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 sin