Looking back on Australian water policy from 2027

1
Looking back on Australian water policy from 2027

• Prof. Mike Young and Jim McColl
• Research Chair, Water Economics
  ManagementThe University of Adelaide Research
  Fellow, CSIRO Land and Water,
• 5th Annual Australian Water Summit, Monday 26th
  February 2007

2
A caveat

• Predicting the future is risky.
• We do it to discover what might go wrong.
• And how we can improve the future we actually
  experience.
• What follows is fictional,
• It is offered in good faith.
• We try to bring together what many have been
  recommending.

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2 Case study histories

• Southern Connected River Murray System
• Large surface water system with very large
  storage indirectly connected to a series of slow
  moving groundwater systems of varying quality
• South East of South Australia
• Unconfined groundwater water system

4
Climate shifts occur
8yrs.
11yrs.
A drought, Australia should have expected (not a
1 in 1,000 years event)
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River Murray Inflows 2007/8

• By May 2007, all Murray System dams empty
• 2007/8 inflows gt 1,000 GL
• South Australia got its 1/3 gt
  333 GL
• But SA system evap. losses gt 1,300
  GL
• Balance
  967 GL
• Add back Wellington weir Lake Bonney triage
  L. Alexandrina and L. Albert 1,100 GL
• Available allocation to SA cities, vines, etc
  133 GL
• Lakes became Southern Hemispheres Aral Sea!

6
New Governance

• Well briefed, in Jan 2007 Howard requested
  referral of MDB management powers to
  Commonwealth. With 3b 1.6b 3.6b 8.2b to
  fix over-allocation.
• In Feb 2007, all states but Victoria agreed to an
  Independent Murray Darling Basin Authority
  responsible for
• Running the entire system as one
• Allocation announcements trading rules
• Entitlement registers
• Stopping over-allocation from re-occurring
• Moving from one political system to another was
  not enough! An independent Authority was needed!
• Victoria agreed to sign on only after they had
  seen Commonwealth legislation passed in February
  2008

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MDB Act and new Agreement

• The 2008Act established an Authority using the
  Uhrig Commission template
• New MDB Agreement to be established as schedule
• SA insisted on a detailed MDB Agreement
• 200 GL minimum flow through Mouth to recover the
  Lakes and save the Coorong
• SAs high security entitlements combined with NSW
  and Victorias and Adelaides urban water
  tradeable
• Carry-over for all water in all States
• Binding power referral only when over-allocation
  solved
• (When the Agreement came into force, the
  responsible Minister was no longer Malcolm
  Turnbull!)

8
Recovering from over-allocation

• 2008 Commonwealth started buying entitlements
• Used simple one page buy-back offer
• (The 2007 30 page efficiency contract failed)
• By the end of 2009 (one year later) 2,000 GL had
  been secured for the environment and leased back
  for two years at cost of 3 billion
• Some compulsory acquisition of isolated farms
  occurred.

9
SAs South East Ground water system

• Since 2000, the SE had been progressively and
  quietly converting from groundwater area
  licences, to meters, to volumetric allocations
  and then shares over 8 years
• Full volumetric allocation system from 2009 with
  capacity to carry forward up to 90 of any
  allocation
• Gave all an initial 25 carry over at the start
• No-one complained. The SE NRM Board had been
  open, inclusive and transparent.
• Coonawarra wine just kept on coming from the
  system!
• Dairy moved autonomously from the SA lakes to the
  SE.

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MDB Authority functions and powers

• s. 9 The Authority, in the performance of its
  functions, must pursue the objectives of
• Ensure over-allocation does not recur
• Efficient and cost effective management
• Maximise economic efficiency in use of MDB water
• Ensure accountability
• Achieve cost-recovery targets
• s.10 The Authority must do all things that are
  necessary or convenient to be done for, or in
  connection with, the performance of its functions.

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Neutralising flow-reduction activities

• As the Aust. NWI gave states until 2010 to plan
  to fix water interception, nothing was done about
  interception as it was called until 2011
• Economists, scientists, the Senate, the
  Productivity Commission had repeatedly warned
  that about an interception train wreck!
• The 93/94 Cap was set so that only 28 of mean
  flow went to the environment.
• Since then flow interception by forests, by farm
  dams, by increases in salinity interception, and
  by increases in water use efficiency had reduced
  the mean flow allocation to 10! The River was
  still going out backwards.
• It was finally realised that this was why the
  lakes were dead and a dredge was used to keep
  open Murray Mouth!

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Plantation Forestry offsets

• South East introduced offset rules for rainfall
  interception in 2006 and tapping by roots into
  aquifers in 2008
• Forestry in top of MDB catchment costs 3,000 per
  hectare in water entitlement erosion
• In 2011, MDB Authority announced it was better to
  be around 80 right than 100 wrong and ordered
  use of Zhang curves still the best available
  science.
• The Authority announced that each states must
  surrender sufficient entitlement to offset the
  estimated effect or the Authority would do it for
  them. The Minister chose not to intervene even
  though all up-stream States called for it.

13
Water-use efficiency and flow erosion

• South East in 2006 converted area licences into
  entitlements that recognised that under flood
  irrigation 50 of groundwater returned to
  aquifer.
• Decided if an irrigator moved to a more efficient
  spray or drip system they would be allowed to
  pump less gt much less!
• MDB Authority decided to try to deal with the
  issue in the River Murray system.
• Technical increases in water use efficiency
  decreased river flow!

