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Simplifying complexity: Rationalising water entitlements in the Southern Connected River Murray System, Australia
agricultural water management 86 (2006) 229–239
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Simplifying complexity: Rationalising water entitlements in the Southern Connected River Murray System, Australia§ Tian Shi a,b,* a b
Corporate Strategy and Policy, Primary Industries and Resources South Australia, GPO Box 1671, Adelaide, SA 5001, Australia Policy and Economic Research Unit, CSIRO Land and Water, PMB 2, Glen Osmond, SA 5064, Australia
article info
abstract
Article history:
Water markets have the potential to greatly improve the productive use of water by
Accepted 31 May 2006
reallocating entitlements to where they are most highly valued. However, water markets
Published on line 25 July 2006
do not always function efficiently because the property rights structure initially was not designed for market transactions. A major challenge dominating Australia’s water reform
Keywords:
agenda is to rationalise the complex and inconsistent water entitlements within and across
Entitlememt compatibility
jurisdictions to facilitate markets. In this paper, a classification framework was developed to
Entitlement attribute
identify entitlement types and specify entitlement attributes, and alternative entitlements
Property right
arrangement options are proposed to minimise transaction costs and streamline admin-
Water market
istrative processes. Although the study focuses on the reform of water entitlements systems
Classification framework
in the Australian context, its broad implications are briefly discussed. # 2006 Elsevier B.V. All rights reserved.
1.
Introduction
Through the mid 1980s it became clear that existing institutional arrangements were inadequate for sustainable water use and management in Australia (Randall, 1981). In 1994, the Council of Australian Governments1 (COAG) endorsed a national Water Reform Framework to make the necessary changes. The key element of the package in relation to water property rights was a recognition of the need to develop and implement comprehensive and consistent systems of water entitlements, which were ‘‘backed by the separation of water property rights from land title,
with clear specification of entitlements in terms of ownership, volume, reliability, transferability and, if applicable, quality’’ (COAG, 1994). Government policies also identified establishing competitive markets as the most appropriate instrument to allocate scarce water among competing users (Pigram, 1993; Bjornlund, 2003). In 1995, a cap2 was introduced to limit surface water diversions from the Murray–Darling Basin (MDB)—the biggest catchment in Australia. Prior to the cap there was little incentive to trade because increased demands for water were largely met administratively through increased allocations to irrigators.3 The cap effectively limited entitlement holders’
§ An earlier version of this paper was invited to present at the Australian Water Summit, 28 February–2 March 2005, Melbourne, Australia. * Tel.: +61 8 8226 0561; fax: +61 8 8226 0221. E-mail address: [email protected]. 1 COAG comprises the Premiers of the various sovereign states, together with the Prime Minister of the Commonwealth of Australia. It debates matters of national significance. 2 The cap set the use of water for consumptive purposes (e.g., for irrigated agriculture, stock and domestic and urban needs) to a level reflecting the 1993/1994 levels of development. 3 As irrigated agriculture dominates water use in Australia, the scope of this paper is restricted to the consideration of irrigation water entitlements and trading. 0378-3774/$ – see front matter # 2006 Elsevier B.V. All rights reserved. doi:10.1016/j.agwat.2006.05.019
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agricultural water management 86 (2006) 229–239
access to water, forcing them to meet any increases in demand through trade (Goesch, 2001). In Australia, water trade sometimes is referred to as permanent trade of water entitlements (i.e., irrigators’ access rights to a specific quantity of water each irrigation season) and sometimes is referred to as temporary trade of seasonal allocations (i.e., the proportion of water entitlements allocated by water utilities during an irrigation season). Markets for temporary water are relatively easy to administer, because the underlying property right in water remains with the seller, and only the right to use the water for a defined period of time is traded. In general, there are more trade restrictions on water entitlements than on seasonal allocations, and more restrictions on trades between irrigation districts than within a district (Bjornlund, 2003; Appels et al., 2004). The existence of markets for both temporary and permanent water enables irrigators to manage the risk of increased supply uncertainty, and also facilitate a continued reallocation of water both within and between seasons (Crase et al., 2000). For example, some irrigators have sold permanent water to gain cash and in return accepted higher supply risk, which they try to manage by buying temporary water. Others have purchased permanent water to secure their production during periods of low supply, and then sell it on the temporary market when they do not need it. At the community level, water markets have the potential to maximise the economic benefits not only for individual irrigators, but also for agricultural regions (e.g., Young et al., 2006). Markets for temporary water have achieved far wider adoption than markets for permanent water. For example, among 990 gigaliters (GL) of water traded in the MDB in 2001– 2002, 913 GL (or 92%) was traded temporarily and the remaining was traded permanently (Productivity Commission, 2003). Differential tax treatment, considerable policy uncertainty related to the level of future supply, the administrative complexity and cost associated with markets for permanent water and irrigators’ perceptions of water rights as an inherent part of their property, are significant factors driving the preference for markets in temporary water. Also, many buyers indicate that they are not able to pay the prices on the market for permanent water, simultaneously with making other considerable investments in farm improvements and expansions in response to increasing adjustment pressures within the irrigation industry (Bjornlund, 2003). It often has been argued that in order to facilitate real structural change within the irrigation industry and encourage a move to more efficient and higher-value uses, permanent entitlements trade is essential, because irrigators are unlikely to invest significant amounts of money in irrigation infrastructure without the long-term security of water supply (Bjornlund and McKay, 2002). The slow uptake of the market for permanent water has been an impediment to maximising significant economic benefits from efficient and high value water uses (Marsden Jacob Associates, 1999; Crase et al., 2000). A prerequisite for an efficient market is completely specified, enforced, and transferable property rights (Saliba, 1987). However, it has been recognised that current water entitlements are not well defined (Crase et al., 2000).
Individuals in environments with such insecure property rights will choose to engage only in self-enforcing contracts, which provides less potential for the society to realise gains from trade and build a foundation for economic growth (e.g., invest in more efficient irrigation infrastructure) (Fuchs, 2003). As a result, water trading has been limited to spot sales of water or to the lease of water for a single year rather than to permanent sales of water entitlements (Freebairn, 2005). In addition, existing water entitlements systems are complex and inconsistent within and across jurisdictions, and restrictive of water transfers, which resulted in maintaining existing, possibly inefficient uses of water. Australian water administrators are being called upon to develop nationally compatible water entitlement systems coupled with trading arrangements that minimise transaction costs to facilitate markets. The recent National Water Initiative4 (NWI) represented strategic attempts to standardise approaches to water management at a national scale. By 2007, institutional and regulatory arrangements are required to be in place to facilitate ‘‘intra and interstate trade, and manage differences in entitlement reliability, supply losses, supply source constraints, trading between systems, and cap requirements and to develop arrangements to facilitate effective and efficient water trading on the markets’’ (COAG, 2004). Simplified and consistent water entitlements will improve the efficiency of water markets, and increase the benefits of markets by reducing the transaction costs of trading. Beyond the general consensus, however, there is much less agreement about what the specific reforms should be. With this in mind, this paper attempts to: specify the feature of existing water entitlements arrangements in the study area; propose a water entitlements classification framework; explore opportunities to simplify and standardise entitlements to streamline administrative processes and facilitate water markets.
2. Property rights and water markets—a literature review Over the past two decades, the establishment of tradable property rights in water and development of markets in these rights has received considerable attention around the world. Markets for permanent water have been introduced formally in the United States (Colby, 1995), Chile (Bauer, 1997), Mexico (Rosegrant and Binswanger, 1994), New Zealand (Sharp, 1996) and Australia (Bjornlund and McKay, 2002). Many other countries such as Canada, Spain and South Africa are working on their introduction (Easter et al., 1998). However, there are considerable uncertainties and restrictions associated with the development of permanent water 4 At the COAG meeting of 25 June 2004, the Commonwealth, the Australian Capital Territory, Queensland, New South Wales, Victoria, South Australia and the Northern Territory agreed to participate in an intergovernmental agreement on water allocation and management.
agricultural water management 86 (2006) 229–239
markets. In South Africa, under the Water Act 1998, unused water entitlements will be withdrawn in areas of water scarcity. Hence, there is some doubt about how much trade will occur in the future (Nieuwoudt, 2002). In Chile, transfers of permanent water have been possible since 1979, but trading has not been widespread (Bauer, 1997). In the United States, trade between agricultural users predominantly takes place within mutual or ditch companies through a network of canals. Within such areas water can be traded permanently as long as the water remains within the system, while external trading has at times been opposed (Anderson and Hill, 1997). Although markets in permanent water have been introduced in New Zealand and Mexico, they have not taken hold (Bjornlund, 2003). Markets for permanent water are difficult to establish due to the need for fairly sophisticated institutional arrangements necessary to administer and implement such markets, while markets for temporary water have flourished quite widely in many countries around the world, such as India and Pakistan (Easter et al., 1998; Bjornlund and McKay, 2002). The market-based system is generally regarded as more flexible and adaptable in allocating water than centralised allocation of water (Rosegrant and Binswanger, 1994; Anderson and Hill, 1997). Experiences from many countries (e.g., Chile and western United States) demonstrate that water markets have improved water use efficiency and provided farmers incentives (e.g., via water price) to save water in order to sell the surplus, and to transfer rights to higher-valued uses within agriculture or other sectors of the economy (Dinar and Letey, 1991; Hearne and Easter, 1995; Rosegrant et al., 1995; Bauer, 1997; Zekri and Easter, 2005). Property rights form the basis for all market exchange (Cole and Grossman, 2002). Property rights define the owner’s rights, privileges and the associated limitations of the specific resource use, and their allocation in society affects the efficiency of resource use (Bromley, 1997). Water rights provide owners with a vested right to use water. In most western states of the United States they are both a property right and a licence (Tarlock, 1999). Water rights in most markets (e.g., Chile and western United States) have perpetual duration (Rosegrant and Binswanger, 1994). When the governments face escalating demands and increasing water scarcity two options are available: (1) continue to permit users to consume water on a first-comefirst-served basis and (2) regulate the consumption of water by allocating water among competing users (Sturgess and Wright, 1993). A key distinction between water rights in California and those in Chile and Mexico is that the former defines rights on a priority basis, while the latter two effectively define the water right as proportional (share) over a variable flow or quantity. Because those priorities are not based on economic returns, considerable inefficiencies can occur due to some low-value users enjoying supply priority based on historical precedent at the expense of potential high-value users. The inability to obtain water where it is most needed during shortages is a major limitation of the prior rights system (Rosegrant et al., 1995).
