Inside Story

Rethinking the Murray–Darling buybacks

Buybacks aren’t the only way to reduce the amount of water being taken out of the system, argues Brian Toohey

Brian Toohey 3 November 2010 2334 words

Sign erected by South Australians protesting at the extraction of water from the Murray in upstream states. Mundoo/Flickr

THERE is a strange disconnect in the way Australian governments treat water and other natural resources. With few exceptions, state and federal governments accept that companies should pay royalties (or resource rent taxes) if they exploit petroleum or mineral deposits that ultimately belong to the Australian community. When governments provide rail and port facilities, they usually charge the mining companies more than enough to cover the capital and operating costs. Efforts to recover the cost of the environmental damage caused by resource extraction are also improving.

It’s a vastly different story with water, although it too is a community-owned natural resource. In many parts of Australia, most notably the Murray–Darling basin, the Commonwealth doesn’t recover a cent from the billions of dollars spent on new and renovated irrigation infrastructure, violating a 1994 agreement by the Council of Australian Governments, or COAG, to apply the user-pays principle. The Commonwealth is also abandoning the 2004 intergovernmental National Water Initiative, which strongly endorsed that agreement. (Ironically, it’s the much-derided NSW Labor government that’s applying this principle to state spending on irrigation works, with the other states doing so to a more limited extent.)

There is no chance that the Commonwealth would build mineshafts and ore-crushing mills, or natural gas production platforms and pipelines, and then let private-sector companies use these facilities without paying a cent. Instead, the more profitable miners are being hit with a new resource rent tax, on top of state government royalties, for the right to exploit Australia’s mineral and energy resources. With the exception of brown coal reserves in Victoria and elsewhere, companies have to pay something approaching a reasonable price to get access to the nation’s ore bodies and petroleum reserves. In all cases, they have to pay for their own production facilities.

In contrast, what happens with irrigation water is one of the great public policy failures of recent Australian history. The picture with urban water is better: increasingly, the prices for desalinated and recycled water reflect costs in line with the 1994 and 2004 agreements. But the Commonwealth has shamelessly walked away from these decisions when it comes to irrigation. In the case of the Murray–Darling basin, COAG explicitly agreed that water charges should fully fund the maintenance, refurbishment and upgrading of all new irrigation facilities.

In 2004, John Howard’s government won the backing of the National Party and the National Farmers’ Federation when it signed the National Water Initiative with the governments of New South Wales, Victoria, Queensland, South Australia, the Australian Capital Territory and the Northern Territory. This agreement unambiguously described water as “part of Australia’s natural capital” and reaffirmed that all governments “are committed to meeting their commitments under the 1994 COAG framework… as amended in 1996 to include groundwater and storm water management.” Once again, the governments agreed that full cost recovery would apply to “all rural surface and groundwater based systems” except for some small community services that meet social and public health obligations. Large-scale irrigation infrastructure for commercial use was definitely not exempt.

But Julia Gillard’s government is ignoring these agreements as it implements a plan, inherited from Kevin Rudd’s government, to spend almost $5.8 billion on irrigation infrastructure, predominately in the Murray–Darling basin. In line with Rudd’s approach, Gillard has no intention of recovering a cent of this public spending from the irrigators who benefit. The $5.8 billion is meant to “save” water by reducing leaks and seepage from canals and pipes, with half the savings going to irrigators and half retained for the rivers. Much of the savings, however, would have found their way back to the rivers and groundwater systems as part of the basin’s normal hydrological processes.

Apart from large-scale spending on off-farm engineering works of direct benefit to farmers, at least $720 million has been allocated to upgrade on-farm irrigation infrastructure. This spending gives an even bigger boost to the value of these farmers’ properties without any of the costs being returned to the public purse. The program is also unfair to farmers who have already paid to make their irrigation systems more efficient, as has happened particularly in parts of South Australia.

And now the water minister, Tony Burke, proposes to spend more money on infrastructure, this time to create extra water for irrigators by diverting it from wetlands and other environmental assets intimately linked to the basin’s rivers. Again, farmers won’t pay a cent for the extra water. Burke’s offer is a direct response to the hostile reaction from some farmers and residents in local towns following the release of the draft water plan by the Murray–Darling Basin Authority, or MDBA, on 8 October.

Many of the protesters still hold John Howard in high regard. But his 2007 Water Act required the MDBA to draw up a plan, based on scientific advice, setting out how much water needs to be diverted from irrigation to ensure the sustainability of the basin’s water systems. This requirement reflected the National Water Initiative’s concern – shared by most Australians – that excessive water use over recent decades is endangering the long-term health of the rivers. It should have come as no surprise that the MDBA’s draft plan recommended that a minimum long-term average of 3000 gigalitres of water be retained for the health of the basin’s water systems.

So far, Burke has not explained why he is so confident that the 3000 gigalitres is more than needed. As well as promising to fund new engineering works to divert water from wetlands, he has warned that he will use his ministerial powers to override the MDBA’s final recommendations if they do not comply with what he regards as a satisfactorily low level.

Based on the MDBA’s preferred method for sourcing more environmental water, the 3000 gigalitres represents an average cut of 22 per cent in the long-term volume going to irrigation (with variations from valley to valley). Given that the government plans to phase in the changes over ten years, this amounts to an average cut of 2 per cent per year over a decade. For food-producing industries such as horticulture, nuts and dairying, the average cut will be less than 1 per cent per year. During the drought, water allocations to irrigators were cut by 70 per cent, yet irrigated agricultural production remained almost unchanged because of an outstanding productivity performance by farmers.

