The plight of the Murray-Darling is now a familiar story, and has been accompanied by a long string of water management policies to stem its degradation. The story also reflects the trend in favoured policy tools, from centralised regulatory directives towards reliance on market-based approaches, generally classed as quantity or price instruments. ^[3] Quantity instruments, often requiring a cap, have been used as an alternative to direct regulation, commonly in the framework of a market with tradeable property rights (Rolfe and Mallawaarachchi 2007). While there has been increased use of price instruments, there seems to be a tendency to shy away from direct water pricing. For example, cost recovery for water was only ever limited to operational costs, and does not capture environmental costs of extraction. ^[4] So price instruments come commonly in the form of auction-style tenders, grants and rebates (Rolfe and Mallawaarachchi 2007). While subsidies have largely fallen out of favour, we appear to have come full circle, with the most recent policy, the National Plan for Water Security, embracing the use of direct subsidies to ‘modernise irrigation’.

Inter-governmental arrangements have evolved from the early 1900s, beginning with the signing of the River Murray Waters Agreement in 1915, which focused on resource sharing between the States. Various amendments to the Agreement made over the 70 years of its operation were only minor changes relating to the construction of dams and weirs. The need for balance between environmental and extractive demands came to light as Australia’s water economy moved into its mature phase, symbolised by the signing of the Murray-Darling Basin Agreement in 1992 (Quiggin 2001). The 1994 COAG Water Reform (Water Reform) marked the initial shift in natural-resource management towards market-based solutions, and was integral to the Federal Government’s National Competition Policy for competitive neutrality in key industries. The Cap was also introduced in 1995, alongside the water reform to enable transferable property rights for water. ^[5] The water-reform process was tied in with National Competition Payments to motivate its implementation, although this financial incentive had varying degrees of success in promoting the full water-reform agenda. The Payments represented the first of a string of Federal funding towards environmental management in the years to follow. It can be regarded as a precursor to the weak correlation between government spending and outcome in natural-resource policies.

Problems contributing to stagnating progress since the 1994 Water Reform related to institutional factors in water-sharing arrangements, pertaining to the specification of property rights for extractive and non-extractive uses which compromised the security of water entitlements. In 2004, the National Water Initiative was introduced to overcome these sticking points, resulting in an agreed public–private cost-sharing arrangement if environmental flows were to be increased (Freebairn 2005). It was also agreed that priority would be given to the provision of water for the environment ahead of extractive use, representing a fundamental shift from the view that water management is designed to coordinate increased water use (Connell and Grafton 2008). Discussions on missing property rights over externalities associated with return flows also took place, in particular on the impact of increased water-use efficiency on downstream users; and the implications that water trade between hydrological systems has for water quantity and quality. Following from this was the introduction of ‘exchange rates’, in part to try and capture transmission gains or losses for interregional trading. ^[6] This was in spite of there being significant knowledge gaps in understanding hydrological systems, which raises concern over the prudence of using those exchange rates. Another example where a rush for action overshadowed the need for robust information and evaluation is the Landcare program. Government failure in this instance led to excessive and poorly distributed public expenditure on small on-ground works (Pannell 2008).

Other prominent programs developed during this period include the Living Murray Initiative and Basin Salinity Management Strategy. The Living Murray began in 2002, aiming to deliver environmental improvements through the Water Recovery and Environmental Works and Measures Programs. The 2001 Basin Salinity Management Strategy focused on salinity-related problems in the Basin, and is linked to the National Action Plan for Salinity and Water Quality. The relevant governments also agreed to build salt-interception schemes under the Joint Works Program to achieve salinity reduction at Morgan, South Australia (which is at the mouth of the Basin). These initiatives represent substantial funding to deliver environmental improvements at target sites, with increasing reliance on market mechanisms, although still conspicuously avoiding direct buy-back. This shift away from ‘command-and-control’ policies reflects greater public acceptance of economic instruments in environmental management.

The most recent policy development was in January 2007, when the Federal Government announced the National Plan for Water Security — since renamed ‘Water for the Future’ by the succeeding government in 2008. The strategy of this Plan was in accordance with the objectives outlined in the National Water Initiative; specifically; to address over-allocation, to modernise irrigation, and to create a transparent water-management system. By this stage, market-based instruments have become fairly mainstream, with one-third of the funds to be directed at buying back entitlements. Water information has also become a priority area, and for the first time irrigators are required to disclose water-use information to public institutions. This was done in parallel with efforts to improve basin-wide hydrological modelling.