1. Prof. Mike Young Research Chair, Water Economics and Management The University of Adelaide Renmark 27 th June 2008 Your future: Where is it headed?

2. 2 “The country that takes top prize in water management is Australia” Shares Unbundling Trading Full cost pricing

3. 3 Which future is best?  One that gets the fundamentals right, now?  A system that can be confidently explained as able to cope -- whatever future arrives  One that commits all to more decades of reform and uncertainty?  Incremental progress (more of the same)  No guarantee of resolution of current problems  An entitlement market about the cost of past mistakes

4. 4 Planning for long drys DRY WET Total River Murray System Inflows (including Darling River)

5. 5 Re-live from 1938 2014

6. 6 Insufficient planning for less water - 1% - 3%

7. 7 Adverse climate change Mean supply 10,000 River & Storage Evap 2,000 Flow to sea 2,000 Deliverable water 6,000 Environment Use 1,500 Consumptive Use 4,500 0 Mean supply 7,000 River & Storage Evap 2,000 Flow to sea 2,000 Deliverable water 3,000 Environment Use 1,500 Consumptive Use 1,500 0 In Mediterranean climates, a 10% decline in mean rainfall results in around a 30% decline in mean storage inflow 10% less rain means a 67% reduction in allocations unless the system is resized or environmental aspirations reduced

8. 8 Current River Murray System Cap on Diversions  Normal years  Cap on diversions  NSW and Vic % Share inflows + obligation to supply SA  SA gets 1850 GL + Responsibility for maintaining bottom of system + 100% entitlement but no carry forward  Special accounting  Each state gets ~ 1/3 of River Murray inflows  Exceptional circumstances (Senior officials group)  Special arrangements & new rules possible

9. Volume of Water in the System Indicative template for sharing water with the environment

10. 10 Interception & double counting groundwater 0GL1,200GL2,400GL3,600GL Solution Require States to offset 100% of interception Surrender entitlements equal to deemed impact Interception “could reduce stream flow by approximately 2,570 GL per year by 2023 and by up to 4,690 GL per year by 2053.” May Ministerial Council

11. 11 Use it or sell it because you can’t save it Back to empty Inflows have dropped 68% but use has only dropped 12% Got recently by running the system too low Solution Change MoU, MDB Agreement and Act to allow SA to carry forward water. Encourage all states to allow 100% carry-forward less evaporative losses Give first priority to set-aside of enough water for maintenance (conveyance, etc)

12. 12 Lake Alexandrina levels 03/0907/08 - 0.5 - 1.0

13. 13 Lake Alexandrina Salinity 03/0907/08 4000 EC 7000 EC

14. 14 Adverse climate change Mean supply 10,000 River & Storage Evap 2,000 Flow to sea 2,000 Deliverable water 6,000 Environment Use 1,500 Consumptive Use 4,500 0 Mean supply 4,000 River & Storage Evap 2,000 Flow to sea 2,000 Deliverable water 0 Environment Use 0 Consumptive Use 0. 0 In Mediterranean climates, a 20% decline in mean rainfall results in around a 60% decline in mean storage inflow With 20% less rain, there is an urgent need to downsize and or reconfigure the system.

15. 15 System reconfiguration options (Reducing evaporation) More dams  What will you fill them with? New sources  None have yet to passed detailed analysis Leakage and seepage  Most eventually reaches the river (for a gain most can’t be shared)  Better control  A short term gain Evaporation  Real savings from top to bottom  Lakes, wetlands, weir pools, river height, etc Solution An independent and highly transparent review  Strong community consultation and engagement

16. 16 Environmental security The environment is the interest that always loses  Irrigation Security at cost of Environmental Security  83% reductions from environment  17% reduction from users Solution Give the environment a share that has the same status as that given to all other users (as in NWI) Allow environment to carry over water {Entitlement purchases for environment are doing this!} First allocation priority to maintenance water needed for conveyance, evaporation, etc

17. 17 Future-proofing the Basin www.myoung.net.au 1.A sustainable sharing system for ground & surface water  Maintenance water (conveyance, evaporation + min flow to sea)  Shares for all non-flood water 2.Put all states under the same regime and give all the opportunity to save water  Share inflows (no cap the diversions)  Shares issued to environment and States 3.100% carry over of all water  Continuous accounting – similar to Dudley’s capacity sharing system

18. 18 Future-proofing the Basin www.myoung.net.au 4. Require off-set of all land use change that erodes entitlement reliability (forests, dams, SIS)  State shares reduced as interception increases 5. An independent authority making allocations to shareholders 6. If still dry, review system configuration & size from top to bottom  Search for evaporative savings

