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The Great Water Plan

January 29th, 2007

I’ve been reading the PM’s Water Plan announced last week. While the Plan gets the scale of the problem about right, the near-exclusive emphasis on engineering repeats the mistakes of the past on a larger scale.

The big problem is the primary focus on engineering solutions such as lining and piping of channels. No benefit-cost analysis is presented and the aggregate numbers are worrying. The proposal is to spend $6 billion on efficiency improvements that are

aim to achieve efficiency gains of around 25 per cent of total irrigation water use. This programme will generate water savings of over 3,000 GL per year, with over 2,500 GL per year saved in the MDB. Water savings will be shared 50 per cent with irrigators to help meet the challenge of declining water availability, and 50 per cent to address over-allocation and sustain river health.

On the good side, if I read it correctly, the implied return of water to the Murray-Darling Basin is around 1250 GL, which is close to the 1500 GL recommended by the Living Murray program as the minimum needed for sustainability.

But the average cost of $2 million per GL saved ($2000 a megalitre) is very high. While the drought and evidence suggesting a long-term decline in inflows have raised the market price of irrigation water entitlements, it is still below this value in most markets as far as I can observe. Here’s some recent data from the MIA .

By contrast, market purchases of entitlements continue to be treated as a last resort. This is bad policy. Proposed engineering schemes should be tested for cost-effectiveness with a water price set by the value of water to irrigators, as indicated by the price at which they are willing to sell (or buy).

The other feature of the plan (not surprising with Howard) is a Commonwealth takeover of the whole sector. I don’t see the need for this. There are plenty of problems in water policy, and plenty of mistakes have been made, but there’s plenty of blame to go around. There’s no evidence that the Commonwealth would do a better job on the Murray-Darling by itself than through the long-standing co-operative arrangements, let alone, as Hal Colebatch points out (in a piece for which the link I had is broken), that it has any business running the water sector in states like WA and Tasmania.

And, as Kevin Rudd pointed out just before being trumped by Howard on this one, it’s not as though having the Commonwealth control the issue ensures a co-ordinated approach. There are a bunch of different departments and agencies with a finger in the pie, and they aren’t obviously more co-ordinated with each other than with their state counterparts.

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  1. January 29th, 2007 at 08:38 | #1

    John,

    Thanks for a very readable blog.

    Apropos your last point: I recall hearing that Turnbull’s new gig is to centralise the water bureaucracy in his department. The only link I could find with a quick Google is:

    http://www.smh.com.au/news/national/first-water-now-he-takes-on-the-world/2007/01/23/1169518709536.html

    “Mr Turnbull’s department will now subsume other federal agencies in an attempt to produce a more co-ordinated approach to water policy. Along with water, climate change will dominate his time and, increasingly, the political agenda.”

    Cynically I might suggest that a handout to irrigators is worth more to the Government than having market forces jack up the price of water.

    BTW my immediate impression was that the Feds were taking over the MD basin, not all water policy in Australia – the WA Premier was bleating on the ABC NSW news about how relevant his state is to the Federation. :-) I haven’t read the policy though.

    cheers
    peter

  2. Uncle Milton
    January 29th, 2007 at 08:48 | #2

    “But the average cost of $2 million per GL saved ($2000 a megalitre) is very high.”

    “Here’s some recent data from the MIA .”

    According to this data, the average price sought by sellers is $2390 per ml and the average price offered by buyers is $1660 per ml. A cost of $2000 per ml seems about right.

  3. January 29th, 2007 at 09:25 | #3

    I have put some thoughts on the water scheme on weekend reflections and the following letter was published in todays Canberra Times. Be most interested in hearing comments on the suggestions.

    http://johnquiggin.com/index.php/archives/2007/01/26/weekend-reflections-54/#comments

    The Prime Minister’s water initiative will solve the overuse of rural water but it is more costly than it needs to be. The underlying problem with water in rural areas, as well as in cities, is that the price of water is lower than the cost of saving water. That is, it costs more to build pipelines and more efficient ways of using water than the water can be sold. The government is proposing to purchase water allocations from property holders and to fund water savings projects on properties where 50% of the savings go to reducing water allocations and 50% to the property holder. Neither of these schemes will give the most efficient allocation of money to saving water. Buying allocations does not put money into water savings infrastructure and funding water savings schemes where there is no cost to the property holder will not encourage them to use the money efficiently.

