Chapter 3


Chapter 3

Water buybacks and infrastructure investment

3.1        The major elements of the Commonwealth's ten-year Water for the Future program commence in 2008 are:

  • $3.1 billion for purchase of water entitlements for the environment (Restoring the Balance in the Murray-Darling Basin Program); and
  • $5.8 billion for infrastructure improvements to improve water use efficiency (Sustainable Rural Water Use and Infrastructure Program).

3.2        A summary of the programs follows, and issues arising are considered further below, including:

  • the balance between buybacks and infrastructure investment to recover water for the environment;
  • the regional impacts of buybacks and trade out, and the problem of stranded assets; and
  • need for a more efficient and transparent water market.

Government purchase of water entitlements for the environment

3.3        Recovering water for environmental purposes has in the past been largely achieved through administrative reallocations under state water plans, or by increasing water efficiency through upgrades to delivery and (more recently) on-farm infrastructure. These mechanisms are now being overlaid with purchases of water entitlements mainly by the Commonwealth and to a lesser extent by some Basin states.[1]

3.4        The Restoring the Balance program is the main buyback operation currently operating in the Murray-Darling Basin. The program is focused on the purchase of entitlements. Since the start of the program in 2008 the expected timing of expenditure has been brought forward significantly, as outlined in Table 1.

Table 1—Budgeted expenditure for Restoring the Balance program

Financial year

Budgeted expenditure original ($ million)

Budgeted expenditure revised ($ million)

2007–08

50

45.5

2008–09

157

432.5

2009–10

466

1 237.8

2010–11

468

254.4

2011–12

346

249.5

2012–13

n/a

510.5

2012–13 to 2016–17

1633

n/a

2013–14 to 2016–17

n/a

369.8

source: Productivity Commission, Market Mechanisms for Recovering Water in the Murray-Darling Basin, research report, March 2010, p. 5.

3.5        From the commencement of the Restoring the Balance program in 2008 to 31 January 2010 the Commonwealth has purchased 797 gigalitres of entitlements of varying reliabilities at a cost of about $1.3 billion.[2]

3.6        In addition to the Restoring the Balance program, the Commonwealth has been purchasing water through an open tender process operated by the MDBA to meet earlier commitments to the Living Murray Initiative. Some of the Basin states have also been or are still actively purchasing entitlements—one example being NSW's Riverbank program.[3]

Government assistance for infrastructure improvements

3.7        The $5.8 billion Sustainable Rural Water Use and Infrastructure Program funds rural water projects to save water by infrastructure improvements. Components include:

  • State priority projects: in the Intergovernmental Agreement on Murray‑Darling Basin Reform (3 July 2008), the Commonwealth committed up to $3.7 billion for state priority projects in the basin states, subject to due diligence;
  • On-Farm Irrigation Efficiency program: up to $300 million to assist irrigators in the Lachlan and southern connected system to modernise on-farm irrigation infrastructure;
  • Private Irrigator Infrastructure Operator Program in New South Wales: up to $650 million to assist private irrigation infrastructure operators to modernise and upgrade irrigation infrastructure;
  • Private Irrigator Infrastructure Operator Program in South Australia: up to $110 million to fund irrigation infrastructure efficiency improvements;
  • Menindee Lakes and Aquifer Recharge: up to $400 million to reduce evaporation and improve water efficiency at Menindee Lakes to secure Broken Hill's water supply and return up to 200 gigalitres a year to the environment; and
  • Water Meter Test Facility Upgrading and Accreditation: a $600 million program to improve water metering and monitoring in the Murray-Darling Basin; and
  • Irrigation Modernisation Planning Assistance: up to $2 million to help irrigation water providers develop modernisation plans for their districts.[4]

3.8        The planned timing of expenditure under the Sustainable Rural Water Use and Infrastructure Program is shown in Table 2:

Table 2—Budgeted expenditure for Sustainable Rural Water

Use and Infrastructure Program

Financial year

as shown in 2009–10 Budget ($ million)

as shown in 2010–11 Budget ($ million)

2008–09

92

2009–10

575

230

2010–11

539

706

2011–12

828

868

2012–13

1217

900

2013–14

  

732

source: DEWHA Portfolio Budget Statements 2009–10, p. 63; 2010–11 p. 59.