19. 19 Market value of tradeable entitlements State / ValleyEntitlement MLEst. Value per MLTotal $ Value NSW Lower Darling General Security30,000$1,000$30,000,000 NSW Lower Darling High Security8,000$2,500$20,000,000 NSW Murray General Security1,669,000$1,100$1,835,900,000 NSW Murray High Security182,000$2,400$436,800,000 NSW Murrumbidgee General Security1,986,000$1,200$2,383,200,000 NSW Murrumbidgee High Security302,000$2,500$755,000,000 Vic Goulburn & Murray Connected High Reliability2,288,000$2,400$5,491,200,000 Vic Goulburn & Murray Connected Low Reliability784,000$200$156,800,000 SA Murray High Security550,000$2,350$1,292,500,000 Total7,799,000$12,401,400,000 Source: Waterfind, 2008

20. 20 Waterfind buy-back warning 1.Purchase entire entitlement market would take 14 years to get 1500 GL. 2.If limit govt. to 30%, so some opportunities for structural adjustment remain, would take 47 years to get 1500 GL. 3.$3 billion will buy 540 GL in 17 years if a 30% limit is imposed 4.Warning that upward revision likely  CSIRO Sustainable yield report  Interception “could reduce stream flow by approximately 2,570 GL per year by 2023and by up to 4,690 GL per year by 2053.”

21. 21 $5 billion now or up to $10 billion over 10 years? 1. Give the environment a % and shift to inflow sharing (without a Cap) a) Pay $3.5 billion just and fair compensation now to southern irrigators and irrigation companies for a future-proofed regime to commence in 3 irrigation season’s time. b) Waive all govt. water trading charges and pay all exit fees. c) No capital gains tax. d) Stop interception. 2. Informed by CSIRO modelling, environment’s % share could be phased in. $3.5 billion is 28% of $12.4b paid three season in advance. (A confident step change, a new Agreement, a predictable sustainable future)

22. 22 Off-market share buybacks Corporate experience reveals that large buybacks are best implemented using off-market mechanisms. Coles Myer has provided one of the better known examples.

23. 23 Coles-Myer Share Buyback Schedule

24. 24 Coles Myer “2005” Press Release Price paid and volume shares purchased  Off-market buy-back price $8.30 (All who offered $8.30 or below per share were paid $8.30)  70.4 million shares bought back for a total of $585m  Secured 5.7% of Coles Myer shares on issue

25. 25 Indicative structure of water buyback tender 1.Invited to sell a proportion or all of your water licence with lease back until 30 th June 2010. Advised that the price will be above market value. (No change over the next two irrigation seasons). 2.Tender closes on 30 October, notified 2 weeks later on November 15 th. 3.Each licence type, paid the same clearing price two weeks later on 30 th November. 4.Entitlements may be leased back for next two irrigation seasons at $300 per ML of allocation received. 5.This year’s allocation remains left with licence holder.

26. 26 Illustrative Offer form (High security entitlement) Type of Licence South Australian River Murray Licence Offer 1 …………….. ML @ not less than $2,400.00 per ML Offer 2 …………….. ML @ not less than $2,700.00 per ML Offer 3 …………….. ML @ not less than $3,000.00 per ML Offer 4 …………….. ML @ not less than $3,300.00 per ML Offer 5 …………….. ML @ not less than $3,400.00 per ML Signatures Licence holder ………………………………………… Registered interest (if any) ………………………….. Will you be leasing back any allocations made to these entitlements at $300 per ML of allocation made until 30 June 2010? Yes / No

27. Volume of Water in the System Indicative template for sharing water among States and with the environment

28. 28 What would it mean for SA? Maintenance water becomes national responsibility Min flow to sea instead of 1850 GL guarantee An environment shares held in trusts (not by Minister) Offset 100% of interception Access right  A share of inflows like NSW and Vic  100% carry over rights  A storage account with Lower Lakes and many wetlands may not survive

29. 29 CoAG on 3 rd July 1.Establish maintenance water as a system-wide responsibility. 2.Authority to add allocate remaining non-floodwater to state shareholders across entire connected system. 3.States and environment gets a share 4.100% carry forward for all States and Environment. SA with storage rights the same as other States 5.100% offset of all increases in interception from 2010. 6.Commitment to finalise foundations for the regime upon which a robust Basin Plan can be built within 6 months. 7.Funding for a timely step change.

30. 30 “We don’t have all the answers – nobody does – but before we start laying bricks and mortar, we have got to get the foundations right, otherwise the cathedral will tumble with the smallest of tremors.” Peter Cullen Wentworth Group of Concerned Scientists

31. Contact: Prof Mike Young Water Economics and Management Email: Mike.Young@adelaide.edu.au Phone: +61-8-8303.5279 Mobile: +61-408-488.538 www.myoung.net.auwww.myoung.net.au Download our report and subscribe to droplets at www.myoung.net.au