    Another way is to allow farmers to sell their existing allocations of water but require that the money they receive from the sale of water allocations be invested in water efficiency measures. If farmers are unwilling to sell water allocations then the price of all water can be increased until they are willing to sell their rights. This is politically possible because it increases the value of water allocations. Using this approach will allow the market for water infrastructure projects to indirectly set the price for existing water. This ensures that all government funds are spent on water saving measures because all buyers of water allocations will want to get the best value for their allocations which is the most efficient way to spend money on saving water. Governments will only need to purchase water allocations for environmental flows.

  4. jquiggin
    January 29th, 2007 at 10:58 | #4

    Uncle M, you need to look at deals that have actually gone through. These all seem to below $2K and there is only one offer to buy at this price.

  5. January 29th, 2007 at 10:59 | #5

    Pr Q on the Howard’s politicised Green policy:

    But suppose that Howard has worked this out, and intends to introduce some form of emissions trading as a pre-election rabbit from the hat. If the public servants on the committee push for this, the business reps will find it hard to resist. After all, there is no coherent alternative. And once they signed off, Howard would be insulated against blowback from the sectors they represent.

    If Howard is indeed the Machiavellian genius he is painted as (most notably by Jack Strocchi in the comment threads here) this is the strategy that will ultimately be revealed.

    Well it looks like Howard is not a Machiavellian political genius, at least on the terms laid out by Pr Q. But give him time, I expect that he has some green trading ideas still to pull out of his electioneering hat.

    Howard’s water plan has more in common with Rex Connor-in-reverse statism rather than, say, Deakinite liberalism.

    I wholeheartedly agree with Pr Q on the efficacy of a state-sponsored economic market for trading in carbon emmissions over purely engineering approaches. And on the superiority of provincial over national approaches. A modernist conservative will prefer the liberal and local approaches.

    Still one has to admire his moxy on stepping forward as the salvation of the environment after a decade of dragging his feet on this issue. And the cleverness of using Turnbull as his stalking horse to block the advance of Costello.

    So I will raise one ragged cheer for Howard’s policy and two cheers for his politics.

  6. January 29th, 2007 at 11:20 | #6

    Pr Q says:

    By contrast, market purchases of entitlements continue to be treated as a last resort. This is bad policy.

    It is just staggering that Howard, a purported free-market evangelist, is so antipathetic to market-based solutions to the problem of providing the optimum supply of ecological public goods.

    He is evidently in the thrall of the carbon-based industry groups. This is political support for business interests, not the capitalist system.

    It must be a cold day in Hell when a socialistic intellectual lectures a free-market politician on the blessings of consenting capitalist acts.

  7. January 29th, 2007 at 11:52 | #7

    Jack,
    Howard is no more a free-market “evangelist” than our good host is – and probably even less. The rhetoric might be there (at times) but the actions are always those of a centralist and a conservative. This is why Rudd is just so wrong when he rabbits on about this. Being right, though has not been a priority for either man. Winning elections is.

  8. still working it out
    January 29th, 2007 at 15:40 | #8

    I’m not sure that Howard himself is not a believer in free markets, at least at the abstract level and I don’t think he believes in centralisation one way or the other. I just think that over time he has compromised on his ideals in the name of practical politics it has been the inevitable result. The centralist and conservative tendencies are a result of him constantly trying to accrue political capital to the federal coalition. Its hard for a prime minister to win votes for delivering services if the states are the ones doing the actual delivering. In that sense the water policy seems to be a piece of very careful political engineering that is typical of Howard’s time in office. Designed to produce as few loser’s as possible and acheiving this with a less than perfectly efficien use of large amounts of money. Quite a change from the man who was a our federal treasurer.

  9. SJ
    January 29th, 2007 at 16:21 | #9

    Hal Colebatch points out (in a piece for which the link I had is broken)

    Try here.

