The politics of water in an age of scarcity

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By Brian Chatterton.


Over the last hundred years we have lived through an age of plenty where water resources, fertiliser and agricultural chemicals have been used in ever increasing quantities. That age of abundance is coming to an end. Water shortages can no longer be solved through an endless expansion of engineering projects. Neither can we use oil, converted into fertilisers and chemicals, to boost agricultural production for ever. Global warming limits the use of fossil fuels and we may have reached peak oil production even if coal supplies are plentiful.

I am not a merchant of doom forecasting famine as I believe there is plenty of food in the world if we develop a fairer system of distribution but we will need to develop policies that manage better the demand for the resources of water and energy rather than depending on constant expansion.

Policy development in the age of scarcity

Developing policies for this new age is going to be difficult as policies are formulated by people. We talk about institutions, about ministries, about think tanks and pressure groups as if they were impersonal mechanisms but they consist of people and people who have been cultured through training and experience to think of expansion as the solution to every problem. I was initiated into high input farming at university in Britain but after that I became a farmer. Farmers have a natural antipathy to the extravagant use of inputs but their frugality is undermined by advertising that suggests an expensive input as the solution to every problem. In Australia there is always a risk of drought and we farmers are reluctant to invest heavily in inputs knowing that we can lose all if the rains fail. Farming made me discard most of the economic theories and models that I had studied at university.

When I became a parliamentary candidate in the 1960s I was involved in the age of scarcity at a policy level.

Minister and bureaucrats in the policy process.

Ministers alone, or with their colleagues in cabinet, give official approval to water policies but they are influenced very much by the bureaucracy. Only a few ministers take the trouble to draft their own policy statements in any detail. Usually policies are based on options and general discussions provided by the bureaucracy. Bureaucrats have their own agendas and are not the dispassionate men (or very rarely women) that are described in their own memoirs. However, ministers are not at all oblivious to the political consequences that may arise from a new policy and this must be balanced against the advice of bureaucrats and technocrats.

While bureaucracies play a crucial role in drafting the policy statements it is usually left to the minister to garner political support from his colleagues in cabinet, parliament and the pressure groups. Once the policy has run the gamut of the various power centres the minister needs to sell the policy to the wider community.

The internecine warfare between ministries such as water and agriculture often play an important part in policy formulation. Departments created by bureaucracy make an artificial division between water and the use of water. I can remember as Minister of Agriculture being involved in heated arguments with the Minister for Water Resources who paid lip service to efficient water use as promoted by the ministry of agriculture but harangued me in private on the need to sell more water to maintain the revenue of his ministry.

Bureaucracies are centralised organisations and they think in centralised terms rather than those best suited to the problem under discussion. The delegation of power downward to the users is most unusual as senior bureaucrats see the size of their staff as an indication of their own power and status and a reason for promotion.

One successful exception has been developed in South Australia for water distribution at the local level. Power has been to transferred up and down from the middle. For most of the last one hundred years effective control of water has been at the state level. Now control has been ceded upwards to a body that covers all the Murray – Darling basin and downwards to independent organisations (called trusts) controlled by farmers who manage the distribution of water within a canal or pipe system. The trusts are set up by statute. They are similar to a cooperative but the farmers have responsibilities under the law as well as to their farmer clients. They cannot sell the main assets without ministerial approval.

Farmers in the policy process

Farmers play an important part in the acceptance and operation of water policy but more often policy is initiated at a political level of the minister and the bureaucracy and then passed down to the farmer. Often there is a disappointing response from attempts to consult with farmers because the grand designs formulated at senior levels often lack the detail that interests the farmer but I can assure you that if you get it wrong at the local level farmers are quick to protest and to mobilise support from their relatives and sympathisers in the cities. They see policy from the ground up while senior ministers and bureaucrats see it from the top down. It is difficult to reconcile the two.

When drought relief measures were transferred from the Minister of Lands to my control in agriculture during the 1970s it was the most significant change in policy at the bureaucratic level for one hundred years but left the farmers unimpressed until we undertook a major reform of drought relief loans.

Farmers view water quite differently from the technocrats and bureaucrats who inhabit the bureaucracy. Farmers see water, land, labour and other inputs as part of their farm economy and are quick to evaluate any new policy in terms that will affect their individual operations.

Farmers are not the only pressure group with an impact on water policy. Throughout the world there is a growing environmental movement that is concerned about water. Their concern is not as intensive as that of farmers but they are growing in numbers and have some very influential members.

During the recent drought in Australia the reduction in river flow was so great that it had an impact on urban supplies. As long as the water comes out of the tap most urban populations regard water policy (except for its cost) as a low priority but the rationing of water in Adelaide and other cities in South Australia has made it a hot political issue.

The role of ideology in policy formulation

In my experience the traditional Left – Right divide now plays only a small part in water policy because the neo-liberal, Washington consensus has so successfully infiltrated the ideology of both Left and Right. Market solutions are now the fashion for every problem. While Left and Right may speak with different buzz words they are both convinced that the market is the only game in town. To take an example from my dryland farming experience, Left wing governments established grazing cooperatives in arid areas but those projects funded by the World Bank had grazing associations. On the ground it was difficult to tell the difference as both cooperatives and associations were in effect American ranches under different names.

