Water management options for urban and rural Australia
The spin and economics of irrigation infrastructure policy in Australia
Professor Lin Crase
Professor of Applied Economics
Executive Director of Albury-Wodonga Campus
La Trobe University
Lin Crase has a PhD in economics with a strong interest in water policy, institutions for managing water allocations, water property rights and analysis of the trade-offs between sectors that compete for water access. He is currently managing research projects for the Australian Government and regularly provides advice to state and regional agencies on water policy.
He has published three books and more than 75 refereed journal articles along with numerous book chapters, conference papers and invited contributions. He is regularly sought out by the media and others for his views on the political economy of water policy in Australia.
The direction of water policy in Australia was fundamentally altered with the release of the Howard government’s National Plan for Water Security and the subsequent Rudd government’s Water for the Future manifesto. The major shift embodied in these policies was the return of public subsidy for irrigation infrastructure. This policy change was accompanied by a narrative that disguises important public policy ramifications – what some might call ‘spin’. Lin will explore this discourse with the view to make taxpayers and voters more aware of its pervasive nature. He also cautions against public subsidy of irrigation infrastructure as a panacea for dealing with the challenges associated with managing water in Australia.
The spin and economics of irrigation infrastructure policy in Australia
Professor Lin Crase
I am delighted to be here and to accept the invitation of the Academy to talk to you. I need to make a bit of a confession about the genesis of this paper. I have been working on water policy for about 15 years and about two or three years ago I started to carry around this piece of paper. It was a bit like a security blanket. Whenever I was in a meeting and I heard somebody say something that annoyed me, I used to add it to the list. So I was making out this list of words and I was thinking, ‘I know what I’ll do. I’ll make some sort of puzzle out of it; maybe I’ll make a crossword out of it.’ Then about six months ago some people asked me to write an accessible piece for a particular journal and so I thought, ‘Oh well, I’ve been putting off doing this,’ so I sat down and wrote this particular piece.
My topic is about spin and it is particularly about the economics of irrigation infrastructure policy in Australia. I guess, when you are thinking about irrigation infrastructure, it is important to understand that, if public funds are invested, there is an opportunity cost to those funds. Economists are trained very early on to understand the concept of opportunity costs but I think at times we forget that, when governments promise certain things, invariably they come with a cost and invariably other things will need to be forgone.
I live in Albury-Wodonga, which is on the border of Victoria and New South Wales, and I actually look out over the Hume Dam – when there is water in it. But, interestingly, a few months ago I had a little pamphlet delivered to my letterbox; the pamphlet related to the Food Bowl Modernisation Project in northern Victoria. So, as I commence this talk, I think it is helpful for you just to take a look at what was on the back of that pamphlet.
[Slide: DISCLAIMER]
This publication may be of assistance to you but the State of Victoria and its employees do not guarantee that the publication is without flaw of any kind or is wholly appropriate for your particular purposes and therefore disclaims all liability for any error, loss or other consequence which may arise from you relying on any information in this publication.
It does make you wonder why they bothered to print the pamphlet. I did think, as somebody who spent many years teaching undergraduate students, that many undergraduates would dearly love to have that on the front of their assignments when they hand them in.
[Slide: Some Starters]
This slide just gives you a flavour of the types of things that I was jotting down on my piece of paper – things that were annoying me. So this is somewhat of a cathartic piece.
Just to give you the background, my basic hypothesis or the thesis of this paper is that water policy in this country changed markedly in 2007. The start of that change was a thing called the National Plan for Water Security, which was released by the then Prime Minister, John Howard. In my view, it had the traditional Hollowmen feel about it. It had 10 dot points, it was to be done over 10 years and there was $10 billion attached to it. The reason that I contend that this was a U-turn in policy is that, up until that point, governments had pretty much agreed through the National Water Initiative process that they were over the idea of subsidising irrigation infrastructure; they were over the idea of subsidising water usage activities. Basically they said, ‘If it doesn’t pass this cost test, we’re not going to do it. So, if it doesn’t pass economic muster and it doesn’t pass environmental muster, we’re not going to do it.’ But in 2007 we changed all that and went back to this notion that somehow subsidising irrigation infrastructure was a useful thing do.
Of course, the great thing in talking about water is that, regardless of whether you vote Labor or Liberal, I can talk about water and be apolitical because both parties manage to do it pretty badly. So, not to be outdone, the Rudd government, of course, then announced its own manifesto, Water for the Future, to which $13 billion is attached. So $10 billion was upped to $13 billion. Now, the lion’s share of this is to be allocated to irrigation infrastructure projects, so most economists actually regard this as a trip back to the future.