  10. January 29th, 2007 at 16:36 | #10

    swio,
    Howard has always been a believer in centralisation. I had a (brief) discussion with him in the late 1980′s (when he had been dumped from the leadership) where he made his views on state / federal relations quite clear. Being from WA I found his views objectionable and several of us there made our position on this quite clear.
    I would also add that it is not a change from him as treasurer under Fraser. As a treasurer, he makes a good PM.

  11. still working it out
    January 29th, 2007 at 16:51 | #11

    Did he indicate he might be inclined to removing the state level of government altogether? I am genuinely curious becuase its sort of the natual corollary to believing in centralisation. I had concluded his centralisation tendencies were due to politics because on issues like health, where the politics of centralisation are a bit difficult he seems to be strongly against centralisation. Very interested to hear about your conversation.

  12. January 29th, 2007 at 17:47 | #12

    swio,
    He seemed to regard the states as a conduit for the delivery of federal (or, to him, national) government services and perhaps as a lobby group for issues specific to the state. Not in favour of abolition, but he did not have a high regard for them generally. This was a period where we had Brian Burke as Premier, so his arguments on the basis of competance were difficult to refute. Things have generally not improved much.
    This was nearly 20 years ago, but those were my memories of the conversation. I have been ambivalent about him (personally) ever since.

  13. January 29th, 2007 at 18:03 | #13

    You can see the changes this area is bringing in things like the re-branding of the federal government as “The Australian Government” or departments as “National” and the dropping of words like “Federal” or “Commonwealth”. Legally, the Federal Government is only an Australian Government (not “the”) and should not be regarded as pre-eminent, but perhaps as the first amongst equals.
    The trend towards centralisation has been going on for a long time, run by both of the major parties and mainly stems from the handing over of the income taxing power during the “temporary” emergency of WWII. This power of the purse has been used ruthlessly by successive governments to push and hold the states down.

  14. Jill Rush
    January 29th, 2007 at 21:15 | #14

    The plan to centralise the water system suffers from the fact that we have a highly politicised public service which will run the water issue for the benefit of the political masters. The interests of the irrigators will be paramount. John Anderson was quick out of hte blocks today to defend the growing of cotton and rice although these systems are inherently wasteful through large scale evaporation of the resource..

    South Australians would do well to look at the sacking of Vanstone to see that their voice has been weakened at a time that they will need strong cabinet support to overcome the historic reluctance of Queensland, New South Wales and Victoria to ignore their interests. Engineering solutions are useful but would come anyway if the price of water was raised in conjunction with a buy back scheme. Irrigators would be able to sell or to build better channels to reduce usage. The price must be too low when irrigators have a large dam with high evaporation levels, water with large overhead sprinklers in the middle of the day and maintain open channels.

    The Federal govt is able to provide funds but unless there is a commission which is independent of government then the problems will change with a new centralised bureacracy but will not be solved. The Federal Govt is no guardian angel. The devil is in the detail and needs more than a prayer to ensure that waterways are protected.

  15. Paul Walter
    January 30th, 2007 at 01:48 | #15

    Must admit am no expert on the esoterics of market solutions to water, but the Jill Rush post sums up this writer’s unease. In the wake of privatisations, ppp’s and so forth over the last decade resources have been trshed and mismanaged, as Tasmanian forestry so horrifically demonstrates. Is there going to be a concerted effort to direct water policy toward most efficient and environmentally sustainable outcomes, with SIGNIFICANT inputs from SCIENTIFIC bodies like CSIRO, or are we just seeing a “Queenslandisation” of national water policy with neo-lib dogma prioritising the “rights” of the property-holder ( eg Cubbie Creek ) at the expense of the resource, productivity and the community interest.

  16. derrida derider
    January 30th, 2007 at 08:57 | #16

    Paul, market solutions are just a set of tools which can be used for efficient and equitable ends or for pork-barrelling ends, just like non-market solutions. They happen to be very effective tools where the resource in question – water – is clearly defined, finite and easily measurable.

    We need to focus on the detail rather than getting too hung up on the general question of market versus non-market solutions – after all, Cubbie Creek station got developed because of a lack of property rights in water.

