Thursday, March 08, 2007

JWH's plan for water at the pub

Today I went to a talk at the Elephant and Wheel Barrow Pub in Melbourne, given by the widely-respected Alistair Watson, on the Prime Minister’s National Plan for Water Security.

I enjoy talking economics with agricultural economists – they have their feet more firmly on the ground (and the manure pile) than the rest of the profession. They also drink more and generally enjoy themselves. I enjoyed this pleasant social occasion and the chance to meet up with old mates – Chisholm, Edwards, Dumsday etc.

According to Al, Howards’s plan was cobbled together rapidly (without input from Treasury or the Murray Darling Basin but with input, apparently, from Alan Jones) and is part-good, part-wasteful. It offers to spend $10 billion over 10 years on improving Australia’s water security. In part it reflects the short term panic over a severe national drought – the Plan itself however seeks to be a long-term solution.

The Plan’s decisive attractive feature is that it recognises too much water is being allocated to irrigators and seeks to remedy this at minimum cost – by buying back irrigation licenses. How these buybacks are handled is a challenge but this limited move is a good one..

But the major challenge is in implementing a program of investment infrastructure. The difficulty here is that such investments create distortions - particularly in relation to on farm investments - since they are input subsidies. They are inequitable for farmers who have already upgraded their irrigation systems and ignore the role of the existing supply markets where investment in irrigation upgrades is made on the basis of price signals. Presumably there is a case for supply side interventions off farm given the natural monopoly character of many water resource developments. Also, though Alistair didn’t agree, I think there is scope for some interventions on farm if farmers are facing inadequate price signals for water supplied. They will then have inadequate motivation to invest on farm. Even if water is traded water prices will not be high enough if irrigation endowments are excessive.

The Plan generally reflects wishful thinking technological optimism about costs and returns. In part these are motivated by the Wentworth Group and Peter Cullen’s exaggerated claim that profits could be doubled and water use halved inside 5 years with the right off and on-farm water investments. The idea is that Australia can sell lots to Asia as water constraints there bite - optimism transferred to Malcolm Turnbull.

The technological are also shown in the emphasis on considerations of technical rather than economic efficiency. Silly claims about denying water to rice and cotton farmers – while ignoring the role of dairy farming in states like Victoria don’t help.

According to Al, there isn’t a sensible case for spending taxpayer money on irrigation infrastructure. The Commonwealth doesn’t have a good record for ‘engineering’ agricultural sector policy solutions. The States have not necessarily done better and Premier Beattie’s Bradfield scheme to turn the northern rivers southwards takes what Alistair terms the Bruce Davidson* Award for sheer policy stupidity.

The key difficulty in Australia is that too much water has been allocated to irrigators. That is the water resource issue that needs to be addressed. The Wentworth Group –technological solutions create ‘photo opportunities for politicians’ but are expensive. The idea of central government authorities checking through individual farmer plans given judgements by a ‘committee of experts’ gives one the horrors.

I couldn’t find a hyperlink to a copy of Alistair’s paper. It’s a good read. He told me that he sometimes reads this blog so if he has such a link he might post it here.

It was a good talk and a pleasant social occasion.


Quentin said...

I think the 'W' in your JWH is silly, or is it that in the back of your mind Howard is the Dubya of Oz??

hc said...

I had not thought of this habit of mine but ... now that you raise it....maybe. Of course Howard's critics might well in fact describe him as the Dubya of Oz.