29 recommendations from the ACCC 8 min read
The Australian Competition and Consumer Commission (ACCC) has released the final report of its inquiry into the Murray-Darling Basin (Basin) water markets. These markets are worth roughly $1.8 billion a year and accounted for roughly half of all water used for irrigation in the last financial year. Australian agribusinesses are large water users and the operation of the water markets is critical to their efficiency and productivity.
The final report delivers on the 2019 election promise of the Federal Government to examine the use and trading of water from the Basin. The ACCC found there is widespread distrust of the water market among farmers and other market participants but found there was no evidence of market manipulation. It did, however, stipulate the need for ongoing monitoring to prevent misconduct and bolster integrity in the markets.
The ACCC released 29 recommendations. At the heart of the recommendations is the establishment of a new Water Markets Agency. The proposed Agency would have the power to oversee and regulate the water market in the Basin. We distil the key recommendations in this Insight.
The recommendations are ambitious, not the least because they involve substantial regulatory reform requiring the cooperation of the Basin States and Federal Government, but also because they will result in the evolution of trading in water rights in the Basin, which will be like trading in other regulated markets such as stock exchanges, with comparable conduct rules and objectives of improving transparency and creating an efficient price discovery mechanism.
we anticipate that the recommendations (if adopted) are likely to represent a substantial administrative and cost burden, particularly to irrigation infrastructure operators and Basin states.
- In its final report, the ACCC recommends:
- the introduction of a new independent Water Markets Agency to oversee and regulate the water market;
- the development of digitised trading processes and infrastructure to allow sharing between relevant agencies to create a public-facing information platform that centralises water market data; and
- that water allocation decisions be published and shared with individuals to help water users understand the influences on water supply.
- The recommended measures aim to restore confidence in the Basin water markets, ensure they work better for market participants and deliver benefits to dependent industries and the Australian economy. However, we anticipate that the recommendations (if adopted) are likely to represent a substantial administrative and cost burden, particularly to irrigation infrastructure operators and Basin states. Even though the ACCC has recommended that Basin state governments consider subsidising the cost of private service providers' system upgrades to assist with the transformation, it remains to be seen whether this funding will be provided.
The inquiry into the Basin water markets was an election promise of the Coalition Government. The pledge came about, in part, due to mounting pressure from regional communities claiming, for instance that 'non-irrigators can buy water and just hoard it, collect it and short the market of it'.
The ACCC was asked to examine whether the market was operating as intended, including whether there had been any evidence of market manipulation, market trends and the availability and accuracy of public information.
The ACCC concluded that the Basin's water rights markets have serious flaws and have led many water users to distrust the fairness of the markets and effectiveness of key market institutions. In particular, the ACCC's view is that:
- there is a lack of quality, timely and accessible information available to water market participants about water trading;
- there are scant rules governing the conduct of market participants, and no particular body to oversee trading activities, thereby undermining the integrity of the markets; and
- the complex nature of the markets means the trading systems and opportunities are best understood and leveraged by professional traders and large agribusinesses.
Improving the 'flow' and quality of data
The ACCC was extremely critical of current data availability on water prices and trades, which is currently spread across multiple Basin state registers and the Bureau of Meteorology. The ACCC observed that the complex nature of the Basin water markets is best leveraged by large agribusiness and professional traders, and other participants are therefore at a disadvantage.
Consistent with the ACCC's focus on improving market transparency following its other market inquiries (including inquiries into the agricultural sector, such as its Dairy Inquiry and market studies into the cattle and beef, and wine grapes sectors), the ACCC recommends tackling the opacity of the water trade market. In particular, it has recommended adopting digital solutions, including:
- a public-facing platform which centralises water market data, information on relevant government policies and decision-making, as well as water announcements;
- a private digital platform to act as a single repository for water market data and a single hub for trade approvals (known as the 'Backbone Platform'); and
- a comprehensive digital messaging protocol for the capture, storage and transfer of communication between water market operators and uses of private exchange platforms.
The recording of information through these platforms will require an overhaul of the market participants' practices, which today largely operate via paper.