The balance between water buybacks and infrastructure improvement

3.9        From the commencement of the Water for the Future program in 2008 to 28 February 2010, expenditure on the buyback component was $1079 million, and expenditure on water infrastructure for irrigation and other primary industry purposes was $465 million.[5]

3.10      Irrigator groups generally submitted that they would prefer a greater emphasis on infrastructure improvements, and are concerned that spending on infrastructure has lagged behind spending on buybacks. For example:

NFF's concern in this regard is a balancing of [the acquisition of water entitlements] with the $5.8 billion Rural Water Infrastructure package, with much of the latter held up in negotiations with the states and development of project plans. NFF supports an acceleration of the infrastructure package as this delivers more widespread and improved social, economic and environmental outcomes throughout the Basin.[6]

We would prefer that Commonwealth acquisition of water were done by infrastructure programs; that is our first preference. Our second preference is that infrastructure and purchase programs run contemporaneously... We recognise that infrastructure programs take a bit longer to roll out but they do really need to be on the ground now.[7]

3.11      There was some frustration at the 'long gestation' of the state priority projects foreshadowed in the 2008 Intergovernmental Agreement on Murray-Darling Basin Reform.[8] For example, the NSW Irrigators Association noted that the Commonwealth has allocated up to $400 million to improve the efficiency of the Menindee Lakes storage (which suffers from high evaporation), but:

We have been frustrated that the money set aside to do something to improve the efficiency of the Menindee Lakes system is still sitting aside and nothing as yet has been done.[9]

3.12      Mr Anderson of the Victorian Farmers Federation suggested that there should be priority to on-farm works, since in that way 'you should find out who is serious about staying in irrigated agriculture and then build state-of-the-art delivery systems to deliver to them.'[10] Mr Rooney of Waterfind (a water trading broker), argued that there should be more emphasis on helping irrigation communities adjust to a lower water environment:

Our approach to this at the moment is, ‘We’ll buy your water from you and, in the instance of a small block irrigator grant, you can’t even use your property for five years,’ rather than programs designed to help, for instance, an irrigator live with a lower water entitlement or a lower water allocation.[11]

3.13      Some submitters were concerned about references to buybacks from 'willing sellers', on the grounds that in present conditions many sellers are more distressed than willing.[12] On the other hand the National Water Commission, in a recent review of water trading, argued that:

...while water trading is sometimes undertaken by individuals facing difficult circumstances, it is entered into voluntarily... This suggests that water trading is likely to be financially beneficial to both parties, provided that they make trading decisions that are in their own best interests.[13]

3.14      The alternative view on the appropriate balance of buybacks and infrastructure improvement, is that water can usually be recovered for the environment more economically by buying it directly from entitlement-holders. This allows sellers to decide the best way to allocate available funds, including infrastructure improvements to make better use of their remaining water.[14]

3.15      For example, Prof. Young argued that 'the type of investment being made at the moment in infrastructure...is very, very expensive'; on the other hand, the contraction of rural economies resulting from buybacks (which appears to be the main reason why rural interest groups prefer infrastructure investment) would be less than is often feared:

The research that is being done around this shows that the economic impacts would be much less than people think and there would be massive reinvestment back into the basin and into the community because of the amount of money that would be injected into each area.[15]

3.16      Similarly, in March 2010 the Productivity Commission argued that 'subsidising infrastructure is rarely cost-effective in obtaining water for the environment':

Purchasing water from willing sellers (at appropriate prices) is a cost-effective way of meeting the Government’s liability for policy-induced changes in water availability. Subsidising infrastructure is rarely cost effective in obtaining water for the environment, nor is it likely to be the best way of sustaining irrigation communities.[16]

3.17      However, the Productivity Commission also noted that 'the case for subsidising a particular irrigation infrastructure project would be stronger where it provided external benefits':

 For example, reducing leakages from distribution systems can decrease waterlogging and land salinisation problems for unrelated third parties. But these projects can also decrease return flows that otherwise might benefit downstream users, or increase downstream salinity, hence the net impacts would need to be considered on a case-by-case basis.[17]

3.18      The government has indicated that it does not agree that infrastructure investment should be de-prioritised:

The Rudd government agrees that water purchase is the fastest way to improve the health of our rivers... But we don't agree that infrastructure investment should be de-prioritised. It is equally important to invest in infrastructure to shore up the long term viability of our food producing communities and sustain the regions–particularly in the face of a future with less water.[18]