  17. gordon
    January 30th, 2007 at 09:05 | #17

    The conditionality of the whole proposal on State referral of powers to the Commonwealth seems to refer primarily to the role of States in setting caps – at least, I can’t think of what other State roles would be particularly important in this connection. If the Commonwealth took over the setting of caps, it would effectively have control of the water in the MDB dams. This in turn would mean that the Commonwealth would be in a position to control the water market throughout the MDB. One would expect the Commonwealth to then move to a loosely-regulated private market, the size of which could be expected to increase rapidly since cross-border trades would be easy and the amount of water would be increased by the massive public investment promised by Howard. Seen from this perspective, the whole proposal then looks like a classic Howard privatisation-of-public-assets manoeuvre.

    The supply of water to cities is quite explicitly excluded from Howard’s plan, but obviously, unless they all invest billions in local desalination plants (unlikely), the cities will have to live with it. There is, after all, only so much water to go around. Howard’s idea of where the cities fit into the new private-market regime is perhaps indicated by his comment “The truth is that all of our cities are able to afford as much water as they need�. Forcing the cities into a privatised water-trading regime would of course provide the water market with large, continuing and inelastic demand – good for maintaining prices.

    The final component then needed for Howard’s fully-fledged privatised, market-based, loosely-regulated (or unregulated) water regime would be an Enron to engage in massive corruption and speculation. There’s a guy called Turnbull who’s make a good CEO…

  18. derrida derider
    January 30th, 2007 at 09:11 | #18

    Andrew, on centralisation I think there are structural factors that push it and continue to push it throughout the world – it’s not just an accident of history. Mostly these are advances in transport and communications, but there have also been advances in management technique for very large scale enterprises.

    Setting the budget for WA hospitals in Canberra would have been an absurdity when it took 2 weeks to get a message from there and there were no formal measures of performance anyway. Hell, doing it for Broome hospital in Perth would have been bad enough. Now both would be merely a bit unresponsive to local concerns.

  19. O6
    January 30th, 2007 at 11:07 | #19

    “Merely a bit unresponsive to local concerns”, dd? Have you ever worked in Canberra? There are 3rd generation public servants who’ve no idea that anywhere in Australia is different from Barton or O’Connor, apart from the airports being bigger than Canberra’s. That’s why we continue to get purpose-designed foul-ups like the GST, ATSIC, Baxter, telecoms privatisation [not against it but the implementation...], media control… – and they’re not State or regional issues.

  20. January 30th, 2007 at 11:47 | #20

    O6,
    I might have a differing list of concerns, but – hear, hear! The number of stupid programs put in place by ministers brought up in Sydney who seem to think that the only areas of importance in Australia finish somewhere around Parramatta is just absurd.
    The whole framework of tariffs and subsidies put in place to artifically advantage Sydney- and Melbourne-based industries to the detriment of Australia as a whole for over 70 years is probably the most egregious example.
    The devastating effects of Federal control over the lives of the Aboriginal people seem to be obvious to everyone except the people who exercise that control.
    I hope, but do not believe, that Federal programs for the Murray-Darling can undo some of the damage the previous combined Federal – State control has done.

  21. cs
    January 30th, 2007 at 13:25 | #21

    I haven’t had an opportunity to study the detail, but would like to know why this water thing should not be regarded as a (retrospective) subsidy to Australian farmers. Protectionism can come in many guises. One way is for taxpayers to subsidise output prices; another is to subsidise input prices. In this case, have not farmers been permitted to keep their prices low by trashing their capital asset and passing the price on to future taxpayers?

    Further, today, Warren Truss claimed that Australia has “many of the world’s most advanced and efficient farmers … with the capacity to compete effectively in world markets without taxpayer support”, and compared this with the US, which allegedly pays $25 billion in agiculture subsidies every year. Given that the US has a population 15 times that of Australia’s, and that this $1 billion a year is on top of substantial other publicly funded ag resource maintainance programs, not to mention who knows how many other farmer tax breaks and lurks and perks, a full accounting might well find that Australia’s subsidies are higher on a per capita basis.

