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STANDING COMMITTEE ON REGIONAL AUSTRALIA
25/03/2011
Impact of the Murray-Darling Basin Plan on regional Australia

CHAIR —We now welcome our next witnesses. Thank you for coming. Do you have any comments to make on the capacity in which you appear?

Dr Stubbs —I appear as a private citizen, unpaid, to talk about a report that I did in relation to socioeconomic impacts on rural communities, arising from the Basin Plan.

CHAIR —Thank you, Judith.

Mr Storer —I am an engineer/economist working for Judith Stubbs and Associates. I am also here as a private individual in my own time, and to talk about research work that we conducted for the Cotton CRC, looking at the social and economic impacts of water reductions or changes in irrigation water on rural communities.

CHAIR —Thank you. Although the committee does not require you to give evidence under oath I should advise you that this hearing is a legal proceeding of the parliament and therefore has the same standing as proceedings of the respective houses.

Thank you for coming back. We obviously spoke at the committee hearing in Dubbo but we needed a little bit more time. I do not think we have to revisit some of the things that were discussed in Dubbo but we appreciate you coming back to us. This report has been mentioned on quite a few occasions. We do want to flesh it out a little bit further. We do have your report, obviously. Do you want to make additional opening statements today and then take questions?

Dr Stubbs —Yes, I do. I could provide a summary of what I talked about last time but I imagine you all have that from last time. If it would assist I will do that.

CHAIR —Just a little bit of a snapshot, because there may be some committee members who were not at Dubbo.

Dr Stubbs —I just want to take two minutes, because of the particular questions last time, before I hand over to John Storer. He will have 10 minutes. Firstly, the report that we did, which is produced in many volumes, is the result of very detailed empirical work that we did over 12 months. Basically, it was very detailed desktop and field work, so we travelled the basin. I was in the basin for about eight months, north to south and south to north, consulting and testing findings et cetera. It is very detailed work.

Very briefly, in terms of the methods it started out as a report looking at community resilience and the factors in that. In the process we were overtaken by events and we were always going to look at water, so the focus became more on what happens if there is a cut to irrigation water in communities and particularly what would happen to different types of communities, given different levels of resilience. Some of those key factors are isolation, size, the number of Indigenous people, the reliance upon our agriculture, the diversity of the economic base, opportunities for diversification. We really looked at all of those types of factors in factoring in what would happen in terms of reductions in water. Then in the final stage we modelled hypothetical scenarios on water cuts across the basin at different scales. We did that in advance of the Basin Plan. We still did it with the best empirical data that we had at that point in time but we had to make certain assumptions. We also tested a few key propositions that had been put forward at that time.

Very briefly, the findings showed that there would be a small relative impact at the national level from, say, the 25 per cent cut across the basin in irrigation water. We talked about 14,000 real jobs or a 0.3 per cent loss of GDP but we have said that that would probably be recovered within a few months through general national economic growth.

Nonetheless, the jobs and the GDP lost would be real. If this did not happen then of course we would have a bigger economy. We would have more jobs. They are jobs we always would not have had. As John will talk about, that is an opportunity cost in that sense, but nonetheless small and fairly easily recovered at the national level. At the local level we are likely to see the biggest impacts and some communities will have a far more disproportionate impact upon them, depending on those factors of resilience, depending on how much water is lost and depending on their ability to make a whole range of adjustments in terms of trade and so on.

We are saying that some will be okay. There will still be problems for some sections within those communities and some people being displaced. Others will disproportionately suffer both short- and long-term effects. They will not easily structurally adjust with or without government intervention. The final point I would make is that our findings, and all the stakeholders we talked to and the work we looked at, show that agriculture has been resilient and communities have been resilient over time, notwithstanding the ongoing trend to urbanisation of Australia. Communities have been adjusting over time, as have irrigators and industries, to policy changes and drought. They have been increasing efficiency gradually. They have been increasing on-farm management techniques to ensure there’s better practice. They have been training within the limits of regulation and practicalities—that is, markets, what can be grown, where it can be grown et cetera, where water can be traded to and from. There has been quite a lot of work done in response to drought changes and regulatory changes over a period of time. There is still some work to be done, no doubt. Also, one of the very strong findings was one of quite a lot of bounce-back of communities, when you look at the ebb and flow of population, the ebb and flow of jobs and so on. It is quite interesting what happens to communities’ long-term resilience.

