Economic water can’t run uphill

River Red gums - credit Flickr barmahmillewacollectiveThe plan is one of the main components of the Commonwealth Water Act, committing to return 2750 gigalitres of environmental water to the river.

So far the plan has achieved over half of the target, mostly through buying water from farmers. But now the new government has indicated it would like to shift focus away from farmers to water-saving infrastructure, meaning taxpayers will be footing the bill for an expensive but inefficient strategy.

In simple terms, the Murray-Darling plan is about improving and shoring up the environmental health of the Murray-Darling river systems. But in politics most interest has centred on the size of the environmental water reserve, which is the amount the government has decided is needed to aid river health.

Currently, the target for the environmental reserve is 2750 gigalitres. In September the Commonwealth held 1629 gigalitres, making it the largest single owner of water entitlements in the Murray-Darling Basin. To date, about 80% of this water has come from purchasing entitlements from willing sellers – around 1343 Gl.

Buying water from farmers who want to sell it shouldn’t be that controversial, especially if you purport to be philosophically disposed to the use of markets. It also shouldn’t be controversial if you are a government focused on cost effectiveness – aka ‘stopping waste’.

This is because buying water is much cheaper for taxpayers than any other alternative. But now the coalition’s parliamentary secretary for water, Senator Simon Birmingham, has indicated a commitment to use other mechanisms for accumulating the remaining environmental reserve.

The main alternative to water buybacks favoured by governments of both persuasions has been investing in water infrastructure upgrades in irrigation areas. These projects are funded by taxpayers. The water savings then accrue as entitlements for the commonwealth.

Estimates of the differences in costs between buybacks and infrastructure projects differ, but the best taxpayers can hope is that it will be only four times more expensive. In simple terms, to meet the required reserve using infrastructure upgrades will cost four times as much as buybacks. The only alternative – if the government wants to stay within budget – would be to reduce the remaining target by three quarters.

Governments have been keen to rationalise this expense on the basis that farming communities suffer when water is sold – Senator Birmingham has found the same song sheet. But there is no evidence that this is necessarily the case.

In fact, most sellers of water remain in agriculture, often using the temporary water market, and the government purchases have proven critical to helping many farmers adjust.

Another well-disguised reality for water infrastructure subsidies is that infrastructure wears out. Taxpayers might reasonably expect that having gifted assets, farmers would be required to maintain them. Unfortunately, this is not the case.

It is precisely because taxpayers donate infrastructure that farmers are not required to look after it. Under the rules that govern water charges, irrigators don’t have to pay for the depreciation on gifted infrastructure, let alone pay a return to the irrigation operator for the value of those assets.

Even a cursory review of the financial status of irrigation entities like Goulburn-Murray Water, the recipient of the largest infrastructure project, would show there is neither capacity nor willingness to pay for the maintenance of these assets.

When set against the claims of fiscal responsibility offered by the Coalition before the election, the statements of Senator Birmingham can only be regarded as reckless or naïve. One of the first lessons for any politician with a water portfolio is that economic water can’t run uphill, unless attended by extraordinary financial assistance from the taxpayer.

First published on The Conversation on 11 October 2013.

Professor Lin Crase is the Director of the Centre for Water Policy and Management at La Trobe University in Albury-Wodonga.