In essence, I think what I’m hoping to do this evening is to highlight the worst of these projects. Unfortunately, the spin doctors are busy at work as we speak, so I cannot claim that my presentation is comprehensive; but I want to highlight some of the worst cases so that you will go away thinking a little more seriously about water – and, as I have indicated to many people, including the press, I think this is a very serious policy issue because at the end of the day we all stand to be much poorer as a result.
[Slide: Dividing the Spin]
What has really emerged, in my view, is a water policy vocabulary that seems to have the objective of pretty much confusing straightforward thinking and, broadly speaking, I think it divides into two main themes. The first seems aimed at clouding the economic costs associated with the current policy choices around infrastructure. In essence, this is entirely counter to the National Water Initiative, which I have explained to you. An important subcomponent of this theme is the effort to conflate private and public objectives as well as social, economic and environmental ambitions. In fact, if you look at some of the issues papers that are floating around on the Murray-Darling Basin Authority’s website, you will see that the people at that authority have the very difficult task of crafting a Basin plan. In my view, it has been made all the more difficult because the plan conflates a number of objectives. In economics, we talk about this thing called the Tinbergen Rule, which basically says that, if you have an objective, you need at least one policy instrument. We have a plan that seems to be doing all sorts of things for all sorts of people. It seems to me that the plan would be better just focusing on one objective and using other policy instruments to deliver others.
The second theme in this particular discourse appears to be aimed at mystifying the resource itself. In this group lies a large range of expressions which are crafted to make relatively straightforward hydrological and engineering science as inaccessible and confusing as possible. (I couldn’t resist putting that little picture at the bottom of the ‘Dividing the spin’ slide. A colleague of mine, a scientist called Terry Hillman, found it interesting that while travelling around Europe he came across this sign on which the ‘University of Economic Sciences’ would be pointing to the right and even be twisted slightly to the right, in the same direction as the Market. Anyway, that is something for ecologists, as it would probably mean something to them.)
[Slide: Infrastructure Costs Sustainable Rural Water Use Infrastructure Program ]
I’d like to turn first to the first strand of concern around the spin. It is not necessary to stray very far even from the titles that have been assigned to the infrastructure programs to find the handiwork of the spin doctor. At the national level we have a program called the Sustainable Rural Water Use Infrastructure Program and it holds centre stage with a price tag of about $6 billion. What is not at all clear to me and to other people who have looked at the history of irrigation is how public investments in irrigation infrastructure can be called ‘sustainable’. Given that some elements of this industry have been subsidised for almost a century and still seem a long way from standing on their own feet, I really do puzzle as to how we can use the word ‘sustainable’ for such a program. However, this is hardly the worst case of spin. Top of the list from my perspective is the Victorian Food Bowl Modernisation Project. It is an ambitious project which involves replacing irrigation gates and measuring devices in gravity-fed irrigation areas with sophisticated engineering structures. The cost of stage 1 of this project is $1 billion, with a similar amount required for stage 2. The rationale for this project rests heavily on the notion that water can somehow be saved by these devices and this then can be used to shore up supplies for Melburnians and to provide a dividend for the environment. Now, the dodgy economics of this project are quite well documented if you want to look it up, but it is worth focusing for a moment on the rhetoric that surrounds this particular project.
‘Basic food’ is an interesting thing. Making food the centrepiece of the project raises some interesting questions for me. In essence, the narrative is crafted to play to our most primal human needs as a rationale for public investment. For example, would the project have the same appeal if it centred on modernising the production of illicit drugs and, instead of the Food Bowl Modernisation Project, it was called the ‘illicit drug modernisation project’? The fact is that 12 per cent of the state’s wine grapes are produced in the region; this also implies a particular definition of food which may not sit comfortably with some elements of society. I am not being a wowser here; I love a drink of wine and I regard that as food – in fact, I regard beer as food as well – but I am sure that, when people read things like the ‘Food Bowl Modernisation Project’, they will not necessarily think about 12 per cent of the state’s wine grapes.
An extension of this approach is the ongoing reference to ‘food security’ because this is somehow used as an implicit justification for government support. In my opinion, food security has no logical place in expenditure on local irrigation infrastructure unless food producers are about to provide their outputs at no cost for distribution to the needy, most of whom actually do not live in Australia. To highlight the absurdity of this food security argument, it is worth noting that 45 per cent of the milk produced in this region is destined for export – not surprisingly, to countries that actually pay for it. To argue that taxpayers’ money is required to support this is both mischievous and, in my view, potentially harmful to the efforts of people who are genuinely interested in food relief in areas of need.