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In recognising that many water property rights traditionally were not designed for market transactions, some scholars (e.g., Easter et al., 1998) suggest that potential gains might arise from establishing tradable water rights and allowing water trade between different regions. The concept of tradable water entitlements is generally accepted, in Australia and internationally, as a workable and equitable way of improving the efficiency of water allocation and securing the maximum benefits from water use (Pigram, 1993; Rosegrant and Binswanger, 1994; Bauer, 1997; Brennan and Scoccimarro, 1999; Young et al., 2000). In the United States, the heterogeneous nature of water rights and the changing social values associated with water make standardised transactions in water improbable. Every state imposes conditions on water transfers. Such policies generate uncertainties and costs for transferors and have been described as inefficient and unnecessary impositions on the markets (Colby, 1995). In Australia, the heterogeneous nature of existing water entitlements (e.g., in terms of duration, access priority, supply reliability and extent of tradability) within and across jurisdictional boundaries has made it difficult to organise the market and a failure to align them has increased transaction costs and administrative errors (Brennan and Scoccimarro, 1999; Shi, 2005). High transaction costs have greatly limited gains from trading, and they should be minimised so that market transactions can proceed unencumbered (Colby, 1995; Rosegrant et al., 1995). A common prescription for improving efficiency of water markets is to clarify attributes of water entitlements and address inherent problems (Lee and Jouravlev, 1998; Haddad, 2000). Some scholars (e.g., Matthews, 2004; Shi, 2005) suggest simplifying and standardising existing water entitlements to streamline administrative processes and facilitate water markets. The underpinning rationale is that in a policy environment where trading is encouraged, consistent approaches to entitlements and trading arrangements will reduce transaction costs. Markets operate most efficiently when the entitlements being allocated are homogeneous (Howe et al., 1986).
3.
Water entitlements in the study area
3.1.
The study area
The Southern Connected River Murray System5 (SCRMS) is essentially a winter rainfall system that is physically shared or hydrologically connected by a set of river systems and associated groundwater systems in southern New South Wales (NSW), Northern Victoria and Eastern South Australia (SA) (Fig. 1). This study focuses on irrigation water entitlements in the regulated river systems as approximately 90% of irrigation water applied in the area is drawn from these sources.
5
It includes the River Murray, Lower Murray, Angas Bremer, and five pipeline systems in SA; the Darling River and its Ana Branch below the Menindee Lakes, the River Murray itself, the Murrumbidgee system in NSW; and seven Victorian tributaries.
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agricultural water management 86 (2006) 229–239
Fig. 1 – Southern Connected River Murray System and its 10 irrigation regions (source: derived from Shi, 2005).
3.2.
Terminology
A water entitlement defines an individual or group’s ongoing right to access water from a specified source. The terminology and nature of entitlements varies significantly within and across jurisdictions (Table 1). The high degree of variability in water policy between states has led people to use different terms to describe the same concept (e.g., in Victoria entitlements are called water rights or diversion licences while in NSW they are called access licences) or use the same word to describe different things (e.g., in SA both a water entitlement and an allocation are called water allocations, while in Victoria and NSW the term allocation is used only to describe the amount of water received annually by an entitlement holder).
3.3.
Constraints on water entitlements trading
The trading of water entitlements is the major method by which new farmers can obtain water and existing farmers can expand their production. However, several constraints limit the extent of the trade. In addition to physical congestion constraints6 that preclude trade between some regions, administrative and regulatory restrictions explicitly limit the trade of entitlements between regions and across state borders (Young et al., 2000; Goesch, 2001; Appels et al., 2004). In many cases, regulatory approval procedures that seek to protect third party interests are a major cost of implementing a transaction. In NSW, for example, it typically takes 6–12 months to complete a permanent entitlement trade and even 6 The most significant river channel constraints on the River Murray is the Barmah Choke, through which the flow capacity is reduced to around 8500 megaliters per day to prevent flooding of the surrounding red gum forest. As a result, downstream trades are only possible if they are offset by upstream trades.
a temporary water trade takes up to 7 weeks to approve (Marsden Jacob Associates, 1999). In addition, irrigation authorities impose restrictions on trading of water entitlements outside the scheme. For example, the Central Irrigation Trust in SA has put a 2% cumulative limit on permanent entitlement trade out of the trust’s districts in an attempt to protect regional interests. In some river systems, trading zones have been introduced to assist with environmental and other management issues. Currently 23 trading zones have been established in the Northern Victoria regulated water system (Fig. 2). These zones limit trade to within the zones or, in some cases, apply reduction factors to allow for trading into zones of rising water tables, or to account for river transmission losses.7 For example, an irrigator in zone 10B, who buys 1 megaliter (ML) water from an irrigator in zone 10A, will only receive 0.85 ML water; but if he/she sells 1 ML to zone 10A, then the recipient would receive 1 ML water. These constraints distort the markets (e.g., both allocation and entitlement prices are unlikely to reflect the full opportunity cost of water) and impede water moving to higher-valued uses. A study (e.g., Bjornlund, 2002) of permanent water entitlements markets along the River Murray in SA and Victoria found that prices paid and market activities were lowest in areas with most restrictions on trade, and as restrictions were eased, price differences declined and market activities increased. In addition, due to the relatively thin market and confidential nature of many entitlement trades, there is little publicly available information on the prices being paid for entitlements. 7
A locational exchange rate is used to identify the quantity of water that can be moved from one location to another without detriment to the integrity of the supply system, river health and other irrigators.
agricultural water management 86 (2006) 229–239
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Table 1 – Key terminologies used in this study State
Terminology
NSW
High security access licence General security access licence Supplementary water access licence
Victoria
Water right Diversion licence Sales watera
SA
Water holding licence Water taking licence
Definition A highly reliable entitlement that allows holder to access water prior general security licence holders A medium reliable entitlement that allows holder to access water prior supplementary water licence holders A low reliable entitlement that only applies to general security licence holders A highly reliable entitlement that allows holder to access water in irrigation districts indefinitely A renewable entitlement that allows holder to divert water from a river or stream for up to 15 years A low reliable entitlement that only applies to water right or diversion licence holders, allow holders to receive a percentage of the volume specified on their water right or diversion licence up to maximum allocation A highly reliable entitlement that allows holder to access water in prescribed sources indefinitely but cannot be used until it is transferred to a water taking licence A highly reliable entitlement that allows holder to access and use water in prescribed sources indefinitely
a Under current arrangement, sales water is not a formal entitlement. It is attached to water right or diversion licence and cannot be traded separately. As the Victorian Government White Paper (2004) has proposed to unbundle sales water into a separate, legally recognised and independently tradable entitlement, in this study, sales water is identified as an entitlement.
3.4.
An overview of water entitlements arrangements
In Australia, the use and control of water is vested in the Crown and it is mainly the state government’s responsibility to manage water resources through legislation and policy (LWA, 2002). The legislation introduced by each state (e.g., Water Management Act 2000 in NSW, Water Act 1989 in Victoria, Water Resources Act 1997 in SA) is not uniform in its approach or language. The states grant water access rights or entitlements to users (generally in the form of a licence). Traditionally, these entitlements entitle a holder to:
a nominal volume of water, which will be subject to supply reliability; a specified delivery capacity for that water; the right to use water on the landholder’s property. Since 1997, many states have begun separating the site use right from volumetric rights and delivery capacity rights. The states have generally made different decisions on how those rights will be unbundled in their jurisdictions. For example, in Victoria, there existed a traditional bundled water right consisting of a volumetric entitlement, delivery capacity and site use. In contrast, SA has separated the site use right from
Fig. 2 – Trading zones in the Northern Victoria regulated water system (source: http://www.watermove.com.au).