Finally, I would say that some of the most positive things we saw were around the bottom-up work that was happening in communities. Councils all have their economic development plans and all the ones we talked to have been trying to work with regional development organisations and others to look at how they could adjust to some of the pressures that are on them in all sorts of ways. We have seen very good bottom-up approaches and this could provide some very valuable frameworks to work with: those local potentially bottom-up approaches within an appropriate framework set by government.

They are some of the key things we talked about last time. I will hand over to John Storer because you asked some technical questions regarding some of the methodologies that were used by the authority and by ABARE. You also asked some technical questions about the differences between our findings—our approach—and those of the Basin Plan. John is going to focus on the economics. He told me that it is not boring because he is an economist, but we all know that is not necessarily going to be the case. I can order strong coffee for you if you like. We have a number of technical papers to hand up and give you. John is going to try and hit the key points and then open up for questions.

Mr Storer —Thank you very much. I will try not to make it too dry. There are two major concerns regarding the Basin Plan that I would like to talk about today. The first is whether the plan represents best practice in social and economic impact assessment. The second relates to some concerns regarding the economic modelling and the presentation of GVIAP data.

First I would like to talk about best practice. I refer to two publications. They are the Australian government’s Best Practice Regulation Handbook, of which I have a copy here, and an SKM report commissioned by the authority called Demonstrating use of best available scientific knowledge and socio-economic analysis. The SKM report says:

Most of the official national and state government guidelines ... predominantly favour the use of CBA—

cost-benefit analysis. The guidelines say cost-benefit analysis measures the efficiency or resource allocation effects of a regulatory change. This is from the SKM report. By comparison, a socioeconomic impact assessment:

... traces impacts of a policy or project through an economy and measures the cumulative effects.

The guidelines say under the heading ‘Common cost-benefit analysis pitfalls’:

The costs and benefits of a regulatory proposal properly relate to changes compared to what would have happened in the absence of the proposal. That is, it is necessary to compare the world without the change to the world with the change. It is inappropriate to merely calculate incremental costs and benefits compared with the status quo ...

They further say:

This problem is especially prevalent when assessing the impact of regulations which are part of a suite of policies ... the ‘without regulation’ base case option should include the impacts of these complimentary interventions.—

I believe that in the Basin Plan modelling there are actually four policy proposals. These have not been considered individually or incrementally. In that way they appear to represent a socioeconomic impact analysis as articulated by the SKM report rather than the best-practice cost-benefit analysis as suggested by both the SKM report and the government guidelines. Those four policies are, firstly, the diversion of irrigation water to environmental flows; secondly, the relaxation of administrative restrictions around trade in water; thirdly, changes to immigration policy; fourthly, reimbursement to irrigators for water diverted to the environment.

What the authority has done I think is this: they have more or less said, ‘Right, we’ll take away irrigation water. That will lead to job losses. However, we’ll assume that the remaining water will be redistributed through relaxation of trade and that redistribution of water through relaxation of trade will offset these job losses to some extent, greater or lesser.’ Then they further assume that rather than feeding our growing Australian economy with migrants, as is currently the case, we will feed it with people who have lost their jobs in the agricultural sector. Finally, they assume that by reimbursing farmers for loss of water it will transfer money from the coastal areas of Australia or the cities or whatever into the Murray-Darling Basin, into the regional areas.

This may be a perfectly legitimate approach but in my view it needs to be transparent. Most particularly, if unrestricted trade was allowed tomorrow, I would expect to see a massive growth in employment across the MDB in irrigation industries. In fact, that was seen between 1996 and 2001. If that restriction of trade increased this industry and then the SDLs were taken from that industry, the loss of jobs would be enormous. It would be a really large number. That loss of jobs is the true cost, to me, of the implementation of the Basin Plan in terms of opportunity cost. An opportunity cost is widely cited to be itself the best-practice approach. Effectively trade, changes to immigration policy and reimbursement to irrigators in my mind are mitigations to the adverse social and economic impacts of increased environmental flow at the expense of irrigation uses. In the interests of transparency they should be presented as such.

I will now turn to the basin modelling. I have some more detailed notes which perhaps I should hand up later but I will try and touch on the key concerns. Firstly, the authority appears to have done a socioeconomic impact assessment rather than a cost-benefit analysis. This is important. No sensitivity analysis is reported. That is, they did not vary their assumptions across a reasonable range to see how that might change their findings. They have looked at only one case and presented only one case. It could well be that they have looked at the best case and in the absence of any sensitivity analysis we have no way of knowing that. When we do look at their assumptions I see some obvious concerns and I will go through these. Firstly, their baseline, their starting point, does not seem to reflect historical data. In this regard I rely on ABS estimates for GVIAP and I suspect these have been widely quoted to you by all sorts of people. There is an immediate problem with that data, in that that data has not been adjusted for inflation.