Regional impacts of buybacks and trade out

3.19      Several submissions argued that the regional socio-economic effects of buybacks need to be considered:

There is no information regarding the socio-economic impact of diverting additional water to environmental flows. As national water reforms are rolled out, the socio-economic impact on communities must be measured and publicly reported...[19]

3.20      The National Water Commission (NWC) recently reviewed the impact of water trading in the southern Murray-Darling Basin and found that:

...reduced regional water use does not lead to a proportional reduction in the value of agricultural production—because water is moving to those who value it most...

Comparisons of trade patterns and key socioeconomic indicators revealed no discernible link between patterns of water trading in or out of a region and changes in population, employment in agriculture or weekly household income. Instead, it was found that observed trends in those indicators were similar across regions regardless of their water trading history. For example, employment in agriculture fell in all regions, regardless of whether those regions were net purchasers or sellers of water.[20]

3.21      A recent paper by the Wentworth Group of Concerned Scientists suggested that the current buyback and infrastructure programs should be rolled into one, to be used for buybacks or infrastructure according to which is most cost-effective, case by case. This would yield savings that could be used for structural adjustment assistance to the affected communities as a whole, not only to irrigation farmers as at present.[21]

3.22      The Minister for Sustainability, Environment, Water, Population and Communities, the Hon Tony Burke MP, recently highlighted the importance to regional communities of the Basin Plan consultation process:

None of this adjustment [to a long-term healthy river system] is easy. We are talking about a situation where up and down the Murray-Darling Basin there has been over-allocation and we need to be able to adjust to have a long-term healthy river. We need to be able to do that in a way that pays respect to the importance of environmental flows, to the importance of food production, and to the importance of the future of regional communities...

The guide to the draft plan that is released on 8 October [2010] is put together by the [Murray Darling Basin] Authority, not by myself. But I will be doing everything I can to encourage people up and down the basin—those who are concerned about what sort of adjustment comes through and about where we end up in terms of sustainable diversion limits—to make sure that they do participate in that, because we want to make sure that we end up getting the balance right.[22]

Committee comment

3.23      While infrastructure investment can at times be more costly than market purchases of water, it can also deliver wider community benefits by maintaining a viable irrigation sector to support a town or community. The beneficiaries of water buybacks are those that hold water licences. However, those whose economic investments and livelihoods rely on the economic health of the irrigation community do not receive direct compensation. Investing to make irrigation more efficient can be a way both to save water for the environment and underpin the economic base of an entire community. In such instances, paying a premium for infrastructure investments may be justified by these wider benefits.

3.24      That said, such community benefits could be delivered in other ways. For example, in some communities economic activities other than irrigation may provide a more sustainable base. A wider structural adjustment package, which had a focus beyond just investment irrigation infrastructure, could target these opportunities.

Problem of stranded assets and structural adjustment

3.25      The problem of 'stranded assets' refers to assets, such as water delivery channels, which have fixed maintenance costs that may become unsupportable if the number of end users served by them falls below a certain point.

3.26      Some submissions were concerned that buybacks risk leaving assets stranded, and are not well targeted to minimise adjustment costs. For example:

The [buyback] program...represents an unmanaged “swiss cheese” approach, with potential to leave lots of stranded assets.[23]

Four pump districts averaged 750 properties in each district, and all of a sudden you only have 350 properties, which might be owned by only 100 people... A hundred people cannot sustain what 750 used to.[24]

3.27      The Victorian Farmers Federation argued that buybacks should be designed so as to reduce structural adjustment costs:

The VFF have always supported a planned approach to buyback (targeted buyback) as opposed to a 'shotgun' method of simply buying individual water entitlements with no overall vision for the future of irrigation and regional communities.[25]

3.28      This problem of stranded assets was the reason for the restrictions on permanent trade out of irrigation areas accepted in the National Water Initiative (the four per cent annual cap).[26] However the National Water Commission argued that:

...interregional entitlement trade restrictions are no longer necessary to manage potential stranded assets...

