Jun 042014

Original story by David Adamson and Adam James Loch, University of South Australia at The Conversation

The federal government’s approach for the Murray-Darling Basin Plan has shifted again, and now favours water-saving infrastructure over purchasing water rights. But is it the right move?
Spending on water-saving infrastructure could expose Murray-Darling farmers to debt and drought. Photo: Michelle Bartsch/Flickr, CC BY-NC-ND

Spending on water-saving infrastructure could expose Murray-Darling farmers to debt and drought. Photo: Michelle Bartsch/Flickr, CC BY-NC-ND

The new scheme proposes to cut the amount of water bought back from farmers by 200 billion litres — from 1,500 billion litres down to 1,300 billion litres.

By pledging instead to invest in infrastructure upgrades for irrigators, the government says it can bring the total amount of water saved to 3,200 billion litres.

But our analysis suggests this will expose farmers to debt and drought, while leaving the environment no better off.

Changing tactics

This type of shift is not new; the emphasis between the two main strategies has see-sawed several times. From 2004 to 2007, infrastructure investment was preferred to buy-backs under the Living Murray project. Then in 2007, at the height of the Millennium Drought, buy-backs returned to prominence. With the new decade came the end of the drought, and now this latest rethink has seen buy-backs fall from favour.

Buy-backs work

Between 2008 and 2012, the Murray-Darling buy-back scheme (known as Restoring the Balance) purchased around 1,700 billion litres of water rights that will probably return around 1,300 billion litres to the river (the difference being due to variability in water supply).

Buy-backs also had another effect: they gave farmers the chance to sell their water as a way to tackle debt, which many chose to do.

Meanwhile, infrastructure upgrades originally introduced by the Labor government were financed by a system of tax breaks and subsidies called the Sustainable rural water use and infrastructure program. It is expected that this process will now continue with the aim of recovering the outstanding 1,900 billion litres to achieve the Basin Plan’s objectives, with a renewed emphasis on tax breaks and subsidies to do the heavy lifting. But our analysis suggests that it won’t be quite so simple.

Tax breaks may not be the smartest way to keep the Murray and Darling rivers flowing. Photo: Peterdownunder/Wikimedia Commons

Tax breaks may not be the smartest way to keep the Murray and Darling rivers flowing. Photo: Peterdownunder/Wikimedia Commons

Water efficiency can backfire

Last year, we published an analysis which highlighted two possible drawbacks with the idea of giving government funds to farmers to improve irrigation efficiency.

First, capital investments (which are obviously less flexible than water trading) can encourage inflexible farming systems that could be caught out by future water scarcity.

Second, increasing irrigation efficiency could actually reduce the amount of water that flows back into the river, because more of it stays on the farm.

The logic behind this is quite simple. Imagine a farm with old technology using 10 million litres of water for irrigation. Because of inefficiencies, 2 million litres of water might flow back to the river, without being accounted for in official figures.

Imagine the farm then gets a subsidy to invest in upgraded equipment that can grow the same crop with 8 million litres of water, with just 5% runoff instead of 20%.

Under the policy, the government and the farmer will share the savings – a million litres of water each. Our farmer, logically, will reinvest that million litres in the farm and increase production, while the government will release its million litres back into the river.

But the environment loses. Instead of getting 2 million litres, the river now gets just 1.45 million litres: a million from the government and 0.45 million litres in farm runoff (5% of the farmer’s 9 million litre total).

So the more water-efficient we become, the less water goes back to the river. Logically, as the program evolves these two issues will become exposed and subsequent arrangements may alter either the efficiency dividend, the tax breaks, the subsidy level, revise the environmental goals downwards, or necessitate the reviving of strategic water purchases to restore the balance.

Increasing costs

Another study, led by Adam Loch, compared spending on buy-backs and water-saving infrastructure.

The average cost of buy-backs was A$1,527 per billion litres during 2004-12, increasing modestly to A$1,600 per billion litres during the survey’s later years (2009-12). Meanwhile, the costs of infrastructure increased from A$3,300 per billion litres to A$5,109 over the same time-frame.

What’s more, water-saving infrastructure suffers from diminishing returns. Once the most inefficient systems are upgraded, the cost to recover each additional million litres increases as the “cheaper” options are eliminated. The result is that inefficient farmers are publicly rewarded for not innovating and failing to upgrade obsolete equipment.

This same study found that farmers support infrastructure funding, but much less than the proposed changes. Meanwhile, they support a much wider buy-back program than is currently being considered.

Where does this leave farmers?

First, the new infrastructure investment may require farmers to go into debt to finance upgrades, increasing their fixed costs.

Second, off-farm infrastructure upgrades will require higher maintenance and refurbishment contributions from farmers, as the reform stipulates that farmers must cover the true and full costs of providing water.

Third, calculating the water savings generated by infrastructure is an inexact science, as discussed. So the reliability of these savings may legitimately be called into question in the future.

If farmers equate infrastructure upgrades with greater reliability, and invest in (arguably less flexible) perennial production, they expose their capital to climate variability. When drought returns to the Basin (and it will), those farmers might have to go into yet more debt to buy water rights.

The next time water allocations aren’t enough for farmers, they will either have to enter the market when everyone else wants the water and prices are going up, or face the prospect of crop loss and increased debt burden.

Meanwhile, the environment – the supposed beneficiary of all this – is left to fend for itself once more.The Conversation

Adam James Loch receives funding from the Australian Research Council under DP140103946, and the National Water Commission.

David Adamson does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published on The Conversation.
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