The development of water markets has been highly publicised, having been regarded as the ‘holy grail’ for water-allocation problems. While water markets have been established in most catchments, water trading has remained rather limited. In the past, trade has been confined to high-security licences in middle and lower reaches of the River Murray (Connell 2007). Even with the rules relaxed, trade in permanent water entitlements was less than 1 per cent of diversions in 2001–02, with less than 1% of all trade occurring inter-regionally (Heaney et al. 2004). ^[7] In 2005–06, permanent trade remained below 1 per cent of the entitlements, and temporary trade under 10 per cent of annual allocations. Of the total temporary trade, 41GL (5 per cent) were sold interstate (MDBC 2007b). This is explained by the existence of several barriers to trade, including a 4 per cent limit on sales of entitlements outside of irrigation districts, and exit fees that will remain until 2016 (Connell and Grafton 2008). Taxation issues present further institutional constraint on permanent trading; temporary purchases are fully tax deductible in the year of purchase whereas permanent purchases can be subject to capital gains tax (Bjornlund 2003).

1: This new money was sourced to purchase Toorale Station.

Note: State-based arrangements are not included.

There have also been several unexpected consequences, including the fallout in increased water use as ‘sleeper’ and ‘dozer’ licences are activated in trade, stranded assets, and reduced return flows as irrigation efficiency increases. In addition, the push for greater water trading in the National Water Initiative has encountered problems of variability of supply and hydrology between catchments, resulting from gaps in biophysical and hydrological knowledge (Connell 2007). Furthermore, there is a general apprehension towards the water market, drawing from concerns pertaining to community decline, threat of foreign ownership, and a perceived loss of subsidies (Randall 1981). Concern over the impact on property values of selling entitlements and policy uncertainty over future allocations are other factors limiting permanent water trade (Bjornlund 2003). To circumvent the thin-market problem, and in an effort to discover efficient prices, there has been a move towards tenders for buying back entitlements. However, there remains resistance from rural communities to recent government purchases, even though there is evidence of growing support where the buy-back is perceived to generate justifiable benefits.

Part of the Living Murray agreement was the First Step program, developed in 2003, which identifies six ‘ecological assets’ in the Basin to be protected. The implementation of the First Step was endorsed as part of the 2004 National Water Initiative under the Intergovernmental Agreement, in which contracting governments agreed to commit $500 million over five years for the recovery of (on average) 500GL of water per year for the environment — known as ‘new environmental water’ or ‘new e-water’. ^[8] This sum was allocated towards the Water Recovery program for a set of approved market-based variants of buy-backs and infrastructure projects.

Overall, water recovery lagged, and it was not until February 2008 that there were enough projects approved to potentially recover the full 500GL. ^[9] April 2008 marked the historical first ‘water recovery’ event, with 133GL of environmental water entitlements secured in Victoria and South Australia. While the first water recovery is a significant milestone of the Living Murray, most projects are still under development; 367GL still need to be recovered at the rate of at least 1500 megalitres (ML) per day to achieve the full 500GL by mid 2009.^[10] Also, no physical environmental water will be released except in wet years (MDBC 2008). This has obvious implications for the sustainability of water sharing under the expected long-term climate change, in addition to the inconsistency with National Water Initiative commitments to prioritise ecological preservation over irrigation interests.

Complementing the Living Murray First Step, the Environmental Works and Measures Program was created in 2003, with a funding of $150 million over eight-years for capital works and improvements in infrastructure targeting the six ecological assets, such as upgrading weirs and fish ways. No evaluations of the effectiveness of the program are yet available; however, a task force has been established for this purpose.

In addition to the First Step, there are also substantial efforts being made towards environmental water recovery at State level. For example, the NSW Government allocated $13.4 million towards its Wetland Recovery Plan in 2005, a sum that was matched by the Commonwealth via the Australia Water Fund. The objective is to permanently recover water for ecologically significant wetlands through infrastructure projects and buying back entitlements, which so far has acquired 6.5GL in the Gwydir and Macquarie. ^[11] There is also the NSW Riverbank Fund introduced in 2006, which allocated $105 million towards buying back water for environmental purposes. Other Riverbank projects were also supplemented with $72 million from the Australian Water Fund. In July 2007, 15GL of environmental water was purchased for the Gwydir, Macquarie, Lachlan and Murrumbidgee rivers in NSW. Riverbank’s role has since expanded to include the Market Purchase Measure as part of The Living Murray Water Recovery, to buy back 125GL via a tendering process (NSWDECC 2008). However, it is unclear how much physical environmental flows will eventuate from these entitlements.

