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Water Policy Frontiers
Prof. Mike Young
Research Chair, Water Economics & Management
School of Earth and Environmental Sciences
The University of Adelaide
Wednesday 21st June 2006
My three year plan
What
1. Catalyse new ways of thinking about water
• Water for a Healthy Country as a National challenge
• Adding value to the National Water Initiative
2. With the wisdom of hindsight,
how would one set up a system
if one did not have to worry about
where we are today?
How
1. Play a positive independent role in the development of the
next generation of water reforms
2. Prepare a series of Droplets
 Single issue 2 pagers – policy options & ideas for further research
3. Collaborate with many to prepare a policy-focused synthesis
of what “Australia” knows – (reports, papers, a book?)
2
Droplets – a draft list
Water
accounting
How would an accountant manage the River Murray? Do we manage backwards?
System
management
Managing dams – Should markets allow to carry water forward from year to year?
Water
entitlements
and trading
Reducing the number of entitlements. Would a “Murray-oh” work? What can we learn from
European Community experience with the Euro? Can trading be free?
A dynamic versus a constant cap? What would happen if the Cap was dynamic and varied
according to a long term trend? Should the environment have a fully tradeable capacity share?
What is the role of the market is sourcing and managing environmental water?
Ground-surface water trading. How should it work? How precautionary should one be?
Cost recovery
Should the MDBC collect a water levy or a catchment management levy?
A financially independent Commission?
Sourcing and
managing
environmental
water
Managing environmental assets – How should trade-offs be made when impacts take 50 to 100
years to arrive?
Governance
Environmental trusts and other ways to hold environmental water? What happens if one develops
mechanisms that take management for environmental outcomes out of the realm of government?
Capital gains tax advantages of compulsory purchasing environmental water. Would it be better
just to buy water and then let the market sort out the problems?
Should the MDBC be set up under a separate Act and operate like an independent company?
Urban- Rural
Interface
Where and how will Australia’s growing urban population source its water? How much can come
from recycling and how much from other sources? What is the role of pricing, trading and other
policies in facilitating change in both sectors?
3
Plagiarising from the Accountants
Australia does not have “a coherent, coordinated, consistent body of doctrine”
Paton and Littleton
Purpose of accounts
 Improve decision making
 Facilitate evaluation
Beneficiaries of accounting systems
 Those who depend upon the performance of the
described system
4
Insightful accounting concepts
Aim to maximise the probability that the company (the system)
will continue to operate for ever
Focus on full, complete and costed disclosure
“Outcome” not “input” focus – allocate according to final
performance => reverse planning processes
Challenges
 Setting transmission exchange rates
 Setting entitlement conversion ratios
 Consolidated accounts - No double counting
 Liabilities (Declaring expected future impacts
 Performance ratios – beyond benchmarking
 Transparent disclosure of accounting problems
5
Key accounting concepts
Two types of accounts
 Internal Management information for the Board etc
 External reporting to investors (Water users) – a big research
challenge
Reporting responsibilities
 Obligation to communicate to those with
 limited access to information; and
 limited ability to interpret it
 A single investment decision is more significant for a small
investor
Timeliness
 Commitment to report by a set date
 Control axiom – rule off books at a date
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Ideas from Accounting
Principles – The accounts must balance
Conventions – Objectivity (a true and correct
description of the situation)
 Materiality (Only record contracted activity
not MOU’s, announced intentions, etc)
Doctrines – Disclosure doctrine (Personal governance
liability to disclose to share holders)
Standards – Accrual v’s cost (Accrual accounting difficult)
Requirement to present the accounts as an Ongoing Concern so
potential bankruptcy is revealed
Critical governance links from the notion of an ongoing concern
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1 Water accounting definition
A National
Water
Accounting
Protocol?
2 Reporting entity
definition
Scope
Conceptual
Framework
3 Objectives
4 Structure
5 Elements
Account preparation
6 Basis of 7 Basis of
8 Techniques
recognition measurement of measurement
9 Allocation
Balance
(Over-allocated
Solvent?)
13 Applicability
10 Storage
Account
Reserves
14 Elevation
(principle
v’s detail)
18 Monitoring compliance
11 Water use &
Flow Account 12 Compliance
(Inflows
reporting
– outflows
(NWI
– extractions) Protocols)
15 Research
Methodology
(due process)
16 Audit
requirements
17 Transition
policies
19 prosecution for non-compliance
Account
Presentation
Policy change
Enforcement
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Adapted from AARF
A water accounting protocol?