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Table 2 – A summary of state approaches to irrigation water allocation in regulated water systems State NSW
Entitlement High security access licence
General security access licence Supplementary water access licence
Victoria
Water right Diversion licence Sales water attached to water right
Sales water attached to diversion licence SA
Water holding licence Water taking licence
a b
Allocation policy
Supply reliability
Specified as a maximum volume and expected to be available in all but the worst droughts; unused allocations are surrendered at the end of the season (i.e., no carry over) Varies according to the water available in the general security allocation pool; allow to carry over or overdraw in some years Available after meeting the needs of high and general security licences and when flows are surplus to in-stream requirements; varies from year to year
95% (Murrumbidgee) and 97% (Murray & Lower Darling)
Specified as a maximum volume and expected to be available in all but the worst droughts; no carry over Usually allow a maximum diversion rate; no carry over Only available after meeting the needs of water rights and the volume of water required to supply the next season’s water rights is secure in the dam; varies from year to year; no carry over Same as above
96–99%
Allocations do not vary from year to year and expected to be potentially available in all but the worst droughts Specified as a maximum volume and expected to be available in all but the worst droughts; taking allocations include permission to use water at a specific location; no carry over
Almost 100%b
70% on average
Opportunistic
96–99% 68%a (Murray) 43%a (Goulburn)
48%a (Murray) 30%a (Goulburn)
Almost 100%b
Data is approximate and reflect the probability of receiving full sales water allocation. In 2003–2004 and 2004–2005, for the first time in history, SA water licence holders did not received their full allocation.
volumetric and delivery capacity rights. NSW has gone further to separate those rights into: share/volume, extraction/delivery, and site use (Bruton, 2003). No state has introduced generic provisions to facilitate tailored unbundling in local areas (LWA, 2002). Currently, state governments use different terminology to describe water entitlements, and different approaches to declare water allocations (see Table 2). Entitlement8 refers to the annual amount of water specified on each irrigation licence as the limit of water extraction for the licence holder, but the actual volume that can be ordered is governed by an allocation, announced by the local managing authority at the beginning of a season and revised throughout the season, based on available supplies. In Victoria, for example, a farmer can possess water rights and diversion licences to take water, and an entitlement to sales water. The total water available to the farmer is known as the seasonal allocation,9 which equals the water entitlement (water right and diversion licence) plus sales water (if there is excess water), or a quantity less than the water entitlement (if there is not enough water to meet all the entitlements). Most existing water entitlements are based on water acts written in a time that focused on encouraging water development rather than water allocation (Young and McColl, 2002). Accordingly, water management and entitlements have been largely developed on a regional basis with little expectation that there could be a highly standardised approach. It is not 8 Entitlements when granted have no seniority attributes and all entitlements for the same use purpose are treated equally, including allocation of available water supplies. 9 This water can either be used or sold temporarily on the markets.
surprising that details underpinning these entitlements are inordinately complex and many entitlement attributes are only partially specified. As a result, buyers and sellers typically face considerable uncertainties regarding the quantity of water that may be transferred and conditions and costs that may be imposed.
4. A classification framework to identify water entitlements types In this study, a classification framework is developed to identify any type of entitlement from different perspectives. Using this framework, water entitlements are first grouped according to the nature of the supply system (i.e., determine the prime source of water supply from a regulated or unregulated surface water system, or from a confined or unconfined aquifer). Each of these supply systems is then further defined by physical location, hydrological boundaries and associated infrastructure. The next is the management zone, which is defined by a combination of political, administrative, and physical considerations. State and hydrological boundaries are always respected. The next element in the classification framework is the allocation category or pool, which is defined by the purpose of use usually associated with the statements about access priority10 and the reliability of the expected allocations. The last grouping collects a large variety of use 10
Access priority varies by state but generally environmental flows, industrial and town water supplies and basic landholder rights (i.e., stock and domestic and indigenous water rights) have priority over irrigation water supply.
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conditions and restrictions (e.g., on the location where water may be used or traded, and obligations to infrastructure suppliers). The feature of a type of water entitlement can be further specified by referring to four entitlement attributes: supply reliability—defined in terms of the number of years in 100 when entitlement holders can expect to receive full entitlement volume allocation; entitlement and allocation tradability—refers to the ability to trade among states (***), within the state (**), only within the region (*) or not tradable (0); tenure—describes whether the licence is issued for a number of years or perpetual (1); access priority—describes the order in which water is taken from pools of the system. These attributes are not complete independent or exclusive. Generally there is a high correlation between access priority and supply reliability. As the length of tenure increases the values of other attributes are enhanced. The major purpose of using this classification framework is to identify different types of water entitlements, which enables one to compare their similarities and identify opportunities for rationalisation. Within a water management zone if two entitlements have identical attributes, belong to the same allocation pool or category, and share the same source of water supply, they are the same type. Otherwise, they are different
entitlements (Shi, 2005). By using the classification framework, 22 categories and 438 types of water entitlements have been identified in the study area (see Table 3). Among them, 9 categories and 183 types of entitlements are assigned for irrigation purpose (Shi, 2005).
5.
Simplifying existing irrigation entitlements
5.1. Unbundling use condition from entitlement and allocation to use licence Unbundling a water licence into three components (i.e., entitlement, allocation and use licence) is central to the formation of effective water markets (Young and McColl, 2002). Under current arrangements, all or some components are combined together in a water licence. When entitlement trading involves both a change in ownership and details pertaining to the allocation pool, management zone, use conditions and restrictions, etc., obligations and environmental impacts associated with water use in the new location need to be considered. These complex arrangements complicate administrative processes and increase the transaction costs associated with water trading, which therefore is impeded. Under the unbundling arrangement, only issues related to entitlements and allocations are subject to trade consideration. Issues of use conditions and environmental
Table 3 – Existing 22 entitlement categories and the feature of their attributes State
Entitlement category
Attributes Supply reliability (%)
Entitlement tradability
Allocation tradability
Tenure (year)
Access priority
NSW (8)
Domestic & stock access licence Local water utility access licence High security access licencea Environmental water access licence General security access licencea Supplementary water access licencea Conveyance access licence Indigenous cultural access licence
100 100 >95/97 100 70b 50b 50b 100
0 0 E *** 0 E ** 0 0 0
0 A* A *** 0 A *** A* A* 0
1 20 1 1 1 2 1 1
1 1 1 1 2 3 2 1
Victoria (6)
Domestic & stock right Town water supply Supply by agreement Water righta Diversion licencea Sales watera
100 100 100 96 70b/96 30–70
0 0 0 E ** E *** 0
0 A* A* A *** A *** A **
1 1 1 1 5/15 1
1 1 1 2 2 3
SA (8)
Stock & domestic licencea,c Country town water licence Industrial licence Recreational & environmental licence Water taking licencea Wetlands licence Water holding licencea Metropolitan water licence
100 100 100 >97 >97 >97 >97 100
E *** 0 0 0 E *** 0 E *** 0
A *** A* 0 0 A *** 0 A *** A*
1 1 1 1 1 2–5 1 1
1 1 1 1 1 1 1 1
Note. E, entitlement; A, allocation; ***, trade among states; **, trade within the state; *, trade within the region; 0, not tradable; 1, perpetual. Assigned for irrigation purpose. b Figure is estimated and indicative of the average supply reliability. c In general, stock and domestic licences are not tradable. The exception applies to SA stock & domestic licences, which are separated from land title and can be traded independently. a
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Table 4 – Ranking and grouping 112a types of irrigation entitlements Entitlement category (9)
Entitlement type (112)
Entitlement group
Attributes Supply reliability (%)
Stock & domestic High security Water taking Water holding Diversion licence High security Water taking Water holding Water right High security Diversion licence General security Diversion licence Sales waterb Sales waterb Supplementary water Sales waterb Sales waterb
Entitlement tradability
Allocation tradability
Tenure (year)
Access priority
3 10
G1 G2
100 >97
E *** E ***
A *** A ***
1 1
1 1
6 14
G3 G4
96 >97
E *** E ***
A *** A ***
5 1
1 1
17 4 13 10 5 4 4 10 7 5
G5 G6 G7 G8 G9 G10 G11 G12 G13 G14
96 >95 96 70 70 60 60 50 40 40
E ** E ** E ** E ** E ** 0 0 0 0 0
A *** A *** A *** A *** A *** A ** A**c A* A ** 0
1 1 15 1 15 1 1 2 1 1
1 1 1 2 2 3 3 3 3 3
(Murray) (Murray) (Goulburn) (Goulburn)
a
There are 183 types of irrigation entitlements in the study area. Due to the lack of information on some entitlement attributes, only 112 types are listed here. b In terms of temporary trade of sales water, irrigators can maximum sell 30% of allocated sales water, and if they sell any water above that they lose the right to sales water for that season. c Water allocations can only be purchased from Goulburn–Murray trading zone.
approvals are described in site-specific use licences, which are not subject to trade. This arrangement provides an opportunity to streamline the process for water trading.
5.2.
Rationalising entitlements by ranking and grouping
Although many irrigation entitlements are only partially specified, the features of their attributes are very similar or even identical. As a result, different types of entitlements can be ranked according to their attribute features (e.g., from high to low by supply reliability) and then separated into groups (entitlements in each group have identical attribute features) (see Table 4).
5.3.
Reducing entitlement categories and types
As summarised in Table 4, 14 entitlement groups are identified and in each group entitlements have identical attribute features. From a broad study area rather than an individual
state perspective, these 9 categories and 112 types of irrigation entitlements can be reduced into 3 classes (i.e., A, B and C) and 14 types (see Table 5). Entitlement classes are differentiated by access priority, and entitlement types are differentiated by their attribute features (i.e., supply reliability, tradability and tenure).
6. Standardization opportunities for consistent entitlements arrangements 6.1.
Introducing standard terminology
Consistent terminology should be used across jurisdictions to standardise the language and decrease confusion. This would require amendments to current legislation and all licences that are not described in a standard manner. There appears to be an emerging consensus that the term ‘entitlement’ should be used to describe an ongoing right to access water and the term ‘seasonal allocation’ should be used to describe the
Table 5 – Reducing 9 categories and 112 types of irrigation entitlements into 3 classes and 14 types Existing arrangement NSW High security General security Supplementary water 30 a
Proposed arrangement: SCRMS Victoria
SA
Water right Diversion licence Diversion licence Sales water 61
Stock & domestic Water taking Water holding NAa NAa 21
A (first access, high reliability 91–100%)
A1–A7
B (second access, medium reliability 61–90%) C (third access, low reliability 0–60%) 3
B1 and B2 C1–C5 14
In a fully tradable system, class B and class C entitlements would expect to be introduced in SA (see Young et al., 2004).
