03 August 2016

Water rights and trading in Australia

This article was written by Debra Townsend and Odette Adams.

Water access rights are core assets for many agribusinesses. In the Australian Water Markets Report 2012-2013, the National Water Commission estimated that the value of water entitlements in the Murray-Darling Basin (MDB) is approximately $13 billion. Trading in water has become commonplace, not only for water users but increasingly for speculators or companies whose core business is not water or land related. With more than a decade of trading under our belt, in this article we look at the benefits and challenges of trading water and what we might expect the regulators to do next.

What’s happened so far?

Since 1994, all state governments have reformed their water laws to separate water rights from the land, to implement water allocations and entitlements and to put in place trading rules within the context of water resource management plans.

Water entitlements are rights to an ongoing share of the total amount of water available in a water resource or system. Water allocations are the actual amount of water available under water entitlements in a given season. During the year, water is allocated against entitlements by state governments in response to factors such as changes in rainfall and storage levels. Allocations for the environment are also created to support the health and longevity of rivers and groundwater basins. Both water entitlements and water allocations are tradable, with the number of trades in water allocations in the MDB being around 5 times the number of trades in water entitlements.

For the last decade, water reform in the MDB has been a key priority of the Commonwealth Government. Often referred to as the “food bowl” of Australia, the MDB is jointly managed by the Commonwealth, New South Wales, Queensland and South Australian Governments along with the independent MDB Authority through the Basin Plan 2012. New South Wales, Queensland and South Australia remain responsible for managing water resources within their jurisdictions, but have agreed to implement the Commonwealth MDB Plan, including its new cap, by 1 July 2019.

Progressive reforms in the MDB water trading market have improved its operation and increased trade, making it one of the most sophisticated water markets in the world. Improved trading rules, a central online access point for comparing water products and the development of an MDB compliance strategy have all contributed to its success. With the release of the Government’s White Paper on developing water resources in Northern Australia over the next two decades, we can be sure that there is more reform to come.

Has water trading been beneficial?

With additional water resources being required to serve a growing population, food production must compete with other sectors such as manufacturing and energy generation for water allocation.

The idea behind water trading is that the creation of a price signal encourages the most efficient water use, improving the resilience of the agricultural industry to drought and shifts in commodity supply and demand. A recent survey of participants suggests that the experience of water trading in the MDB has been a largely positive one – with individual farmers and large corporates alike believing that the market has allowed people to find the highest value for their water, so that each megalitre produces the most earning capacity for the industry.

Studies have found that the ability to trade water has allowed irrigation industries to maintain income during times of drought. There is evidence of other economic benefits as well, such as allowing farmers to improve their security and commercial certainty and some (although unquantified) environmental benefits (such as flow management and buy-backs of water entitlements for environmental purposes).

What’s the downside?

Despite the success of water trading, there are lingering barriers to its effective operation. One issue is the high administrative cost of participation, made harder by the overlapping rules and regulations of the various states involved.

There is also a perceived lack of confidence among some that water allocations are being effectively enforced. Some people query whether the New South Wales Department of Primary Industry Water (DPI Water), the state water regulator, has the resources needed to stop people illegally extracting water, thus avoiding the need to purchase allocations. DPI Water is aware of these concerns and has concentrated greater effort recently on compliance technology in particular, installing improved metering on licenced water extraction sites.

Another key concern is the accurate measurement of extractions. The age, lack of proper maintenance and installation of many water meters mean they have questionable accuracy, with one study suggesting an average of 2.2% under-reading of volume extracted. If this were confirmed and acted upon by the regulator, DPI Water estimates that it could see up to a $21 million write-down in the value of the water trading market. Perhaps unsurprisingly, increased accuracy of water metering is largely supported by water allocation users.

According to Dr Cameron Holley, other concerns relate to the unequal operation of different water markets across Australia, different levels of investment in water efficiency infrastructure between regions and the uncertain environmental impacts of the regime.

Where to from here?

Better public access and searchability of water rights registers are areas in need of improvement. Improved compliance measures and a greater focus on the accuracy of meters would also assist the long-term viability of the water trading market. The anticipated commencement of the Commonwealth trading rules in 2019 will bring greater certainty about the future, but for now, the water market is showing signs of good health and presents an interesting, portfolio-diversifying investment opportunity for both land based and non-land based industries.

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