Plagiarising from the accounting profession
Australia could set up a “water accounting” framework
 Defines functions of accounts
 Sets objectives for each function
It could establish a set of
 Doctrines
 Protocols
 Guidelines for preparation
 Guidelines for interpretation (ratios)
It could establish a role for independent water auditors
That includes links to governance rules – may force governance
reform
9
Two new MDBC reports on 6 “risks”
In 20 years, a further reduction in flow of around 2,500 – 5,500GL.
 Effects below dams and hence outside release rules erode flows most.
10
Possible reduction in mean annual River Murray flow as a
result of incomplete accounting (baseline 1993/94)
Unmanaged flow reducing effect
Reduced water yield (Trees and dams)
Nett
effect
- 600 GL
Water use efficiency savings
- 723 GL
Increased groundwater use
Salinity Interception Schemes
Estimated nett reduction in mean river flow
and allocations to irrigators
Add back 500 GL
-349 GL
-20 GL
-1,692 GL
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Known accounting solutions
1. Offset the flow reducing effects of establishing
permanent vegetation, clay spreading etc by
surrendering an entitlement equivalent to the
expected mean effect
2. Defining tradable entitlement as a “nett”
entitlement to prevent increased WUE erosion
(return flow reduction)
3. Defining salinity interception as a water use and
acquiring the necessary water from below the cap.
Changes the cost benefit of most schemes!
4. Amending the cap to include all unconfined
groundwater within, say, 10kms of the River as
part of the system
12
Research challenges
1. How to manage with much, much less water
2. The science of keeping wetland and estuary
systems alive
3. Deciding when and how to make triage
decisions
13
The Murray Darling Cap
•Was a critically important initiative, with hindsight
 Ground water not part of the Cap
 No account of changing land use and technology
 Climate change not accounted for
Challenging opportunities
 Including groundwater in the Cap – (Carry forward, low cost storage)
 Defining an adaptive Cap – (A 10 year moving average of inflows for
the high security pool = autonomous progressive adjustment.)
 Changing the supply rules for South Australia
 A “mean” as well as a “minimum” supply guarantee?
 Convert all entitlements into shares of standardised High or
General security pools??? – (No state entitlements all tagged to
the source)
 Moving from a cap to a consumptive pool system
14
Thinking about environmental water
• Need to source more water
• Imperfect knowledge of opportunities coupled
with imperfect science suggests need a very
flexible environmental governance
• Yet there is a need for rapid responses to
changing situations = judgement!
• A Trust that buys and trades water?
15
River Murray Environment Trust
Board of 3 to 5 members responsible for the use, distribution
and management of trust assets.
Selection criteria
 Excellent chairing and public communication skills
 Strong but broad environmental and scientific credentials and
ability to make judgements about what’s best for River health
 Business sense and understanding of water markets, water trading
and the needs of agricultural and urban water users.
Trustees appointed as individuals by the Murray Darling Basin
Ministerial Council (the settler of the Trust)
Replacements appointed, by the Council on the
recommendation of a non-partisan selection committee
established by the Trustees in consultation with the MDBMC
16
Trust Objectives
To establish principles for and trial experience in the use of water
trusts and similar entities to increase quantity of water available to
river flow managers responsible for improving environmental outcomes
throughout the Southern Connected River Murray System and its
associated environments by:
a) Attracting donations & bequests of money, water, etc for this
purpose;
b) Operating strategically in the water market with a view to both
enhancing the value of entrusted assets and
increasing the Trust’s capacity to help improve environmental
outcomes;
c) Making water available to those responsible for the management of
flows of water and the distribution of water for environmental
purposes;
d) Seeking opportunities to support, foster, co-operate and invest in
delivery of environmental outcomes in the River Murray System.
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Water efficiency tender
A River Murray Environment Trust offers to partner with irrigators to make
water efficiency savings
Conditions of the offer:
 Irrigators will be invited to offer to tender to sell up to 20% of their
entitlement and use the money received to increase the irrigation efficiency. No
more than 4% of any licence type in a region will be sourced.
 All entitlements sourced will be leased back to participants for the following
irrigation season at no cost. Participants will be given one year to make the
savings.
 The Trust will be required to use the water to improve the health of the River
Murray System but may make some of water available to irrigators during a
drought.
 Offers received before 30 September will be evaluated during the first two
weeks of October. All participants will be notified if their offer has been
accepted on October 15th (two weeks later). Payment will be made before 30th
October
 For each licence type, a single clearing price will be paid. All irrigators who offer
to make water available at less than the clearing price will receive the clearing
price.
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Coles-Myer Schedule
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Extracts from Coles Myer “2005” Press Release
• Buy-back price $8.30
• 9.2% discount to Friday’s closing price of $9.14
• 70.4 million shares bought back for a total of $585m
– approximately 5.7% of Coles Myer’s shares
• All shares tendered in the buy-back at or below $8.30
were bought back.