In a similar vein, the appeal to the ‘modern’ within this project is obviously contentious if not somewhat trite, given the longevity of subsidies for engineering fixes in irrigation. There is nothing particularly modern about a policy that subsidises irrigation in this country. A related ploy is the invocation of the water-use efficiency concept. I am sure that you have all heard that term; you probably have not thought much about it, because efficiency is a good thing. You never hear anybody say that efficiency is a bad thing. Indeed, the gold-plated engineering being witnessed in northern Victoria’s irrigation district is heavily premised on water-use efficiency arguments. Chris Perry, a respected international water scholar, is particularly wary of these concepts, noting value-weighted terms like ‘losses’, ‘waste’ and ‘efficiency’ and how unhelpful they are. You may want to google ‘Chris Perry’ and read about water-use efficiency and what it really means because he is a very thought-provoking writer and is worth a read.
This is also where the two lines of narrative start to cross over – where you get confusion about hydrological bases being used to compound spurious arguments that seek to disguise the real cost of particular government projects. It needs to be understood that, if water is fully allocated in a catchment and if economic incentives give the resource a marketable value, terms like ‘waste’ and ‘inefficiency’ will be the exception and not the norm. As I frequently point out to students, newspapers and politicians, when water is supposedly lost en route to an irrigation farm or wasted by a farmer as he applies it to a crop, it does not go to Mars but remains within the hydrological system, often underpinning other uses. Now, there is a caveat on that: obviously, if water ends up in a saline sink, it basically loses all economic value and all environmental value. But what we are talking about here are projects which are based on the notion that all the water that is magically saved was somehow disappearing into a saline sink and was of no use. We know that is not the case.
This has been borne out by recent work of the Productivity Commission, also a worthwhile read, which found that water saved through publicly funded infrastructure was around five times more expensive than water purchased from the market. On this basis alone, it is very hard to justify terms like ‘efficiency’ and ‘savings’ as a rationale for this type of project.
[Slide: Infrastructure Costs (upping the ante)]
In an effort to deflect some of the criticism from people like me about the costs associated with water infrastructure projects, politicians have increasingly resorted to changing the perceived status of the work that they are doing. This amounts to upping the ante by dubbing projects as ‘iconic’ or part of a ‘nation-building exercise’. The following example is one I can remember when I wrote down ‘iconic’ on my list. I was in a meeting where people were talking about rainwater tanks. I drew it to somebody’s attention that when you look at the data on rainwater tanks in many instances they are not worth having. I explained this to a fellow from the South Australian government and he said, ‘Yes, but’ – you know, he was bragging that the South Australian population has more rainwater tanks per head of population than anyone else – ‘they’re iconic.’ I thought, ‘That’s a really odd way to describe it.’ When I think of icons, I think of big crucifixes and people carrying them on their shoulders and I just had this image of people walking up the middle of Adelaide carrying rainwater tanks on their shoulders!
So there is this tendency to up the ante by calling things ‘iconic’ or ‘nation building’. Their iconic status presumably relates to the symbolism attached to man’s capacity to subjugate natural resources or other aspects of our agrarian traditions. The implication is that such projects should not be subject to the usual standards of fiscal scrutiny; to do so might be considered un-Australian. It is hard to see how subsidised, gold-plated infrastructure used to produce relatively low-value products, by world standards at least, builds a stronger nation. If these projects are building anything, it is ignorance within the electorate and complacency on the part of the polity to deal with the problem in a serious way.
Not wishing to appear to dismiss all elements of fiscal probity, the polity often requires that water infrastructure projects be subjected to business cases or due diligence processes. Stage 2 of the Food Bowl Modernisation Project, which is being funded by our taxes, will purportedly be funded only if the benefits of stage 1 are shown to outweigh the costs. Perhaps this is where the spin doctors have shown their greatest enthusiasm for muddying the waters. For long-time observers of water policy like me, the apparent enthusiasm shown by elements of the polity implies to me that the deal has already been done, regardless of any substantive holes in the business case. It seems to me that the original decision will stand and I suspect that stage 2 will proceed, regardless of how bad the business case is.
One technique used to conflate these issues is to employ a type of analysis that shows the wider economic ramifications of investment choices that have actually been made already; it is called ‘input-output analysis’. These impacts are then used to rationalise similar choices in the future. Put simply, having settled already on spending large sums of public money on irrigation infrastructure, the costs are then justified on the grounds that somehow the regional economies have gained something of a boost because of all the related engineering works. As an aside: if you read through the Productivity Commission report on buying back water, you will see that in actual fact some of the modelling shows that regional communities get a boost when governments come in and buy water and not necessarily when people come in and build infrastructure projects.
