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An Australian Water Tragedy

On a common assumption that Australia is in the midst of a water crisis, which many commentators believe could threaten the very fabric of society, the nation is on the threshold of making some big decisions on the management of water resources. Depending on the path taken, some very large sums of public money are at risk of being committed and possibly wasted.

 A wide range of solutions are being trumpeted from numerous directions and special interest groups but sadly there is no consensus and very little insight into the fundamental nature of what Australian water problems are.

 The bizarre underpinning of the Australian water crisis is that a huge volume of water – some 4,000 Gigalitres (1,000 GL = 1,000,000 Megalitres ) – is being splurged by irrigation on grass and pasture for very little financial benefit. This incredible volume of water, which is about a third of the current irrigation diversion, is twice the total annual consumption of the whole national urban sector. So with such waste, how can there still be a water problem?

 There are a number of myths on Australian water which are highly influential on public opinion and the direction of government spending, but which do not survive rational and reasonable scrutiny.

 Great Australian Water Myths

  1. Australia is the driest continent.
  2. The world would starve if we did not grow so much food.
  3. Water shortage threatens the basic economic & social foundations of the way we live.
  4. Irrigation agriculture in Australia is buoyant and highly productive
  5.  Water demand beyond irrigation is huge and will put great pressure on irrigators.
  6. Desalination of water is a positive step forward.
  7. It is unfair to move water from irrigation to urban users.

 The first myth is that Australia is the driest continent, and somehow this is really bad and woe onto us. Well in fact Australia is not the driest continent, Antarctica is, but it is uninhabited and so what? Surely a more relevant context is driest country? However, if we go there we find that Australia does not rate — she does not even get into the top thirty for being dry. Also, in terms of freshwater stress, Australia does not rate anywhere near the really stressed counties in the world where water withdrawals are over 40% of the total water available. In UNEPs terms Australia sits up in the least stressed category of countries where less than 10% of available water is withdrawn, and again on a per capita basis the availability is in the softest sufficient quantities category. (and before the experts go there, of course lots of countries are different!).

 Well, if Australia does have a dry issue it is that the cheapest sources of water have already been captured and unfortunately most of this easy water flows into irrigation. It is true that the highest relative share of the nation’s water withdrawals go to irrigation and the country sits with the highest rank of countries that devote large shares of often limited water to irrigation and growing food.

 And then we get to the second myth, “we really do need all that food”, right? And of course … “the world would starve if we did not grow so much”.

 The reality of food abundance is acknowledged by the ABARE where research over the last 30 years has confirmed a sustained downtrend in Australian real food prices while output has increased steadily. Actually, the international perspective on food prices is quite a bit more dramatic with the agricultural terms of trade generally heading steadily lower for the past 100 years. At this stage the most important influence on this trend is a very high level of agricultural subsidisation in the US, Japan and Europe which ensures that huge surpluses of food are produced at prices too low for poor country farmers to compete with. Thus, we find food dumping in the poor countries, resulting in the collapse of local pricing and market devastation as poor farmers are unable to compete

 Perceptions that Australian farmers have something to contribute in this distorted market are difficult to justify, but the country still remains in the top rank of global food exporters.

 Ironically, it is a fact that the first irrigation schemes in Australia were constructed by engineers and builders without any appraisal of prices or markets for irrigated produce. Sadly most of the early irrigation schemes went bankrupt as it was discovered that relative to the very high infrastructure costs there was very little market for irrigated agricultural product. As a response to this failure, the early political leaders adopted the attitude of build it and they will come and proceeded to dam and modify just about every accessible water system in the country. They did this without any substantive financial analysis or justification and apparently for a range of often irrational secondary reasons. Thus, Deakin’s comments in 1886 that … “the people would be swept away, and the land returned back simply to sheep farming”, remain as the strongest words justifying the expansion of irrigation ever since.

 Even today it is not clear that there is sufficient market to sustain the massive structure of irrigation which has been put in place. Irrigation has enabled a lot of food to be produced cheaply to the extent that large areas of dry land farming, where Australia does have a significant competitive advantage, are compromised. Witness the current financial stress of the dairy farmers in Tasmania and Victoria. However, it is also notable that the irrigation sector is having difficulty in finding sufficient market and we find that more than half of the nation’s irrigation water is sprayed on grass, pasture, and low value cereals, for very little efficient food production and very little financial return. In fact according to the latest statistics, the bottom half of irrigation has not returned a profit recently, despite the high level of subsidization.