• Shares tendered into the buy-back at a price above
$8.30 were not bought back.
• ….
• On-market buy-back of up to 15 million shares
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Draft offer form
Type of Licence
South Australian River Murray Licence
Note: No more than 20% of any holding may be offered.
Offer 1
…………….. ML @ not less than $1,500.00 per ML
Offer 2
…………….. ML @ not less than $1,475.00 per ML
Offer 3
…………….. ML @ not less than $1,450.00 per ML
Offer 4
…………….. ML @ not less than $1,425.00 per ML
Offer 5
…………….. ML @ not less than $1,400.00 per ML
Signatures
Licence holder …………………………………………
Registered interest (if any) …………………………..
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Facilitating Structural Adjustment
Impede
 Trading barriers because rules on partially specified
 Exit fees rather than supply contracts
Facilitate
 Unbundle into separate components
 Remove purpose-based entitlement specification
(Urban = Rural - realise the gains)
 Low cost allocation trading (Qld free, SA over $500 per temp.
trade – $20 per trade should be possible)
 (Entitlement reform is not urgent and expensive)
Expedite
 Source environmental water using market-like processes
22
Generalised framework for unbundling
Scale
Policy Objective
Distributive
Equity
Economic
Efficiency
Externalities
Individual Entitlements Allocations
Use licences
(approvals)
Total
System
Catchment
Plans
Water
allocation
plans
Trading
Protocols &
Accounting
Rules
Alternative governance
arrangements
Research agenda
 Applicability of European concept of “subsidiarity”
 Can call in powers only when needed rather than
delegated down
 Role of independent commissioners
 Role of corporate-like accountability
24
Market-based instruments
Allow all to be part of the solution rather
than part of the problem!
Markets are excellent servants but poor
masters
Potential Instruments
 Offset mechanisms
 Offset credit banking mechanisms
 Bundled cap and trade mechanisms
 Unbundled cap and trade mechanisms
25
Salinity markets
Currently
• Individuals are largely excluded from the market
• There is no formal incentives to encourage salt to
the sea
Potential solutions
• Defining obligations in term of tonnes
• Dilution flows
• Strategic releases
26
A Storm Water Markets
• Could modify rules for the proposed Storm
Water Authority to reward councils and
developers who act to reduce storm water
loads
 Less rates to pay
 Less state government expenditure
 Proactive business opportunities
27
Storm-water trading model
Indicative elements
 Local Govt contributions for cost of new works in
proportion to increased load
 Anyone can get credit for decreasing the storm water
load by gaining exemption from a storm water levy
 Credits generated by reducing load are tradable
across Adelaide’s Metropolitan Area
 Storm water credits could be banked until sold
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An emerging agenda
1) Accounting properly
2) Trading to build and maintain regional
prosperity
3) Restoration of river and aquifer health at
least cost
4) Smart management of externalities
5) Excellence in governance
6) Robust definition of entitlements that builds
upon hydrological knowledge
29
Some ideas
On accounting work out how to
1. Deal with the flow reducing activities
2. Manage unconfined groundwater and surface water as one!
(Bring groundwater in under the cap.)
3. Adjust allocation pools autonomously
On Trading work out how to
4. Unbundle so you don't have to move registers from one state
register to another. Bring urban users into the market place.
5. Make the cost of electronic allocation trading less than $20
per trade
6. Replace exit fees with contracts
7. Allow carry forward for all water (and rewrite the
management plans to enable this)
8. Separate water management policies from structural
adjustment
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Some more ideas
On restoration of health work out how to
9. Buy water from irrigators and empower independent
environment trusts to manage this water with confidence
10.Allow counter-cyclic trading and build a portfolio of
instruments that deliver water when it is needed
11.Facilitate and expedite adjustment and cope with changing
land-use and climatic conditions
On externalities work out how to
12.Use markets to manage storm water
13.Use salinity offsets as a first step to cap and trade
14.Combine levy on all irrigators to pay for salinity interception
but exempt them if they are part of the solution
15.Introduce Dilution flows and flushing
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A few more ideas
On governance work out how to
16.Advise environmental water trustees
17.Set up water accounts to

inform water users and

establish performance ratios for governors
18.Design instruments that produce autonomous trade-offs
On planning work out how to
19. Unbundle catchment, trading and allocation plans
20. Set up exchange rates and entitlement conversion ratios
21. Specify entitlement pools that autonomous adjust to change
22. Tag entitlements at source and reduce the number of
entitlement types to two
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Drops of water create rivers and aquifers
Contact:
Prof Mike Young
Water Economics and Management
Email: [email protected]
Phone: +61-8-8303.5279
Mobile: +61-408-488.538