There is a secondary problem in that it also reflects impacts of price changes. We have adjusted that data for inflation and in that respect we note that the data shows a drop in GVIAP between 2001 and 2005-06 of 5.8 per cent. However, the unadjusted data as used by the authority and other people who have quoted this data to you shows an increase of 8.6 per cent. That purported increase is actually just inflation. That is what it is. That concerns me.

Let’s go back to ABARE. ABARE appear to add around 3,000 gigalitres to the 2005-06 year but they calculate that that 30 per cent increase in water will increase production by only one per cent or $60 million by reference to the ABS data. To me that seems an underestimation. If that extra 3,000 gigalitres of water was used for cotton, the correct figure would be an increase in GVIAP of around $1.8 billion. It is not surprising that when they deduct 3,500 gigalitres from the baseline the impact on production is small. If we look at 2001 as their model year and compare their numbers to empirical data for 2001, their calculated GVIAP underestimates production by 5.2 per cent.

Secondly, the way they assign GVIAP to commodity groups is of concern. The baseline overstates the proportion of donor commodities such as hay, rice, sheep production and understates the proportion of recipient commodities such as horticulture and vegetables. Again it is not surprising they find the impact of the introduction of SDLs as slight as there is more water in use with low productivity per gigalitre and their model assumes that this low-productivity water is used as the source of the SDLs.

Finally, their model assumes no growth in irrigation area. Again this is at odds with data. This is their baseline calculation. I think there is a reason for this. If they did assume growth their baseline figure would push production right up. Their model would show that in the baseline farmers would trade water and production would increase markedly. Two things on that: firstly, a set of data. In the Victorian Mallee, for example, irrigation area increased by 30,000 hectares or 75 per cent between 1997 and 2009. Most of that increase was by private diverters and in permanent plantings.

With regard to modelling conducted separately for the Garnaut report, this modelling used a similar form of model to that used by ABARE. The researchers for the Garnaut report did not have this restriction on growth in irrigation area. They found that a 28 per cent reduction in water would reduce output by 65 per cent. This is around 13 times the impact predicted by ABARE. That comes from varying one assumption.

The ABARE second-stage model compares results with what would have otherwise occurred in the economy in the absence of the scenario. Because of their assumptions regarding international migration and the easy movement of labour from agricultural industries and regions, it is likely that the low level of employment loss predicted by the model arises from rather than having a growing economy fuelled by migrants, it is now going to be fuelled by internally sourced displaced labour. That is what ‘the long run’ means. The long run means people lose their jobs and they pack their bags, move somewhere else and get another job.

I think Judy spoke about this previously: the real world may not match this ideal world. We come from Wollongong. In the 1980s the Wollongong steelworks underwent significant restructuring. Twenty-five years later in 2006 unemployment in the two Wollongong suburbs of Warrawong and Cringila was 19 per cent and 17.6 per cent respectively, by comparison with the New South Wales rate of 5.2 per cent. In that regard you would have to say in that environment the long run is something in excess of 25 years.

We are currently doing a retrospective study for the Cotton CRC and that seems to show that the growth in irrigation between 1996 and 2001—and there was a large growth in irrigation in that period—provided employment growth for less-skilled people and reversed trends of rural decay in regional areas. I think these various discrepancies and methodological problems go some way towards explaining the difference between our prediction of 14,000 lost jobs and the authority’s prediction of 800 jobs at the basin level and 3,000 jobs at the national level, although I read recently in the press that they are now suggesting 5,000 jobs, or a short-run 5,000 jobs. They seem to be getting closer to us, which gives me some small comfort.

CHAIR —We might have to take some of the written material.

Mr Storer —Yes.

CHAIR —We would like some time to ask some questions, if we could. We have only got about 10 minutes left in this segment, so if you could draw that part to a conclusion.

Mr Storer —I can talk very briefly around our approach. We took an empirical approach rather than the bottom-up modelling approach used by the authority. The advantage of our statistical approach is that it contains fewer assumptions and inputs by comparison with other models and hence I would expect it to be more robust. Importantly, the relationships we find are statistically defensible, as our modelling describes the irrigation industries as they were in the Murray-Darling Basin in 2006. Our approach can be applied at different scales so that local and regional impacts can be understood. Our approach appears to align with historical data.

