talking about a 10-year plan and the expenditure of billions of dollars. If this money is not spent in a cost-effective way, it is hard to imagine that another such chance to fix the problems of water policy in Australia will arise any time soon.

Some features of the Plan are commendable. Most importantly, and unlike the NWI, the magnitude of the problem is recognised. The Plan aims to generate water savings of over 3,000 GL per year, with over 2,500 GL per year saved in the MDB. Water savings will be shared 50 per cent with irrigators to help meet the challenge of declining water availability, and 50 per cent to address over-allocation and sustain river health.

The implied return of water to the Murray-Darling Basin is around 1250 GL, which is close to the 1500 GL recommended by the Living Murray program as the minimum needed for sustainability. And the savings for irrigators are consistent with recent estimates of possible declines in inflows arising from climate change.

While the Plan gets the scale of the problem about right, however, the dominant emphasis on engineering solutions such as lining and piping of channels repeats the mistakes of the past. No benefit-cost analysis is presented and the aggregate numbers suggest that not all the projects will be cost-effective.

Spending $6 billion on efficiency improvements to save 3000 GL implies an average cost of $2000 for each megalitre permanently saved. While the drought has raised the market price of permanent irrigation water entitlements, this is still a high price, well above the likely economic value of marginal supplies of water for irrigation . Moreover, cost estimates of this kind are frequently optimistic. Almost certainly, at least some projects will turn out cost considerably more than $2000/GL.

By contrast, market buyback of entitlements are soft-pedalled. Even though ‘up to $3 billion’ has been allocated for this purpose, the option is not mentioned in the ten point summary and receives only a couple of sentences in the main text.

A balanced policy would give equal weight to market purchases and to engineering solutions and would adopt the latter only where the value of water saved exceeded the cost. Hopefully, the Plan’s soft-pedalling of the buyback option reflects political sensitivities rather than real policy priorities.

The other feature of the plan is a Commonwealth takeover of the whole sector. While this move is unsurprising, given the centralist (or ‘nationalist’) inclinations of the Howard government, it is unfortunate. There's no evidence that the Commonwealth acting alone will do a better job than the long-standing co-operative arrangements of the Murray-Darling Basin Commission, let alone that Canberra has any business running the water sector in states like WA and Tasmania.

And, as Kevin Rudd pointed out in his proposal for a water summit (trumped by Howard’s announced), having the Commonwealth control the issue does not ensure a consistent approach. Under current arrangements five different Commonwealth departments and agencies have a role in water policy, reflecting the interaction of water with other areas such agricultural and environmental policy. The plan now is to put everything under the control of a single ministry, headed by Malcom Turnbull. He will have his work cut out for him.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

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