14
Infrastructure investment and technical efficiency

• Howard Plan economics
• 3.1b for delivery efficiency gains
• 1.6b for on farm efficiency gains
• savings to be split 5050
• If the Plan went ahead 1,250 GL would have to be
  purchased. gt an additional 53 cost burden.
• By 2009, it was realised that it was more carbon
  efficient to stay with gravity fed systems and
  more economically efficient to solve
  over-allocation by buying water and fixing this
  accounting problem.
• Leave structural adjustment to farmers and
  infrastructure management to water supply
  companies.
• In 2010, the NWI pricing rules were reinstated.
• By 2015, all water supply companies became carbon
  neutral

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Offsetting the effects of farm dams

• As with trees, farm dams stop water flowing into
  rivers.
• In 2016, decided to make Local Government in NSW
  and Victoria pay for the cost of offsetting this
  impact. (SA had NRM board levies.)
• Resulted in dramatic local government boundary
  reform and transfer of NRM to local governments
  now aligned with catchment boundaries.
• The Authoritys power to do all necessary to stop
  over-allocation from re-occurring was starting to
  bite.

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Ground-surface water connectivity

• Under the NWI, 2014 was the D-day for Govt to
  start paying compensation for scientific error.
• But there was no allocation in the NWI or the
  Plan for research.
• New science in 2015 revealed connectivity was
  underestimated by 30.
• More entitlements would have to be purchased!

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Funding change

• How could all this be financed?
• By 2015, the Commonwealth already charged
• A fixed fee per entitlement for system overheads
• A fee in proportion to any allocation made
• States charged
• A fee in proportion to the volume of water used
• Parliament considered a River Return.
• Every year, 2 of each entitlement holding would
  be put up for tender and the money used to
  support community development and stop
  over-allocation.
• The proposal failed to get Senate support and
  failed. Taxpayers kept on supplying the money.

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Counter-cyclical trading of Env. water

• Environmental water managers can sell one years
  allocation in a drought and use the money to buy
  entitlements.
• By 2013, the MDBA held over 3,000 GL for the
  Environment and it was a drought again.
• Agreement was amended to allow counter-cyclical
  trading.
• Early in 2014, a superannuation trust took the
  MDBA to court for insider trading.
• The claim was that the Authority announcements
  took into account counter-cyclical trading
  opportunities.
• In 2015, an Independent River Murray Environment
  Trust was established.

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Water Supply Sharing

• In 2014, the new Env. Trust moved immediately to
  broaden the portfolio of water products it held.
• Options contracts were ruled out.
• Revived Murrumbidgee Irrigations River Reach
  Proposal
• Trust purchased a wet-period share in a 50 GL
  Murrumbidgee River entitlement.
• Split allocations 5050 split based on a 10 yr
  moving average
• 100 to irrigators when under the moving average
• 100 to Trust when over the moving average
• Entitlement time share contracts were born.
• By 2027, this accounted for 25 of the Trust
  portfolio.

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A climate-adjusted cap

• In 2007, the South East decided to allocate water
  volume on basis of moving average of last 5 years
  recharge estimates.
• Allocations would adjust autonomously with long
  term supply shifts to stop over-allocation.
• Carry over of allocations allowed.
• In 2010, when the MDB Authority commenced, it
  immediately defined the cap as a 10 year moving
  average.
• The Authority defined all unconfined groundwater
  within 5kms of the River as surface water.

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Water entitlements, registers and trading

• While each MDB State has its own register, the
  Howard Plan promised a single MDB register!
• In 2007, new Minister for Water asked SA to
  unbundle

Water licence (Consent)
All registers transferred to Victoria. Register
integrity guaranteed. Electronic trading of MDB
allocations in 2009.
22
Allocation announcements derivatives

• In late 2006, many MDB allocations were cut.
• SA announced an 80 allocation and people started
  trading, a month later it was cut to 70 and then
  another month later to 60.
• Some NSW irrigators had water allocations they
  had carried forward cancelled.
• In 2008, the MDB Commission announced it would
  make monthly announcements that were definitely
  available. Allocations, once made, were
  guaranteed.
• In 2009, a futures market emerged
• Sydney Futures Market offered contracts on 600 ML
  of water to be delivered at Griffith on 30th
  December.

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Barriers to water trading

• In 2009, the World Bank reviewed Australian water
  reform and focused on exit fees.
• In 2010, the Authority enforced the ACCCs 2006
  recommendation that exit fees should not be
  greater than 8 times the annual access charge.
• Late in 2010, banks began were offering a 1
  discount on loans whose mortgaged was registered
  on the Victorian entitlement register.
• Water supply company shareholders revolted and at
  AGMs across the country voted to devolve
  entitlement ownership to each individual and
  transfer them to the Victorian register.

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The business of water trading

• Burnt by insider trading allegations in 2014, in
  2015, the Authority ruled that no water supply
  company could have any interest in any water
  trading business.
• Victoria was forced to sell off Goulburn Murray
  Waters Watermove internet trading business and
  Queensland to sell off Sunwaters trading
  business.
• Purchased by Waterfind and the Water Exchange.
• In 2018, water trading moved to the Bendigo Stock
  Exchanges electronic trading network.

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Insights from the future

• Governance and robust accounting have been
  Australias two biggest water management mistakes
• Attention to detail is critical. Design systems
  for
• Trading
• Change (climate, technical, economic social)
• Wealth creation and environmental protection

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The future depends upon how we talk about it
Contact Prof Mike Young Water Economics and
Management Email Mike.Young_at_adelaide.edu.au P
hone 61-8-8303.5279Mobile [phone]

www.myoung.net.au