In 2006 a one-off supplementary funding of $500 million was made to the Murray-Darling Basin Commission by the Commonwealth, as a top-up to the $500 million for the First Step Agreement. The supplementary contribution is to be spent over five years from 2006. Of this, $200 million was allocated for Water Recovery alone, bringing its total to $700 million over five years. Of the remaining supplementary fund, $100 million was flagged for infrastructure projects under the Environmental Works and Measures Program, totalling $250 million. The rest of the supplementary funding was to hasten other programs, including the Basin Salinity Management Strategy, although it is uncertain how this was distributed (MDBMC 2006).

As mentioned, 133GL of water entitlements have been ‘recovered’ as at mid 2008. If the full 500GL is recovered, the average cost reduces to $1,400/ML. Based on 2006 market prices, this is more than three times greater than permanent water rights of $400/ML in the Murray Irrigation Limited (Quiggin 2006). Had the water-recovery funding been put entirely towards entitlement buy-back at this price, this would have resulted in a total of 1750GL of new e-water — three times greater than the Intergovernmental Agreement target of 500GL, and sufficient for moderate improvements in the health of the Murray-Darling.

The implementation of the Cap has been delayed in three of the five contracting States; although most valleys are within long-term targets (MDBC 2007a). Each State is required to have water-sharing arrangements as part of its obligations under the National Water Initiative. For example, in New South Wales this takes the form of Water Sharing Plans, in which environmental flows beyond Cap provisos have apparently been stipulated (NSWDNR 2008). The Basin Plan has requirements for a new sustainable Cap to be set, incorporating the inter-linkages between surface and groundwater systems. However, how this new Cap will be reconciled with the existing commitments in current water-sharing plans is yet to be resolved (Connell and Grafton 2008).

Environmental flows derived from the Cap and investments outside of the Intergovernmental Agreement can be considered ‘old e- water’ or ‘other new e-water’. Since 1999, combined old and other new e-water releases from NSW and Victoria total around 770GL, made up of one major release of 500GL in 2006, for the Barmah-Millewa site, and a series of smaller flow events (NSWDNR 2008). Considering that 95 per cent of bulk water off-take occurs in NSW and Victoria (MDBC 2006), these releases account for almost all environmental flows to the Basin. ^[12] This averages 86GL/yr over the last nine years (less if the 500GL release in 2006 is excluded). Even in aggregate with the 133GL of new e-water, average environmental water provisions remain well below the 500GL/year target. This is unlikely to have preserved environmental sustainability as per the stated purpose of the Cap.

The impact of the Cap is more difficult to discern in unregulated systems. ^[13] The available means of monitoring extractions often involve just one gauge at the upstream and downstream end of unregulated rivers, and penalties for over-extraction are based on the three-year average flow at the downstream gauge. The lack of monitoring capacity limits the extent to which the Cap and water-sharing arrangements can be enforced. For that matter, a general lack of water information has been a persistent issue underlying the inability to manage water effectively, which, until recently, has been recognised but ignored.

The Australian Water Fund was set up by the Prime Minister in December 2004 for implementing actions towards National Water Initiative objectives. A commitment of $2 billion over five years was allocated among three programs under the umbrella of the Australian Water Fund: Water Smart Australia, Raising National Water Standards, and Australian Water Fund Communities. These programs were designed to ‘improve water-use efficiency’ via technological or infrastructural means, and through increasing capacity for water management.

Given the nature of Australian Water Fund projects, it is difficult to gauge environmental outcomes against which to measure progress; for example, projects which improve water accounting and develop water markets funded via Raising National Water Standards. Projects under Water Smart Australia and Community Water Grants, such as wetland management or water-recycling systems, may deliver more tangible environmental and water-efficiency improvements. While the projects appear to follow a vague mantra of ‘increasing water efficiency’, they may not meet the efficiency criterion. For example, rainwater tanks provide a ‘feel-good’ factor, but they do not represent an efficient solution to augmenting supply; households can be better off under scarcity pricing for water, which better coordinates demand and supply and removes the need for water restrictions (Grafton and Ward 2007). Without clear targets or reliable means to evaluate a project’s effectiveness, there is no reliable indicator of its success. This undermines the capacity for future investment decisions, which can become an exercise in distributing funds rather than achieving desired outcomes.

