Looking back on Australian water policy from 2027 Prof. Mike Young # and Jim McColl* # Research Chair, Water Economics & Management The University of Adelaide * Research Fellow, CSIRO Land and Water, 5 th Annual Australian Water Summit, Monday 26 th 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.

3 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)

5 River Murray Inflows 2007/8 By May 2007, all Murray System dams empty 2007/8 inflows => 1,000 GL & South Australia got its 1/3 => 333 GL But SA system evap. + losses => 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 Hemisphere’s 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

7 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  SA’s high security entitlements combined with NSW and Victoria’s and Adelaide’s 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 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 SA’s 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.

10 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.

11 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!

12 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 => 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 50:50 If the Plan went ahead 1,250 GL would have to be purchased. => 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

15 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 Authority’s power to do all necessary to stop over-allocation from re-occurring was starting to bite.

16 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!

17 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.

18 Counter-cyclical trading of Env. water Environmental water managers can sell one year’s 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.

19 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 Irrigation’s “River Reach” Proposal Trust purchased a “wet-period” share in a 50 GL Murrumbidgee River entitlement.  Split allocations 50:50 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.

20 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.

21 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) Entitlement Shares in perpetuity Bank-like Allocations Use licences with limits & obligations 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 30 th December.

23 Barriers to water trading In 2009, the World Bank reviewed Australian water reform and focused on exit fees. In 2010, the Authority enforced the ACCC’s 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.

24 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 Water’s Watermove internet trading business and Queensland to sell off Sunwater’s trading business. Purchased by Waterfind and the Water Exchange. In 2018, water trading moved to the Bendigo Stock Exchange’s electronic trading network.

25 Insights from the future 1.Governance and robust accounting have been Australia’s two biggest water management mistakes 2.Attention to detail is critical. Design systems for  Trading  Change (climate, technical, economic & social)  Wealth creation and environmental protection

The future depends upon how we talk about it Contact: Prof Mike Young Water Economics and Management Phone: Mobile: