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Focus: Water – September 2003

Water: rights aren't wrong

In brief: The manner in which we use and protect Australia's scarce water resources has been foremost in the minds of politicians in recent days. Partners Chris Schulz (view CV) and Jim Parker and Lawyer Ashley Bleeker report on two landmark initiatives.

Conservation of Australia's precious water assets has driven two recent and highly publicised initiatives: the Council of Australian Governments (COAG) endorsing a National Water Initiative and the Victorian State Government releasing its Green Paper on water reform.

COAG's National Water Initiative

At the COAG meeting on 29 August 2003, the eastern States and the Federal Government agreed to pitch in $500 million to restore environmentally sustainable flows to the Murray-Darling Basin and give irrigators more certain rights to water entitlements and a market in which to trade those rights.

Under the Initiative, the Commonwealth will contribute $200 million, NSW and Victoria will each contribute $115 million, SA will contribute $65 million and the ACT $5 million.

To be detailed in an intergovernmental agreement for consideration at the first COAG meeting in 2004, the Initiative aims to:

  • improve the security of water rights – giving them effectively the same legal status as property rights – by creating a nationally compatible system of water entitlements providing perpetual access to a share of water resources available to irrigators (as opposed to a fixed volume);
  • ensure water is put to best use by creating, and encouraging trading in, a water market encompassing the entirety of the Murray-Darling Basin that allows participants to trade water rights both intrastate and interstate;
  • restore over-allocated river systems to environmentally sustainable levels; and
  • encourage water conservation in our cities, including better use of storm water and recycled water.

The Initiative builds on the achievements of the 1994 Strategic Framework for the Reform of the Australian Water Industry, the Natural Heritage Trust and the National Action Plan for Salinity and Water Quality.

At face value, the framework provides a system that gives security to bankers and investors, to irrigators and to the river itself. But, importantly, the detail of the Initiative is yet to be decided.

Entitlements

COAG still needs to clearly identify and assign risks between government and irrigators over possible future reductions in water availability. To this end, irrigators will carry the risk associated with natural events, such as reductions in allocations due to climate change or drought, and with legitimate improvements in the knowledge of the water systems' capacity to sustain particular extraction levels.

Meanwhile, COAG has agreed to compensate rights holders in cases where water entitlements are reclaimed for the purposes of restoring environmentally sustainable flows. COAG has also indicated that this will include a framework for addressing water use where water is intercepted before entering ground or surface-water systems due to changes in land use (for example, plantation forestry, changes in agricultural use and revegetation for salinity control).

COAG still needs to determine how much water will be restored to each river, particularly the Murray River. This should be known before the next COAG meeting (scheduled for April 2004). Until this happens, irrigators cannot have any certainty as to the size of their slice of the aquatic pie. And, if the current entitlements are reduced (which they will need to be in many cases), COAG still needs to determine the manner in which such an entitlement 'buy-back' will take place. Currently, COAG has indicated that it favours a market-based model where, rather than reducing every entitlement proportionately, COAG is prepared to buy back those entitlements that are being offered at the lowest prices.

Although it seems equitable that irrigators should be compensated for water rights that they are required to relinquish, it's been proposed that compensation does not necessarily have to be in the form of cash. For example, the Federal and NSW governments are supporting a feasibility scheme to improve the efficiency of the mechanics of irrigation. It is likely that the allocation of funds to improve aspects such as this, rather than just cash payments alone, will form the basis for a solution.

National water market

It is unknown how a national water market would operate over the huge Murray-Darling Basin, which stretches from Kilmore, in Victoria, up to central Queensland. However, in implementing such a market, COAG needs to address the discrepancies between the different licensing systems in each State. Issues that still require some form of resolution include:

  • a suitable definition of a water right;
  • who may trade such rights;
  • the nature of the regulatory body that may administer such a market;
  • the geographic extent to which such a market should be implemented; and
  • establishing clear rules for trading and robust water-accounting arrangements.

An additional complicating factor is the constant uncertainty of climate change and how that may impact on rivers and irrigators alike.

Until these issues are addressed, it may be difficult to generate a truly competitive and workable interstate market for the trading of water. However, COAG has indicated that it may be possible to achieve interstate compatibility without overhauling each State-based system already in place. One important element of such a system is to ensure that commodities (that is, a bucket of Murrumbidgee water and a bucket of Murray water) are interchangeable. COAG proposes to achieve this by establishing some form of exchange rate between water available in different States. For example, one megalitre of high-security water in NSW may be exchanged for 1.2 megalitres of entitlement water in Victoria.

Notwithstanding those difficulties associated with integrating the current State-based systems, it seems that an important way to encourage the efficient use of water is by letting irrigators buy and sell their entitlements as they wish. A market based on the real price of water – including delivery, planning and environmental costs – would ensure that irrigators focus on crops that produce the best returns. This may not be good news for irrigators conditioned to flooding their paddocks or cultivating rice or other pasture crops. However, it may appeal to farmers prepared to adopt new technologies and switch to higher yield products such as cotton, nuts and grapes. In effect, a free market of this nature would force irrigators to become efficient or fail. The effect of this is two-fold: encouraging irrigators to use water more efficiently would act as an incentive to develop better agricultural practices and alleviate some of the environmental strain under which our rivers have been placed.

Victorian Government's Green Paper

To coincide with the COAG meeting, the Victorian Government released its Green Paper on water reform on 27 August 2003, which will form the basis for community discussion ahead of new legislation to be introduced into the Victorian Parliament next autumn.

The Green Paper sets out more than 80 proposals to protect and manage Victoria's long-term water supplies. In many aspects, it incorporates the principles espoused in COAG's National Water Initiative and includes the following proposals:

  • Special measures to protect rivers in Victoria by giving them a specific legal entitlement to a share of Victoria's water (by establishing an environmental reserve under the Water Act) where they previously have received only the leftovers. This may be important not only for the environment but also for the long-term future of the irrigation industry and other industries upon which regional communities depend, such as tourism and recreation.
  • Capping or, where necessary for environmental sustainability, reducing the amount of water taken out of over-allocated rivers (particularly in southern Victoria). In this respect, the Government has proposed providing a power to acquire rights compulsorily in defined circumstances. What those circumstances may be – and the terms on which such acquisitions would occur – is still unknown at this stage.
  • Enhancing irrigated agriculture water markets by investigating the separation of water rights from land. Such a system would make it possible to accumulate water without having an interest in land but, in recognising this, the Government has proposed limiting the amount of water held by non-irrigators. Similarly, the price at which water is traded may be pushed up or manipulated by speculators, making it harder for irrigators to affordably buy water.
  • Developing a pricing framework that better reflects the cost of, among other things, environmental impacts associated with providing water services.

The Green Paper also notes the long-term aspiration of the Bracks Government to remove ocean sewerage outfalls.

In the same way as it will be difficult to comment specifically on the legal and commercial implications of COAG's National Water Initiative until the terms of the intergovernmental agreement have been considered at the next COAG meeting, it will be difficult to perform the same task in respect of the Green Paper until the Victorian Government produces its corresponding White Paper and introduces the relevant legislation into Parliament next year. In the meantime, however, we can provide you with links to the relevant reference material (see below) and will keep you informed of any water reform developments as soon as they occur.

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