Murray-Darling Basin’s murky trade in water

Water is scarce in a country prone to droughts, which are likely to become more frequent. Scott Morrison has said building drought “resilience”, which replaced the goal of drought “proofing”, requires comprehensive understanding and integrated management of our soil, vegetation and water resources. One of the tools in managing this precious water is a trading system. Water’s most valuable use — say for grains, nuts, vegetables, viticulture or meat — often changes as commodity prices change. So trading in water markets, the theory goes, helps irrigators access water where it is wanted most, to be put to its most productive use. As the Australian Competition & Consumer Commission sees it, water trade allows us to produce more of the things people value the most, which raises the wealth and welfare of the community.

But the $1.5bn water market in the Murray-Darling Basin has failed to deliver on its promise. As we reported last year, water was being hoarded, prices in some areas jumped fivefold and growers were put in a perilous position while speculators made a motza. Last September the Morrison government called in the competition watchdog to investigate and take action on any improper trading of water. The government earlier had asked the ACCC to provide policy advice to improve the water market in the basin, where 90 per cent of trading occurs. In an interim report released on Thursday, the ACCC found the rules are deficient; enforcement of them is inconsistent and limited; and the overall governance of the basin’s water trade is troubled.

The ACCC waded into the basin’s murky world of oversight and found it to be inconsistent, fragmented and complex. There are few rules to prevent market manipulation, conflicts of interest abound and water brokers have no specific industry regulation. A single regulator, akin to one operating in financial services, makes sense. The ACCC also found information crucial to the business decision-making of irrigators and traders, such as allocation policies and river operations policy, is not always well communicated or easy for users to access. Sophisticated traders can easily exploit market flaws. Yet simple identifiers, such as an ABN, would improve market transparency in trades. As well, the ACCC said the rules that managed the trade and delivery of water might not always reflect the physical realities of the river system, particularly in the southern basin.

In some areas there is too much regulation and in others not enough. When water is scarce or demand is rising, the problems make a bad situation worse. So more of the same won’t work. But dismantling the entire system, returning to the era when water was tied to land, as some still advocate, is not the way forward. The ACCC points out trading can deliver big benefits to irrigators: extra income, more production, new business models and freeing up capital to invest on the farm. Ditching trading would hurt the economy and significantly diminish the value of water entitlements, which make up a substantial proportion of farmers’ assets. One estimate values tradeable water rights at $22.7bn.

In a nutshell, the water market has outgrown its governing framework and there is a lack of trust. “We need to rethink how these water markets are governed,” ACCC deputy chairman Mick Keogh said, adding “decisive and comprehensive” reform was needed. The pay-off for small and large water users, the community and the economy could be substantial. In 2017, the Productivity Commission found water trading had made the irrigation sector “more prosperous and resilient”. Using water optimally also would provide a much-needed confidence boost to the ailing agricultural sector. The National Farmers Federation has a goal of lifting the value of production to $100bn by 2030. But to achieve that, farmers will need to be more innovative, alive to consumer choices and able to attract investment and workers. Governments need to make tough policy choices to protect the integrity of water allocation, especially in the basin, where one-third of our food is produced. The ACCC’s final report to the federal government, due in November, has the potential to set a course for open, fair and efficient water trading in the basin. But it will require co-operation among basin partners to get the architecture right.