Unbundling of water access entitlements and delivery rights, combined with the potential application of termination fees, provides a fair and effective mechanism to manage potential stranded assets resulting from water trading.[27]

3.29      The Nature Conservation Council of NSW noted that a patchwork effect is to some extent inevitable if buybacks are voluntary:

It has to be patchy if you depend on volunteers doing it. In the longer term it would be much better to be able to develop a bit of a consistent plan where you might encourage targeted invitations to sell, in order to manage the system better.[28]

The four per cent annual cap on trade out of irrigation areas

3.30      In 2009, the Commonwealth and Victoria agreed to begin phasing out the four per cent annual limit on inter-district entitlement trades from July 2011, with a view to removing the limit entirely by 2014. The agreement also allows exemptions to the four per cent limit to enable the Commonwealth buyback program to purchase up to 300 GL of additional water entitlements over five years, subject to certain conditions. A similar bilateral agreement between NSW and the Commonwealth was also completed.

3.31      Despite these agreements, there is still debate about the four per cent limit and other artificial trade barriers. The ACCC’s (2009) draft advice on water trading rules and the Productivity Commission’s Research Report on market mechanisms for recovering water in the Murray–Darling Basin both recently recommended the immediate removal of the four per cent limit. The committee notes that the South Australian Government has filed a constitutional challenge in the High Court against Victoria’s implementation of the limit.

3.32      In its 2009 biennial assessment of progress in the implementation of the NWI, the National Water Commission (NWC) also recommended the coordinated removal of all barriers to trading, including the four per cent cap.[29]

3.33      In a recent report the NWC noted that the cap increasingly constrained buyers and sellers, particularly from 2007–08:

Such restrictions create uncertainty and are costly to buyers and sellers. They prevent prospective sellers from alleviating financial pressures or exiting the industry.[30]

3.34      In this inquiry, submitters who mentioned this matter supported the cap. The Victorian Farmers Federation submitted that 'the four per cent cap on trade from a water district is essential in preventing large scale and significant social and economic dislocation of rural communities...'

The reduced allocations of recent years have already caused significant economic impacts on rural communities. Allowing unfettered trade at this time would result in unintended and significant negative consequences for the sustainability of many rural communities. This is exacerbated by the Federal Government's decisions to speed up a water buy back.[31]

Need for more transparency about buybacks

3.35      Several submissions argued that there should be more transparency about Commonwealth buybacks. For example, the Victorian Farmers Federation said:

The transparency of water buybacks has not been adequate and is adding to the level of uncertainty in rural communities.[32]

3.36      Mr Rooney of Waterfind argued that more transparency is needed to reduce concern about potential conflict of interest in that 'the body that is responsible to provide transparency in the marketplace is also the body which is supplying information to the federal government in relation to what they should be paying for entitlements':

This year, the federal government is not providing information about the quantity of submissions which are being received or the volumes of water actually acquired in each particular pricing round. So our key points there would be that there is a need for greater transparency in relation to the buybacks which are occurring and the elimination of some of those potential conflicts of interest.[33]

Committee comment

3.37      The committee agrees with the predominant view in submissions that both buybacks and infrastructure improvements have a place in recovering water for the environment. Infrastructure improvements are considered necessary by rural communities, and in the committee's view are important to secure their economic and social future. The committee is concerned about the delay in delivering results from the Commonwealth's infrastructure program (the Menindee Lakes project is a prime example). [34]

3.38      However infrastructure projects should be subject to orderly prioritising including due diligence, and delivery against clear timeframes. The committee recommends that there should be better reporting of their outcomes.

Recommendation 1

3.39      The government should prepare an annual report of the Sustainable Rural Water Use and Infrastructure Program, detailing projects completed, in progress and planned, including for each project information on costs and timelines, water savings, and the share of water savings dedicated to the environment, extractive uses or other purposes.

3.40      The committee agrees with suggestions that it is important to monitor the regional socio-economic impacts of buybacks and trade out.

Recommendation 2

3.41      The government should commit to making community impact statements for Commonwealth water purchases from each sub region of the Murray Darling Basin.

3.42      The committee is concerned that there has been no financial support provided to affected communities beyond payments to water holders. Economic contraction resulting from less water use flows through to the whole community. The committee considers that a structural adjustment package is necessary to help communities adjust to reduced availability of water.

Recommendation 3

3.43      The Commonwealth should fund a structural adjustment package, based on the needs identified by community impact statements, for communities affected by reduced water availability resulting from the Commonwealth's water buyback program.