In Australia the government and water community of bureaucrats and academics have become imbued with the ideology of neo-liberalism and have adopted a market solution to demand management for water which brings tears of joy to neo-liberal economists but has some real practical handicaps for those who suffer the consequences. Overallocation and the water market has had an adverse effect on farming communities.

A market solution to water allocation

South Australia was the first Australian state to recognise the limits to the growth of irrigation in the 1960s. Victoria followed soon after in the 1970s. It also experienced a rush of over-allocation as farmers and speculators dashed in to beat the ban. New South Wales was the last state to recognise that expansion could not continue forever. They learnt nothing from the experience of the other states and their over-allocation of water rights was enormous.

Today Australia has adopted a market solution to the allocation of water in the Murray Darling basin. I will discuss the operations of the market in more detail later but most of you will not be familiar with Australia so this is a brief description of the Murray Darling.

Map 1

This is a map of Australia with the Murray Darling basin shown in pale green.

Map 2.

This map provides a more detailed view of the basin and an idea of the scale. The mouth of the Murray is South Australia (district 6 ) Most of the water comes from the Murray not the Darling although the Darling basin is much larger.

The basin area is over one million square kilometres (about 14% of the total area of Australia) which makes it quite significant by world standards but less than half the size of the Nile basin. When one looks at the water volumes the Murray becomes much less significant. The average rainfall in the basin is 530 BCM but this translates into an average river flow of about 12 BCM compared to the Nile which has a flow of nearly 90 BCM or the Mekong which has a slightly smaller catchment than the Murray Darling but a flow of 500 to 600 BCM. However I think the Murray Darling does take one world prize – if a rather dubious one – that is the flow rate is the most variable of all the major rivers in the world.

The two upstream states of New South Wales and Victoria contribute most of the flow and take water for irrigation and also for some domestic use in the case of Victoria. while South Australia, the downstream state, uses water for irrigation and domestic use but contributes nothing.

Production data for the basin is unreliable as the Murray Darling basin authority does not separate irrigated production from that produced reliant on rainfall alone.

The major cities of Sydney, Melbourne and Adelaide are all outside the basin but Adelaide is heavily dependent on Murray water pumped over the intervening range of hills and Melbourne is diverting Murray water for its expanding urban population.

The closure of the water resource in South Australia

During the post war period there was a rapid expansion of irrigation throughout Australia. A boom in wine production during the 1960s meant that South Australia, the main wine producing state, was responsible for a high proportion of this expansion. Farmers in the irrigation areas became concerned that South Australia was expanding at such a rate that it would no longer be able to meet the irrigation needs of farmers from the quota of water provided by the Murray waters agreement. They protested to the state government and eventually succeeded in stopping the expansion. Until then it had been possible for private companies to acquire a licence for a nominal fee and throw a suction pipe into the Murray river and begin irrigation without restriction.

This South Australian example provides a useful lesson in water policy formulation. In this case it was the farmers who saw the problems first. Politicians and bureaucrats were forced to react to public pressure rather than the reverse.

It is a salutary lesson for all of us policy experts. We need to be reminded that policy wisdom does not automatically flow from a command of the statistics and models pored over in offices and laboratories. The South Australian bureaucrats involved in water were not stupid but they lacked the insights and practical experience of the farmers who were the end victims of government largesse.

Closure of the water resource is easy to define but hard to implement. Closure is the realisation that the exploitation of the water resource has reached its limit. More water cannot be developed by engineering structures and allocated to expand the irrigation area. With closure, existing entitlements are used to their limit or other mechanisms are used to squeeze some water past the eyes of the water managers. Water may be saved through improved irrigation efficiency and water can be recycled for further irrigation. Even with these marginal expansions, the resource has in reality reached its limit an is closed.

There are other important lessons to be learnt from the South Australian experience of resource closure in the 1960s. The majority of farmers were protesting against the expansion of irrigation as they could see, before the bureaucrats did their sums, that there would not be enough water to satisfy all the irrigation demands in years of low river flow.

When the closure was discussed some farmers and speculators were determined to grab water licences before the wheels of the bureaucratic and political process ground towards closure. I do not think these speculators were so far sighted that they thought there would be a water market thirty years later. They were working on a shorter time scale where simply having access must be worth something. This was a pattern repeated again and again. Not just in the closure of the water resource in the other Australian states of New South Wales and Victoria but within other community resources such as fisheries which came under State management and were closed in the 1970s in order to sustain declining fish stocks. Once closure is discussed there is a rush to entry as these speculators try to gain a valuable piece of property at low cost before the barriers come down.

My experience is that these opportunists will always react faster than bureaucratic and political processes and if given free reign will create or exacerbate the problem of over-allocation that closure is design to stop.