 The third myth is that the nation has a serious water shortage which threatens the basic viability of the economic and social foundations of the way we live and must accordingly require an extraordinary level of public attention and financial commitment.

 Some of this myth is explained in relation to dismissing the first myth as far as the concept of water stress is concerned. The important recognition to understanding the myth of scarcity is that apparent scarcity can be a function of a distorted market structure. Basically, if you have miscalculated the market and have made way too much of something, you can get rid of it by reducing the price a good deal. Ironically, if you drop the price far enough you can actually create excess demand. In the end you will have lost a lot of money. Sadly, the best examples of shortages have occurred in certain failing states and who could forget the mess the Soviets got into with cheap bread. Surely a modern democracy such as Australia can do a little better than this?

 But this is the history and reality of water provision to irrigation in Australia.

 What our early leaders did do was to create a massive water surplus in the cause of nation building which could only be disbursed and thus justified by essentially giving the water away. In the very early days of irrigation, the prices for water did not capture anything but a very small fraction of the operating costs of getting water to the irrigators, and for a range of institutional reasons it has been difficult to increase those prices since. Even today under the guise of cost recovery it is not uncommon to find irrigation prices lower than $20 per megalitre and there are some in NSW down to $4. With cost recovery, most of the capital assets have been conveniently sunk and written off, and the remaining systems are accounted as having little of their construction or replacement value. Of course there are many other cute accounting ways to make cost recovery seem respectable.

 The status quo then is that while there is not much of a market for irrigated produce, the exceptionally low price of water means that it is still possible for some farmers at the low value end of irrigation to eke out a few dollars return, but it is only a few dollars and only occasionally. Interestingly, ABARE data on farm productivity in the Murray Darling Basin indicates that despite the distortionary downward pressure on food prices brought on by excessive irrigation, incomes to dry land farming in the general region are higher and more stable.

 The big picture of Australian irrigation is that quite a bit less than half the irrigation water is producing high value crops with a reasonable return, whilst the other half is stuck with low value, dairying grains, hay and pasture. With the water price exceptionally low it is still possible for the low value irrigators to make a living – some of the time – but they are not traveling well. Recent ABS and ABARE information clarify that the bottom 6,700 GL of irrigation on dairy, pasture and hay actually made a loss of some $160 Mill in the most recent statistical period, while the top 1,200 GL of irrigation on vegetables and fruit netted a profit of nearly $1.1 Bill. 

 And that was the fourth myth, that irrigation agriculture in Australia is buoyant, bountiful and homogeneous. It is not. The reforms brought on by Council of Australian Governments and the National Water Initiative, threaten to squeeze the low value irrigators out very slowly. They will go broke drop by drop, tear by tear, with their local communities dragged down with them. Many are hoping to hang on and sell their water rights, but what they don’t realise is that the water demand on the other side is not that great. That was the fifth myth – that the water demand in Australia beyond irrigation was huge. It is not.

 The irony of the great Australian water shortage, is that urban demand is not that gargantuan and certainly does not represent much of a threat to the irrigation sector. The fifth myth was that urban water use is and will put a great deal of pressure on irrigators. It will not, and that will be the conundrum for the very many low value irrigators hoping to be bought out at high prices.

 In fact urban and industrial water use is quiet small compared to irrigation use, and the recent heavy restrictions and price scares in all the nation’s cities will probably slow urban water demand for the next ten years. So not that much threat to the big pool of irrigation. Irrigators use somewhere near 12,000 GL of surface water per year while urban and industrial users squeeze out about 2,000 GL per year. It is hard to see how future urban demand will eat much into that huge 12,000 GL. Ironically, water use per capita in Brisbane has fallen quite dramatically to about 150 lit per day while the water authorities seem to need 230 lit per day to balance the books, and it was only a few years ago in 1987 that cities such as Brisbane were using nearly 500 lit per person per day. 

 But urban and industrial water is exceptionally costly and water will need to be planned here for the future. The sixth myth is that desalination of water is good, and is a positive light at the end of the tunnel for all our cities. But desal is incredibly expensive and not particularly environmentally sensitive in terms of the energy – carbon footprint. Desal will cost the urban user close to $10,000 per megalitre with retail margins, up from the current level of about $2,200 per megalitre.

 But while the cities are currently paying in the order of $2,200 / ml, with the prospect of desal at $10,000, standard irrigation rates of a mere $20 /ml are beginning to look obscene. In this setting it would seem common sense to consider moving some of the exceptionally low cost water from low value irrigation to over the top cost urban users. This abnormality is equivalent to the country cousins getting their Grange Hermitage for about $5.00 a bottle whilst the city slickers pay the full price of $550. In the current hung political environment with rural independents calling for equity of opportunity for country folk, it might be appropriate to look at the other side of the coin for a change.