But there is a more serious problem with this whole approach. The trouble with this approach is that it potentially uses the side effects from one bad decision to justify even more bad decisions. Let me give you an example. Let us say that we take a policy decision to pay residents of inland Australia to dig large holes in their backyards and then fill them in again. One consequence of this policy choice would be a boost to regional economic activity, especially in high unemployment areas – because people who were previously unemployed would now get paid to dig a hole and fill it in again. Other spin-offs which we could model would be the rocketing sales of shovels, or automated diggers if we wanted to call it a ‘modernisation hole-digging project’. However, most voters would realise the futility of such a policy and undoubtedly baulk at paying your neighbours to dig holes and then to fill them in again. To measure the wide-scale employment effects of this policy choice and then use it to justify the original decision would be bad enough; to use the results to then do it again seems to me to be even worse.
Now, in the case of the Food Bowl Project, this is basically what is happening. A well-respected academic economist was commissioned to model the wider economic impacts of the construction and the results were then used to help justify the cost of the project. However, the treatment of this analysis set a new benchmark in mediocrity, with the final business case being reported as inexplicably adding another $624 million of net benefits unbeknownst to the bloke who did the original analysis. There are other numerous flaws with the business case, but it is hard to see how these will actually be taken seriously when so much political capital has already been laid down for these projects.
A similar problem bedevils irrigation infrastructure decisions that are made on the run. You might recall that federal support for the Food Bowl Project in Victoria was secured by the state government only after protracted and difficult discussions around ceding the state’s constitutional rights over water to the federal government. This occurred as part of the COAG discussions under the then new Rudd government. The Howard government had failed previously to persuade Victoria to be party to the federal Water Act 2007. However, upon realisation of the largesse of the new federal government, the other Basin states quickly sought additional support for irrigation infrastructure. In the case of New South Wales, this amounts to almost $1.4 billion worth of infrastructure subsidies that were described at the time as being ‘at the conceptual planning stage’. I don’t know how many of you have children but I have a daughter who will be 20 this year. It did make me wonder what I would do if my daughter were to come to me and say, ‘Dad, can you give me $1000? I’ve got an idea; it’s at the conceptual planning stage.’ I do not know what you would say as a parent, but I would say, ‘No. Go away and think about it a bit longer. Come back when you have a real plan and you’ve worked it out’ – not $1.4 billion for something that is at the conceptual planning stage.
This approach places considerable pressure on bureaucrats who are reviewing business cases and auditors who are undertaking due diligence. In effect, the political decision has been made to spend these funds and the spin becomes an important component of usurping any serious analysis of the public expenditure.
[Slide: Infrastructure Costs Drought proofing Future proofing]
This slide shows a couple of other terms that I simply could not help but mention. I noted in the introduction that there is this conflation of a range of objectives and this is thematic throughout the discourse. While the use of terms like ‘social impact’ can be taken to imply that these are the wider economic impacts used to justify expenditure, there are at least two other words that I want to have a crack at. At the local and regional level these include the concepts of ‘drought proofing’ and ‘future proofing’. At a national and international level, the notion of food security also fits in here, but I’ve already dealt with that.
Australia’s rainfall is inherently variable and it is predicted to become even more so as the result of climate change. Early white settlers in this country were made intimately aware of this variability and most of the engineering effort since has been about trying to normalise the availability of water. This has basically amounted to building large storages for surface water – in fact, much larger than in most other parts of the world and, of course, much more expensive as a result. So the idea of being drought-proof precedes the more recent policy narrative, although its place in the Australian psyche obviously persists, as the politicians are all too keen to suggest that we continue to live on the ‘driest continent on Earth’ – which is a dodgy metric as well.
Despite the very large water storages that support irrigation in the southern Murray-Darling Basin, a decade of very low rainfall and run-off has seen these supplies dwindle. This is not to say that there is no water; rather, water availability is too low to meet the very substantive demands that have been created by generous allocations to irrigation over time. For agricultural economists, drought is simply a risk that can and should be incorporated into decisions that involve the use of water. Endeavours to proof against drought involve completely ignoring the economic and environmental costs of engineering solutions. Is low-value irrigation to be drought-proofed by building expensive desalination plants and pumping heavy water back uphill? Maybe this is a sensible response at some point when the relative price of food is such to justify the investment, but this is hardly the status quo. Surely one way to limit the economic impacts of drought is to allow for a reduction in demand, using water markets. This may not make enterprises drought-proof in the conventional sense of the term, but I suggest that it will certainly reduce a lot of futile calls on the public purse.