In retrospect one can see that closure of the water resource in South Australia was a pivotal moment in the history of demand management in Australia but we did not see it at the time nor for some decades afterwards. It did not create a water market immediately. To create a market one needs buyers as well as sellers. At the time of the initial closure South Australia had many sellers and no buyers as everyone with any intention of irrigating had jumped in to acquire water licences before the government lowered the barriers. Once the barriers are down the over-utilisation does not necessarily stop as speculators have dormant licences which they bring into play over time. Many of these speculators in South Australia intended to sell out at a profit but it took many years to achieve this. Their hopes for large profits were somewhat restricted as farmers from South Australia could move to Victoria where closure was not so complete or New South Wales where the water resource was still completely open.

Chart 1 The diversion of water from the Murray Darling for the three major users. New South Wales, Victoria and South Australia. (Source Murray Darling Basin Authority)

Water rights – the foundations of a water market.

Closure is a prerequisite for a water market. If one could obtain a water licence for a nominal fee there was no point in purchasing a water right in the market place. Once there was a ban on new water the only path to irrigation was through inheriting or purchasing existing water rights.

Water ownership is not well defined in most of the world. Usually the theoretical position is that the national water resource belongs to the state, the government, the nation or the people but the reality is that the government will rarely exercise its rights to withdraw water from farmers and certainly not without some compensation. The farmers may not own the water de jure but their continued use of the water is virtually guaranteed. This ambiguous position does not suit the operations of the water market.

In Australia, farmers do have legal water rights. They have a title deed to a certain volume of water. The volume of water is not, however, completely guaranteed and different titles have different levels of reliability. These titles can then be bought and sold within the Murray – Darling basin with few restrictions – at least in theory. In fact there are some conditions on water rights that are applied differently in different states. This makes inter-state trading more complex than intrastate trading.

There are water traders and exchanges. Water is purchased by investors and leased to users. In fact the Australian water market has most of the attributes of the financial markets. At present there are no sub-prime water-backed securities but I am sure that Goldman Sachs is working on the idea. Certainly large amounts of water in Australia are owned in Singapore, France, the USA and by nomadic hedge funds and private equity groups.

The development of the water market

The water market was developed gradually during the 1990s. At first water markets operated in single states or parts of states. Gradually they were merged and now most of the basin is a single market. During the debate on the water market it was always referred to as “water reform” not as a water market or water trading. Of course we are all in favour of reform. It has a nice progressive ring to it and suggests improvement. The World Bank (World Bank 2007) in their report on water scarcity in the MENA region refers to water reform but does not spell out the details.

Economists had been advocating a market solution for some decades as a means of improved and efficient water use . There appears to be plenty of scope in Australia for improved efficiency. Most of the water is used for low value crops such as pasture or cereals and economists promoted the market for water as a means to transfer water from low value to high value crops such as fruit, vegetables and wine grapes.

Chart 2.

I think their analysis was fundamentally flawed. A superficial glance at Chart 2 indicates that there are huge gains to be made by shifting water from livestock, pasture, grains, cotton, rice and sugar to fruit, grapes and vegetables but economists failed to notice that the low value crops are export crops and Australian production of these is only a small share of world production. Australia has no influence over the price of these commodities. The other high value crops (with the partial exception of grapes) are for domestic consumption. A large expansion of domestic production would just expose farmers to a price collapse. Australian economists are naïve if they think that shifting huge amounts of water from low value crops to high value crops would expand national income. High value crops would simply become low value ones. This has already been confirmed by events in the wine industry. The world recession has led to a collapse in wine and grape prices. There is such an over-supply of grapes they cannot be sold at any price and vineyards are being abandoned.

In my experience in the Arab countries of North Africa and West Asia these apparent market anomalies are quite common. Farmers can make good profits from melons but economists wonder why they do not grow more. Farmers are aware, without articulating any theory, that a few melons make a good profit but the market is easily flooded and they become unsaleable at any price. In Egypt you have no shortage of foreign experts telling you that you should produce more high value crops for export to Europe and you should buy cheap wheat from Australia. (World Bank 2008) This predicates a future where the price of wheat from Australia will remain cheap – not if the current speculation in the price of wheat becomes common. High value export markets carry a high level of risk of oversupply and if they are expanded too fast they will become low value export markets. In any case exporting to Europe from the Middle East is a one-way market. The European Union provides effective protection for European produce and produce imported from North Africa and the Middle East is only allowed in when European producers are unable to supply.

While efficient allocation and demand management are now put forward as the major benefits of the water market in Australia it was originally proposed as an environmental measure. The argument put to farmers and the wider public was that water could be traded out of any irrigation area but only traded into areas where salinity was not a problem. The argument was that over time saline areas would be abandoned and the environmental problems of saline drainage would be reduced. (Chatterton 2001) I have not been able to verify that trading in water rights has fulfilled this promise but it has created a patchwork of abandoned farms. The distribution of water to the remaining farms has become more expensive. Community services have become more costly to deliver. The crisis in water supply is decimating rural communities dependent on irrigated crops, it has destroyed much of the value of the properties now denied sufficient water to sustain their crops, and the rural-urban rift in Australia is being exacerbated by what is seen as an unfair water market.