 But that brings us to the seventh myth, that it is unfair and impossible to move water from irrigation to urban users in Australia. There is a reasonably common belief through much of the country that since the irrigators got hold of the water first they should be entitled to it forever. The deep fear for irrigators is that moving a few drops to the urban sector will be the death knell for irrigators, well that could not be further from the truth.

 At this stage the prospect for irrigators is that they will give up more environmental flows and be exposed to deeper scrutiny on cost recovery, leading to a slow death rattle at the low value end of irrigation along with some of their associated rural communities. The current contradictory efficiency initiative in irrigation could cost close to $12.9 bill, with the gains bizarrely being channeled back for more irrigation, increasing food supply and reducing prices to irrigators further. At the end of the day the portended efficiency gains to irrigation, which would surprise if they were anywhere close to 10%, would yield as little as half a cent to the dollar invested, given the current paltry net returns to irrigation reported by ABARE. 

 The irrigation industry makes much of the fact that it generates in the order of $9 Bill of gross value to the nation’s economy, but in reality it is the net return which is important and this is barely $900 mill according to some of the latest ABS figures. In these terms, it would be difficult to find a total asset value of $10 bill for the whole sector, and the prospect of government paying nearly $12.9 bill to shore it up seems patently absurd. The bizarre contrast is that urban water in South East Queensland is paying nearly that much for a relative small drop of medium term water security. 

 The other side of the $10 bill asset value to irrigation is that when we reflect that the actual replacement value of the irrigation works we find it could be upward of $36 bill. Thus, the irrigation industry has actually devalued the inherent capital value delivering their resource. In fact, since federation the irrigation industry has sucked up in the order of 625,000 GL while the opportunity cost of the public funds diverted to irrigation over that time could be in the order of $150 bill (nearly four NBN’s!!).

 Ironically, the often touted radical and feared prospect of water price increases reflecting full cost of provision could result in a flood of unused water around the nation. A full cost price with meaningful opportunity cost and allowances for the capital used to build the schemes, or their real replacement value, could result in a water price close to $300/ml, which would be too high a price for at least half the current irrigation industry. A surplus of near 6,000 GL could swamp urban and industrial demand for a ridiculous amount of time and would inevitably be washed through the river channels at considerable cost. So we don’t need to go there.

 The big hope in water reform from the irrigation industry at the moment is the water market, where a degree of transferability of irrigation water is expected to rationalise and solve all the industries problems. But if water markets are restrained to irrigation, the big issue of urban supply is ignored and while there will be minor benefits to high value permanent plantings irrigation, overall the impact will be rather small. 

 The thrust of current water policy is to differentiate some of the available irrigation water supply from consumptive irrigation use, to environmental flow. Additionally, current protocols might enable some water to be purchased from certain irrigators to build an allocation for additional environmental flows. Volumes between 500 GL and 1,500 GL are alluded to, but it is early days.

 Which brings us to the crux of the Australian water tragedy. If water can be abstracted and purchased in ad hoc and small ways for environmental ends, it should not be too much of an intellectual leap to consider the possibility of buying back slightly larger volumes in a planned and coherent way which benefits the environment, the inevitably long suffering urban users (the taxpayers who originally paid for the schemes) and ironically, the irrigators.

 If water is to be transferred from irrigation to urban and other uses, how much water should be considered? Surprisingly, the ball park values relative to the huge irrigation pool are quite modest. At the low value end of irrigation the extraordinary use of in the order of 4,000 GL of water on pasture (a waste unparalleled anywhere on the planet, Smith, 1998) will set the upper level of needs for transferability.

 But in terms of the relatively slow growth in urban water demand we might not need to transfer so much water that quickly, facilitating an orderly transition. A series of simple and easy options are worth considering.

 Firstly, the Bronze Standard Water Plan would be a slightly more articulate version of the current ad hoc grab bag of policies. Here 1,000 GL could be sought from the low value end of irrigation, preferably from the pasture and hay operations. This water should be obtained by targeting discreet water districts and rationalising them as a whole unit. Irrigation water should be purchased on a basis of appropriate capitalisation of the net value to water used in the district. In terms of current net returns this first 1,000 GL should cost in the order of a mere $800 mil. By way of comparison the same volume of water from Desal would cost in the order of $25 bill to the urban community.