‘Future proofing’ is one of the more perplexing terms to emerge in the water infrastructure debate. Presumably, the term is meant to imply that some omniscient government that sponsors the deployment of engineering works can somehow shield us from the challenges of the future. Of course, this is hardly a convincing case, given the track record of government involvement in agricultural production decisions in this country. Moreover, there is emerging evidence that much of this infrastructure will actually do a very poor job of serving future agriculturalists. Farmers will need to contend with zero water availability for several years running if the predictions of climate change hold true. In this environment, lavish irrigation infrastructure acts as a millstone for farmers rather than as a panacea making them adaptable to a challenging future.
A paper by Jeff Connor, which came out last year, is worth reading. Jeff works for the CSIRO. The thing that people struggle here to understand is that, if you think about climate change increasing the variability of the available water – we are not just talking about an average reduction in water, we are talking about periods when there may be no allocations – and if you have a perennial agriculture – in other words, if you have a tree that needs water every year and you go through three years when there is not any water – chances are that you will not have a tree. And yet governments, particularly in my part of the world, Victoria, have hitched their wagon to the view that somehow perennial agriculture is what they consistently regard as high-value agriculture and they will move heaven and earth to keep it there and will use a lot of public money at the same time. When you do the modelling of this, as Jeff Connor has done, you start to realise that you get to a tipping point where perennial agriculture is actually of a much lower value than annual agriculture. With annual agriculture, when you have a period of two or three years, you can turn it off and sell your allocation and then when you have big allocations you can start it up again. So, although I am sure that there are plenty of people here who demonise things like cotton and rice, these may well be the most profitable high-value enterprises in an environment where you have no water for a period of years and then lots of water in other years. So do not necessarily believe that perennial activity is high-value activity.
[Slide: The Mystique of Water]
I want to quickly touch on the second strand of discussion about water: the mystique of the resource itself. To date, I have tried to focus on those elements of water infrastructure vocabulary that subtly and perhaps not so subtly disguise the economic costs of projects. There is an inherent overlap, though, between that narrative and another narrative which is around hydrological phenomena. This second strand of dialogue is also characterised by widespread misunderstanding of water management. Take, for example, the most common unit of water measurement applied in irrigation. The Australian convention is to use megalitres or gigalitres to account for water in irrigation. Yet, if you are an average household, you will receive a water bill from that fine utility ACTEW specified in kilolitres. In addition, the average household has been consistently shown to know relatively little about its own water consumption behaviour, let alone the relationship between the few hundred kilolitres it might use in a year and the hydrological cycle. A kilolitre is relatively easy to visualise; it is a thousand litres, so it is a cubic litre. By way of contrast, a megalitre is a million litres and is much more difficult for most of the population to visualise. For this reason, it has become common practice for politicians to describe this as an Olympic swimming pool, although troublesome details like the number of swimming lanes, the depth and so on are usually left out. A gigalitre represents a thousand megalitres. Once again, this is pretty tricky to visualise, so politicians tend to employ analogies like the Sydney Harbour – or Sydharbs, as they are now referred to. So, if you see a Sydharb, that is the amount of water that is purportedly in Sydney Harbour.
While such analogies might be construed as an attempt to help the masses understand the magnitude of the policy decision, it is my contention that such metrics are not particularly helpful at all, particularly for the uninitiated. Most farms use hundreds or thousands of megalitres in a year, while a household that leaves a tap running for an hour will usually discharge a single kilolitre. Oddly enough, the latter – if you leave your hose running for an hour – is widely demonised and considerable effort goes into preventing urban water users from watering gardens at particular times of the day, let alone hosing down a concrete surface. This is not to support such recalcitrant behaviour, but it is worth noting that the effort to save urban water by modifying demand seems to be at odds with the determination to deal with the difficulties of confronting irrigation by subsidising infrastructure to shore up supply.
A related mystery for voters is the notion of ‘environmental flows’, which are particularly pertinent in the context of the Basin plan. I wrote a piece yesterday for the Age, which was a little gripe about the Basin plan. It struck me as rather odd that the Basin Authority felt that this is a document that in an election could not be released. In fact, even the pre-pre-pre-plan could not be released. I found that peculiar: the Reserve Bank does not stop doing things when there is an election on, but we stop doing water planning.
One of the major forces for modifying irrigation is the strongly held view that inland waterways are severely stressed due to a lack of flow; thus water that is purportedly saved through infrastructure projects can be redirected to generate a flow that will then bring forth some favourable ecological response. Now, notwithstanding that most urban water users naively relate their modest adjustments in household water-use to improved environmental outcomes, there are a range of other problems that attend this concept. The ecological benefits of water go beyond flow. The ecosystems of Australia’s inland rivers are geared to extreme variability and it is the removal of this variability that is as problematic for indigenous species as is the reduction of flow itself. The upshot is that achieving an environmental benefit goes beyond specifying the volume of water. Things like timing, variability, duration and temperature are also important components, without even starting on the land use that attends particular environmental assets. So the Water Act, as some of you will know, only deals with water. It does not actually deal with people who want to put cattle into a wetland; it only deals with water.
