PM's remedy is as clear as mud

Efficient solutions to the Murray-Darling water crisis are difficult to see in the government\u27s plan, writes John Quiggin THE gradualist reform process envisaged in the National Water Initiative of 2004 has been overtaken by events as the record-breaking drought continues in much of southern Australia. Even with severe rationing and the decision by the Queensland government to implement water recycling, there is a significant possibility that Brisbane’s water supply will be unable to meet demand for ordinary household use by 2008. Adelaide is also facing the possibility of inadequate supply from the Murray River and planning is under way to meet this contingency. The national plan for water security, announced by Prime Minister John Howard last week, marks a shift from an institutional reform process centred (at least in theory) on market-oriented reforms, to a multibillion-dollar program of government intervention. The shift in focus is remarkable. The 24-page plan mentions markets only twice, which suggests that use of market-based policy instruments is being treated as an afterthought or even as a last resort. To some extent this makes sense. Market solutions work best when the price mechanism has time to influence investment decisions and long-term consumption habits, but time is in short supply. Nevertheless, the government is talking about a ten-year plan and the expenditure of billions of dollars. If this money is not spent in a cost-effective way, it is hard to imagine that another such chance to fix Australia’s water problems will arise any time soon. Some features of the plan are commendable. Most importantly, and unlike the National Water Initiative, the magnitude of the problem is recognised. The plan aims to generate water savings of more than 3000 gigalitres per year, with more than 2500 gigalitres per year saved in the Murray-Darling Basin. The water savings will be shared 50 per cent with irrigators to help meet the challenge of declining water availability, and 50 per cent to address overallocation and to sustain river health. The implied return of water to the Murray-Darling Basin is about 1250 gigalitres, which is close to the 1500 gigalitres recommended by the Living Murray program as the minimum needed for sustainability. The savings for irrigators are consistent with recent estimates of possible declines in inflows arising from climate change. While the plan gets the scale of the problem about right, the dominant emphasis on engineering solutions, such as lining and piping of channels, repeats past mistakes. No cost-benefit analysis is presented and the aggregate numbers suggest that not all the projects will be cost effective. Spending $6 billion on efficiency improvements to save 3000 gigalitres implies an average cost of $2000 for each megalitre permanently saved. While the drought has raised the market price of permanent irrigation water entitlements, this is still a high price. Also, cost estimates of this kind are frequently optimistic. Almost certainly, at least some projects will cost considerably more than $2000 per gigalitre. By contrast, market buyback of entitlements are soft-pedalled. Although “up to $3 billion” has been allocated for this, the option is not mentioned in the ten-point summary and receives only a couple of sentences in the main text. A balanced policy will give equal weight to market purchases and to engineering solutions and will adopt the latter only where the value of water saved exceeds the cost. Hopefully, the plan’s soft-pedalling of the buyback option reflects political sensitivities rather than real policy priorities. The other feature of the plan is a Commonwealth takeover of the entire sector. While this move is not surprising, given the centralist (or nationalist) inclinations of the Howard government, it is unfortunate. There’s no evidence that the Commonwealth acting alone will do a better job than the long-standing cooperative arrangements of the Murray-Darling Basin Commission, let alone that Canberra has any business running the water sector in states such as Western Australia and Tasmania. And, as Kevin Rudd pointed out in his proposal for a water summit, having the Commonwealth control the issue does not ensure a consistent approach. Under current arrangements, five different commonwealth departments and agencies have a role in water policy, reflecting the interaction of water with other areas such agricultural and environmental policy. The plan now is to put everything under the control of a single ministry, headed by Malcolm Turnbull. He will have his work cut out for him. • John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland. His web site is at http://www.uq.edu.au/economics/johnquiggin and his weblog is at http://johnquiggin.com. Photo: Murray River. Susie Harders/iStockphoto.co