    Don’t get me wrong, I like rivers, water and trees as much as anyone and think present generations have a duty of care to the continent owed to future generations. But if this initiative adds up to a retrospective subsidy to farmers for neglecting to maintain their capital stock, let’s call it for what it is, even if the beneficiaries have long taken their (subsidised) money and run. And in any event, the idea of describing a public subsidy that aims to fix a gaping hole in the country created by past producers ‘bold’ and ‘visionary’ is surely just a big joke.

  22. MP
    January 30th, 2007 at 15:03 | #22

    I was a bit early, posting the following comment in an earlier thread.

    The Government’s plan is a bad idea.

    We can actually solve Australia’s water problems without spending much (Government) money at all. First, fully specify water property rights (this may require some Government money to buy back overallocated licences).

    Then implement full water trading, including between urban and rural areas and across state boundaries, getting rid of exit fees. Ditch all urban water restrictions, allow urban areas to by water from rural areas at (much lower) cost. Allow anyone to sell water to the urban area at the urban water price (as long as they meet quality standards!).

    The Government should buy additional licences for water flows that are needed for the environment.

    Why is this good? Simply, it allows gains from trade. Both the buyer and the seller benefit from trade. For example, current owners of water licences will get a capital gain if they sell the licences on market.

    For urban areas where there is inadequate ability to move water from rural areas, urban prices may remain very high, until the price difference encourages the market to build water channels/pipes from rural areas that have much lower prices.

    If that still doesn’t generate low enough prices in urban areas, then the high prices in urban areas will encourage efficiency gains, recycling, or even desalination (NB need to ensure the greenhouse costs of desal are incorporated in its costs).

    Result is probably lower prices in urban areas and higher prices in rural areas. Perhaps less cotton and rice is grown – but the water is being allocated to its highest value use, whether it is growing my grass or washing my car or growing cotton.

    With this framework in mind, I’m not at all happy with the Government’s proposals, as they throw money at a problem which could be solved without much expense. Even worse, perhaps this plan makes the ideal solution even harder to reach.

    Addendum: probably the best bits of the Government’s plan are to increase cross-boarder trading in the Murray-Darling and to try to improve property rights in water.

  23. derrida derider
    January 30th, 2007 at 15:40 | #23

    FWIW, guys, I’m a Canberra public servant and, yes, I have seen plenty of cockups due to our isolation. But it’s bloody unfair to blame it all on the public servants – in all of the examples o6 cited pollies elected from elsewhere had more than a little to do with it, and in at least a couple of cases the problems were a direct result of ignoring strong advice from the professional public servants. And its not Canberra public servants who are keen on boondoggles to transfer taxpayer’s money to selected politically favoured groups in marginal seats.

    Its bizarre, in particular, to blame the Feds for the sorry state of our indigenes – racist and repressive policies by State governments over 100 years have gotta take most of the rap for that.

    My point was simply that, whether its efficient or not, it is now possible to run things from a distance where once it was out of the question.

  24. derrida derider
    January 30th, 2007 at 15:50 | #24

    As for the water policy being a thoughtful gift of other people’s money to some well-connected and not particularly deserving farmers, well what did you expect? I actually favour this on pragmatic grounds – either we pay these bribes or we don’t have an effective water policy at all and Adelaide drinks seawater.

    Don’t let the best be the enemy of the good.

  25. January 30th, 2007 at 15:56 | #25

    DD,
    On the “indigenes” yes, they were treated badly and not even really counted as human when under control of the state governments – but the real degradation in the communities has come over the last 30 – 40 years. Both sets of government (and the way the rest of the good citizens of Australia have treated them) have to take the rap for that; but the real changes in life expectancy and other health outcomes have happened over the last 40 years.
    I was also clear that the problem is not the public servants, but the physical isolation – many of the current functions of the federal government could and should be returned to the states, the local governments or given up altogether.

  26. gordon
    January 30th, 2007 at 16:52 | #26

    Yes, cs, I largely agree. The “…taskforce to explore future land and water development in Northern Australia…” which Howard mentioned as point no.10 (I think it was) is little more than a prospecting expedition to see if the same boneheaded agricultural practices which have ruined so much of our rural areas can be repeated in the Deep North. But of course we need to maintain a minimum number of National Party electorates, don’t we?