While voters might not need to understand all of these intricacies, they should be cautious about the use of volumetric targets as an environmental performance indicator. The modest achievements of this thing called the Living Murray program that claims to have returned 500 gigalitres of water to the River Murray is a case in point. In fact, I have forgotten the numbers, but I think we had 6 gigalitres or something like that available this year. But the target was reached: we have 500 gigalitres in the Living Murray. So tick the box and move on to the next problem.
A final peculiarity is the trend towards using the water purportedly embedded in a particular product as some sort of policy guide. This has assumed the title of ‘virtual water’. Although not always invoked in conversations around water infrastructure, the concept, in my view, is dodgy enough to at least warrant some mention. Studies into virtual water have gained government sponsorship. I know that the Victorian government, for example, spent considerable sums of money for the Victorian Women’s Trust to do studies of how much water is embodied in various products. It seems like a rather peculiar thing that you would sponsor the Women’s Trust to do. Anyway, studies have been sponsored and they can tell you really important things like 16 kilolitres of water is required to produce a kilogram of beef. The clear implication of this, apparently, is that if we reduce beef consumption it will somehow take pressure off water resources in particular locations. Of course, the fact that most beef in Australia is actually produced in rangelands and in the tropics, not through irrigation, is ignored in this type of analysis. In effect, this type of approach fails to account for the relative availability of resources in different settings and it simply presumes that all water-intensive outputs are innately inferior; so, just because it has supposedly got more virtual water in it, by definition, it is automatically inferior. The other one that can be put in this basket is this lunatic idea of miles.
The notion that production or policy decisions should be made on the basis of use of a single input falls a long way short of sensible analysis of a resource allocation problem. Just to give you an example: I work for a university where we recruit people every now and then. Presumably, we are recruiting those people in order to produce an output; we are recruiting them as an input in order to produce better students as the output. I was trying to explain this to somebody the other day: what if the only input or the only thing we measured in the production of high-calibre students was the amount of office space. You need offices for academics to work in, so let us say that all we are going to measure is office space. What would be the policy outcome in our university? The policy outcome would be that we would only employ really short academics because they use less input ‘office space’ in order to produce the output. That does not seem like a very sensible policy choice to me, but that is basically what you do when you start talking about things like virtual water. When you start to make decisions on the basis of how much water is purportedly embodied in something without reference to the other inputs and the value of the output, it seems to me that you will end up with some pretty dopey outcomes.
[Slide: Concluding remarks]
The difficulties associated with water policy are not about to subside simply because the federal government has recently assumed greater influence in this sphere. If anything, the stakes are higher because the fiscal capabilities of the Commonwealth are not well matched with its experience in water affairs. Irrigation lobbyists will be queuing up to have their say and invariably these conversations will involve many of the terms that I have mentioned in this talk. Regrettably, politicians often know even less about water than the general public and can be easily confused by conflated arguments and complicated metrics. Recent proclamations – this is not a political statement, it is just a statement of fact – by the shadow minister for water about the extent to which he was going to reflect on the contributions of the highly respected Productivity Commission are illustrative of our problem. As taxpayers, we should take an interest in these affairs to limit the excesses and ensure that public funds are used for public and not private good. As citizens, we also have a stake in the longer term outcomes of these decisions. As it stands, the substantial public investments in irrigation infrastructure fail on both of these fronts and, in my view, should be halted immediately.
Discussion
Question: You have hoed into a lot of government activities, policies and statements. If you were sitting in the prime minister’s chair, what would you do to improve the water supply and make it more ‘efficient’? I hate to use that word after the presentation you have given here. But what do you think we should be investing into to make a more sustainable country?
Lin Crase: There are a couple of issues with your question. Why do governments need to invest? That is an important question to understand in the first instance. I was talking to some colleagues earlier. We are doing a small project on climate change at the moment and one of the things that I know is going to upset people is that we are going to recommend to a few people, ‘Don’t do anything.’ Governments are desperate to do things. They want to be seen to be solving problems. So, in the context of climate change, for example, if you sit back and think about climate change and about adaptation strategies – I will come back to your question in a minute – the benefits of adaptation will mostly be internalised. That is, the people and the businesses that undertake the adaptation strategies will do it because it is good for them.
So the question then becomes: ‘Well, what role does government have to play in this space?’ If they start doing things, you actually create a moral hazard, because then businesses will not do things because they will wait until they get a subsidy from government to do them. So I guess the message that we will deliver in that small project is that, unless you can identify what it is that government can do that nobody else can do – and that it can do better – probably a sensible thing is to do nothing.