The Australian drought - scarcity bites

During most of the first decade of the 21st century the Murray Darling river system has suffered extremely low flows due to drought. The 2006/7 flow was the lowest on record and some other years have been only marginally better. Of course unlike the Nile, Australian records only cover the last one hundred to one hundred and fifty years so we do not know whether they are truly exceptional. Certainly there was a drought from 1939 to 1946 which was almost as severe as the present drought. The impact on irrigators was much less because the water allocations were only a third of what they are now.

The drought has certain provided a severe test for the water market. Of course it is impossible to say definitively whether it has succeeded or failed because we cannot turn the clock back and run the drought again without the water market.

Chart 4 (Source Murray Darling Basin Authority)

The above table shows that as the drought began to bite the amount of water actually available under this type of water right fell to 10% in 2002/03 and then 0% during 2006 to 2008

The chief executive of the Murray Darling Authority claimed the water market was successful in managing the scarcity of water as three times as much water had been traded and prices had increased from $AUS200 per Megalitre (1000 cu M.) $AUS1000 (Craik 2008). I find this claim an inadequate indicator of success. It is like saying that increased churning of the stock market shows it is providing more capital to small enterprises. I do not see the connection.

There were some clear failures of the water market during the drought. Over-allocation is the most obvious problem. Protagonists of the water market will rightly claim that over-allocation is not a symptom of the failure of the market model but a sign of the weakness by the New South Wales government in resisting inflated water claims. They have a valid point but these inflated claims to convert dormant water into actual water rights were in part due to the windfall profits that water rights gave to landowners. In fact this has proved to be the case as some successful claimants have never used their water rights and have sold them back to the Murray Darling Authority for tens of millions of dollars as a simple paper transaction. Australia can afford to transfer funds from poor taxpayers to rich owners of water rights but I doubt whether the model has much merit for the developing world.

Another failure lies at the heart of the market model and cannot be shuffled off to a weak government. One of the benefits claimed for the water market is that it encourages efficiency. This is one of the supposed advantages that will be promoted in Egypt by protagonists of market ideology. Water is used more efficiently through improved irrigation techniques and the farmer can sell the surplus generated. The sale of surplus water will help pay for the improved irrigation techniques. Of course the purchaser of the surplus water will use the water purchased to the limit.

Improved water efficiency did not start with the introduction of the water market. It has been going on for years but the farmer could not sell or necessarily use the surplus he created. It was in effect an on-farm reserve. That disappeared with the water market as these reserves were sold. When the drought came and the full allocation of the water right could not be delivered there was no reserve to fall back on. I am sure it was not intended but the reality is that the water market increased water use. Nominal water rights may have stayed the same but actual use increased.

Now that the drought has begun to break, at least in some regions of Australia, farmers who have received rain and who are able to reduce their irrigation have been selling surplus water to farmers in other areas. The drought has shown yet again that rainfall does not lead immediately to runoff. Increased river flows occur when the soil is saturated. Water managers are faced with increased demand without increased supply.

Markets are expensive to run. Adam Smith recognised this centuries ago when he outlined the regulatory and legal mechanisms needed to keep markets reasonably honest. Water does not stand still for long enough to draw a line around it so water rights need a system of water meters. In Australia a great deal of the irrigation water has been metered for a long time but the water market has increased the value of water and increased the incentives to cheat. When prices leapt during the drought the rate of tampering increased and there is now an expensive program underway to improve water metering.

Further consequences of water markets.

The above difficulties are the sort of problems that will worry hard-headed water managers but there are further consequences that will concern ministers as they severely limit their freedom to develop policies that help small farmers.

During the recent Australian drought water allocations to farmers were at times reduced to as little as five percent of amount they had on their water right title – even those with high reliability status. If I had been minister I would have argued for a flexible scale of cuts that reduced the amount of water for large farmers by a greater proportion than the reduction for small farmers. With the water market that option disappeared. The water market is an ideological straight jacket that prevents the development of farmer friendly policies of this type. The water rights in Australia are now owned by a wide range of people. Would a small insurance company get better treatment than a large? Would a large owner that sub leased his water rights to small farmers be preferred? The whole idea would become hopelessly complex.

The effect on communities dependent upon irrigated crops as their water allocation has been cut dramatically has been dire. Social consequences of the water market have yet to be converted to data but local knowledge and anecdotal evidence from those who belong to these communities is sufficiently alarming for it to develop political consequences. (Burgess 2010) The trading of water can leave a patchwork of abandoned irrigation land. This makes the delivery of water to the remaining farms more expensive and as the farmers move out of the district the provision of schools, hospitals and other services becomes more expensive for those remaining.

Government responses to scarcity

At the beginning of the drought there was no call for government action but, as the drought began to bite, the storages became exhausted and water allocations had to be reduced below the level written on the water right. Pressure mounted on the government to act. The farmers with perennial tree and vine crops demanded that water be diverted from rice and cotton to keep their crops alive. This may appear to be a change of heart on the part of the farmers but it was seen as a short term measure not a change in support for the market. Direct intervention in the allocation of water was resisted by the government. This was not just on ideological grounds but due to the complex legal position. Some farmers sued the government for failing to deliver the water stipulated under their water rights but lost their cases because the court ruled that the government had acted impartially in cutting water allocations. If larger farmers or those with crops such as rice and cotton had suffered more the government may have been faced with compensation payments on a large scale.

