The Great Water Plan

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.

44 thoughts on “The Great Water Plan

  1. 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?

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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.

  9. 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.

  10. 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.

  11. 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?

  12. 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.

  13. 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.

  14. 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.

  15. 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.

  16. 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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