In the context of what I would advise, currently – if I can shed some praise – one of the benefits of the current government is that they did actually get on with water buyback. I know that creates some angst in some communities and buyback was not given as much weight as infrastructure, but at least they got on with it and started to buy back some water. So, as it stands at the moment, with the money that has been allocated for buyback it looks as if about 20 per cent of the extractive entitlements in the MurrayDarling Basin will end up being owned by the Commonwealth environmental water holder.
Now, if you sit down and think about that, 20 per cent of extractive water rights is actually more than what some of the scientists were advocating when we did the Living Murray assessment. So it seems to me that at least we are well on the way to dealing with that environmental issue. But I am not comfortable that a Commonwealth environmental water holder based in Canberra is necessarily in the right place to deliver those ecological benefits. It’s starting to sound a bit like a pink bats scheme to me.
So, in terms of my advice, proceed with buyback. Get the plan done quickly because one of the problems with the plan is that it is creating enormous uncertainty around irrigation investment decisions. I know that much of my presentation sounds as though I am bagging irrigators. I am not bagging irrigators per se; I am bagging the notion that we should be using public funds to sponsor private irrigation activity. So irrigators at the moment face a problem in that there is considerable investment uncertainty because we are failing to provide them with the sorts of guidelines, if you like, in terms of what government is likely to do.
If you are asking me what I would suggest, I would suggest that we proceed with buyback as is planned and get that done and out of the way, that we should certainly hasten our thinking around how we will manage such a large volume of water in terms of time and delivery and those sorts of things and that we do not rush to do things; but I would almost guarantee that politicians will find that very hard to do.
I think I heard yesterday about some government announcements on water-sensitive urban design. This again is rushing to be seen to be doing things – rushing to be seen to be saving every drop of stormwater, for example, without thinking, ‘Well, where was it going previously? Have I actually created more water or have I simply created a problem for somebody else?’
Question: I would like to make a comment about that signpost on the slide you showed at the beginning of your talk. With economic costs and market forces pointing in the same direction, to the right, what was missing, of course, was a signpost pointing in the opposite direction with ‘ecological costs’ and, by and large, the more that market forces and economic costs go up, the more that erosion of ecological facilities go down. As the economist Kenneth Boulding rather rudely said, there are only two kinds of people who believe in perpetual growth: one is economists and the other is madmen. The question I would like to ask is about Cubbie Station, which I think holds several Sydharbs of water and which is being used to accumulate a fair amount of profit from cotton growing. Has anybody had the courage to work out a cost benefit analysis in terms of the ecology and economics of Cubbie Station? In other words, would the Murray-Darling River be alive now if there were no Cubbie Station?
Lin Crase: I will break my response into two parts. Firstly, the proposition seems to be that economists invariably will be anti-ecology and that somehow there is some other system that will necessarily deliver a better outcome. My observation would be that the deterioration of the ecological status of the MurrayDarling Basin happened long before we had markets. Most of those decisions were government decisions made while ignoring the advice of economists. So economists were bemoaning the establishment of an irrigation industry in this country back in the time of Deakin. They were warning that the comparative advantage of irrigation in this country does not exist and that you cannot have a sustainable irrigation sector in a country like Australia with such highly variable water resources, because invariably irrigation requires intensive investments; it also requires lots of labour, which we simply do not have. If you look at a map of the world, you will see that, if you are going to grow things like vegetables, you are an awfully long way from people who are willing to pay for them.
So I think there is a temptation for people to believe that somehow economists are at the root of some of the ecological problems. In fact, what we are enthusiastically doing at the moment is offering solutions. There is the market, for example; I talk about this 20 per cent of water. The Commonwealth is going to have 20 per cent of all extractive entitlements and it is going to be called the ‘environmental reserve’. It seems to me that there are some really useful market instruments that could be used in this case to get the best bang out of that particular buck of water. You might have, for example, trusts that bid in order to access that water so that they can then manage it to deliver the best environmental outcomes and be rewarded accordingly. So I would have thought that economics is not necessarily at the other end of the extreme of good ecological outcomes.
Perhaps I can talk quickly about Cubbie Station. It is located north of Menindee. If you think about the Murray-Darling Basin system, about 90 per cent of the water basically comes down the Murray system and about 10 per cent comes from the Darling system. So, if you are going to deal seriously with the issue, the issue is about the overextraction of water out of the Murray. Now, the Darling system does not have much regulation, it does not have many dams and weirs along it, so basically above Menindee Lakes it is unregulated in the sense that there are no dams to lock things up and let the water out at particular times. So buying large volumes of water in that part of the catchment is not actually very useful for you, because the way the system works is that the people who hold entitlements in that system have flow rules by which they can access water. Once the river reaches a certain height, they are allowed to pump the water. So that system is organised very differently to the Murray system, where people hold a volumetric entitlement which varies with what is in storage.
