Productivity Commission report on Murray-Darling water buyback

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The Productivity Commission says much can be done to improve the Federal Government’s $3.1 billion Murray-Darling water buyback program in a recent research report.

The buyback and a larger irrigation infrastructure program are being used to recover water for the environment, and ease the transition to the much lower water diversion levels expected under a Basin Plan.

The report raises some concerns about aspects of the design and sequencing of the strategy, noting problems in having commenced the buyback before the Basin Plan is ratified. However, Commissioner Neil Byron said ‘There is still much that can be done to improve the recovery and management of water for the environment in the Basin’.

In particular, the Commission recommends that:

  • the Murray-Darling Basin Authority (MDBA) set ‘sustainable diversion limits’ under the Basin Plan in a way that balances environmental, social and economic tradeoffs (possibly requiring legislative amendment)
  • The buyback is occurring before sustainable diversion limits (SDLs) are set under the Basin Plan, and before the liability for policy-induced changes to water availability has been resolved. This is creating uncertainty in the minds of irrigators and affecting the efficiency of the buyback.
  • SDLs must be based on scientific assessments of the amount of water that is required to avoid compromising key environmental assets and processes. Good science is a necessary but not sufficient basis for optimising the use of the Basin’s water resources. The value people place on environmental outcomes, the opportunity cost of foregone irrigation, and the role of other inputs, such as land management, must also be considered. If the Water Act 2007 (Cwlth) precludes this approach, it should be amended.
  • The same cost effectiveness tests should be applied to all water recovery options. Purchasing water from willing sellers (at appropriate prices) is a cost-effective way of meeting the Government’s liability for policy-induced changes in water availability. Subsidising infrastructure is rarely cost effective in obtaining water for the environment, nor is it likely to be the best way of sustaining irrigation communities.
  • Other water products (for example, seasonal allocations and options contracts) are potentially valuable in meeting short-term environmental needs.
  • Tenders are sound purchasing mechanisms where active markets for water entitlements do not exist. But where active markets do exist, acquiring water directly from those markets is likely to be more efficient.
  • The 4 per cent limit on out-of-area trade of water entitlements should be eliminated as soon as possible. Limits on the amount of entitlements that can be sold to the Commonwealth through the buyback should also be eliminated.
  • Using the buyback to achieve distributional goals, system rationalisation or to manage salinity is likely to compromise its efficiency and effectiveness. Other more direct instruments should be used to address these issues.
  • Governance arrangements for the recovery and management of water for the environment are fragmented. Greater coordination of water recovery and environmental watering by Basin jurisdictions is required.

The report is available here.

Written by Paul Dalby on 16 April 2010

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