 However, in the Bronze Standard, not all the water would need to go to the urban sector. This plan would be focused on the shorter term, three to five years with the first 500 GL going into urban and the other 500 GL used for environmental flows. The massive saving in urban bulk water could also enable a loading of say 50% on purchase to facilitate and enable adjustment in the broader irrigation community which would be diminished as some of the irrigation moved on.

 The Silver Standard Water Plan would up the ante to 2,000 GL and the cost would increase as the productivity of the next batch of irrigation yields a slightly higher net profit to the water used. The cost of this plan then increases to about $2 bill, while the cost saving in terms of Desal is still way within the $25 bill saving.

 This plan would have a longer time frame, possibly up to ten years and could be scheduled progressively in stages, thus reducing the adjustment stress. Here, 750 GL could be diverted equally to urban and environmental flows, with the balance of 500 GL made available to high value permanent irrigation (the fruit and veges), at an appropriate price, thus reducing the cost somewhat. Again provision for rural community adjustment should be straightforward, given the saving to urban users and an appropriate loading for regional adjustment could be allowed for – say now in the order of $800 mill.

 The Gold Standard Plan with 3,000 GL, would only need a further 1,000 GL at an additional cost of $1.5 bill, yielding a total cost of $3.5 bill still only a small dent against the desal option. This plan would have a focus out to about 15 years, and could provide 1,250 GL to urban and environment and 500 to high value irrigation, with appropriate loadings for regional adjustment.

 Finally, the Platinum Standard Water Plan would withdraw the full 4,000 GL at a total cost of about $5.5 bill. This plan could have a much longer time perspective of up to 20 years and would open up some other positive dimensions. Here 1,500 GL could be used for environmental flow 1,500 to urban, 500 to high value irrigation and now 500 GL to rainfall variability management, for example.

 And the costs of even the “Platinum Standard Water Plan”, make little impact on the pending desal costs which could rise to $37 bill if we need to look for the full 1,500 GL for the urban sector. In comparison to the current investments in efficiency gains in irrigation, which are proposed to be in the order of $12.9 bill, it might also be possible to bring the curtain down on the tragedy and actually get some efficient rationalization of the whole water industry which will benefit all Australians.

 Unfortunately, in the current economic climate it is difficult to identify who will benefit very much from the current $12.9 billion water plan, beyond the managers and builders. If the efficiency gains can be pushed up to 10% – a difficult ask as suggested before – it would appear that a return of as little as $90 mill is rather pathetic given that for the same money it would be possible to; save between $25 and $37 bill in desal water for the cities; provide water security for the whole nation for the next 25 years; provide sufficient water via environmental flows to clean up most of our rivers from the massive irrigation induced devastation which has built up over the past 100 years; provide an equitable pathway for low value irrigation farmers to retire from the industry with dignity; and enable rural communities to be downscaled in a fair and orderly way.

 The great Australian water saga has always been painted as being about the long suffering irrigator. In reality the great Australian water tragedy is completely the reverse. It is true that urban folk do benefit from lower food prices as a consequence of the abundant new supply of heavily subsidized irrigated produce, but they have paid the price in terms of the drain on taxation revenues over the last 100 years, and they continue to pay by not getting a access to the modest water supplies needed in the cities in the near future. 

 Despite groveling pleas from the States that they are approaching cost recovery for irrigation water, it is not clear that the reported accounting gains are little more than tricky accounting games when the real accounting issue with the nation’s water supplies is the opportunity cost in the high valued urban, mining and commercial uses. With irrigators paying as low as $20 per megalitre, the current average urban cost is in the order of $2,200 per megalitre – more than one hundred times more than in irrigation. And with desalination as the most likely option at close to $10,000 per megalitre the distortion grows to 500 times irrigation cost. With the average net return to irrigation being a pathetic $70 per megalitre, the inability to move a little water from low end irrigation to the cities is a sad national tragedy, and the fundamental economic health of Australia is being suffocated accordingly. 

 The other side of the tragedy is that those same irrigation users are not benefiting grandly from their waste of water, and might find their lifestyles a deal more secure if they were retired from the industry together with their community, in an orderly and reasoned way sooner than the chaos which will surely catch up with them later. The pipe dream for some of these folks is that there is a belief that somewhere in the mess of water rights and auctions “Christmas” is just around the corner. The actuality is that the low level of real water demand in the nation will never lead to this windfall and they will grow old dreaming – while the rest of the nation pays. And the saga continues?

An Australian Water Tragedy

A K. Dragun

September 2011

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