Between forced resumption and voluntary sale: a mechanism for the collective sale or transfer of irrigation water.(Report)

1 Introduction

The Murray--Darling basin is in crisis in south-eastern Australia, with environmental flows desperately needed. The Commonwealth Government has allocated $500m to the Murray--Darling Basin Commission (MDBC) for the purchase of 500 gigalitres (GL) of water for annual environmental flows. However, a combination of the continuation of the severe drought and the imposition of limits on the sale of irrigation water and water entitlements has meant that the Commission has had difficulty obtaining water for 'iconic' environmental sites. (1) In addition, some irrigators are frustrated that they cannot buy or sell water or water entitlements, due to restrictions on trade.

Trade in water entitlements is sometimes restricted on geomorphic or hydrological grounds--in particular, trade in entitlements from above to below the Barmah Choke is forbidden, because the Choke constrains the amount of water that can be passed, and thus the MDBC cannot guarantee delivery every season (2); and some trades are forbidden or restricted on environmental grounds (e.g., land salinity). But trade in water or entitlements that are unaffected by the Choke and other 'technical' considerations has also been restricted.

Restrictions of this 'non-technical' kind have been placed not only on trade in water between irrigation districts and for the environment, but also on trade in water from irrigation to other commercial uses, including into cities and towns; and trade across state boundaries. A limit of 4 per cent on the sale of water outside an irrigation district and a 10 per cent limit on the proportion of water entitlements in an area that can be decoupled from a land title have been imposed in Victoria by the State Government. In New South Wales, irrigation districts are for the most part owned and operated by the irrigators, as cooperatives; and the individual irrigators own entitlements to 'shares' in the water that is made available, rather than to water itself. Many NSW districts have placed limits on sales, and a number have imposed so-called 'export fees' on water. (3)

A number of non-'technical' reasons have been given for the imposition of limits on water trade. At the general social and political level, governments have stated their determination to preserve rural communities, as far as is reasonable and feasible, from the deleterious effects on irrigators and their communities that could follow the large-scale transfer of water from its current use in or allocation to irrigation. This kind of governmental policy pronouncements echoes the strong feelings and opinions of many people and businesses in rural areas, be they on farms or in the regional villages and towns that service the irrigation farming communities; and, to a large extent, it may also reflect the feelings of Australians generally.

In addition, the limits on trade have been justified as a means of protecting the financial interests of irrigators. The sale of one irrigator's water or entitlements may impose economic costs or disadvantages on other irrigators in the district. A reduction in the level of irrigated farming activity will reduce the demand in the district for the services of the suppliers of 'non-water inputs' (e.g., servicing of machines). This reduction in demand may lead to a rise in the price of the services, or a reduction in the service quality; or it may even threaten the financial viability of enterprises providing services into the district. (4)

Second, the sale of water outside of an irrigation district can affect the financial viability of the district's irrigation authority or corporate body. These districts rely on revenue from the charges levied for the release of water to the individual irrigators. Most of the costs of operating the irrigation district are joint or common to the 'customers': they are 'overheads', and not costs attributed to deliveries of water to a specific farm or farms at a specific time. The usual way to charge for water is via a two-part tariff--an annual fee, plus volumetric charges for delivery. If a farm sells its entitlements outside of the district, and if the purchaser does not become responsible for the fixed charge, then the remaining irrigators in the district will be faced with higher charges, if the irrigation district is to continue to cover its costs as before the sale. In the language of economics, there may be a 'pecuniary externality' from sales of water outside a district. Even if the liability for the fixed charge is transferred to the purchaser, those who do not sell their water can suffer a financial disadvantage as a consequence of the sale: the fixed charge may not cover the fixed costs of the district; or there may be fewer economies of scale or scope in delivery. (5)