COAG & the new water agreement

Last Thursday I went to a talk by Professor Mike Young on sustainable management plans for the Murray-Darling Basin run by the Australian Agricultural and Resource Economics Society at the Elephant and Wheelbarrow pub in Melbourne. Mike made a presentation based on this paper (well worth reading) and commented on the recent COAG meeting’s water outcomes.

I’ll get around to sorting out the issues and posting eventually on these issues but want to point out this interesting AARES symposium on related issues in May that I will probably attend.
Victorian farmers did well extracting a billion dollars from the Commonwealth for foolish investments in improving irrigation technology that are handouts. There was never any issue of principal in the Victorian Government’s opposition to the wrong-headed Howard Plan – it was only ever a question of the size of the required bribe. It reminded me of an ancient joke.

The Labor Premiers and PM Rudd were full of congratulations for each other but the COAG achievements on the MDB were modest with most of the difficult work remaining to be done. Moreover, it is by no means clear that the framework set up will resolve these outstanding issues. The COAG meeting was pragmatic politics.

One issue is timing. The agreement to limit water taken from the MDB is supposed to be finalised by 2011 but will not be enforceable until the state water plans expire or are updated. The final plan is Victoria’s which expires in 2019. Given the severity of current problems we cannot wait a decade for a sustainable management plan.

The $1 billion bribe for uneconomic technological investments in improving water use efficiency in Victoria does not make a great deal of sense. Water buybacks could realise more efficient water gains than investing $1 billion in Victoria’s ‘Food Bowl’ project where infrastructure upgrades will yield 100 billion litres at a cost of $10,000 a megalitres – more than four times the cost of buybacks. The Food Bowl project is an economic absurdity.

The idea of buying water back and using the water for environmental flows is sound but is most strongly opposed in Victoria.

Young points out that the heavy spending on infrastructure of $5.8 billion under the Howard National Water Plan to save 200 billion litres due to leakage and seepage overstates gains since much of this water would have drained back into the river system.

Gold-plated irrigation infrastructure will become redundant once the over-allocation of water irrigation licenses is dealt with by buybacks. Inevitably feeing up rural water martkets to allow free trade in water with urban areas will further reveal the poor economic rationale for such investments.

In addition the current COAG deal leaves the states in charge of water allocations within their boundaries and be able to insist on a review of the basin plan. The states will still manage the Goulburn and Murrumbidgee rivers. A federal minister does have final say on the cap on water extractions and its enforcement but this puts pressure on a Commonwealth Government that seems to have less backbone than John Howard’s.