The National Plan for Water Security added a further $10 billion to the mix, which increased to $12.9 billion when the Plan was re-branded as Water for the Future in early 2008. At the March 2008 COAG meeting, a Memorandum of Understanding for the Murray-Darling Basin Reform was agreed to by all States, including Victoria which initially opposed the reform. This took $1 billion in sweeteners to the Victorian government, which leaves $1.9 billion as the net increase to Water for the Future. ^[14] The ensuing Basin Plan has an important feature whereby a final decision-maker — a Commonwealth Minister — settles disputes between the States. This is envisaged to reduce the politicised nature of the Murray-Darling Basin Commission, which has overshadowed decision-making processes (Blackmore 2002; Scanlon 2006). The Water for the Future package has various novel — though sometimes conflicting — objectives.

Of the $3 billion earmarked for the Addressing Over-Allocation component, $50 million was offered in a first round of buy-backs from February–May 2008. The first round acquired 35GL of ‘other new e-water’, at an average cost of $1400/ML; according to different sources only $37 million had been spent to acquire 22GL, in which case the average cost is $1700/ML (Wong 2008; Bardon 2008). It would appear that the value of entitlements has been inflated in the course of government buy-backs; the price is likely to increase as more substantial purchases are made (Connell and Grafton 2008).

The $6 billion Modernising Irrigation component, largely in the form of subsidies for water-efficient irrigation technologies, can further increase the cost of water recovery as it is in direct conflict with the objective to retire inefficient irrigation areas. The financial assistance for water-efficient technologies allows less-efficient irrigators to remain in the industry, and to use the water savings to expand irrigated production (Ancev and Vervoort 2007). In this sense, the value of such properties becomes inflated and unnecessarily increases the cost of buy-backs.

The smaller, but significant, element of the plan is Improving Water Information, towards which $480 million has been allocated. The Bureau of Meteorology has been given new powers to request water information from various parties to be used in a National Water Account. Under current arrangements, even where water metering is in place, water-extraction data is considered confidential and is not publicly disclosed (Hudson 2005, personal communication). The new arrangement would mean this information is relayed to the Bureau of Meteorology, allowing for better water management through transparent monitoring of water use on a national basis. For this purpose, $620 million of the Modernising Irrigation component has also been allocated for water metering and telemetry rollout, administered by the Department of Environment, Water, Heritage and the Arts (Vertessy 2007).^[15] This brings the total investment in water data to over $1 billion over the next 10 years, signalling the emphasis now given to accurate water information.

The Joint Works program began in 2001, and is a jointly funded program to build six major salt-interception schemes as part of the Basin Salinity Management Strategy. The program is estimated to cost $60 million, with six jointly funded schemes towards keeping salinity below 800EC at Morgan. ^[16] These new schemes are in addition to seven State-owned schemes predating 1988, and in aggregate are expected to contribute 61EC of the salinity target (MDBMC 2006). In other words, the cost to reduce salinity is at least $1million/EC given the $60 million investment. Despite being a pragmatic solution, salt-intervention technologies are expensive and treat only the symptom rather than the cause; that is, from non-point pollution that continues to introduce salt into the system. This is evidenced by recent experience with the Salinity and Drainage Strategy (now the Basin Salinity Management Strategy).

The Basin Salinity Management Strategy was developed in 2001, as the successor to the 1988 Salinity and Drainage Strategy. The Salinity and Drainage Strategy was a once-off agreement between the States and Commonwealth to finance activities to reduce salinity. This was initially deemed successful, as major investments made towards salt-interception schemes led to an immediate reduction in salinity throughout the 1990s. However, it soon became evident that further action was needed as salinity continued to rise, motivating the new Strategy in 2001 (Conner 2004).

The Strategy manages basin-wide salinity through end-of-valley targets and an overall downstream target at Morgan in South Australia. The States work to achieve these targets through in-valley actions, which are entered into a central Salinity Register managed by the Murray-Darling Basin Commission. The Register also captures legacy impact from previous activities and current salinity-reducing or -increasing activities, which are calculated in dollar terms using modelled cost-functions. The objective is to ensure there is net credit for each State and the Basin as a whole. Through these measures, in-valley actions are expected to offset 10EC points at Morgan, while salt-intervention schemes are expected to offset 61EC points. In 2005–06, these measures combined achieved the salinity target at Morgan (MDBMC 2006), although this success is still largely attributed to salt-interception schemes. A sustainable, long-term solution would be to change the pattern of land use to reduce the movement of salts. Targeted in-valley measures could potentially make a greater contribution; for example, Heaney et al. (2000) have shown that reforestation at sites with faster-responding, saline aquifers with porous soils can efficiently reduce salinity. Such long-term strategies will become feasible as greater hydrological information becomes available.