Support for the water market is generally strong among the dominant Right-wing media (Anon 2010a) and politicians with the notable exception of an independent senator from South Australia. Otherwise I cannot find a strong divergence of views between parties of the Left and Right. Farmers have mixed views on the water market. Those who were forced to buy expensive water to keep their trees and vines alive when thought they had a high reliability water right are less supportive than those who sold their water. The leadership of the farmer organisations has not made a coherent critique of the water market. Environmentalist in the cities protested as the lakes and swamps dried up. They were not so enamoured of the water market.

The market solves the problem of scarcity – at least that is what the market purists say. Governments should keep out of the market except to provide services to keep them reasonably honest. That has been the reaction of the Murray-Darling Basin Authority who boasted of the rise in price for water rights as an indicator that the market was working and the scarcity problem was solving itself. The theory is that the rich get the water and the poor.... well it is embarrassing to talk too much about them but essentially they get nothing. The classic quote “Water flows uphill to wealth and power” seems to be confirmed by the operations of the Australian water market.

The propagandists for market theory then go on to insult the losers by saying they are bad farmers and the fact they cannot compete for expensive water rights is due to their own inefficiency. Getting them out of farming is both good for them and for the economy as a whole. This theoretical viewpoint is not supported by the evidence. In an earlier drought during the 1970s in South Australia when I was the minister in charge of relief we commissioned a study to try to find the factors that correlated with survival. The farmers with the best chances were those who had a high level of equity in their farms. High levels of equity came through inheritance or through a long period of farming without a serious drought. The farmers who failed due to drought were mainly those who had purchased their farms with borrowed money and who could not borrow any more. Survival has nothing to do with farming skills or efficiency – more with luck. If you were lucky enough to inherit or lucky to have a decade or more drought free to repay your loans you survived.

Eventually the governments acted. The Commonwealth Government of Australia provided a pile of money to go with a new management authority. Previously the states had legal powers over water and had co-ordinated their actions by agreement but they were caught in a pincer action. They did not have the money to undertake the new water plan and the Commonwealth was not prepared to give the money to them without ceding control. On the other side, having created a Murray- Darling wide market they could not intervene effectively on a state by state basis even if they had the money to do so. By agreeing to a market for the whole basin they had made themselves irrelevant. While control passed to the Commonwealth from the states the bureaucrats merely changed places. This explains the lack of criticism of New South Wales, its weak governance and over-allocation of water rights. Many of the bureaucrats in the new authority are those who were responsible, in their former positions in New South Wales, for the over-allocation. Instead drought and global warming have been identified as the causes of the water crisis in spite of the evidence from the drought of 1939-46.

The new authority manages the whole of the Murray Darling Basin and while it has been launched with great fanfare as a new era in management I am more sceptical as I have seen many organisational changes that have little impact on the ground. The Victorian government (instead of being prudent about allocation) is installing a pipeline to take water from the Murray to provide domestic and amenity water for a large outer suburban housing development established as a satellite to the capital city of Melbourne. This is an indication of the next “water war” - urban domestic use versus food production.

Together with the new authority the Commonwealth government promised about $US6,300 million for the basin over the next ten years. This has been split between supply and demand measures with slightly more going to supply compared to demand. At this stage the supply programs seem to be infrastructure development, monitoring and control of water use to improve the operations of the water market and most controversially some assistance to farmers to improve their irrigation efficiency.

On the demand side the program is to buy back water rights that have been over-allocated during the closure process and to cancel them. Small growers with less than 15 ha are being offered $US135,000 to leave their farms but most of the water rights are being purchased from a few large irrigators who have received a considerable windfall profit from the high price of water. By September 2009, 588 GL (588 million cu. M.) of water rights had been purchased at a cost of $US820 million or $US1.40 per cu M. About 60% of this water came from just two irrigators. (Keane 2009). The buy back scheme as it is currently structured is a transfer of funds from poor taxpayers to rich owners of water. One clever company has sold its water rights to a pension fund and is now leasing them back.

The buying back of water rights is supposed to improve the reliability of supply but in the short term it merely supports the high prices reached during a period of acute scarcity. If continued buy-back maintains this inflated market it will become increasingly difficult for new entrants into farming to buy water and make a profit.

So far I have been unable to find any evidence that the taxpayer is aware of the burden that this water bonanza had cost them or any recognition of the future cost to them of administering the demand and supply policies that have been adopted.

There have been intimations that the urban/country rift that has existed for many years in Australia is being exacerbated as city domestic needs continue to put pressure on the amount of water for irrigation. This could well become a political issue. During the recent Australian election there was little difference between the main parties on water policy. The party of the Right promised a one-off release of water to refill the lakes in a failed attempt to win the Green vote while the party of the Centre Left promised even more money for the buy-back scheme.