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volume of water allocated within a specific period (Carmichael and Cummins, 2002).
6.2.
Aligning entitlement attributes to standardised ones
Tables 4 and 5 reveal that NSW high security entitlements, Victoria water rights and diversion licences, SA stock & domestic, water taking and water holding entitlements have a supply reliability of 95–100% and access priority of 1. If their supply reliability can be aligned (say to 95%) and arrangements on tenure and tradability could also be aligned to a standard, then these seven types of entitlements (i.e., A1–A7) are differentiated only by water supply systems and/or management zones. In the same vein, entitlements in class B and class C could also be standardised. By aligning those entitlements that share similarities in supply reliability and tradability into standardised ones, those allocation pools that share the same source of water supply could also be merged as one.
6.3. Rationalising sales water and supplementary water arrangements Currently, NSW supplementary water allocations are contingent upon the availability of water, only available to general security entitlement holders, and can only be traded temporarily within the region. Similarly, opportunities to apply for Victorian sales water are attached to water right and diversion licence holders and allocations can only be traded temporarily within the state. In a policy environment where trading is encouraged, it is possible to abolish this form of quasientitlement and unbundle supplementary water and sales water into separate, legally recognised and independently tradable entitlements.
7.
Discussion
Many of the details of existing entitlements and market development are unique to Australia. But when delving further into the complex historic, economic, social, political and institutional contexts that shape the evolution of water entitlements and the development of water markets, some implications can be drawn from the Australian experience. One of the simplest ways of reducing transaction costs is to reduce the number of entitlement types. Options to do this in the study area include developing a single standardised system or a more unified system. Conceptually, a single standardised system of water entitlements, with the removal of all differences among states, would minimise transaction costs. In reality it needs to recognise the large administrative costs and political risk in changing any system.11 Given the extent of state investments in their separate systems, a more unified system of water entitlements has a higher probability of success. However, it seems unlikely that the unified entitlements and
11
A new entitlements system may introduce legal and economic uncertainty in water resource management and can be difficult to implement because of the rigidity of the infrastructure already in place.
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governance arrangements would evolve without first passing through significant policy and legislative reforms. Existing water entitlements can be regarded as property rights of sorts in that state legislation backs an entitlement holder’s right to the exclusive use of an allocation or diversion of water. However, the emphasis of the existing system is on regulatory and administrative control of entitlements rather than on a market-based system of tradable rights. Overregulation at the outset will limit the size and scope of the market, and will likely reduce the efficiency gains (Rosegrant et al., 1995). Water policy must seek a balance between the degree of regulation to protect various interests that are affected by water trades, and the level of transaction costs associated with water trading. It is therefore important to clearly define the characteristics of water entitlements and the conditions and regulations governing the trade of water entitlements. It is important to note that trading is only one way to provide incentives to right holders, and not all water rights encourage trading to the same degree. Markets may not maximise the overall outcome in terms of social equity, ecological sustainability and economic efficiency. Market decisions, by their very nature, involve atomistic individuals making choices in their own best interest and they do not readily accommodate collective preferences (Saliba, 1987). Transfer of water entitlements causes third party effects. Since water is characterised by interdependent and jointly produced values, it is impossible to completely internalise externalities using property rights alone. While improving the definition and security of water entitlements is critical to improving the efficiency of water markets, it is also essential to remove any impediments to water trading within and between regions so that water can be traded to its highest value use and irrigators can more effectively address increased supply uncertainty. Currently, the differences in the legal frameworks of jurisdictions have impeded the ability of the government to change the structure of existing water property rights. A market-oriented and property rights-based system cannot exist or function without formal legislation and administrative decisions (Bauer, 1997). Markets cannot substitute for overtly legal and political processes. In addition, geography, hydrology, and the pattern of water use in a region must also be considered. Implementing more consistent water trading processes nationally requires a common information base and some common elements of process. The development of a National Entitlement Registration System (NERS) might provide consistent data to streamline entitlements. Information from the NERS would need to be supplemented by on-ground collection of information that cannot be collected at a national or state level. The key to a consistent national approach is that while administration may vary to suit local arrangements, the same on-ground information must be collected, analysed and reported in a standardised way. In addition, an integration of trade into a wider water planning and management framework is likely to be necessary for a consistent trading process.
8.
Concluding remarks
This paper advocates that simplified and consistent water entitlements within and across jurisdictions would reduce the
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transaction costs and facilitate markets for permanent water. Major opportunities identified include: introducing standard terminology; unbundling use conditions and restrictions from entitlement and allocation arrangements to use licences; aligning entitlement attributes to some standards; rationalising supplementary water and sales water arrangements; rationalising trading zone boundaries by merging allocation pools with similar supply reliabilities. The complex application process of water entitlements trading has been of concern to irrigators but can be streamlined to some degree. The specification of water entitlements is likely to vary from place to place as rights are embedded in specific historical sets of social, economic and environmental structures. Also, the benefits of water market development will not be uniform across regions. Although individual entitlements to water cannot be perfectly specified, a consistent framework for entitlements is needed in which the entitlements of individual users can be constrained and modified. It is envisaged that the proposed classification framework and the identified simplification and standardisation options could substantially improve entitlements in the study area. In the foreseeable future, however, it may be politically unrealistic to implement a ‘‘one size fits all’’ approach to water entitlements for all states. Individual jurisdictions, however, can strive to ensure that entitlement specifications are consistent within jurisdictions and compatible among them.
Acknowledgements This research was funded by a CSIRO Post-Doctoral Fellowship program. The author appreciates the comments of Kim Alvarez, Henning Bjornlund, Gerry Davies, John Howe, John Radcliffe, Tom Rooney, Ian Wills, John Ward, and anonymous reviewers on earlier drafts of this manuscript. Special thanks to Mike Young and Jim McColl for inspiring the development of my ideas in this research.
references
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Bjornlund, H., McKay, J., 2002. Aspects of water markets for developing countries experiences from Australia, Chile and the US. J. Environ. Dev. Econ. 7 (4), 767–793. Brennan, D., Scoccimarro, M., 1999. Issues in defining property rights to improve Australian water market. Aust. J. Agric. Resour. Econ. 43 (1), 69–89. Bromley, D.W., 1997. Constitutional political economy: property claims in a dynamic world. Contemp. Econ. Policy 15 (4), 43–54. Bruton, A., 2003. Water property rights, water access entitlements in Australia: a new beginning. In: Proceedings of the National Water Conference, 7–8 October, Melbourne, pp. 37–51. Carmichael, A., Cummins, T., 2002. Water talk: let’s start speaking the same language. Unpublished manuscript. Council of Australian Governments (COAG), 1994. Communique´. In: Meeting of COAG, Hobart, 25 February. Council of Australian Governments (COAG), 2004. Intergovernmental Agreement on a National Water Initiative between the Commonwealth of Australia and the Governments of New South Wales, Victoria, Queensland, South Australia, the Australian Capital Territory and the Northern Territory. Colby, B.G., 1995. Regulation, imperfect markets, and transaction costs: the elusive quest for efficiency in water allocation. In: Bromley, D.W. (Ed.), Handbook of Environmental Economics. Blackwell, Cambridge, pp. 475–502. Cole, D.H., Grossman, P.Z., 2002. The meaning of property rights: law versus economics? Land Econ. 78 (3), 317–330. Crase, L., O’Reilly, L., Dollery, B., 2000. Water markets as a vehicle for water reform: the case of New South Wales. Aust. J. Agric. Resour. Econ. 44 (2), 299–322. Dinar, A., Letey, J., 1991. Agricultural water marketing, allocative efficiency, and drainage reduction. J. Environ. Econ. Manage. 20, 210–223. Easter, K.W., Dinar, A., Rosegrant, M.W. (Eds.), 1998. Markets for Water—Potential and Performance. Kluwer Academic Publishers, Boston. Freebairn, J., 2005. Issues in the design of water markets. Melbourne Institute Working Paper Series No. 18/05, University of Melbourne. Fuchs, D.A., 2003. An Institutional Basis for Environmental Stewardship: The Structure and Quality of Property Rights. Kluwer Academic Publishers, Dordrecht, The Netherlands. Goesch, T., 2001. Delivery charges for water: their impact on interregional trade in water rights. Austr. Commodities 8 (4), 626–634. Haddad, B.M., 2000. Rivers of Gold: Designing Markets to Allocate Water in California. Island Press, Washington, DC. Hearne R.R., Easter K.W., 1995. Water allocation and water markets: an analysis of gains-from-trade in Chile. Technical Paper No. 315, World Bank, Washington, DC. Howe, C.W., Schurmeier, D.R., Shaw Jr., W.D., 1986. Innovative approaches to water allocation: the potential for water markets. Water Resour. Res. 22 (4), 439–445. Lee, T.R., Jouravlev, A.S., 1998. Prices, property and markets in water allocation. United Nations, Economic Commission for Latin America and the Caribbean, Santiago, Chile. Land & Water Australia (LWA), 2002. Property: Rights and Responsibilities—Current Australian Thinking. Land & Water Australia, Canberra. Marsden Jacob Associates, 1999. Water trading development and monitoring. Report to the Department of Land and Water Conservation, Victoria. Matthews, O.P., 2004. Fundamental questions about water rights and market reallocation. Water Resour. Res. 40 (9), W09S08 doi:10.1029/2003WR002836. Nieuwoudt, W.L., 2002. Water market institutions in South Africa—lessons from Colorado. In: Proceedings of the