The main stumbling block for the Strategy (as is the case for water recovery) is the measurability of outcomes, with monitoring and evaluation identified as key areas for improvement. The reliability of entries in the Salinity Register is evaluated according to a standardised classification protocol, according to which most of the entries are of low reliability. This undermines the confidence in the progress of signatory States (MDBMC 2006). A contributing factor may be that each State uses its own hydrological models to estimate salinity impacts, each of which have strengths and weaknesses and are useful for different purposes. Following from this is a strong impetus for hydrological-economic models to be consolidated so that salinity impacts are modelled consistently, and thereby improve the transparency of investment decisions. There also remain significant information gaps in groundwater hydrological functioning. For example, IQQM models surface water and MODFLOW models groundwater, each with weak hydraulic interactions between surface and groundwater (Letcher and Jakeman 2002) — which is arguably a fundamental knowledge gap to understanding salinity. This has implications for the reliability of bioeconomic models which base cause-effect relationships on such hydrological models.

This subsection covers the following programs and activities: retiring properties in Queensland and NSW; the Natural Heritage Trust and National Action Plan for Salinity and Water Quality; and the National Competition Policy.

The considerable controversy over Federal government plans to retire properties that can provide flows to the Murray-Darling can be largely attributed to unease over the socio-economic impact of such purchases. In a recent move by the Federal government, $50 million of new money has been flagged for the purpose of acquiring land with large water storages (ACF 2008). The first purchase was Toorale, which cost $24 million split between the NSW and Federal government. The property held 14GL of entitlements. That is to say, it was bought at an average cost of $1700/ML, equivalent to the cost in the first round of Addressing Over-allocation under Water for the Future. Toorale seems to have attracted significant media attention because it was purchased in the midst of rural discontent over the buy-backs, and was particularly contentious because of Toorale’s history and the potential for benefits to be offset by irrigation expansions in Queensland (Ferguson 2008). However, a similar purchase was made in August 2008 of the Pillicawarrina cotton property in the Macquarie Marshes, under a joint venture by the Commonwealth and NSW governments through Riverbank. The land was reportedly acquired for $10 million with 7GL of entitlements (The Land 2008); at an average cost of $1400/ML, this is similar to the cost of Toorale. Pillicawarrina was fully operational as a cotton farm, yet its purchase had widespread support from landholders, and did not attract the same media coverage as Toorale. The main issue at stake seems to be community disgruntlement over government decisions which were perceived as being questionable and not well justified in terms of the benefits they would deliver.

Other national programs include the Natural Heritage Trust and National Action Plan for Salinity and Water Quality, which funded environmental conservation activities delivered through Regional Natural Resource Management bodies. Joint funding to these programs has averaged $400 million/yr since its inception in 2001. In the third phase of Natural Heritage Trust from 2008, a further $2.25 billion over five years is committed towards States’ natural-resource strategies operating under the guise of Caring for our Country (DAFF 2007). Another significant source of funding was the National Competition Policy. While not directly related to natural-resource management, tranche payments were tied into the water-reform process and totalled $3.9 billion from 1997–2004 (NCC 2005).

The projects under Natural Heritage Trust and National Action Plan were largely small-scale, and unsuccessful in some instances. With some exceptions, most of the investments promoted practices that were not adoptable at the required scale, or were invested in the wrong places (Pannell 2008). In an audit report, it was noted that there was an absence of consistently validated data and insufficient information to indicate whether the programs were meeting expectations. The audit also highlighted the need to address the transparency and accountability of funds, and problems with the quality and measurability of targets directly linked to the paucity of scientific data (ANAO 2008). The issue of transparency and measurability of outcomes is a common theme throughout most natural-resources programs, compromising the cost effectiveness of on-ground actions.

In summary, public investment into natural-resource management totalled at least $25 billion over the last 17 years, or $21 billion excluding the National Competition Policy. In spite of the substantial expenditure, this has not produced the envisaged restoration of over-allocated river systems. Investment decisions appear to be without strong justification; the most cost-effective solution to buy-back rights from irrigators has, until recently, largely been avoided (Quiggin 2008). There remains resistance from the rural community, who are unconvinced of the merits of government buy-back. Furthermore, the numerous initiatives will likely benefit from better-defined deliverables to rationalise the sums allocated and develop a way of quantifying results.