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Murray-Darling: keeping government out of the bedroom and taxpayers out of farming

Everyone wants a functioning Murray-Darling Basin, but it makes sense to get there the most cost-effective way. Tim Keegan

Murray-Darling: keeping government out of the bedroom and taxpayers out of farming

A common catchcry used to bemoan any proclivity of the state to reach into individual decision-making is “keep government out of the bedroom”. The equivalent mantra for economists involved in analysing rural and regional affairs is “keep taxpayers out of farming”.

It is against this background that the latest announcement about the hotly debated Murray-Darling Basin Plan needs to be considered.Today, the Prime Minister announced that the volume of water to be returned to the environment as part of the plan will be increased by 450 gigalitres. The predicted cost is $1.7 billion.

Much of the money is to be targeted at paying for farmers’ on-farm infrastructure. A complicating factor in this most recent announcement is that the additional water is to be accompanied by measures aimed at reducing the constraints around how environmental water is moved along streams and across the landscape.

There are positives and negatives to this latest approach. The fact that governments are now talking about how environmental water is used is a plus. Too much of the debate about the Basin Plan has focused on the volume of water to be held by government, as if this was the sole determinant of the environmental, social and economic consequences. By placing some of the river management constraints on the agenda hopefully the public will come to appreciate that the so-called Sustainable Diversion Limit is only part of the story.

The down-side is that another round of debate will undoubtedly ensue around risks to private property located on floodplains and the costs to any disaffected parties. It is encouraging that the public debate is moving towards a more sophisticated level, but the cost to taxpayers remains worrying, as do the legacy effects of some of these decisions.

Buyback of water is still the most efficient way to achieve any change to the Sustainable Diversion Limit. The cost of recent buybacks as part of the Restoring the Balance program averaged around $2,500 per megalitre. The National Water Commission found that many of those selling water stayed in agriculture, implying the so-called “community impacts” are modest.

Set against buyback are two broad groups of irrigation infrastructure projects. The first relates to taxpayers subsidising communal irrigation works that, under the previous National Water Initiative of 2004, were to have paid their own way. These deals amount to using taxpayers’ money to reduce leakage from distribution channels, improve the accuracy of metering and so on. In return for public money the government receives a portion of any water that is estimated to have been saved by the irrigation company.

This approach is complicated and expensive. The complications stem from the fact that saving communal water can amount to shifting it in the landscape. Water that was flowing out the end of communal networks was often used by others, so saving the water within the district leaves others worse off. Similarly, some of these savings are achieved by reconfiguring the main backbone infrastructure so farms at the end of systems are disconnected.

Undoubtedly the new infrastructure in these districts is welcomed by some, especially those on the new backbone, but the benefits are not uniform. Whether taxpayers should be responsible for the cost is a moot point.

Another complication relates to the on-going cost of this communal infrastructure. Any assets that are paid for by government do not attract a depreciation charge, so unless the new infrastructure is maintained in perpetuity, it will simply be written off in a decade or two and the irrigation community will be back to where it started. The most recent guide to the cost of communal irrigation upgrades is that of the second-stage project in northern Victoria which came in at around $5,600 per megalitre – more than double the cost of buybacks.

The second form of so-called irrigation upgrade is on-farm works. This is now being offered as the vehicle for reaching the proposed Sustainable Diversion Limit.

Here, individual farmers apply to have changes made to the infrastructure on their farm and this is then paid for by government. Works might include laser levelling of paddocks to reduce the volume of water required, reconfiguration of on-farm channel network or increased automation. In return the farmer’s water right is adjusted to reflect some notional saving that accrues to the government.

On-farm projects have been part of the policy mix for some time, but they have not been widely deployed, in part because a criterion used to assess projects is “value for money”, and relatively few projects have passed that hurdle.

In stage two of the Victorian upgrade project a small amount of 20 gigalitres was attributed to on-farm works at a cost of $2,425 per megalitre, which approximates the cost of buybacks. There are several reasons why on-farm works in this particular case were relatively cost effective, including the fact that farmers were able to undertake some of the works themselves.

On-farm works can avoid the complication of not paying for depreciation, insomuch as any failure to maintain the assets should simply be reflected in the value of the farm. However, projects like this are likely to yield less and less water at higher cost. For instance, if most of the $1.7 billion set aside to increase the Sustainable Diversion Limit was used solely for on-farm works the cost would be about $3,500 per megalitre.

One thing is for sure about on-farm projects of this form – it looks dangerously like governments picking winners in agriculture. There are numerous precedents that provide evidence as to why this approach to public policy needs to be guarded against. History shows that farmers are well-equipped to make sensible production decisions when faced with market incentives, including choosing which technologies to adopt and when. Buybacks provide just that incentive and there is no need for governments to dabble in on-farm decisions and interfere with production and technology choices.

While this approach may have political appeal, to the extent that it appeases some interests and potentially splits irrigator opposition, it seems destined to make the achievement of the environmental goals in the Basin Plan more costly both now and in the future.