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Conference on Irrigation Water Policies: Micro, Macro Consideration, vol. 1, Agadir, Marocco, 15–17 June, pp. 261– 274. Pigram, J.J., 1993. Property rights and water markets in Australia: an evolutionary process toward institutional reform. Water Resour. Res. 29 (4), 1313–1319. Productivity Commission, 2003. Water Rights Arrangements in Australia and Overseas. Commission Research Paper, Productivity Commission, Melbourne. Randall, A., 1981. Property entitlements and pricing policies for a maturing water economy. Austr. J. Agric. Econ. 25 (3), 195–220. Rosegrant, M.W., Binswanger, H.P., 1994. Markets in tradable water rights: potential for efficiency gains in developing country water resource allocation. World Dev. 22 (11), 1613– 1625. Rosegrant, M.W., Schleyer, R.G., Yadav, S.N., 1995. Water policy for efficient agricultural diversification: market-based approaches. Food Policy 20 (3), 203–223. Saliba, B.C., 1987. Do water markets ‘‘work’’? Market transfers and trade-offs in southwestern states. Water Resour. Res. 23 (7), 1113–1122. Sharp, B.H.M., 1996. Progress toward tradable water permits in New Zealand. In: Pigram, J. (Ed.), Security and Sustainability in a Mature Water Economy—A Global Perspective. Centre for Water Policy Research, Armidale, pp. 141–154. Shi, T., 2005. Simplifying complexity: a framework for the rationalization of water entitlements in the Southern Connected River Murray System. Technical Report 03/05,
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Policy and Economic Research Unit, CSIRO Land and Water, Adelaide. Sturgess, G.L., Wright, M., 1993. Water Rights in Rural New South Wales: The Evolution of A Property Rights System. Center for Independent Studies, Australian Print Group. Tarlock, A.D., 1999. Law of Water Rights and Resources. West Group, pp. 3–12. Victorian Government White Paper, 2004. Securing Our Water Future Together. Victorian Government Department of Sustainability and Environment, Melbourne. Young, M., Hatton McDonald, D., Stringer, R., Bjornlund, H., 2000. Inter-state water trading: a two year review. Report to the Murray–Darling Basin Commission, CSIRO Land and Water, Adelaide. Young, M., McColl, J., 2002. Robust Separation: A Search for a Generic Framework to Simplify Registration and Trading of Interests in Natural Resources. Policy and Economic Research Unit, CSIRO Land and Water, Adelaide. Young, M., McColl, J., Ward, J., Shi, T., 2004. Licence-based options for deepening and extending the water market. Option report to the Department of Water, Land and Biodiversity Conservation, South Australia, Adelaide. Young, M., Shi, T., McIntyre, W., 2006. Informing Reform: Scoping the Affects, Effects and Effectiveness of High Level Water Policy Reforms on Irrigation Investment and Practice in Four Irrigation Areas. CSIRO Land and Water, Adelaide. Zekri, S., Easter, W., 2005. Estimating the potential gains from water markets: a case study from Tunisia. Agric. Water Manage. 72, 161–175.
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Simplifying complexity: Rationalising water entitlements in the Southern Connected River Murray System, Australia§ Tian Shi a,b,* a b
Corporate Strategy and Policy, Primary Industries and Resources South Australia, GPO Box 1671, Adelaide, SA 5001, Australia Policy and Economic Research Unit, CSIRO Land and Water, PMB 2, Glen Osmond, SA 5064, Australia
article info
abstract
Article history:
Water markets have the potential to greatly improve the productive use of water by
Accepted 31 May 2006
reallocating entitlements to where they are most highly valued. However, water markets
Published on line 25 July 2006
do not always function efficiently because the property rights structure initially was not designed for market transactions. A major challenge dominating Australia’s water reform
Keywords:
agenda is to rationalise the complex and inconsistent water entitlements within and across
Entitlememt compatibility
jurisdictions to facilitate markets. In this paper, a classification framework was developed to
Entitlement attribute
identify entitlement types and specify entitlement attributes, and alternative entitlements
Property right
arrangement options are proposed to minimise transaction costs and streamline admin-
Water market
istrative processes. Although the study focuses on the reform of water entitlements systems
Classification framework
in the Australian context, its broad implications are briefly discussed. # 2006 Elsevier B.V. All rights reserved.
1.
Introduction
Through the mid 1980s it became clear that existing institutional arrangements were inadequate for sustainable water use and management in Australia (Randall, 1981). In 1994, the Council of Australian Governments1 (COAG) endorsed a national Water Reform Framework to make the necessary changes. The key element of the package in relation to water property rights was a recognition of the need to develop and implement comprehensive and consistent systems of water entitlements, which were ‘‘backed by the separation of water property rights from land title,
with clear specification of entitlements in terms of ownership, volume, reliability, transferability and, if applicable, quality’’ (COAG, 1994). Government policies also identified establishing competitive markets as the most appropriate instrument to allocate scarce water among competing users (Pigram, 1993; Bjornlund, 2003). In 1995, a cap2 was introduced to limit surface water diversions from the Murray–Darling Basin (MDB)—the biggest catchment in Australia. Prior to the cap there was little incentive to trade because increased demands for water were largely met administratively through increased allocations to irrigators.3 The cap effectively limited entitlement holders’
§ An earlier version of this paper was invited to present at the Australian Water Summit, 28 February–2 March 2005, Melbourne, Australia. * Tel.: +61 8 8226 0561; fax: +61 8 8226 0221. E-mail address: [email protected]. 1 COAG comprises the Premiers of the various sovereign states, together with the Prime Minister of the Commonwealth of Australia. It debates matters of national significance. 2 The cap set the use of water for consumptive purposes (e.g., for irrigated agriculture, stock and domestic and urban needs) to a level reflecting the 1993/1994 levels of development. 3 As irrigated agriculture dominates water use in Australia, the scope of this paper is restricted to the consideration of irrigation water entitlements and trading. 0378-3774/$ – see front matter # 2006 Elsevier B.V. All rights reserved. doi:10.1016/j.agwat.2006.05.019
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agricultural water management 86 (2006) 229–239
access to water, forcing them to meet any increases in demand through trade (Goesch, 2001). In Australia, water trade sometimes is referred to as permanent trade of water entitlements (i.e., irrigators’ access rights to a specific quantity of water each irrigation season) and sometimes is referred to as temporary trade of seasonal allocations (i.e., the proportion of water entitlements allocated by water utilities during an irrigation season). Markets for temporary water are relatively easy to administer, because the underlying property right in water remains with the seller, and only the right to use the water for a defined period of time is traded. In general, there are more trade restrictions on water entitlements than on seasonal allocations, and more restrictions on trades between irrigation districts than within a district (Bjornlund, 2003; Appels et al., 2004). The existence of markets for both temporary and permanent water enables irrigators to manage the risk of increased supply uncertainty, and also facilitate a continued reallocation of water both within and between seasons (Crase et al., 2000). For example, some irrigators have sold permanent water to gain cash and in return accepted higher supply risk, which they try to manage by buying temporary water. Others have purchased permanent water to secure their production during periods of low supply, and then sell it on the temporary market when they do not need it. At the community level, water markets have the potential to maximise the economic benefits not only for individual irrigators, but also for agricultural regions (e.g., Young et al., 2006). Markets for temporary water have achieved far wider adoption than markets for permanent water. For example, among 990 gigaliters (GL) of water traded in the MDB in 2001– 2002, 913 GL (or 92%) was traded temporarily and the remaining was traded permanently (Productivity Commission, 2003). Differential tax treatment, considerable policy uncertainty related to the level of future supply, the administrative complexity and cost associated with markets for permanent water and irrigators’ perceptions of water rights as an inherent part of their property, are significant factors driving the preference for markets in temporary water. Also, many buyers indicate that they are not able to pay the prices on the market for permanent water, simultaneously with making other considerable investments in farm improvements and expansions in response to increasing adjustment pressures within the irrigation industry (Bjornlund, 2003). It often has been argued that in order to facilitate real structural change within the irrigation industry and encourage a move to more efficient and higher-value uses, permanent entitlements trade is essential, because irrigators are unlikely to invest significant amounts of money in irrigation infrastructure without the long-term security of water supply (Bjornlund and McKay, 2002). The slow uptake of the market for permanent water has been an impediment to maximising significant economic benefits from efficient and high value water uses (Marsden Jacob Associates, 1999; Crase et al., 2000). A prerequisite for an efficient market is completely specified, enforced, and transferable property rights (Saliba, 1987). However, it has been recognised that current water entitlements are not well defined (Crase et al., 2000).
