1. Water Policy Frontiers Prof. Mike Young Research Chair, Water Economics & Management School of Earth and Environmental Sciences The University of Adelaide Wednesday 21 st June 2006

2. 2 My three year plan What 1.Catalyse new ways of thinking about water Water for a Healthy Country as a National challenge Adding value to the National Water Initiative 2.With the wisdom of hindsight, how would one set up a system if one did not have to worry about where we are today? How 1.Play a positive independent role in the development of the next generation of water reforms 2.Prepare a series of Droplets  Single issue 2 pagers – policy options & ideas for further research 3.Collaborate with many to prepare a policy-focused synthesis of what “Australia” knows – (reports, papers, a book?)

3. 3 Droplets – a draft list Water accounting How would an accountant manage the River Murray? Do we manage backwards? System management Managing dams – Should markets allow to carry water forward from year to year? A dynamic versus a constant cap? What would happen if the Cap was dynamic and varied according to a long term trend? Should the environment have a fully tradeable capacity share? Water entitlements and trading Reducing the number of entitlements. Would a “Murray-oh” work? What can we learn from European Community experience with the Euro? Can trading be free? What is the role of the market is sourcing and managing environmental water? Ground-surface water trading. How should it work? How precautionary should one be? Cost recoveryShould the MDBC collect a water levy or a catchment management levy? A financially independent Commission? Sourcing and managing environmental water Managing environmental assets – How should trade-offs be made when impacts take 50 to 100 years to arrive? Capital gains tax advantages of compulsory purchasing environmental water. Would it be better just to buy water and then let the market sort out the problems? GovernanceEnvironmental trusts and other ways to hold environmental water? What happens if one develops mechanisms that take management for environmental outcomes out of the realm of government? Should the MDBC be set up under a separate Act and operate like an independent company? Urban- Rural Interface Where and how will Australia’s growing urban population source its water? How much can come from recycling and how much from other sources? What is the role of pricing, trading and other policies in facilitating change in both sectors?

4. 4 Plagiarising from the Accountants Australia does not have “a coherent, co- ordinated, consistent body of doctrine” Paton and Littleton Purpose of accounts  Improve decision making  Facilitate evaluation Beneficiaries of accounting systems  Those who depend upon the performance of the described system

5. 5 Insightful accounting concepts Aim to maximise the probability that the company (the system) will continue to operate for ever Focus on full, complete and costed disclosure “Outcome” not “input” focus – allocate according to final performance => reverse planning processes Challenges  Setting transmission exchange rates  Setting entitlement conversion ratios  Consolidated accounts - No double counting  Liabilities (Declaring expected future impacts  Performance ratios – beyond benchmarking  Transparent disclosure of accounting problems

6. 6 Key accounting concepts Two types of accounts  Internal Management information for the Board etc  External reporting to investors (Water users) – a big research challenge Reporting responsibilities  Obligation to communicate to those with  limited access to information; and  limited ability to interpret it  A single investment decision is more significant for a small investor Timeliness  Commitment to report by a set date  Control axiom – rule off books at a date

7. 7 Ideas from Accounting Principles – The accounts must balance Conventions – Objectivity (a true and correct description of the situation)  Materiality (Only record contracted activity not MOU’s, announced intentions, etc) Doctrines – Disclosure doctrine (Personal governance liability to disclose to share holders) Standards – Accrual v’s cost (Accrual accounting difficult) Requirement to present the accounts as an Ongoing Concern so potential bankruptcy is revealed Critical governance links from the notion of an ongoing concern

8. 8 Scope 4 Structure 1 Water accounting definition 2 Reporting entity definition 3 Objectives 5 Elements 6 Basis of recognition 7 Basis of measurement 8 Techniques of measurement 9 Allocation Balance (Over-allocated Solvent?) 10 Storage Account Reserves 11 Water use & Flow Account (Inflows – outflows – extractions) 12 Compliance reporting (NWI Protocols) 13 Applicability14 Elevation (principle v’s detail) 15 Research Methodology (due process) 16 Audit requirements 17 Transition policies 18 Monitoring compliance19 prosecution for non-compliance Conceptual Framework Account preparation Account Presentation Policy change Enforcement A National Water Accounting Protocol? Adapted from AARF

9. 9 A water accounting protocol? Plagiarising from the accounting profession Australia could set up a “water accounting” framework  Defines functions of accounts  Sets objectives for each function It could establish a set of  Doctrines  Protocols  Guidelines for preparation  Guidelines for interpretation (ratios) It could establish a role for independent water auditors That includes links to governance rules – may force governance reform

10. 10 Two new MDBC reports on 6 “risks” In 20 years, a further reduction in flow of around 2,500 – 5,500GL.  Effects below dams and hence outside release rules erode flows most.

