Draft Basin Plan and the Australian Water Project

Read CEDA, Chief Economist, Nathan Taylor's commentary on the release of the draft Murray-Darling Basin Plan.

Information on the Draft Basin Plan and the Australian Water Project 

The draft Basin Plan was announced by the Murray-Darling Basin Authority in late November 2011. It has attracted a substantial degree of criticism over the various scenarios proposed.  Stakeholders- from farmers to environmentalists to politicians- have voiced dissatisfaction with the Plan, and have argued against it on the basis of emotion rather than reason.

The draft plan to recover 2750 gigalitres per year for environmental purposes will be achieved through an expansion of the water entitlement buyback program and investments in water savings infrastructure.

The buy-back program helps resolve the major issue of over-allocation of water entitlements in the Murray-Darling Basin. Since water rights are freely traded, the government is able to purchase water entitlements from farmers and use this water for environmental purposes. The buyback program involves the government purchasing a set amount of water entitlements from the open market. Given the voluntary nature of the program, irrigators only participate if it is more profitable to do so than it is to farm.

The Australian Water Project (AWP), a joint venture between CEDA, Harvard University and UniWater (University Melbourne and Monash University) is an independent analysis of Australia's water policy. A Discussion Paper, Crisis and Opportunity: Lessons of Australian water reform, was launched on 22 November that canvasses options in this important area of public policy. A number of contributions in this document add significant insights into the draft Basin Plan.

The contribution by Professors Peter Dixon and Glyn Wittwer uses econometric modelling to critique various claims on the impact of the buy-back program.

Job losses associated with the buyback program are much less than would occur if the same amount of water was removed by a drought. The modelling finds that jobs in the southern basin fall 500 below forecast by 2018. In the drought scenario, 6000 jobs were lost relative to forecast during the worst of the drought.  Due to the lost years of farm investment,  jobs remain 1500 below forecast a decade after full recovery from drought. The buy-back program provides an income stream to farmers that they either invest in their properties, creating job opportunities, or use to offset the loss of income associated with the lack of water availability.

One claim frequently made is that the buyback program will undermine the international competitiveness of agriculture in the Murray-Darling Basin. However, modelling finds that any increase in the price of water resulting from the buy-back program is largely offset by reductions in the rental costs associated with irrigable land, resulting in no discernable impact on the international competitiveness of the sector.

Another assertion is that the buy-back program will be like a permanent drought for regional communities. This is inaccurate as the income realised from selling water entitlements will be more than the irrigator would have made through farming. Furthermore, the dry-land productivity of remaining irrigators is unaffected.

Various contributions to the AWP discussion paper identify the substantial improvements to the efficiency of infrastructure that can be obtained through the application of modern technology. Professor Iven Mareels describes how the application of information technology can transform the productivity of existing water supply infrastructure. The resulting aggregated efficiency improvement from both off-farm and on-farm investments can exceed 40 per cent.

The AWP discussion paper recognises the importance of getting water policy right. It will provide valuable lessons for other water systems in Australia and in the rest of the world.  The AWP will examine the Murray-Darling Basin Plan in greater detail through soliciting contributions and undertaking workshops with water experts, both urban and rural, prior to the release of the final volume in 2012.

By Nathan Taylor
Chief Economist, CEDA