Individuals in environments with such insecure property rights will choose to engage only in self-enforcing contracts, which provides less potential for the society to realise gains from trade and build a foundation for economic growth (e.g., invest in more efficient irrigation infrastructure) (Fuchs, 2003). As a result, water trading has been limited to spot sales of water or to the lease of water for a single year rather than to permanent sales of water entitlements (Freebairn, 2005). In addition, existing water entitlements systems are complex and inconsistent within and across jurisdictions, and restrictive of water transfers, which resulted in maintaining existing, possibly inefficient uses of water. Australian water administrators are being called upon to develop nationally compatible water entitlement systems coupled with trading arrangements that minimise transaction costs to facilitate markets. The recent National Water Initiative4 (NWI) represented strategic attempts to standardise approaches to water management at a national scale. By 2007, institutional and regulatory arrangements are required to be in place to facilitate ‘‘intra and interstate trade, and manage differences in entitlement reliability, supply losses, supply source constraints, trading between systems, and cap requirements and to develop arrangements to facilitate effective and efficient water trading on the markets’’ (COAG, 2004). Simplified and consistent water entitlements will improve the efficiency of water markets, and increase the benefits of markets by reducing the transaction costs of trading. Beyond the general consensus, however, there is much less agreement about what the specific reforms should be. With this in mind, this paper attempts to: specify the feature of existing water entitlements arrangements in the study area; propose a water entitlements classification framework; explore opportunities to simplify and standardise entitlements to streamline administrative processes and facilitate water markets.
2. Property rights and water markets—a literature review Over the past two decades, the establishment of tradable property rights in water and development of markets in these rights has received considerable attention around the world. Markets for permanent water have been introduced formally in the United States (Colby, 1995), Chile (Bauer, 1997), Mexico (Rosegrant and Binswanger, 1994), New Zealand (Sharp, 1996) and Australia (Bjornlund and McKay, 2002). Many other countries such as Canada, Spain and South Africa are working on their introduction (Easter et al., 1998). However, there are considerable uncertainties and restrictions associated with the development of permanent water 4 At the COAG meeting of 25 June 2004, the Commonwealth, the Australian Capital Territory, Queensland, New South Wales, Victoria, South Australia and the Northern Territory agreed to participate in an intergovernmental agreement on water allocation and management.
agricultural water management 86 (2006) 229–239
markets. In South Africa, under the Water Act 1998, unused water entitlements will be withdrawn in areas of water scarcity. Hence, there is some doubt about how much trade will occur in the future (Nieuwoudt, 2002). In Chile, transfers of permanent water have been possible since 1979, but trading has not been widespread (Bauer, 1997). In the United States, trade between agricultural users predominantly takes place within mutual or ditch companies through a network of canals. Within such areas water can be traded permanently as long as the water remains within the system, while external trading has at times been opposed (Anderson and Hill, 1997). Although markets in permanent water have been introduced in New Zealand and Mexico, they have not taken hold (Bjornlund, 2003). Markets for permanent water are difficult to establish due to the need for fairly sophisticated institutional arrangements necessary to administer and implement such markets, while markets for temporary water have flourished quite widely in many countries around the world, such as India and Pakistan (Easter et al., 1998; Bjornlund and McKay, 2002). The market-based system is generally regarded as more flexible and adaptable in allocating water than centralised allocation of water (Rosegrant and Binswanger, 1994; Anderson and Hill, 1997). Experiences from many countries (e.g., Chile and western United States) demonstrate that water markets have improved water use efficiency and provided farmers incentives (e.g., via water price) to save water in order to sell the surplus, and to transfer rights to higher-valued uses within agriculture or other sectors of the economy (Dinar and Letey, 1991; Hearne and Easter, 1995; Rosegrant et al., 1995; Bauer, 1997; Zekri and Easter, 2005). Property rights form the basis for all market exchange (Cole and Grossman, 2002). Property rights define the owner’s rights, privileges and the associated limitations of the specific resource use, and their allocation in society affects the efficiency of resource use (Bromley, 1997). Water rights provide owners with a vested right to use water. In most western states of the United States they are both a property right and a licence (Tarlock, 1999). Water rights in most markets (e.g., Chile and western United States) have perpetual duration (Rosegrant and Binswanger, 1994). When the governments face escalating demands and increasing water scarcity two options are available: (1) continue to permit users to consume water on a first-comefirst-served basis and (2) regulate the consumption of water by allocating water among competing users (Sturgess and Wright, 1993). A key distinction between water rights in California and those in Chile and Mexico is that the former defines rights on a priority basis, while the latter two effectively define the water right as proportional (share) over a variable flow or quantity. Because those priorities are not based on economic returns, considerable inefficiencies can occur due to some low-value users enjoying supply priority based on historical precedent at the expense of potential high-value users. The inability to obtain water where it is most needed during shortages is a major limitation of the prior rights system (Rosegrant et al., 1995).
231
In recognising that many water property rights traditionally were not designed for market transactions, some scholars (e.g., Easter et al., 1998) suggest that potential gains might arise from establishing tradable water rights and allowing water trade between different regions. The concept of tradable water entitlements is generally accepted, in Australia and internationally, as a workable and equitable way of improving the efficiency of water allocation and securing the maximum benefits from water use (Pigram, 1993; Rosegrant and Binswanger, 1994; Bauer, 1997; Brennan and Scoccimarro, 1999; Young et al., 2000). In the United States, the heterogeneous nature of water rights and the changing social values associated with water make standardised transactions in water improbable. Every state imposes conditions on water transfers. Such policies generate uncertainties and costs for transferors and have been described as inefficient and unnecessary impositions on the markets (Colby, 1995). In Australia, the heterogeneous nature of existing water entitlements (e.g., in terms of duration, access priority, supply reliability and extent of tradability) within and across jurisdictional boundaries has made it difficult to organise the market and a failure to align them has increased transaction costs and administrative errors (Brennan and Scoccimarro, 1999; Shi, 2005). High transaction costs have greatly limited gains from trading, and they should be minimised so that market transactions can proceed unencumbered (Colby, 1995; Rosegrant et al., 1995). A common prescription for improving efficiency of water markets is to clarify attributes of water entitlements and address inherent problems (Lee and Jouravlev, 1998; Haddad, 2000). Some scholars (e.g., Matthews, 2004; Shi, 2005) suggest simplifying and standardising existing water entitlements to streamline administrative processes and facilitate water markets. The underpinning rationale is that in a policy environment where trading is encouraged, consistent approaches to entitlements and trading arrangements will reduce transaction costs. Markets operate most efficiently when the entitlements being allocated are homogeneous (Howe et al., 1986).
3.
Water entitlements in the study area
3.1.
The study area
The Southern Connected River Murray System5 (SCRMS) is essentially a winter rainfall system that is physically shared or hydrologically connected by a set of river systems and associated groundwater systems in southern New South Wales (NSW), Northern Victoria and Eastern South Australia (SA) (Fig. 1). This study focuses on irrigation water entitlements in the regulated river systems as approximately 90% of irrigation water applied in the area is drawn from these sources.
5
It includes the River Murray, Lower Murray, Angas Bremer, and five pipeline systems in SA; the Darling River and its Ana Branch below the Menindee Lakes, the River Murray itself, the Murrumbidgee system in NSW; and seven Victorian tributaries.
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agricultural water management 86 (2006) 229–239
Fig. 1 – Southern Connected River Murray System and its 10 irrigation regions (source: derived from Shi, 2005).
3.2.
Terminology
A water entitlement defines an individual or group’s ongoing right to access water from a specified source. The terminology and nature of entitlements varies significantly within and across jurisdictions (Table 1). The high degree of variability in water policy between states has led people to use different terms to describe the same concept (e.g., in Victoria entitlements are called water rights or diversion licences while in NSW they are called access licences) or use the same word to describe different things (e.g., in SA both a water entitlement and an allocation are called water allocations, while in Victoria and NSW the term allocation is used only to describe the amount of water received annually by an entitlement holder).
3.3.
Constraints on water entitlements trading
The trading of water entitlements is the major method by which new farmers can obtain water and existing farmers can expand their production. However, several constraints limit the extent of the trade. In addition to physical congestion constraints6 that preclude trade between some regions, administrative and regulatory restrictions explicitly limit the trade of entitlements between regions and across state borders (Young et al., 2000; Goesch, 2001; Appels et al., 2004). In many cases, regulatory approval procedures that seek to protect third party interests are a major cost of implementing a transaction. In NSW, for example, it typically takes 6–12 months to complete a permanent entitlement trade and even 6 The most significant river channel constraints on the River Murray is the Barmah Choke, through which the flow capacity is reduced to around 8500 megaliters per day to prevent flooding of the surrounding red gum forest. As a result, downstream trades are only possible if they are offset by upstream trades.
a temporary water trade takes up to 7 weeks to approve (Marsden Jacob Associates, 1999). In addition, irrigation authorities impose restrictions on trading of water entitlements outside the scheme. For example, the Central Irrigation Trust in SA has put a 2% cumulative limit on permanent entitlement trade out of the trust’s districts in an attempt to protect regional interests. In some river systems, trading zones have been introduced to assist with environmental and other management issues. Currently 23 trading zones have been established in the Northern Victoria regulated water system (Fig. 2). These zones limit trade to within the zones or, in some cases, apply reduction factors to allow for trading into zones of rising water tables, or to account for river transmission losses.7 For example, an irrigator in zone 10B, who buys 1 megaliter (ML) water from an irrigator in zone 10A, will only receive 0.85 ML water; but if he/she sells 1 ML to zone 10A, then the recipient would receive 1 ML water. These constraints distort the markets (e.g., both allocation and entitlement prices are unlikely to reflect the full opportunity cost of water) and impede water moving to higher-valued uses. A study (e.g., Bjornlund, 2002) of permanent water entitlements markets along the River Murray in SA and Victoria found that prices paid and market activities were lowest in areas with most restrictions on trade, and as restrictions were eased, price differences declined and market activities increased. In addition, due to the relatively thin market and confidential nature of many entitlement trades, there is little publicly available information on the prices being paid for entitlements. 7
A locational exchange rate is used to identify the quantity of water that can be moved from one location to another without detriment to the integrity of the supply system, river health and other irrigators.