We predict an annual loss of around $2.7 billion associated with a 50 per cent reduction in water availability using 2005-06 as a base year. If we refer to the ABS GVIAP data, the reduction in irrigation water between 2005-06 and 2008-09 was about 53 per cent and the reduction in GVIAP was $1.6 billion. If we allow a multiplier on the $1.6 billion of 0.9, we come up with $3 billion, which is a similar number to our $2.6 billion. Again, that gives me some comfort. Thank you. I might leave it there.

CHAIR —Okay. Thank you, John.

Mr SECKER —Have you taken into account in your job figures—and I am not declining to agree with them at all—the extra expenditure, say, of $10 billion in water buybacks and possible infrastructure improvements as part of your process and what effect that would have?

Mr Storer —Could I please first ask you: what scale are you asking the question? The national scale—

Mr SECKER —Everything is going to be region by region really, so if there is half a billion dollars invested in one area to improve the infrastructure and then buybacks, which is putting more money into the local economy, have you taken that into account? You can talk about the national effect as well, if you want to.

Mr Storer —I would say at the national level the impact would be negative because there would be a transaction cost associated with the transfer, so it would cost us something at the national level. At the regional level there is the degree to which that money translates into increased output on the ground. For example, if that money is taken by a farmer and used to retire debt and he leaves the area, then that is that. That money has not gone to the area. If the money is used to improve infrastructure, let’s say, so that an enterprise can then maintain its current level of production with less water, then there would be no growth in jobs.

Mr SECKER —There would be no loss either. It would be fairly neutral.

Mr Storer —It would be static in that case and there would be some minor increase in jobs over the short period, arising from construction.

Mr SIDEBOTTOM —Could you explain in a little bit more detail for me your earlier statement where you said that on a national level it would be a cost? I am not an economist as such. Secondly, I suppose I am asking you—as Patrick did—did you take into account in your conclusions the $8 billion or the $10 billion expenditure in the basins?

Mr Storer —It is effectively a transfer. What we are doing is transferring. Let’s say I am in Sydney and the cost of this is $10 per capita. That is $10 that goes out of my pocket and that $10 goes to a farmer in Griffith. That means I do not have that $10 to spend at the coffee shop or at the local pizza parlour; whatever it might be. So my consumption in my local area has been reduced and, because I am spending less money on haircuts or whatever it might be, there is reduced employment where I live.

I have given the money to a farmer; he goes and spends it where he lives, so that generates a job there. That means that he might buy more haircuts or whatever it might be. So, effectively, the money has been moved from, let’s say, Wollongong to Griffith and the jobs associated with that money have been moved from Wollongong to Griffith. But there is a transaction cost associated with that. There is an administrative apparatus, there are bureaucrats—a range of things; money has to be collected and put somewhere else. That collection process or transfer process adds nothing to productivity. It is an administrative task and it comes with a cost itself.

Mr SECKER —If it were spent, as you said, in the local community for infrastructure upgrades and improving efficiencies so that you still get the same production but with less water, there could actually be an increase.

Mr Storer —If it were the case. It would never increase. It has just moved it from here to there. One way or another, you have just shifted things around. It is a mitigation. In economic terms, you have said the benefits of increased environmental flows will accrue in the broader community. And this is the way I think of it. For example, I personally put a high value on environmental outcomes, so I would see that as of some value. By redistributing that wealth from me to the farmers, what you are doing is making me bear some small proportion of the cost of my valuation of environmental outcomes.

You asked about our conclusions and our costs. Our costs are the short-term, the short-run costs, so our cost is the immediate cost. When we look at the regional level we have not considered the long term at all; we have not considered the long run. We have not said, ‘People might trade water.’

Dr Stubbs —We have certainly done it in a descriptive sense in the work, so we have talked about what might happen; some communities were more able to trade than not—those types of things. We have done some analysis around that. Where we can quantify it, we have, but it is largely qualitative. It certainly has not been factored into the assumptions in advance of the Basin Plan because we did not know and could not assess and it was well beyond the scope of the project to be able to do that in individual communities. But it is an important thing to say and to do. However, as John has pointed out, there are obvious limitations to the benefits of that in an individual community, depending on how that money is used and whether it stays in the community, and no doubt you are going to be grappling with that particular issue.