11. 11 Possible reduction in mean annual River Murray flow as a result of incomplete accounting (baseline 1993/94) Unmanaged flow reducing effectNett effect Water use efficiency savings- 723 GL Reduced water yield (Trees and dams)- 600 GL Salinity Interception Schemes-20 GL Increased groundwater use-349 GL Estimated nett reduction in mean river flow and allocations to irrigators -1,692 GL Add back 500 GL

12. 12 Known accounting solutions 1.Offset the flow reducing effects of establishing permanent vegetation, clay spreading etc by surrendering an entitlement equivalent to the expected mean effect 2.Defining tradable entitlement as a “nett” entitlement to prevent increased WUE erosion (return flow reduction) 3.Defining salinity interception as a water use and acquiring the necessary water from below the cap. Changes the cost benefit of most schemes! 4.Amending the cap to include all unconfined groundwater within, say, 10kms of the River as part of the system

13. 13 Research challenges 1.How to manage with much, much less water 2.The science of keeping wetland and estuary systems alive 3.Deciding when and how to make triage decisions

14. 14 The Murray Darling Cap Was a critically important initiative, with hindsight  Ground water not part of the Cap  No account of changing land use and technology  Climate change not accounted for Challenging opportunities  Including groundwater in the Cap – (Carry forward, low cost storage)  Defining an adaptive Cap – (A 10 year moving average of inflows for the high security pool = autonomous progressive adjustment.)  Changing the supply rules for South Australia  A “mean” as well as a “minimum” supply guarantee?  Convert all entitlements into shares of standardised High or General security pools??? – (No state entitlements all tagged to the source)  Moving from a cap to a consumptive pool system

15. 15 Thinking about environmental water Need to source more water Imperfect knowledge of opportunities coupled with imperfect science suggests need a very flexible environmental governance Yet there is a need for rapid responses to changing situations = judgement! A Trust that buys and trades water?

16. 16 River Murray Environment Trust Board of 3 to 5 members responsible for the use, distribution and management of trust assets. Selection criteria  Excellent chairing and public communication skills  Strong but broad environmental and scientific credentials and ability to make judgements about what’s best for River health  Business sense and understanding of water markets, water trading and the needs of agricultural and urban water users. Trustees appointed as individuals by the Murray Darling Basin Ministerial Council (the settler of the Trust) Replacements appointed, by the Council on the recommendation of a non-partisan selection committee established by the Trustees in consultation with the MDBMC

17. 17 Trust Objectives To establish principles for and trial experience in the use of water trusts and similar entities to increase quantity of water available to river flow managers responsible for improving environmental outcomes throughout the Southern Connected River Murray System and its associated environments by: a)Attracting donations & bequests of money, water, etc for this purpose; b)Operating strategically in the water market with a view to both enhancing the value of entrusted assets and increasing the Trust’s capacity to help improve environmental outcomes; c)Making water available to those responsible for the management of flows of water and the distribution of water for environmental purposes; d)Seeking opportunities to support, foster, co-operate and invest in delivery of environmental outcomes in the River Murray System.

18. 18 Water efficiency tender A River Murray Environment Trust offers to partner with irrigators to make water efficiency savings Conditions of the offer:  I rrigators will be invited to offer to tender to sell up to 20% of their entitlement and use the money received to increase the irrigation efficiency. No more than 4% of any licence type in a region will be sourced.  All entitlements sourced will be leased back to participants for the following irrigation season at no cost. Participants will be given one year to make the savings.  The Trust will be required to use the water to improve the health of the River Murray System but may make some of water available to irrigators during a drought.  Offers received before 30 September will be evaluated during the first two weeks of October. All participants will be notified if their offer has been accepted on October 15 th (two weeks later). Payment will be made before 30 th October  For each licence type, a single clearing price will be paid. All irrigators who offer to make water available at less than the clearing price will receive the clearing price.

