University of South Australia – School of International Business Water Markets: Lessons From Australia Dr. Henning Bjornlund School of International Business University of South Australia

University of South Australia – School of International Business Content Brief history Change of policy paradigm Drivers of trade Introduction of trade in Australia Two different markets Community reactions Market Outcomes Problems to overcome

University of South Australia – School of International Business Brief History At settlement by white man adopted British common law – riparian rights Proved a restrain on closer settlement policies Lead to review in 1884s – looked at US system New state legislations - started with Victorian Irrigation Act and Water Works Encouragement Act in 1886 Vesting control of water resources in the States with a system of water licences

University of South Australia – School of International Business Brief History The expansionary phase The magic pudding approach Increase in demand met by increase in supply Over commitment of resources Resulted in environmental degradation Outcome: embargo on the issue of further irrigation licences 1970–90

University of South Australia – School of International Business Change of policy paradigm Evolved slowly since the 1970s Important water industry report in 1992 Resulted in shift in Paradigm in 1994 with The CoAG Water Reform Framework and The National Competition Policy

University of South Australia – School of International Business Change of policy paradigm The CoAG Water Reform Framework Pricing policy: full cost recovery, user pay Separation of water rights from land right Water markets Institutional reform Consultation and public education Recognition of the environment

University of South Australia – School of International Business Drivers of trade Resources fully allocated Much irrigated land was unsuitable for irrigation and caused environmental harm Many existing irrigators were low value producers: grazing and broad acre cropping Therefore a need to reallocate water away from existing land and users Governments had the power to reallocate but not the political will – equity issues

University of South Australia – School of International Business Introduction of trade in Australia South Australia permanent and temporary 1984 New South Wales temporary 1984 permanent 1989 Victoria temporary , permanent 1991 Now mandatory for all states under the National Competition Policy

University of South Australia – School of International Business The Australian Water Market Water management under state legislation Very different allocation policies Water markets therefore operates under different rules However also similarities The important thing – market operations are regulated – that is third party impact is to some extend controlled; but not entirely

University of South Australia – School of International Business Two different markets Informal markets: transfer of the right to use a certain volume of water for a specified period of time Formal markets: transfer of the long-term right to access water

University of South Australia – School of International Business Two different markets: expectations Formal markets: Move water to –Higher value users –More efficient users –more suitable locations and better soil –New developments and larger units To achieve –More economic activity per ML of water used –A reduction in environmental damage –In short: to achieve structural change As voluntary actions with financial reward

University of South Australia – School of International Business Two different markets: expectations Informal markets should facilitate: Adjustment of access to water between seasons and within seasons in response to fluctuations in supply and commodity prices; Allow some retiring or unviable farmers to stay on the property and within the community Allow unviable farm assets to be split and its components used in the most beneficial way

University of South Australia – School of International Business Community reactions Initial reaction: reluctance and fear about community impacts Therefore in most states informal markets first With experience informal market taken up with gusto – water now a commodity Permanent market hesitancy prevails – water still an inherent part of ‘the farm’

University of South Australia – School of International Business Market outcomes – Formal markets Formal markets have moved water to more efficient and higher valued uses on better soils and in better locations However formal markets have not taken hold – about 1% of total entitlement p.a. About 60% of traded water was previously unused Farmers only sell if under financial strain or ignorant

University of South Australia – School of International Business Market outcomes – Formal markets Why not more widely adopted Policy uncertainty Policy decision re. unused water Irrigator perception Community concern – export ban Administratively cumbersome and expensive compared to informal market

University of South Australia – School of International Business Market outcomes – Informal market Assisted farmers in managing fluctuations in supply between years Assisted farmers in adjusting their water supply within seasons – manage drought Given farmers the opportunity to maximize financial gain from their water - buy in years where prices are high and sell in years where they area low

University of South Australia – School of International Business Market outcomes – Informal market Assisted farmers to remain within their community Assisted farmers in the structural adjustment process Assisting communities to cope with change Assisted farmers to manage increased risk associated with certainty of supply

University of South Australia – School of International Business Combined impact of the two markets 20% of farmers have been active in both the formal and the informal market: 50% Selling in the formal market also bought in the informal market 79% selling in the formal market also sold in the informal market 83% buying in the formal market also bought water in the informal market 55% of those buying in the formal market also sold in the informal market

University of South Australia – School of International Business Why the popularity of informal markets It does not change the long-term ownership of the access to water – alleviate community concern Water exchanges have emerged which are: easy, quick, cheap, safe, and predictable. Many farmers can’t afford to buy water on the formal market

University of South Australia – School of International Business Conclusions Formal and informal markets have significantly assisted irrigators in managing the increased risk associated with supply, and helped them through a period of serious resource constraint, adjustment pressure and policy uncertainty