A new regulator – the Water Markets Agency
The ACCC has recommended the federal and Basin state governments work together to implement a legislative framework to establish an independent and centralised market regulator – the Water Markets Agency. The ACCC believes the agency would be the best vehicle to consolidate market administration roles (addressing a lack of coordinated governance) and help users navigate the water markets. The ACCC's view is that the new Water Markets Agency would:
- improve transparency of market conduct through surveillance and regular reporting;
- pursue enforcement action if any detrimental conduct is identified, and help maintain the integrity of water markets;
- provide a ‘one-stop-shop’ for water users to access market information such as pricing and availability;
- proactively undertake Basin market evaluation and reporting of trading market issues; and
- oversee the new functions recommended by the ACCC, eg the digital solutions to enhance transparency and accessibility described above and the mandatory code for water brokers described below.
- The proposed Water Markets Agency would not itself be a rule-making body, but the ACCC envisages some rule makers would obtain and have regard to the advice of the Water Markets Agency before making changes to trading rules.
While there was a generally positive response by Basin states to the interim report released in June 2020, we anticipate that any material change to the existing Murray-Darling Basin Agreement (which sets the rules for water sharing) will require complex negotiations between the Government and Basin states. See below for an overview of government responses to date.
Overhaul of the market architecture
The ACCC recommended changes be made to existing market architecture – the framework of laws, rules, policies and arrangements for water markets – within three years of the final report. The ACCC intends for more immediate reforms to lay the groundwork for future improvements, including:
- publishing water allocation decisions to help water users understand influences on water supply;
- improving the measurement and tracking of water take and use across the Basin;
- formalising and publishing plans for shortfalls in water supply; and
- improving intervalley trade mechanisms and removing 'first in, first served' queuing systems which tend to benefit larger market participants with IT systems capable of lodging quick trade applications.
Critically, the ACCC recommends the federal and Basin state governments implement a consistent and transparent process for reviewing and amending water trading rules.
Mandatory code for water intermediaries
The ACCC has recommended an enforceable mandatory code applying to water intermediaries (including water brokers that act as an intermediary to navigate the water market for a commission or fee). The code would aim to address the lack of obligations owed by water market intermediaries to their clients, conflicts of interests, information asymmetries between intermediaries and market participants, and provide better regulatory oversight of intermediaries’ practices. This recommendation follows a series of mandatory codes recommended and administered by the ACCC in a number of agricultural industries. Allens explored the increasing use of mandatory codes with ACCC Deputy Chair, Mick Keogh at a recent roundtable discussion. A recap of that discussion is available here.
Banning market manipulation and insider trading
The final report determined there was no evidence of market manipulation or misconduct based on data available to it. However, the ACCC determined such conduct is not adequately regulated and recommended Basin-wide legislation to prohibit market manipulation and insider trading.
The Government announced in its 2021 budget that it will spend $3.5 million to establish an expert panel to consider and implement reforms recommended by the final report, with a draft roadmap due by the end of 2021. The timeline for establishing the panel has not been announced. At the date of publication of this Insight, the Government is also:
- introducing a Bill to establish an Inspector-General of Water Compliance that will oversee compliance with existing water laws in the Basin, and establish guidelines and standards for monitoring water users. This Bill also introduces new water theft and illegal water trading offences with corresponding penalties;
- investing $5.4 million into a single source Water Market Information Platform;
- investing $25 million to improve the Northern Murray-Darling Basin Metering Program; and
- redirecting $1.5 billion from its Water Efficiency Program to improvement works within the catchments.
The NSW Government Department of Planning, Industry and Environment is currently consulting with key stakeholders, including state and Basin water management agencies to consider the ACCC's recommendations and prioritise their implementation. The other Basin states are yet to release a public statement or otherwise indicate whether they will support the recommendations.
While some stakeholders will undoubtedly be apprehensive of the increased regulatory burden accompanying a new governance framework, there is currently no timeline to guide preparation for the implementation for the anticipated reforms. A substantial number of the ACCC's proposed reforms will require a significant amount of time as they are subject to complicated legislative and regulatory change.
The ACCC has, however, encouraged a phased approach starting with improving existing trade arrangements and commitments prior to implementing the legislative framework that establishes the Water Markets Agency. The Agency will then lead the implementation of the digital platforms described above.
We expect the Basin state governments to respond to the final report shortly, at which time it will become clear whether the ACCC's recommendations will be met with resistance. Once the Basin state governments have affirmed their commitment to the water market reforms recommended by the report, it will be clearer where agreement and disagreement falls and which of the ACCC's recommendations are likely to be taken forward.