Water Markets and Transparency Webinar: Your questions answered!

Our panel, Dr Erin O’Donnell (University of Melbourne), Ben Williams (President of the Australian Water Brokers Association), Chris Olszak (Aither Economics) and Jeremy Cheesman (Marsden Jacobs) have kindly responded to the questions asked during the webinar on 4 June 2020.

Questions for Presentation by Dr Erin O’Donnell

How do open channel systems impact (i.e. high evaporation rates) the water market in terms of supply during periods of drought? Are there any strategic moves to combat these losses in the future?

This is a critical challenge for the water market, and historically, the approach taken by the states has been to manage system losses associated with water delivery separately. The issue has been under investigation, see the MDBA report here. The Connections Project in the Goulburn-Murray Irrigation District has also been an attempt to reduce the losses of irrigation water delivery (including evaporation and seepage from channels).

What are some specific examples of political interference or corruption?

I can only refer to issues which are already in the public record, so here are some useful links:

What do the uses of First Nations cultural water allocations look like? Assuming that First Nations custodians will not degrade water resources to the extent of say intensive irrigation, what requirements are there for a separate environmental water allocation? Is it possible that the environmental water allocation could be returned to Aboriginal custodians?

I would encourage you to take a look at the National Cultural Flows Research Project, which is led by First Nations and explicitly includes the use of water for environmental, cultural, and economic outcomes.

For further information, I suggest:
www.tandfonline.com (please feel free to email me if you can’t get access to this)
www.mdba.gov.au/discover-basin/water/cultural-flows
www.mldrin.org.au/what-we-do/cultural-flows/

From Chris: This report on the concept of a Strategic Indigenous Water Reserve may also be of interest.

In the context of your comment that water rights are not quite the same as property rights, is there a right of compensation if the characteristics of water rights are changed?

This was answered on the day, but for further detail, I would recommend these links:

Questions for presentation by Ben Williams

What disciplinary measures do you have in place for water brokers who are found to do the wrong thing?

The AWBA Code of Conduct and Constitution can be found on the AWAB website. The AWBA can only discipline members for breaches of the code of conduct, breaches carry three potential outcomes: warning, suspension or expulsion. (see www.awba.org.au)

Seeing Civic Ledger launch their block chain water trading system recently using the ASX tech, does anyone see a rapid uptake of this and disintermeditaing existing trading platforms, and as a technology platform, can water meters and other such physical measurement devices be better integrated into the platform to drive higher levels of transparency?

I haven’t seen their exchange, so it is difficult to comment directly. That said, to my knowledge there are currently three water exchanges that allow a client to trade without broker interaction – direct with the market, I have worked with two of them and the number of clients in my experience who are comfortable in doing so would be less than 2%.

As a water trader and water delivery company do you think that is a conflict of interest for MI?

Murrumbidgee Irrigation are not members of the AWBA.

What’s a better way to manage the IVTs to avoid the IVT arms race?

Good question, IVT’s have been managed by ballot in the past. The functionality of the Broker Portal in Victoria compared to the MyWater system for water account holders means that the Broker Portal will always be faster in lodging trades, because it has more automation. If the market is accepting that the best opportunity to move water through an IVT opening is via a Broker, and the most efficient method within each Broker company may be to amalgamate client water on a broker account, then perhaps there is not a problem. Allegedly malicious activity around contested IVT openings is another matter and one that I understand both DEWLP and the ACCC have been made aware of.

Questions for the panel

On Chris’ point of other government interventions, what would be a good policy to reduce the extent of water intensive crops such as cotton?

Chris: As mentioned, aggregate system wide caps on extraction are critical. These need to be enforceable and enforced and they need to be set to achieve the optimal balance of economic, social, cultural and environmental outcomes. If these are in place, then setting limits on particular crops won’t achieve any benefit. All it will do is push water use to other crops, potentially those that are less profitable. The only caveat on this is that the third party and environmental impacts of localised extraction and application on land do need to be managed and, by and large, there are other regulatory approvals that are designed to manage these issues (e.g. works approvals and water use licences). Having governments try to pick winners based on arbitrary reasons isn’t likely to work well in the long term, in my view.

All hail the ‘market’ …. But where do Indigenous water rights and water justice fit in all of this discussion – – beyond rhetoric? Where does genuine recognition of Indigenous decision-making about water trading, management, allocation fit into the dead hand of the market?

Erin: I would encourage you to take a look at the National Cultural Flows Research Project, which is led by First Nations and explicitly includes the use of water for environmental, cultural, and economic outcomes. I am currently partnering with the Murray and Lower Darling Rivers Indigenous Nations (MLDRIN) on a project to increase Aboriginal access to water for economic development across Victoria (an action funded under the 2016 Water For Victoria policy), so if you would like to know more about this project, please feel free to email me.

Is reduced utilisation a negative impact from the establishment of a water market? The economics of returns from permanent horticulture & annual cropping is driving reduced utilisation as demand from permanent horticulture ties up supply to manage future supply risk. Instead of distributing a scarce resource to maintain production we see a massive opportunity cost from reduced utilisation. This is absolutely the situation this year with reduced supply, reduced utilisation & a 70% increase in water to be carried over in the 2020/21 water year.

Chris: Issues of underuse are complicated and are currently being worked through extensively by the states and the MDBA. It is important to consider underuse compared to which benchmark (the old Cap, the SDL), to better understand the causes, to understand whether underuse is locked in or may change over time, and to consider potential policy implications. In general, with increasing horticultural demand, and greater appreciation of the benefits of carryover across many industries, I would expect carryover to increase compared to what it may have been 5-10 years ago. Putting evaporation to one side, carryover balances should however go up and down depending on seasonal conditions – they shouldn’t keep going up. The risk of spills comes into this equation and this is where it gets complicated but it is an important issue to address.

Regarding Jeremy’s stating of tripling or quadrupling cost for transparency, is there any kind of GST on water trading? Would it be relevant to level a transparency tax on the system at large? I ask in relation to the triple/quadruple statement, surely maintaining the effectiveness of the most precious resource on our planet is a given need, rather than a cost-based option?

Jeremy:

The tripling or quadrupling comment I made was illustrative to support discussion. (As far as I am aware) we currently do not know how costs would change under a centralized ASX type market mechanism, or alternatives the ACCC may be considering. Costs may increase, decrease, or remain about the same. In part this will depend on whether existing market operators are compensated if their exchanges and registries are made redundant by a government decision to change market architecture.

Fees and charges are GST free, see for example

Fees and charges are levied on market participants. The costs of approving and recording dealings in water shares and allocations of water under shares are regulated under Part 3A of the Water Act. Using that water on land is regulated under Part 4B of the Water Act. Consistent with cost recovery guidelines and the NWI efficient costs are recovered using (direct) beneficiary pays principles – see NWI pricing principles. The same approach will be used to recover costs under any future market arrangement.

Why is there such a large volume of water traded without a value recorded?

Chris: A key reason for this is that commercial trades are treated the same as administrative transfers between different accounts and systems held by the same entity or related parties. However there are a range of other reasons. As mentioned in Ben’s presentation, efforts to better label and categorise trades and transfers in real time as they are registered would be hugely beneficial in my view.

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