It would be great to generate increased water supplies for the basin, without wrecking wetlands, killing red gums and so on. But schemes to bring water down from northern Australia, or even Papua New Guinea, are very expensive. No one has yet come up with a low-cost solution under which the costs can be recovered from irrigators.

Apart from the $5.8 billion allocated for spending on irrigation infrastructure – and more if Burke has his way – the federal government is already committed to spending $3.1 billion to buy water entitlements from irrigators for use in the rivers. During the election campaign Gillard gave an unconditional promise that a re-elected Labor government would buy whatever extra water the MDBA’s final report recommended should be retained for the rivers. It’s estimated that meeting the MDBA’s 3000-gigalitre target will require almost $3 billion more in water buybacks from willing sellers.

The promise did not survive for long when Burke effectively decreed on 25 October that he wanted a lower figure and would override the MDBA’s wishes if necessary. This will reduce the size of any extra spending on water buybacks, but at the cost of ignoring the Water Act’s requirement that the final plan for the basin must give “primacy” to environmental needs.

THE BUYBACKS remain contentious for two reasons. First, towns could be hit hard if the program removes a disproportionally high volume of irrigation water in a particular region. And, second, the government is paying billions of dollars for entitlements that were issued for free, often creating huge unearned gains that are extremely hard to justify in public policy terms. After all, governments gave away what the National Water Initiative considers “part of Australia’s natural capital” and now the irrigators are selling it back at a windfall profit.

The National Water Initiative made it plain in 2004 that water flowing into the nation’s rivers or underground aquifers did not belong to farmers. Nor could they do whatever they liked with it. Instead, a crucial section said:

In Australia, water is vested in governments that allow other parties to access and use water for a variety of purposes – whether irrigation, industrial use, mining, servicing rural and urban communities, or for amenity values. The framework within which water is allocated attaches both rights and responsibilities to water users – a right to a share of the water made available for extraction at any particular time, and a responsibility to use this water in accordance with usage conditions set by government. Likewise, governments have a responsibility to ensure that water is allocated and used to achieve socially and economically beneficial outcomes in a manner that is environmentally sustainable.

A water access entitlement does not give an irrigator the right to a guaranteed amount of water. In practice, the amount varies each year according to how much water a state government, or eventually the MDBA, makes available for irrigation and the environment. As a result, there is no need for the Gillard government to buy any entitlements.

There is a straightforward solution that would still provide the same amount of water for irrigation and the rivers as the buyback program. It uses the same allocation process as the buyback scheme, and would provide the same amount of water for irrigation and the rivers. The MDBA would estimate the volume of water available at the start of a season and then allocate the required amounts to the rivers and local towns, as will occur when its plan becomes operational. The rest would be available for irrigation and would be allocated in the same way that state authorities currently divide up the estimated amount available for irrigation each season in proportion to farmers’ water entitlements. If there is only enough water for everyone to get 60 per cent of their full entitlement, that's how much they will get. The same system will apply when the MDBA plan comes into effect. The buybacks reduce the amount of water available for irrigation; this alternative would allocate the same amount for irrigation and give the river the same amount that would be bought back.

This option, which has been put forward by several policy analysts, provides an easy administrative alternative to costly buy backs. It would ensure that the same amount of water would be available for irrigation as under the expensive policy of buying entitlements. Because government buybacks would no longer remove some irrigators from the industry, a larger number of irrigators would each get a smaller share of the same total. There would be nothing unusual about governments deciding to protect rivers by restricting how much water farmers can receive without an offer of a buyback. Governments regularly impose conditions on farmers to reduce the damage caused by land clearing, pests, weeds and similar problems.

Scrapping the buybacks and implementing the COAG/National Water Initiative agreements to recover the cost of irrigation infrastructure would save the Commonwealth billions of dollars while bringing the price of water closer to its underlying value. The return to the community from this particular natural resource would still be much smaller than from the nation’s mineral and energy resources, but the reform would reduce subsidies to farmers that are completely out of kilter with the treatment of most other businesses.

Other small to medium businesses around Australia often fail through no fault of their own. Some business owners lose their homes to repay debt, without any expectation that governments will bail them out. But many farmers demand that taxpayers provide drought assistance, exceptional circumstances exit packages, interest rate and fuel subsidies and, now, a “right” to keep extracting water at levels that will severely damage the long-term viability of the nation’s major rivers.

Residents in some towns in the basin are also concerned about the impact of a cut in irrigation water, even though it will not normally be nearly as large as occurred during the drought. But the fact that long-term agricultural productivity is increasing at double the rate for the rest of the market sector should help. As University of Queensland economist John Quiggin points out, employment and population numbers in the basin would also be expected to keep growing if the MDBA’s draft plan were accepted.

This doesn’t mean a small number of towns won’t be hurt. But governments can’t guarantee that no country town will ever suffer a fall in population. Changing fortunes for agriculture and mining have seen many population centres fade while others prosper. And the government could easily afford to fund decent adjustment assistance for people who are hurt by worthwhile reforms.

Usually, Labor governments get the wobbles if they risk losing seats by adopting good public policies. But the Gillard government holds no seats in the Murray–Darling basin. It does risk losing a couple in Adelaide, though, if it keeps surrendering to the basin’s irrigators. Gillard could save the budget almost $10 billion and still do the right thing by the Murray–Darling water systems without losing a seat. But this won’t stop her jumping at shadows when members of the mixed farming community of Griffith in New South Wales once more make a bonfire of a report intended to save the Murray–Darling. •