So, if you as the federal government buy Cubbie Station and then say, ‘Oh, we’re going to get all this down to the lower lakes,’ you somehow have to shepherd that water down the Darling River because, as it goes down, the water goes up, which means that the pumper next door then has the right to pump that water. This is what we call ‘supplementary water’. It is low-value water, because you cannot control it nearly as well as you can some of the regulated water in this other system.
Regrettably, what tends to happen is that the public wants to focus on a particular issue which will actually not do very much. Even if the government went out and bought Cubbie Station tomorrow, it would not do very much. The New South Wales government proudly announced that it had bought Tandow Station’s supplementary water licence. When the minister was asked, ‘Well, you do realise that you have just bought a lot of air, don’t you?’ he said, ‘Oh yeah, but Tandow has been doing it a bit tough lately.’
So you just need to be careful in terms of thinking about water if it is not water: ‘water ain’t water’. It depends largely on the way that the entitlements are crafted and the way the rights are crafted. So, just because it looks as though there is a lot of water there, it does not necessarily mean that it will solve your problem. The basic problem is that particularly the Murray section of the system has been overallocated and that is why the Darling is so important – because, by the time you get to Mildura and Wentworth, if it were not for a little trickle coming in from the north, it would not even get to the lower lakes. So, if you fix the problem upstream in the Murray, you might be some way towards fixing that basic problem.
Question: I’d like to go back to the water buyback issue you were talking about before. The Wentworth Group of Concerned Scientists released a paper a month or two ago which talked about the reduction in allocations, but it also talked about their perceptions of the inefficiency of the current water buyback process and that it was a lot of public money going to very private benefit and had the potentially perverse economic outcome of reduced rural activity and money leaving districts because farmers would sell up their water and move away. They talked about actually reducing the amount of money being allocated to water buyback and moving it into trying to maintain the economies of rural communities. I am interested in your thoughts.
Lin Crase: I have not read the Wentworth group’s contribution; otherwise, I might have my little pad out again. Buyback is the most sensible cost-effective use of public funds if you are trying to reduce overallocation. The other issues related to adjustment of communities and adjustment of industries are a separate matter. So, if you are trying to reduce overallocation, buyback will deliver the most volume of water for the least public dollar.
Now, there have been some ‘problems’ – the purchase of Tandow’s supplementary licence and one or two others – but, if you look at it, the bulk of that water is actually general-security water in New South Wales, some high-security water and some water out of Victoria; Victoria has pretty much only one sort of entitlement. By and large, the people who have sold that water are better off. So, if I were to walk into the streets of Shepparton tomorrow and hold up $2500, I would have a queue of people wanting to sell their water. Regrettably, what we have in this country are governments that somehow think they know better than these people and that it would be really nice to just lock them into poverty for another 10 years because otherwise we might all starve to death. Nothing could be further from the truth.
I have a simple view of things. I took some colleagues from India for a bus trip along the Murray River and it dawned on me when I got back that one of the best investments of public money we could have is to get a whole heap of people from Melbourne, put them on a bus and take them up to some of this country to make them realise just how bad it is – because I am sure that there are voters out there who think there are rolling green plains and happy little lambs jumping around. It is not like that.
People are making rational choices in selling their water and, unfortunately, some of those people are being prevented from doing so because of the acts of government. We still have the cap in Victoria. The Victorian government took the view that communal irrigation districts could sell only 4 per cent of entitlement in a year; now they go into a ballot. It is insane. Of course, the New South Wales government was not to be outdone: a couple of years ago, because they realised that most of the buybacks were happening in New South Wales, they put an embargo on buybacks. They did not bother to tell the farmers in Deniliquin, who had $4 million of buyback on the table, that they’d stopped that. This was $4 million that they were using to transition to growing dryland crops and they did not bother to tell them about that. So I find it a little difficult to understand why somebody would object to buyback. These are people who are making a voluntary choice about what their future should look like.
The reason we have these problems in irrigation is because we have had governments making those decisions for the last 100 years, saying, ‘Look, we have to have this green inland and this noble yeomanry running around the country.’ Nothing could be further from the truth. There is nothing noble about being poor. I think there are too many people who believe that there is something special about agricultural activity and irrigation and that somehow the things that work in all other dimensions of our life have to be cast aside and we need to have governments making decisions around this particular problem.
