176 – The Murray-Darling Basin Plan

A couple of weeks back I attended a very good workshop in Brisbane on the Murray-Darling Basin Plan, which is causing so much political controversy at the moment. Here I’ll summarise a few key points from the workshop.

The workshop, organised by John Quiggin’s group at the University of Queensland, pulled together a who’s who of Australian water economists, including Mike Young, Jeff Connor, Lin Crase, Quentin Grafton, Jeff Bennett, Peter Gooday and Alistair Watson. In addition there were presentations from other social sciences, from ecology, and from the Murray-Darling Basin Authority.

The workshop came only a few weeks after the release of the “Guide” to the draft Plan, and in the wake of big public protests against the Plan by communities throughout the Basin.

The key point of the plan is that there needs to be a reduction in the amount of water taken from the rivers for irrigated agriculture. This has been obvious for a long time, and has been, on its own, a point of relatively little controversy. The recommended reduction is 3000 to 4000 GL, which amounts to 27 to 37% of current diversions. This size of reduction has clearly been a concern to many people.

Part of the controversy seems to be that farmers object to the government taking away their water. Given the media coverage that has occurred, most people who aren’t close to the issue assume that Government is going to forcibly acquire water rights from farmers, maybe even without compensation. This is completely wrong. To the extent that the protests are meant to protect agriculture per se, they reflect a total misunderstanding of the proposals in the Plan.

The proposal is for Government to buy back water from willing sellers only. This means that those farmers who end up with less water will be, by their own judgment, better off than they would have been without the plan. If they don’t think they’ll be better off, they won’t sell, and nobody will make them sell. Thus, farmers are protesting against a program that would make the farmers who sell better off.

Increasing Government purchases of water amounts to increased demand, which will result in a higher market price of water. This will obviously affect farmers who wish to buy water. I don’t think they are protesting about this, but even if they were, the protests would have little merit. The higher price would simply reflect that there are competing uses for the water, some of which are more valuable than some of the agricultural uses. It is just a better reflection of the true scarcity of water. The problem is not that water prices will be too high, but rather that they have been too low.

The other cause of consternation has been the predicted loss of non-agricultural jobs that depend on agriculture. Predicting the level of such job losses is extremely difficult, but the several different economic modeling teams who presented results at the workshop had a strong consensus that it would be small. The total loss of jobs attributable to the Plan over 20 years would probably be less than the daily turnover of jobs in Australia. John Quiggin notes that “For most towns and cities in the region, the ‘job loss’ estimates will be similarly notional. Total population in the Basin is growing, and so is employment.”

There are some communities in the basin where job losses are likely to be more significant locally. It would not be sensible to walk away from the whole Plan as a whole on their account. Rather, strong Government support for social and employment programs would be well justified.

Under the Howard government, billions of dollars were assigned to upgrading irrigation infrastructure in the Basin, as a way of saving water and limiting the need to purchase of water from irrigators. Given the controversy, this strategy probably looks tempting to the current government. Another point of strong consensus among the water economists was that this strategy is a bad idea, costing 2 to 4 times as much as purchasing water from willing sellers. Back-of-the-envelope calculations show that investing in infrastructure as a way to limit job losses would cost millions of dollars per job saved.

We heard about one very reasonable sentiment that is coming from people in the Basin community: if the Government is going to do this, they had better fix it! One could not blame people for being very unhappy if there are large, expensive, disruptive changes but they don’t achieve the hoped-for environmental results. There is a big risk for the Government here. If they aren’t very careful, they could easily find that they spend the money without getting worthwhile environmental benefits. The risks include:

1. Program failure. Past experience with large natural resource management programs does not give one much confidence about the likelihood of success. The Natural Heritage Trust and especially the National Action Plan for Salinity and Water Quality spent billions for very disappointing outcomes (see PD174). The Government will need (a) a real determination to pursue outcomes, not just activity, (b) to take the science and economics seriously, and (c) allow the time and resources to undertake good quality analysis to support decisions about how the money is spent on environmental assets.

2. Uncertainty about cause and effect. There is always a lot we don’t know about the relationship between particular changes in resource use and the resulting impacts on the environment. Even with the best will, and with very good analysis, there is still a risk that our poor understanding of the system will lead to poor results.

3. Ambiguity about the objectives. At the workshop, Hugh Possingham highlighted that, when we invest in the environment, we typically don’t know what we are trying to achieve or why. My experience strongly reinforces this point. This ambiguity makes it impossible to evaluate and compare different investment options.

Unusually for a long-term policy problem, it appears that we actually do have enough money on the table to achieve worthwhile outcomes. Whether we do actually achieve them will be a huge test.

David Pannell, The University of Western Australia

Note: the article has been edited to delete a comment about the effect of the past decade of drought on non-agricultural jobs. I accept a comment that was sent to me that this is complicated. Drought is not the same as permanent reduction in water — some business activities that are maintained at a loss during a drought would be shut down if there was less water permanently.

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