  27. January 30th, 2007 at 20:50 | #27

    dd – having dealt with both fed and state PS wonks, wonkettes, wonkabees and “implementers” I’d have to say I’m with 06 or o6. Canberra is ok on big picture and broad sweep but nfi about how to deliver a real service to real customers and it doesn’t matter if it’s lib or lab.

    I’m also with cs – I’m from the victorian otways – high rainfall and good land – we saw dairying move from ideal country to up near the Murray. Shite land, no rainfall, marginal desert country, but almost FREE water – so the big big big dairy farms set up there. Otway farmers go out of dairy. Now we “might” charge near to market price for water – the Murray people will get HUGE buyouts. It’s another retrospective subsidy.

    And whats with the “develop the north” macho talk. Australians have a weak streak in that they are suckers for a mythical voodoo driven northern outback BIG scheme. It seems as if as soon as you drive a wooden stake through one Rex Connor australians set to work and conjure up another connor kadichi man from gris gris and juju.

  28. January 31st, 2007 at 08:24 | #28

    I agree with DD that we have to purchase water allocations from farmers. What we need to do is to get the best value for our money. Simply purchasing the allocations means that farmers will spend the money on whatever they see fit which may be a big house with a swimming pool.

    If we require the money obtained from the purchase of water allocations to be spent on using what water we have in more efficient ways then we will get better use of the money spent on water allocations. How do we do this? We create tagged money that can only be spent on water saving or enhancement projects. However the tagged money can be “sold” to whomever wants it but the price will obviously be less than the face value.

    I also support DD in his defense of public servants. Public servants do a good job of obeying the whims of their political masters. A bigger issue is the influence of ministerial advisors. I have been told some tales of departments spending a lot of thought and effort on good policy only to have their recommendations dismissed by the one person in the Prime Minister’s Department who looks after policy in say Transport. It would be interesting to know how much of the latest Water Plan came from the Water Commission and how much came from someone in the PMs department.

  29. derrida derider
    January 31st, 2007 at 12:54 | #29

    My apologies in advance, John, for derailing the thread.

    the real degradation in the [aboriginal] communities has come over the last 30 – 40 years – Andrew Reynolds

    That’s a myth. The failures in the last 30-40 years – and they are bad ones – have not been in putting people in degrading circumstances but in not lifting them out.

    I grew up in the 50s and 60s in a semi-remote rural area with a big Aboriginal population. They were very much degraded then, too. The only difference was:
    - they used home-made booze and metho instead of petrol and glue
    - there was no dole or health service so children went unhoused, unclothed and badly malnourished (don’t tell me it never happened – I saw swollen bellies, reddened hair and chronic weakness).
    - no-one except a few pinkos like Nugget Coombs even cared.

    Indeed where I grew up there was a lot of active racism motivated by a desire on the part of poor whites (some were pretty degraded themselves – remember, no welfare in those days) to avoid being at the bottom of the ladder.

  30. cs
    January 31st, 2007 at 15:00 | #30

    In a hostile column, Mike Keating blasts the water plan in today’s AFR for lack of detail on how the money will be allocated, to the point where he argues that no expenditure should be approved at all until the mechanism is made transparent, which he effectively says should be entirely composed of price signals. Points taken, yet it seems unfair and counter good economics to include past (escaped) costs in present prices. Presumably those returns are now well over the hill and far away, and should be written off. In any event, there looks to be a complicated round or two of politics, perhaps even an entire saga or two, yet to be played out before the thing gets underway.

  31. January 31st, 2007 at 15:13 | #31

    cs,
    You are right, the sunk costs should be ignored in an economic analysis – but in the event of a strong political fight they can be used as ammunition. The Nationals hate having it pointed out how much all the rural boondoggle has cost.
    To be fair, though – the farmers have also been paying for the cities in their cost base – the expense of importing equipment through the Australia tariff wall was, for decades, ridiculous, adding substantially to their cost base. A quick calc of the relative costs may be in order.