Industrial and domestic water

Adelaide is the Australian city most dependent on water from the Murray and it has been attempting to use water more economically and diversify it sources for some decades before the drought imposed water rationing. Australian city dwellers are extravagant users of water. They have large gardens which are generously irrigated. While some water is used for fruit and vegetables large amounts are used on growing English style lawns that are unsuited to the hot dry summers of Australia.

All domestic and industrial sewerage is treated in a number of central plants and the water recycled for growing trees and vines. There are a number of pilot schemes for treating storm water, feeding it into the aquifer and using it water public parks and sporting facilities.

As a reaction to the drought the state government built a desalination plant that is producing expensive water and has forced the state government to increase water charges for domestic users. It would have been cheaper to purchase water rights from irrigation farmers even at the inflated drought prices but the government felt politically it could not reduce the irrigation area even more. In this instance government policy overrode the market place allocation of water.

Future generations

So far I have discussed the role of farmers and other external pressure groups on policy and the internal development of policy by the bureaucracy. Interacting with both of these are ideological threads of which the neo-liberal one seems to be dominant.

There is however a ghost at the table that has been ignored. That is future generations of farmers. Water rights create valuable pieces of property. They are now seen in Australia as good investments by pension funds and other investors. The value of these water rights has all accrued to a single generation of farmers as a windfall profit. It is no surprise that they are not complaining. They have been given a valuable piece of community property at no cost at all. It is the future generations that will turn these windfall values into hard cash costs.

The farmers who have acquired these water rights do not see it this way. They see water rights as being the same as land that they have inherited from their parents and grandparents. Water is quite different as its existence at a time and place to be useful depends on community funded and run infrastructure. The Australian example has also demonstrated that a valuable water right is dependent on a strict enforcement system of metering with many inspectors to prevent unauthorised use. In effect the water right represents a private gain from public costs but this private gain accrues to one generation only.

In future some farmers will inherit their water rights from their parents but, over time, more and more will need to buy them from retiring farmers. Water rights will no longer be an opportunity cost counted only in economic models but a cash cost that reduces the farmers' profits.

At present high reliability water rights on issue amount to 4,750 GL and low reliability water rights amount to 8,750 GL (Anon 2008-09) – a total of 13,500 GL or 13.5 million cu M. Assuming the same average price for water as that already paid by the Murray – Darling Authority under their buy back scheme the capital value of water rights in Australia is nearly $US 19,000 million. If we also assume an interest rate of 5% (a very modest rate compared to those currently available in Australia) we find that the cost of servicing the capital value of water rights is nearly $US1,000 million per year compared to a gross value of $US7,000 million for all irrigated crop. Of course all this sounds too theoretical to have any real impact on farm profits but it is only a matter of time before these costs become real. For example the Boundary Bend - Timbercorp olive growing company sold its 26,170 ML of water to a pension fund for $US 45 million ($US 1.7 per cu M) and has leased the water back for an undisclosed annual sum. (Anon 2010b) The government funded buy back scheme has paid as much a $US2.1 per cu M. (Anon 2010a)


It is not my intention in this paper to give succour to the water engineers who may be privately gloating at Australia's failed attempt at demand management. This is not the end of demand management merely the failure of an extreme market driven version. Nor do I want to provide ammunition to the market fundamentalists to claim that the Australian failure is due to a few bungling bureaucrats who over-allocated water rights. I have shown that the failure of the Australian water market has many more components than simple over-allocation.

Nor can I pull a white rabbit out of my hat and provide you with a grand design to cope with managing scarcity in Egypt. Perhaps one inescapable lesson from the Australian experience is that we should avoid the great models – particularly centralised solutions for the whole river basin.

Water reform is the term that has been put forward as the solution to the problem of scarcity. We are all in favour of reform. It has a warm progressive feel about it but it has also become a code word for a water market. My suggested alternatives to a water market are much more low key and complex.

In Egypt it is important to have central management of the water resources of the Nile within Egypt but that does not mean the central bureaucracy needs to control water down to the level of every small farmer. The state should maintain control over water at the wholesale level and not cede power to the market to allocate the water. The Australian experience shows that markets are not an effective or socially responsible means of allocating water. If as in Australia water is over allocated it becomes an extremely expensive exercise to buy the water back. Instead the state can ration the water by imposing a small but continuing efficiency levy.

At the retail level of the individual farmer the state becomes a cumbersome manager and local control may be a better option. Delegation of power and control to local groups will throw up local solutions to the problems of allocation among farmers and other users. They will be local solutions to local problems. One of the good ideas to come out of the Australian reorganisation of water management has been the local irrigation trusts run by farmers. While they only have responsibility for managing the local water distribution systems they could be given an extended role in managing scarcity. These irrigation trust are not water users' associations under another name. They have more statutory power. The users' associations can easily become consultative groups which the bureaucracy can talk to and then ignore. The irrigation trust have real farmer management.

Delegating powers to local trust will make charges for water more acceptable. Farmers will be able to see clearly that they get what they pay for. These charges are for the distribution of water not the water right. They will provide a financial incentive to people to use water more efficiently.

My third low key recommendation is that in addition to rationing and charges there is a program of advice and training to help improve water use efficiency.