3.44      The committee agrees with stakeholders' concerns that there needs to be full transparency of the details of Commonwealth water purchases. Issues raised by stakeholders in this context included:

  • the need for full disclosure of details including price, volume, security, location and where applicable any subsequent changes in land use; and
  • a real time or live exchange disclosing irrigation region, latest sale and value, bid and offer and price per megalitre.

3.45      The committee recommends below that the Commonwealth with the states and territories should give priority to developing a more efficient and transparent water market (see paragraph 3.56).

Need for a more efficient and transparent water market

3.46      Most trading in Australia’s water markets is facilitated by intermediaries, who include water brokers, water exchanges and lawyers. Water market intermediaries match willing buyers and sellers and offer transaction and information services. The activities of water market intermediaries are currently unregulated, so there are no barriers to entry into the intermediary market. This also means that the number and activity of intermediaries are not reported.[35]

3.47      Some submitters and witnesses argued for a more transparent, more efficient water market. For example:

The market operations appear to be relatively inefficient with considerable time required for trade of water to be completed. [36]

Trade in entitlements (apart from the Commonwealth’s acquisitions) [is] historically and now very thin. Development of appropriate systems that facilitate electronic and shorter trade timeframes is supported. NFF supports the COAG agreed maximum timeframes for temporary trade but encourages jurisdictions to facilitate similar maximum timeframes for entitlement trade.[37]

At the moment information about water markets and water trading arrangements is still very hard to obtain and the Commonwealth, in the way it is purchasing water, is really behaving like a monopoly purchaser and is not making information available about what it is doing in a timely manner. There are big delays between when it agrees to purchase water and when people find out what prices it is paying. It can do that because it is a monopolist almost in the purchase of entitlements at the moment. One would not expect the Commonwealth to be exploiting that opportunity in the way it is.[38]

3.48      It was argued that lack of clear market information will encourage risk-takers over efficient farmers:

Unless we have a cluster of information or, if you like, a data room from which everyone can draw... we are never going to have an efficient market. So this medium of exchange that we have created—water right, or water share as I prefer to call it—is currently being dealt with in a dysfunctional marketplace. That is really dangerous because it will only find its way to the biggest risk-takers and the deepest pockets. It will not find its way to the most efficient farmers or the most efficient farm output.[39]

3.49      Some submitters and witnesses argued that brokers should be licensed. For example, the Victorian Farmers Federation said:

A national brokering system including registration of brokers and, at minimum, codes of practice are necessary to ensure markets operate effectively and fairly.[40]

3.50      Waterfind (a water broker) gave suggestions for the types of matters that should be regulated: for example, intermediaries should be obliged to operate through a trust account; intermediaries should be forbidden to buy or sell on their own behalf; and intermediaries should be obliged to carry professional indemnity insurance.[41]

3.51      Waterfind argued further that the relevant government agencies should only be able to accept transactions from licensed intermediaries, and that this requirement would create more transparency:

One of the issues with transparency of trading in the water market is the delays in settlement times between entering a transaction and settling a transaction.... The settlement time frame differences in the water market might be anywhere between a few days to nine months, depending on the type of transaction and the complexity of the transaction. We believe that, through requiring all transactions to occur through a licensed water market intermediary, there could be reporting functions which that intermediary needs to do to a centralised agency which could create greater transparency in relation to the market place. Participants in that water market could then see the contracted prices which are actually occurring for that particular day. [42]

3.52      Waterfind argued further that there is potential for conflict of interest where the market regulator is also a player, and there should be clearer separation of responsibilities.[43]

Committee comment

3.53      The committee agrees with the principles of water trade established in the National Water Initiative. The National Water Commission's recent study shows that water markets and trading are making a major contribution to achieving the NWI objective of optimising the economic, social and environmental value of water.

3.54      The committee has recommended above that there should be a structural adjustment program to assist communities (not only irrigation farmers) affected by buybacks and trade out.

3.55      The committee agrees with concerns about the need for a more efficient and better regulated water market. The details should be a matter for further consideration.

Recommendation 4

3.56      The Commonwealth with the states and territories should give priority to developing a more efficient and transparent water market, including setting best practice standards or regulations for water brokers or intermediaries.

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