agricultural water management 86 (2006) 229–239
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Table 1 – Key terminologies used in this study State
Terminology
NSW
High security access licence General security access licence Supplementary water access licence
Victoria
Water right Diversion licence Sales watera
SA
Water holding licence Water taking licence
Definition A highly reliable entitlement that allows holder to access water prior general security licence holders A medium reliable entitlement that allows holder to access water prior supplementary water licence holders A low reliable entitlement that only applies to general security licence holders A highly reliable entitlement that allows holder to access water in irrigation districts indefinitely A renewable entitlement that allows holder to divert water from a river or stream for up to 15 years A low reliable entitlement that only applies to water right or diversion licence holders, allow holders to receive a percentage of the volume specified on their water right or diversion licence up to maximum allocation A highly reliable entitlement that allows holder to access water in prescribed sources indefinitely but cannot be used until it is transferred to a water taking licence A highly reliable entitlement that allows holder to access and use water in prescribed sources indefinitely
a Under current arrangement, sales water is not a formal entitlement. It is attached to water right or diversion licence and cannot be traded separately. As the Victorian Government White Paper (2004) has proposed to unbundle sales water into a separate, legally recognised and independently tradable entitlement, in this study, sales water is identified as an entitlement.
3.4.
An overview of water entitlements arrangements
In Australia, the use and control of water is vested in the Crown and it is mainly the state government’s responsibility to manage water resources through legislation and policy (LWA, 2002). The legislation introduced by each state (e.g., Water Management Act 2000 in NSW, Water Act 1989 in Victoria, Water Resources Act 1997 in SA) is not uniform in its approach or language. The states grant water access rights or entitlements to users (generally in the form of a licence). Traditionally, these entitlements entitle a holder to:
a nominal volume of water, which will be subject to supply reliability; a specified delivery capacity for that water; the right to use water on the landholder’s property. Since 1997, many states have begun separating the site use right from volumetric rights and delivery capacity rights. The states have generally made different decisions on how those rights will be unbundled in their jurisdictions. For example, in Victoria, there existed a traditional bundled water right consisting of a volumetric entitlement, delivery capacity and site use. In contrast, SA has separated the site use right from
Fig. 2 – Trading zones in the Northern Victoria regulated water system (source: http://www.watermove.com.au).
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Table 2 – A summary of state approaches to irrigation water allocation in regulated water systems State NSW
Entitlement High security access licence
General security access licence Supplementary water access licence
Victoria
Water right Diversion licence Sales water attached to water right
Sales water attached to diversion licence SA
Water holding licence Water taking licence
a b
Allocation policy
Supply reliability
Specified as a maximum volume and expected to be available in all but the worst droughts; unused allocations are surrendered at the end of the season (i.e., no carry over) Varies according to the water available in the general security allocation pool; allow to carry over or overdraw in some years Available after meeting the needs of high and general security licences and when flows are surplus to in-stream requirements; varies from year to year
95% (Murrumbidgee) and 97% (Murray & Lower Darling)
Specified as a maximum volume and expected to be available in all but the worst droughts; no carry over Usually allow a maximum diversion rate; no carry over Only available after meeting the needs of water rights and the volume of water required to supply the next season’s water rights is secure in the dam; varies from year to year; no carry over Same as above
96–99%
Allocations do not vary from year to year and expected to be potentially available in all but the worst droughts Specified as a maximum volume and expected to be available in all but the worst droughts; taking allocations include permission to use water at a specific location; no carry over
Almost 100%b
70% on average
Opportunistic
96–99% 68%a (Murray) 43%a (Goulburn)
48%a (Murray) 30%a (Goulburn)
Almost 100%b
Data is approximate and reflect the probability of receiving full sales water allocation. In 2003–2004 and 2004–2005, for the first time in history, SA water licence holders did not received their full allocation.
volumetric and delivery capacity rights. NSW has gone further to separate those rights into: share/volume, extraction/delivery, and site use (Bruton, 2003). No state has introduced generic provisions to facilitate tailored unbundling in local areas (LWA, 2002). Currently, state governments use different terminology to describe water entitlements, and different approaches to declare water allocations (see Table 2). Entitlement8 refers to the annual amount of water specified on each irrigation licence as the limit of water extraction for the licence holder, but the actual volume that can be ordered is governed by an allocation, announced by the local managing authority at the beginning of a season and revised throughout the season, based on available supplies. In Victoria, for example, a farmer can possess water rights and diversion licences to take water, and an entitlement to sales water. The total water available to the farmer is known as the seasonal allocation,9 which equals the water entitlement (water right and diversion licence) plus sales water (if there is excess water), or a quantity less than the water entitlement (if there is not enough water to meet all the entitlements). Most existing water entitlements are based on water acts written in a time that focused on encouraging water development rather than water allocation (Young and McColl, 2002). Accordingly, water management and entitlements have been largely developed on a regional basis with little expectation that there could be a highly standardised approach. It is not 8 Entitlements when granted have no seniority attributes and all entitlements for the same use purpose are treated equally, including allocation of available water supplies. 9 This water can either be used or sold temporarily on the markets.
surprising that details underpinning these entitlements are inordinately complex and many entitlement attributes are only partially specified. As a result, buyers and sellers typically face considerable uncertainties regarding the quantity of water that may be transferred and conditions and costs that may be imposed.
4. A classification framework to identify water entitlements types In this study, a classification framework is developed to identify any type of entitlement from different perspectives. Using this framework, water entitlements are first grouped according to the nature of the supply system (i.e., determine the prime source of water supply from a regulated or unregulated surface water system, or from a confined or unconfined aquifer). Each of these supply systems is then further defined by physical location, hydrological boundaries and associated infrastructure. The next is the management zone, which is defined by a combination of political, administrative, and physical considerations. State and hydrological boundaries are always respected. The next element in the classification framework is the allocation category or pool, which is defined by the purpose of use usually associated with the statements about access priority10 and the reliability of the expected allocations. The last grouping collects a large variety of use 10
Access priority varies by state but generally environmental flows, industrial and town water supplies and basic landholder rights (i.e., stock and domestic and indigenous water rights) have priority over irrigation water supply.
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conditions and restrictions (e.g., on the location where water may be used or traded, and obligations to infrastructure suppliers). The feature of a type of water entitlement can be further specified by referring to four entitlement attributes: supply reliability—defined in terms of the number of years in 100 when entitlement holders can expect to receive full entitlement volume allocation; entitlement and allocation tradability—refers to the ability to trade among states (***), within the state (**), only within the region (*) or not tradable (0); tenure—describes whether the licence is issued for a number of years or perpetual (1); access priority—describes the order in which water is taken from pools of the system. These attributes are not complete independent or exclusive. Generally there is a high correlation between access priority and supply reliability. As the length of tenure increases the values of other attributes are enhanced. The major purpose of using this classification framework is to identify different types of water entitlements, which enables one to compare their similarities and identify opportunities for rationalisation. Within a water management zone if two entitlements have identical attributes, belong to the same allocation pool or category, and share the same source of water supply, they are the same type. Otherwise, they are different
entitlements (Shi, 2005). By using the classification framework, 22 categories and 438 types of water entitlements have been identified in the study area (see Table 3). Among them, 9 categories and 183 types of entitlements are assigned for irrigation purpose (Shi, 2005).
5.
Simplifying existing irrigation entitlements
5.1. Unbundling use condition from entitlement and allocation to use licence Unbundling a water licence into three components (i.e., entitlement, allocation and use licence) is central to the formation of effective water markets (Young and McColl, 2002). Under current arrangements, all or some components are combined together in a water licence. When entitlement trading involves both a change in ownership and details pertaining to the allocation pool, management zone, use conditions and restrictions, etc., obligations and environmental impacts associated with water use in the new location need to be considered. These complex arrangements complicate administrative processes and increase the transaction costs associated with water trading, which therefore is impeded. Under the unbundling arrangement, only issues related to entitlements and allocations are subject to trade consideration. Issues of use conditions and environmental
Table 3 – Existing 22 entitlement categories and the feature of their attributes State
Entitlement category
Attributes Supply reliability (%)
Entitlement tradability
Allocation tradability
Tenure (year)
Access priority
NSW (8)
Domestic & stock access licence Local water utility access licence High security access licencea Environmental water access licence General security access licencea Supplementary water access licencea Conveyance access licence Indigenous cultural access licence
100 100 >95/97 100 70b 50b 50b 100
0 0 E *** 0 E ** 0 0 0
0 A* A *** 0 A *** A* A* 0
1 20 1 1 1 2 1 1
1 1 1 1 2 3 2 1
Victoria (6)
Domestic & stock right Town water supply Supply by agreement Water righta Diversion licencea Sales watera
100 100 100 96 70b/96 30–70
0 0 0 E ** E *** 0
0 A* A* A *** A *** A **
1 1 1 1 5/15 1
1 1 1 2 2 3
SA (8)
Stock & domestic licencea,c Country town water licence Industrial licence Recreational & environmental licence Water taking licencea Wetlands licence Water holding licencea Metropolitan water licence
100 100 100 >97 >97 >97 >97 100
E *** 0 0 0 E *** 0 E *** 0
A *** A* 0 0 A *** 0 A *** A*
1 1 1 1 1 2–5 1 1
1 1 1 1 1 1 1 1
Note. E, entitlement; A, allocation; ***, trade among states; **, trade within the state; *, trade within the region; 0, not tradable; 1, perpetual. Assigned for irrigation purpose. b Figure is estimated and indicative of the average supply reliability. c In general, stock and domestic licences are not tradable. The exception applies to SA stock & domestic licences, which are separated from land title and can be traded independently. a
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Table 4 – Ranking and grouping 112a types of irrigation entitlements Entitlement category (9)
Entitlement type (112)
Entitlement group
Attributes Supply reliability (%)
Stock & domestic High security Water taking Water holding Diversion licence High security Water taking Water holding Water right High security Diversion licence General security Diversion licence Sales waterb Sales waterb Supplementary water Sales waterb Sales waterb
Entitlement tradability
Allocation tradability
Tenure (year)
Access priority
3 10
G1 G2
100 >97
E *** E ***
A *** A ***
1 1
1 1
6 14
G3 G4
96 >97
E *** E ***
A *** A ***
5 1
1 1
17 4 13 10 5 4 4 10 7 5
G5 G6 G7 G8 G9 G10 G11 G12 G13 G14
96 >95 96 70 70 60 60 50 40 40
E ** E ** E ** E ** E ** 0 0 0 0 0
A *** A *** A *** A *** A *** A ** A**c A* A ** 0
1 1 15 1 15 1 1 2 1 1
1 1 1 2 2 3 3 3 3 3
(Murray) (Murray) (Goulburn) (Goulburn)
a
There are 183 types of irrigation entitlements in the study area. Due to the lack of information on some entitlement attributes, only 112 types are listed here. b In terms of temporary trade of sales water, irrigators can maximum sell 30% of allocated sales water, and if they sell any water above that they lose the right to sales water for that season. c Water allocations can only be purchased from Goulburn–Murray trading zone.
