Creating a real market for water

lin-crase Dr Lin Crase

First published in the Border Mail on 5 August, 2009

The merits of water markets were given much attention in the 1990s when they officially became part of the policy agenda prescribed by the Council of Australian Governments.  The basic rationale for water markets, indeed any market, is that whatever is for sale will progressively move to the user that values it most.  

If you have a piece of second hand gym equipment sitting under the bed and willingly sell it at a garage sale, then it has presumably moved to someone who values it more and will potentially make better use of it.  Otherwise, you would not have sold it in the first place and the purchaser would not have parted with their cash.  This is why most economists argue that markets are likely to enhance the wellbeing of everyone, since the buyer and seller generally end up better off.  At an economy-wide level, markets will perform much the same function, notwithstanding that they do their best when property rights are well defined.

This argument has basically been deemed acceptable for the annual trade of water between agricultural users.  Thus, if a dairy farmer can sell their annual water allocation to a neighbouring horticulturalist and use the money to buy grain and have money left over for a holiday, then nobody complains.  However, the permanent sale of water rights, particularly the sale of water from agriculturalists to urban or environmental interests, has attracted much more criticism.

The reaction of politicians on both sides of the border to these issues leaves a lot to be desired.  In Victoria, the government initially imposed a cap to limit the sale of water from irrigation districts allowing no more than 4 per cent of the water rights to leave the district.  

Let's be clear what this means in a practical sense.  If you are a farmer at the front of a queue of willing water sellers you have your water purchased under a competitive bid, since anybody can buy this water (including governments trying to meet their obligations under the Living Murray Initiative).  

However, if you are at the back of the queue and have to sell your water then you can only sell to those in your own irrigation district.  Not only do these arrangements run the risk of violating the Constitution (as the SA government has argued) they also randomly reward some and severely punish others.  To contend that this is for the benefit of all in the irrigation community misses the point entirely.  Some are winning, particularly successful irrigators able to buy up water cheaply from their struggling neighbours.  Others are clearly losing, namely those who sell into a less competitive market.  Moreover, the community at large also loses out as it continues to be increasingly reliant on water-intensive industries.
Not to be outdone, the NSW government recently announced an embargo on the sale of all water rights to the Commonwealth’s Environmental Water Holder, at least until the Victorian 4 per cent rule is revoked.  What appears to have escaped both governments is that farmers are willingly participating in this market and often using the funds to adjust to more sustainable means of production. 

Shortly after the NSW embargo was announced, a water trader in Deniliquin noted on radio that he was now sitting on more than $10 million of water trades, much of which was being used by farmers to fund dryland crops.

It seems a cruel irony that governments on both sides of the border lack the imagination to put a positive spin on the role of the water market in this case.  By way of contrast the spin on extravagant ‘modernisation’ projects seems never ending.  When it comes to expensive engineering works, inconvenient economic and hydrological information is dismissed in the interests of ‘nation building’.  

For those of us with gym equipment under the bed this is akin to the ‘body building’ argument – if I just buy more modern equipment and put it under the bed I’ll get fit.  Unfortunately, we know this seldom works and if only we could sell to the highest bidder we could afford a decent gym membership.