  32. Uncle Milton
    February 1st, 2007 at 07:57 | #32

    John,

    another question on the costs: you say that spending $6 billion to save 3000 ML, ($2000 a megalitre) is a very high cost. But the $6 billion cost is one-off, while the water 3000 ML are saved every year.

    It’s true that the capital cost is up front while the water savings come later, but on any reasonable discount rate the NPV of the benefits will well exceed the costs, even if you assume low values of water.

  33. Roger Jones
    February 1st, 2007 at 08:54 | #33

    Uncle Milton’s point seems appropriate to me. Let’s assume that the externalities of water have not yet been fully realised in terms of cost, and we have a market that is responding more to short-term (climatic) signals, rather than long-term trends. This is similar to the price of Falls Creek and Thredbo Chalets going up in price when the snow is deep – there is no rational reason for property tracking short-term signals, but it does all the time. So basing an argument about what is expensive or cheap based on the current market may be misleading over the long term (i.e. it’s tracking very human responses to highly variable signals).

    The spot price of irrigation sales water in Victoria this year exceeded $1,000 per ML. The only way paying that would be justified would be to finish off a very valuable crop or to save sunk costs in terms of long-lived production systems (e.g. horticulture). Shortly after, it was back to $400. The difference? It rained, and not very heavily, but evaporative demand had halved, so there was some breathing space in a pressure cooker situation. Some of the big traders have been suspected of buying up water early in the season and profiteering later. The small-holding farmers do not like this behaviour one bit. Real estate agents are buying irrigation farms and splitting the land and water. Often they are efficient properties and the sale has been due to age or ill-health etc. The locals don’t like this behaviour much, either.

    So the price in buying water for environmental security should be expected to respond somewhat differently to price signals than those currently influencing the irrigation industry. In a larger market, therefore, price signals will come from a range of sources (even urban centres and industry), not just the irrigation market.

    Like carbon, we have to establish the full, long-term value of water that includes environmental values and possibly pay a premium for security in a shifting climate. Paying a hefty premium up front for a permanent environmental benefit may be good value in hindsight, particularly if future scarcity continues to drive up the price of both water rights and sales water.

  34. February 1st, 2007 at 09:03 | #34

    The approach suggested in a previous posting solves all the problems highlighted by Keating. This is another application of the same idea expoused for alleviation of greenhouse gases. That is you create a market for investment funds. In the case of water the investment money can come from the sale of Water Allocations but the money so obtained can only be used to create “new water”. New water is water that is recycled or saved from leaky pipes etc. That is it is water made available by spending on infrastructure.

    Let us call the money from the sale of Water Allocations WaterRewards. WaterRewards are tradeable and the price becomes the the amount that people will pay for “new water”. If the Rewards can be used across catchments then the value is the best value in any catchment and will end up being the price for new City Water. It will result in a very rapid sale of Water Allocations from the marginal rural irrigation areas and it will result in many irrigators fixing up their channels and putting in pipes.

    Potentially it will cost the government nothing because the money will come from the sale of city water.

    There is a lot more to the idea but this is a summary.

  35. derrida derider
    February 1st, 2007 at 15:18 | #35

    the expense of importing equipment through the Australia tariff wall was, for decades, ridiculous, adding substantially to [farmers'] cost base

    Yep, and which party was the arch-protectionist Black jack McEwen the leader of? You can’t tell me that farmers aren’t dumb.

  36. February 1st, 2007 at 16:47 | #36

    Uncle Milton, if I read it right Prof. Q. is comparing buying up and cancelling permanent water rights which entitle the owner to a certain amount of water annually in perpetuity, with engineering actions which will also return similarly large amounts of water to the river annually in perpetuity (well, except for depreciation and maintenance costs…).

    I did have one question, however: what about the destinations to which the money is put under the two scenarios. Is it possible that, if rights buyouts are conducted, much of the money will be used for consumption rather than investment, and thus even though it might be cheaper in the short run in the long run the infrastructure investment leaves us better off? Is this in any way a plausible economic argument?