19. 19 Coles-Myer Schedule

20. 20 Extracts from Coles Myer “2005” Press Release Buy-back price $8.30 9.2% discount to Friday’s closing price of $9.14 70.4 million shares bought back for a total of $585m – approximately 5.7% of Coles Myer’s shares All shares tendered in the buy-back at or below $8.30 were bought back. Shares tendered into the buy-back at a price above $8.30 were not bought back. …. On-market buy-back of up to 15 million shares

21. 21 Draft offer form Type of Licence South Australian River Murray Licence Note: No more than 20% of any holding may be offered. Offer 1 …………….. ML @ not less than $1,500.00 per ML Offer 2 …………….. ML @ not less than $1,475.00 per ML Offer 3 …………….. ML @ not less than $1,450.00 per ML Offer 4 …………….. ML @ not less than $1,425.00 per ML Offer 5 …………….. ML @ not less than $1,400.00 per ML Signatures Licence holder ………………………………………… Registered interest (if any) …………………………..

22. 22 Facilitating Structural Adjustment Impede  Trading barriers because rules on partially specified  Exit fees rather than supply contracts Facilitate  Unbundle into separate components  Remove purpose-based entitlement specification (Urban = Rural - realise the gains)  Low cost allocation trading (Qld free, SA over $500 per temp. trade – $20 per trade should be possible)  (Entitlement reform is not urgent and expensive) Expedite  Source environmental water using market-like processes

23. Generalised framework for unbundling Catchment Plans Trading Protocols & Accounting Rules Water allocation plans Total System Use licences (approvals) AllocationsEntitlementsIndividual ExternalitiesEconomic Efficiency Distributive Equity Policy ObjectiveScale

24. 24 Alternative governance arrangements Research agenda  Applicability of European concept of “subsidiarity”  Can call in powers only when needed rather than delegated down  Role of independent commissioners  Role of corporate-like accountability

25. 25 Market-based instruments Allow all to be part of the solution rather than part of the problem! Markets are excellent servants but poor masters Potential Instruments  Offset mechanisms  Offset credit banking mechanisms  Bundled cap and trade mechanisms  Unbundled cap and trade mechanisms

26. 26 Salinity markets Currently Individuals are largely excluded from the market There is no formal incentives to encourage salt to the sea Potential solutions Defining obligations in term of tonnes Dilution flows Strategic releases

27. 27 A Storm Water Markets Could modify rules for the proposed Storm Water Authority to reward councils and developers who act to reduce storm water loads  Less rates to pay  Less state government expenditure  Proactive business opportunities

28. 28 Storm-water trading model Indicative elements  Local Govt contributions for cost of new works in proportion to increased load  Anyone can get credit for decreasing the storm water load by gaining exemption from a storm water levy  Credits generated by reducing load are tradable across Adelaide’s Metropolitan Area  Storm water credits could be banked until sold

29. 29 An emerging agenda 1) Accounting properly 2) Trading to build and maintain regional prosperity 3) Restoration of river and aquifer health at least cost 4) Smart management of externalities 5) Excellence in governance 6) Robust definition of entitlements that builds upon hydrological knowledge

30. 30 Some ideas On accounting work out how to 1.Deal with the flow reducing activities 2.Manage unconfined groundwater and surface water as one! (Bring groundwater in under the cap.) 3.Adjust allocation pools autonomously On Trading work out how to 4.Unbundle so you don't have to move registers from one state register to another. Bring urban users into the market place. 5.Make the cost of electronic allocation trading less than $20 per trade 6.Replace exit fees with contracts 7.Allow carry forward for all water (and rewrite the management plans to enable this) 8.Separate water management policies from structural adjustment

31. 31 Some more ideas On restoration of health work out how to 9.Buy water from irrigators and empower independent environment trusts to manage this water with confidence 10.Allow counter-cyclic trading and build a portfolio of instruments that deliver water when it is needed 11.Facilitate and expedite adjustment and cope with changing land-use and climatic conditions On externalities work out how to 12.Use markets to manage storm water 13.Use salinity offsets as a first step to cap and trade 14.Combine levy on all irrigators to pay for salinity interception but exempt them if they are part of the solution 15.Introduce Dilution flows and flushing

32. 32 A few more ideas On governance work out how to 16.Advise environmental water trustees 17.Set up water accounts to  inform water users and  establish performance ratios for governors 18.Design instruments that produce autonomous trade-offs On planning work out how to 19. Unbundle catchment, trading and allocation plans 20. Set up exchange rates and entitlement conversion ratios 21. Specify entitlement pools that autonomous adjust to change 22. Tag entitlements at source and reduce the number of entitlement types to two

33. Drops of water create rivers and aquifers Contact: Prof Mike Young Water Economics and Management Email: Mike.Young@adelaide.edu.au Phone: +61-8-8303.5279 Mobile: +61-408-488.538