A final warning - scarcity will mean limited access to water and this could introduce a price for water rights by the back door even if water rights as defined in Australia are off the agenda. It is important not to ignore reality but to face it with an alternative such as a lease that recognises the water user rather than a water owner. A lease would also reflect local requirements. A properly drafted lease will also put responsibilities as well as rights on the lease holder unlike in Australia where all rights and windfall profits go to the owner of the title and the community picks up the costs.

A water market needs closure but a closure does not inevitably lead to a water market.


Anon 2008-09 National Water Commission • Australian Water Markets Report 2008–2009

Anon 2010s Sydney Morning Herald, Editorial 06 – 09 – 2010

Anon 2010b Australian and New Zealand Olivegrower and Processor. Issue 72 March-April 2010 pp4

Burgess Rob, 2010

Chatterton Brian and Lynne 2001 ”The Australian water market experiment” Water International. Vol 26 No 1 March 2001 pp 62-68

Craik Wendy 2008 “Irrigated agriculture – managing with less” paper to ABARE Outlook 2008 4th March

Keane, Bernard 2009

World Bank 2008 World Development Report 2008. Agricultural for Development. World Bank. Washington DC.

World Bank 2007 Making the Most of Scarcity. Accountability for Better Water Management Results in the Middle East and North Africa. World Bank 2007

Questions for discussion.

Has Egypt reach the point of closure? Are the water resources fully utilised? How is closure implemented? Has more water been promised than available?

With closure how can water be allocated on a bulk scale between sectors, on a bulk scale between regions and at the local level?

Postscript added after the workshop

Speaking two languages

The Murray Darling plan released on 08-10-10 recognised (but did not state openly) that water had been over allocated to agriculture and diversions should be reduced to a sustainable level which they calculated to be a reduction of between 3000 and 4000 Gl/year or 22 to 29% less than the present level of diversions. This reduced level would provide greater security to agriculture, better quality water and sustain the river environment.

The plan needs Ministerial and Parliamentary approval before it can be implemented but already two separate discourses are appearing.

The Minister:

The Minister is saying that the reduction in diversions by about one quarter will be achieved through voluntary buy back and cancellation of water rights. The Minister has emphasised the voluntary nature of the scheme - there will be no compulsion to sell water to the Basin Authority for cancellation. All purchased will be from willing sellers on the open market. The cost which will be enormous will be borne by the Australian taxpayer not by the holders of water rights or the state governments that over-allocated the water only a few decades ago.

Community groups:

Community groups have realised that taking a quarter of the farmers or a quarter of the land out of irrigation will leave a patchwork of irrigated and unirrigated areas with high infrastructure costs. We pointed this out in our article for Water International in 2001 but that was without this proposed massive buy back of water rights. We said then that trading in water on a much smaller scale could leave some communities on a path to extinction and that these decisions should be taken within a political context rather than random decisions in a market place. Now that one quarter of the land will no longer be irrigated the effect will be massive. No one will know where the chips will fall. Some communities could be unscathed if the farmers and growers decide not to sell. Other may lose more than a quarter of their farmers and irrigated land. Infrastructures for the communities (hospitals and schools as well as the distribution of water) will become uneconomic. If the exodus reaches a tipping point it becomes self fulfilling as more farmers leave a sinking ship due to high costs and poor services. The market deals in water rights not in communities. Buying the water on the open market takes no account of the community impact. It is perhaps the easy political option. By purchasing the water on the open market the government can disclaim any responsibility for the destruction of communities saying it was all "the market."

Table 1. This is a plan of an irrigation area with 100 farms. Assuming a 25% reduction in water and irrigated land 25 farms would be abandoned. If this were done on a planned basis farms at the end of canals or in areas which were marginal for other reasons would be removed. Costs of distributing water would remain high as pumps and other infrastructure will have excess capacity. There would be some savings if some canals were closed - at least in part.

Table 2 With the water market mechanism of buy back the sale of water rights will be influenced to some degree by physical factors that make a farm less profitable but more so by the age of the farmer, their skills and their level of equity. The buy back pattern is likely to be random. It can be seen that under this scenario the whole system must remain intact to deliver water to the remaining farmers.

Mortgaging the water

While I have remarked, perhaps a little flippantly, that we are on the way to a market in sub prime water derivatives I may not have been as flippant as I thought. At the Annual General Meeting of the Bendigo Bank, a small regional bank in Australia (mainly based in Victoria and South Australia) it was revealed that the bank held hundreds of millions of dollars worth of loans backed by water rights. Property loans have proved fatal to banks in many countries but the present market for water rights has more than the usual elements of instability. Prices for water leaped due to the drought and they appear to be sustained by the government buy back and promise of more buy back. Without this support the collapse of the wine grape industry would probably have reduced water right prices to a low level.

Once the buy back is over where will prices go? If they collapse it will be a crisis for the new entrants and also the banks.

Mortgages for water rights demonstrate clearly the new access cost of water - not spread evenly for all farmers and growers but for the unfortunate few who have purchased rather than inherited their water rights. If they believe they can sustain these payments to the banks and other lenders it is obvious that the industry as a whole could sustain a levy or charege at a much lower level on all water. The levy would be more equitable payment to the community for water management and buy back. A levy on water related to access, not the distribution cost which are locally determined, would have the beneficial effect of reducing the capital cost of water rights.