  37. Uncle Milton
    February 1st, 2007 at 19:23 | #37

    Robert,

    as I read it, it costs $6 billion in engineering works to save 3000 megalitres per year. If it saves water for one year, then the cost per megalitre saved is $2000, which is expensive. If it saves water for two years, then it saves 6000 megalitres, and the cost per megalitre is $1000 which is not so expensive. If the life of the engineering works is 20 years, then it will save 60000 megalitres, at a cost of $100 per megalitre saved, which is cheap. Of course, the benefits of water saved in the future have to be discounted appeopriately to put it all in present value terms, so as to compare with the cost of the engineering works incurred up front, but even so the benefits look to far exceed the costs.

  38. February 1st, 2007 at 21:28 | #38

    Uncle: exactly; the AFR piece is in error.

  39. February 2nd, 2007 at 00:20 | #39

    Yes, but Pr. Q.’s argument was that you could buy permanent water rights for even lower prices on the open market.

  40. jquiggin
    February 2nd, 2007 at 05:42 | #40

    What Robert said.

  41. exLib
    February 2nd, 2007 at 19:56 | #41

    One word to answer Quiggin’s two major points of too high a price for water entitlements and the concentration of state’s powers into a new centralised federal bureaucracy: privatisation.

    As a former commonwealth bureaucrat with the current government I can only say this: Turnbull, Macquarie Bank, Ross Cameron and Bob Carr.

    Hence the need for centralised power and decision making. Puts new light on the previous attempts with the Snowy scheme and the PM’s absolute opposition to any independent body modeled on the Reserve bnk, having any say whatsoever.

    Always follow the money.

  42. BilB
    February 5th, 2007 at 10:25 | #42

    Frankly I am suspicious of anything that Howard proposes. He has proven himself to be a political opportunist. He even to this day is a weather change skeptic which means that he does not believe that there is any need to make any concessions to glabal warming needs. But he quickly siezed the opportunity to attempt a slam dunk of nuclear power. Not because of global warming, which he does not believe in, but because he or someone he knows wants it. In the previous drought he reluctantly offered drought relief to towns people, funding relief that was rigged to be unattractive to the extent that 80% was not used. So in this drought suddenly the “so caring” Howard wants to help solve the MD problem. I don’t think so. I,m with SA on this one. It should be managed like any homogeneous business end to end, this does not, however, require handing over ownership rights. Howards motives in this I suspect are more to do with maintaining political profile at the expense of all opposition parties on the one hand and his passion for behumbling the State governments on the other. The man is a manipulative control obsessed demagogue.

    Howard is so discredited as a manager of our national assets that all issues to do with environmental security need to be put on hold till after the federal election. Someone who refuses to recognise danger that 90% of scientific thinking is declaring to be absolutely certain, cannot seriously be considered as the architect of the solution.

  43. Terry Dwyer, ANU
    February 14th, 2007 at 19:23 | #43

    May I ask some questions on water.

    1. Why are suburban gardeners in coastal cities being expected to pay up to 35 to 950 times what some inland Murray-Darling irrigators pay?

    2. If urban water is under-priced why has it become so profitable for State Governments (who in some cases never even paid for the water infrastructure which they corporatized)?

    3. Whatever happened to supply responses (aka new dams)? Or do we only get them in Queensland and the Hunter when people really start to scream?

    4. Whatever happened to the optimality of short run marginal cost pricing in economics? If the proposed Tennent Dam in Canberra added 2 and half years supply and drought-proofed the city any scarcity rent for water would disappear. The sunk cost of $250 million could be amortized out of land rates at perhaps less than $200 per household per annum and marginal cost would be perhaps as low as 20 cents per kl.

    5. Finally where are the cost-benefit analyses comparing those costs of supply augnmentation to the destruction of urban amenity and environments caused by water supply failures?

    In short, whatever the story for the Murray-Darling, isn’t the story for the cities much simpler? Prices will always rise when supply is strangled. It does not matter whether the supply strangulation occurs for reasons of Treasury greed or Brownshirt eco-fundamentalism or sheer incompetence on the part of State and Territory Governments.

  44. Gemma
    March 29th, 2007 at 16:49 | #44

    I am a student particularly interested in this new grand plan…..I’m trying to track where the money is being spent at the ground level and what projects may be underway…..can anyone help me with where I might start looking?

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