approvals are described in site-specific use licences, which are not subject to trade. This arrangement provides an opportunity to streamline the process for water trading.
5.2.
Rationalising entitlements by ranking and grouping
Although many irrigation entitlements are only partially specified, the features of their attributes are very similar or even identical. As a result, different types of entitlements can be ranked according to their attribute features (e.g., from high to low by supply reliability) and then separated into groups (entitlements in each group have identical attribute features) (see Table 4).
5.3.
Reducing entitlement categories and types
As summarised in Table 4, 14 entitlement groups are identified and in each group entitlements have identical attribute features. From a broad study area rather than an individual
state perspective, these 9 categories and 112 types of irrigation entitlements can be reduced into 3 classes (i.e., A, B and C) and 14 types (see Table 5). Entitlement classes are differentiated by access priority, and entitlement types are differentiated by their attribute features (i.e., supply reliability, tradability and tenure).
6. Standardization opportunities for consistent entitlements arrangements 6.1.
Introducing standard terminology
Consistent terminology should be used across jurisdictions to standardise the language and decrease confusion. This would require amendments to current legislation and all licences that are not described in a standard manner. There appears to be an emerging consensus that the term ‘entitlement’ should be used to describe an ongoing right to access water and the term ‘seasonal allocation’ should be used to describe the
Table 5 – Reducing 9 categories and 112 types of irrigation entitlements into 3 classes and 14 types Existing arrangement NSW High security General security Supplementary water 30 a
Proposed arrangement: SCRMS Victoria
SA
Water right Diversion licence Diversion licence Sales water 61
Stock & domestic Water taking Water holding NAa NAa 21
A (first access, high reliability 91–100%)
A1–A7
B (second access, medium reliability 61–90%) C (third access, low reliability 0–60%) 3
B1 and B2 C1–C5 14
In a fully tradable system, class B and class C entitlements would expect to be introduced in SA (see Young et al., 2004).
agricultural water management 86 (2006) 229–239
volume of water allocated within a specific period (Carmichael and Cummins, 2002).
6.2.
Aligning entitlement attributes to standardised ones
Tables 4 and 5 reveal that NSW high security entitlements, Victoria water rights and diversion licences, SA stock & domestic, water taking and water holding entitlements have a supply reliability of 95–100% and access priority of 1. If their supply reliability can be aligned (say to 95%) and arrangements on tenure and tradability could also be aligned to a standard, then these seven types of entitlements (i.e., A1–A7) are differentiated only by water supply systems and/or management zones. In the same vein, entitlements in class B and class C could also be standardised. By aligning those entitlements that share similarities in supply reliability and tradability into standardised ones, those allocation pools that share the same source of water supply could also be merged as one.
6.3. Rationalising sales water and supplementary water arrangements Currently, NSW supplementary water allocations are contingent upon the availability of water, only available to general security entitlement holders, and can only be traded temporarily within the region. Similarly, opportunities to apply for Victorian sales water are attached to water right and diversion licence holders and allocations can only be traded temporarily within the state. In a policy environment where trading is encouraged, it is possible to abolish this form of quasientitlement and unbundle supplementary water and sales water into separate, legally recognised and independently tradable entitlements.
7.
Discussion
Many of the details of existing entitlements and market development are unique to Australia. But when delving further into the complex historic, economic, social, political and institutional contexts that shape the evolution of water entitlements and the development of water markets, some implications can be drawn from the Australian experience. One of the simplest ways of reducing transaction costs is to reduce the number of entitlement types. Options to do this in the study area include developing a single standardised system or a more unified system. Conceptually, a single standardised system of water entitlements, with the removal of all differences among states, would minimise transaction costs. In reality it needs to recognise the large administrative costs and political risk in changing any system.11 Given the extent of state investments in their separate systems, a more unified system of water entitlements has a higher probability of success. However, it seems unlikely that the unified entitlements and
11
A new entitlements system may introduce legal and economic uncertainty in water resource management and can be difficult to implement because of the rigidity of the infrastructure already in place.
237
governance arrangements would evolve without first passing through significant policy and legislative reforms. Existing water entitlements can be regarded as property rights of sorts in that state legislation backs an entitlement holder’s right to the exclusive use of an allocation or diversion of water. However, the emphasis of the existing system is on regulatory and administrative control of entitlements rather than on a market-based system of tradable rights. Overregulation at the outset will limit the size and scope of the market, and will likely reduce the efficiency gains (Rosegrant et al., 1995). Water policy must seek a balance between the degree of regulation to protect various interests that are affected by water trades, and the level of transaction costs associated with water trading. It is therefore important to clearly define the characteristics of water entitlements and the conditions and regulations governing the trade of water entitlements. It is important to note that trading is only one way to provide incentives to right holders, and not all water rights encourage trading to the same degree. Markets may not maximise the overall outcome in terms of social equity, ecological sustainability and economic efficiency. Market decisions, by their very nature, involve atomistic individuals making choices in their own best interest and they do not readily accommodate collective preferences (Saliba, 1987). Transfer of water entitlements causes third party effects. Since water is characterised by interdependent and jointly produced values, it is impossible to completely internalise externalities using property rights alone. While improving the definition and security of water entitlements is critical to improving the efficiency of water markets, it is also essential to remove any impediments to water trading within and between regions so that water can be traded to its highest value use and irrigators can more effectively address increased supply uncertainty. Currently, the differences in the legal frameworks of jurisdictions have impeded the ability of the government to change the structure of existing water property rights. A market-oriented and property rights-based system cannot exist or function without formal legislation and administrative decisions (Bauer, 1997). Markets cannot substitute for overtly legal and political processes. In addition, geography, hydrology, and the pattern of water use in a region must also be considered. Implementing more consistent water trading processes nationally requires a common information base and some common elements of process. The development of a National Entitlement Registration System (NERS) might provide consistent data to streamline entitlements. Information from the NERS would need to be supplemented by on-ground collection of information that cannot be collected at a national or state level. The key to a consistent national approach is that while administration may vary to suit local arrangements, the same on-ground information must be collected, analysed and reported in a standardised way. In addition, an integration of trade into a wider water planning and management framework is likely to be necessary for a consistent trading process.
8.
Concluding remarks
This paper advocates that simplified and consistent water entitlements within and across jurisdictions would reduce the
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transaction costs and facilitate markets for permanent water. Major opportunities identified include: introducing standard terminology; unbundling use conditions and restrictions from entitlement and allocation arrangements to use licences; aligning entitlement attributes to some standards; rationalising supplementary water and sales water arrangements; rationalising trading zone boundaries by merging allocation pools with similar supply reliabilities. The complex application process of water entitlements trading has been of concern to irrigators but can be streamlined to some degree. The specification of water entitlements is likely to vary from place to place as rights are embedded in specific historical sets of social, economic and environmental structures. Also, the benefits of water market development will not be uniform across regions. Although individual entitlements to water cannot be perfectly specified, a consistent framework for entitlements is needed in which the entitlements of individual users can be constrained and modified. It is envisaged that the proposed classification framework and the identified simplification and standardisation options could substantially improve entitlements in the study area. In the foreseeable future, however, it may be politically unrealistic to implement a ‘‘one size fits all’’ approach to water entitlements for all states. Individual jurisdictions, however, can strive to ensure that entitlement specifications are consistent within jurisdictions and compatible among them.
Acknowledgements This research was funded by a CSIRO Post-Doctoral Fellowship program. The author appreciates the comments of Kim Alvarez, Henning Bjornlund, Gerry Davies, John Howe, John Radcliffe, Tom Rooney, Ian Wills, John Ward, and anonymous reviewers on earlier drafts of this manuscript. Special thanks to Mike Young and Jim McColl for inspiring the development of my ideas in this research.
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