Over allocation

The report of the Murray Darling basin authority is an acceptance of the over-allocation of water in the past. This is not stated because the authority is staffed by many of the former state officials who were responsible for over-allocation. Does this matter? Other than the question of accountability in government should we let bygones be bygones? If over-allocation were openly discussed we might be able to develop a better way of buying back water. We could compensate irrigators on their historical use of water instead of some paper water right they were able to claim. Many of the purchases under the buy back have been from farmers who successfully claimed rights that have not been used. They could not cry foul as they obviously not need the water if they did not use it and were only claiming the rights for speculative purposes.

Further implications of reduced water diversions

Moving the water to meet the trades

The water market has always been a theoretical concept developed by economists hunched over their computers. It is difficult to see how theoretical market models can be a practical management tool for the Murray Darling Basin. Water in a river system is not the same as petroleum or grain. These products are really in storage and can be traded. Obviously there are costs involved if trades take place over long distances but these are incorporated into the price and there are no practical barriers. That is not the case for water. The river system is a dynamic flow of water from rainfall to the sea. The engineers have created storages to modify this pattern but they have not yet converted the river into a series of silos connected with pipes. The point of this is that water is not simply water measured in litres but water at a time and a place where it can be used effectively. The water market ignores these practical constraints and treats water as a commodity to be traded like grain without reference to its delivery.

The theoretical weakness of the market model is probably not important as long as trading is restricted to small amounts and is gradual but it could cause the collapse of the model if the proposed reductions in diversions of one quarter are implemented. Let me give an extreme example. Let us say that most South Australian wine grape growers decide to cash in their water rights and the Murray Darling authority meets its buy back requirements from that source. Let us also say that Queensland cotton growers decide not to sell any water rights. The buy back then fails to provide the environmental benefits promised or the security of supply to irrigators on the Darling unless the authority pumps the surplus water they have acquired in South Australia back up the Darling river. One can see other scenarios where crops grown in some cool environment in Victoria expand with water purchased from other sources. Would it be feasible to pump the water upstream to meet these demands? If a large part of the water in the Darling was purchased it would improve the environment but not help the Murray upstream from the Darling junction.

Surely if the authority wishes to manage the river it must have some control over the cancellation of water rights rather than leaving it to random transactions within the market.

Of course the Murray Darling basin in not the only area where armchair economists have converted systems into theoretical models that are antipathetic to physical conditions. A classic, much quoted example, is the privatisation of British railways where all people with knowledge of railways were excluded from the discussions as a matter of policy. A market was created for space on the tracks which sounds fine in university common rooms but has produced a huge bureaucracy to coordinate the activities of all the different operators who have purchased space with the people who actually have to run the trains. As with so many artificially created market models the reality is much more complex than the idea and the costs are correspondingly higher. The privatised British railways spend more on administration that the old publicly owned railways they took over.

Water is not the only factor

The market is the most efficient means of allocating resources such as water. How do we know? Because economists tell us so. We do not have any scientific method of confirming this as we cannot run the system again using other methods of allocation with all other factors staying the same. If we run the system again the climate is different, the markets have changed and the technology is different. Attempts have been made to make these comparisons but the results are inconclusive.

Even economists have at times been known to admit that market failures do occur but these failures are not the fault of the market model. In other words there is a market heaven out there which we poor mortals fail to achieve. If things succeed it is the market model at work. If things fail it is the people not the model. The market is the average of all the decisions of all the people who trade in it. To the fundamentalist tendency of market ideologists the sum of all these decisions is perfection - the market heaven. Of course by definition half are bad decisions (people who sold on a rising market or bought on a falling one) and half good ones (those who did the opposite) but the average is transformed into perfection. At times market failures - such as speculative price bubbles - are so glaringly obvious that only the fanatics can ignore them. In these cases the focus suddenly shifts back to the individual traders away from the market heaven and a whole range of buzz words are used to describe the activities of the market heaven saboteurs

In the case of water there is no need to refer to insider trading or other activities that disrupt the market mechanism ideal. The difficulties are much simpler. The market for water is not uniform. One cannot grow high priced vegetables in some locations because of climatic factors, unsuitable soils, lack of labour or poor market access. In other areas it is uneconomic to grow wine grapes because there is no local winery and transport costs become excessive. The market fanatics dismisses these mini-market problems and says the sum of all these local decisions becomes the market and the perfect allocation of the water but that assumes the complete transfer of water within the system without cost. The reality is quite different and there are considerable costs involved in trying to transfer water in both time and place.

What the current Australian water market does is transfer these costs (water transfers and enforcement) to the public authority. What we need is political synthesis between the hydraulic engineers and the fundamentalist economists. In the past the engineers ruled and created a physical system that delivered water in a sensible and rational way but which took no account of the economic reality of the use of that water. We have now flipped to a system where economic factors rule the roost but can the physical system be adapted to move the water at a cost that we can afford?