Using Market Approaches for Water Recovery

The Productivity Commission has issued a major research report on the Federal Government's buy-back of water entitlements in the Murray-Darling Basin. The report outlines a number of recommendations to improve the recovery and management of water for the environment of the Basin.

Under the current Australian Federal Government's strategy, the buy-back and a larger irrigation infrastructure program are being used to recover water for the environment, and ease the transition to the much lower water diversion levels expected under a Basin Plan. Water will be reallocated administratively through a Basin Plan; and water will be recovered through a ten-year $3.1 billion buyback of water entitlements, and a $5.8 billion murray_darling_basin_bend investment in water saving infrastructure. The buyback aims to assist irrigators to adjust to the much lower diversion limits that are likely under the Basin Plan and to regain some water for the environment in the interim. The infrastructure program shares these broad objectives but also aims to help sustain irrigation communities.

Key Findings from the Report

The report from the Productivity Commission raises some concerns about aspects of the design and sequencing of the strategy, noting problems in having commenced the buyback before the Basin Plan is ratified.The buyback is occurring before sustainable diversion limits (SDLs) are set under the Basin Plan, and before the liability for policy-induced changes to water availability has been resolved. This is creating uncertainty in the minds of irrigators and affecting the efficiency of the buyback. However, as Commissioner Neil Byron said:

There is still much that can be done to improve the recovery and management of water for the environment in the Basin.

We need to make sure that is done in the most effective way possible to get the best environmental value for the money available. There are cases where governments have paid not only 20 or 30 per cent more, but sometimes three or four times more than the market price to recover water through very large, complicated infrastructure projects.

In particular, the Commission recommends that:

the Murray-Darling Basin Authority (MDBA) set 'sustainable diversion limits' under the Basin Plan in a way that balances environmental, social and economic tradeoffs (possibly requiring legislative amendment)
rigorous approval processes be applied to all irrigation infrastructure projects, to prevent inefficient and inequitable investment, with surplus funds reallocated to the buyback or other priorities
jurisdictions clarify how the risks of reductions in water availability are to be shared between irrigators and governments, to allow irrigators to make more informed decisions about whether or not to participate in the buyback
environmental watering be addressed through purchasing a portfolio of water products, not just entitlements
restrictions on water trading imposed by state governments be removed.

The Commission also found that, where active markets exist, acquiring entitlements directly in those markets is likely to be more efficient than the current approach of using tenders. It also warned against the buyback to achieve a broader suite of social and ecological objectives, such as distributional goals, system rationalisation or to manage salinity, suggesting that these are likely to compromise its efficiency and effectiveness. Other more direct instruments should be used to address these issues.

Finally, the report argues that governance arrangements for the recovery and management of water for the environment are fragmented. Greater coordination of water recovery and environmental watering by Basin jurisdictions is required.

Background to the Report

On 24 July 2009, the Productivity Commission received a terms of reference from the Australian Government asking it to undertake a study into alternative market mechanisms for recovering water in the Murray-Darling Basin.

The study's focus was on identifying:

appropriate, effective and efficient mechanisms that could be used to diversify the range of options to purchase water entitlements under the Restoring the Balance in the Murray-Darling Basin program to restore environmental flows, and
impediments to new and established water purchase mechanisms and how these could be overcome.

In undertaking the study, the Commission considered a range of issues, including:

mechanisms used nationally and internationally by governments to purchase water entitlements or similar property rights
the proposed pace of environmental water recovery and the depth of the water markets in the Murray-Darling Basin
impact on the water market, particularly where the Government may be the dominant buyer
potential methods to maximise synergies between water purchase and the Sustainable Rural Water Use and Infrastructure program.

In the course of the study, the Commission consulted widely with interested parties including Commonwealth and State Government agencies as well as industry and community groups.

The final research report was sent to government on 24 March 2010 and was publicly released on 31 March 2010.

Download the report here.