Mr Storer —The other thing to say, just briefly, in terms of the trade is that we allowed for trade when we looked at our small communities because we knew where the limits were. When we looked at it at the regional level or the basin level, we did not allow for trade, but at the same time we took water from each industry uniformly. We took water from each and every industry. So in some ways that would offset the effects of trade.

Mr ZAPPIA —Can I ask you to refer to page 96 of your submission where it refers to the Coorong. The very last paragraph of that section talks about a return of 790 gigalitres of water to the Coorong and it then goes on to say:

... the Coorong and Ramsar wetlands buy the community at between $5 billion and $41 billion of economic value.

Is the figure of between $5 billion and $41 billion per annum and, secondly, is that figure correct? It seems an extraordinary amount of value.

Mr Storer —No. I am not saying the value of the Coorong is that. I am saying, if you valued the water—

Mr ZAPPIA —Yes.

Mr Storer —I am saying that that is the opportunity cost of the water. The value of the water is—

Dr Stubbs —Proposed to be taken under that particular proposal.

Mr Storer —That amount of water, that 790 gigalitres of water, is worth between—and that is net present terms; that is not an annual cost. I have said that is net present terms. That 790 gigalitres of water, in net present terms to the Australian economy, I say is worth somewhere between $5 billion and $41 billion. So what I say is that, if you take that water from the economy, from irrigation, and put it to the Coorong, you must necessarily be saying to yourself, ‘We must value the Coorong at somewhere between $5 billion and $41 billion’—

Dr Stubbs —Because that is the cost.

Mr Storer —‘because we are prepared to pay a cost, and the cost we are prepared to pay is lost agricultural production equivalent to a net present value of between $5 billion and $41 billion.’

Dr Stubbs —That is largely also because of the places where the jobs will actually come from in that scenario. A lot of the jobs would be coming out of the high-value horticultural areas. That is why there is a range of $5 billion to $41 billion, because it depends on where you source the water.

Mr ZAPPIA —You are using the figure for net present value.

Mr Storer —Yes.

Mr ZAPPIA —So that means on today’s values?

Mr Storer —No. Net present value is the amount of money I would have to put in the bank to generate that income for forever and a day. We are getting technical. But let’s say you have $100,000 a year. As an annual cost that is $100,000 a year. As net present value, if you put a million dollars in the bank, that would give you $100,000 a year in interest. So $100,000 a year annual cost, $1 million net present value.

Dr Stubbs —What is being said there is not the proposal that that is what it is worth, but if you were to take the water from different areas, that is the range of cost.

Mr Storer —That is the price you are paying.

Dr Stubbs —That is the price that we are paying under that scenario. An assumption, if you did that, would be that the community would value the Coorong, in opportunity cost terms, at that amount, the lower if you are taking water from lower value uses, the higher if you took it from higher value uses. That is the range. This is the importance of opportunity cost: it enables you to transparently conceptualise what this water means if you had it, what this water means if you give it to the environment in a certain way, and what that loss might be or what the real cost of that actually is to the community. So those are the numbers. But the issue is then a value based one, where you go to the community and you say, ‘As a community, as a nation, if we transparently understand the costs of our decisions, is this something that we are prepared to pay?’ Many people would say ‘yes’ and some people would say ‘no’. The issue is that the costs and the benefits are distributed differently so, as John said, if I go bushwalking and I love it and I kayak, I am regarding that as a benefit; I probably would regard that as a benefit. For others it is a significant cost. Those costs and benefits are very differently distributed, but we all pay.

Mr ZAPPIA —Thank you.

CHAIR —There were similar studies into the impact or potential impact of various salinity levels over a decade ago.

Dr Stubbs —That is right.

CHAIR —Different values you can put on the system.

Dr Stubbs —Correct.

CHAIR —We are out of time, unfortunately. We do thank you for taking the time to come along again.

Dr Stubbs —Thank you.

CHAIR —Thank you, John, for clearing up some of those issues. I think that was very important. That will be valuable Hansard for us to go back through as well, in terms of the differences between the ABARE study and your own.

Mr Storer —Thank you very much for that. I have some documents that I—

CHAIR —Yes, please do.

Dr Stubbs —That will actually assist in some of those more technical points. Thanks, Mr Chairman. Thank you very much for having us.

CHAIR —Thank you. There will be a transcript available. If there are any issues, please let us know.

Dr Stubbs —No worries. Thank you.

Mr Storer —Thank you very much for your time.

[11.35 am]