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Murray-Darling Basin Plan
05/02/2016
Social, economic and environmental impacts of the Murray-Darling Basin Plan on regional communities

BERG, Mr Chris, Senior Fellow, Institute of Public Affairs

DAVIDSON, Professor Sinclair, Senior Fellow, Institute of Public Affairs

HARGREAVES, Mr Scott, Senior Fellow, Institute of Public Affairs

[10:58]

CHAIR: I now welcome representatives from the Institute of Public Affairs. Thank you for appearing before the committee today. I invite you to make a brief opening statement if you wish to do so.

Mr Berg : Thank you for inviting us to provide evidence. The Murray Darling Basin Authority appears to be immensely proud of the fact that the Murray Darling Basin Plan was endorsed in the House of Representatives by 95 votes to five, and argues this shows that the plan 'balances the competing interests of the usage of the basin'.

However, this committee has heard a great deal about the negative impacts of the plans. Our colleague Dr Jennifer Marohasy pointed out to the committee that dramatic improvements in environmental outcomes could be achieved through, for instance, the restoration of the Murray River's estuary. Letting the lower lakes fill with seawater during periods of drought could save approximately 900 gigalitres leaders of freshwater per year in evaporation losses alone. While we do not propose to address that issue today, what it does suggest to us is that an adaptive approach to the plan, which only has room for incremental changes, risks locking in poor outcomes. We recommend the Productivity Commission immediately be commissioned to conduct a full cost-benefit analysis of the Murray-Darling Basin Plan with the knowledge that is being gained through this inquiry and the implementation of the plan so far. A cost-benefit analysis that assesses alternative policy settlements, such as estuary restoration, would also clarify the opportunity costs of policy choices forgone.

We are aware that it is the case that the Water Act requires the Productivity Commission to conduct an inquiry into the 'matter of the effectiveness' of the implementation of the plan and water resource plans which the MDBA describes as 'an audit'. This is inadequate. Rather than an implementation assessment occurring five years into a seven-year plan, the Productivity Commission should have been tasked to inquire every three years during the implementation phase and to study, not only the process but the purpose of the plan. Furthermore, the Productivity Commission should be enabled to constantly monitor the progress and efficacy of the plan, as well as alternative approaches. Only an external body could have the required objectivity to conduct cost-benefit reassessments.

A final word about the scope of the cost-benefit analysis. The 2012 regulation impact statement for the plan argued that 'many environmental benefits can only be expressed in biophysical/ecological terms, rather than in monetary terms.' We do not accept that argument. Value is created through human action and can only be appreciated on a human scale. In this context there is something we can label as 'conservation value'. There is an opportunity cost of not using resources that may otherwise have been used. There is an option value associated with maintaining biodiversity, even if we have no intention of exchanging an asset or selling it. These values can be estimated. We might debate how well they are estimated, but this sort of thing can be done, and is done, on a regular basis. Undefined and incomparable environmental benefits should not be used as a policy trump card. Just because a benefit cannot be measured with precision, does not mean it has infinite value. An upper or lower estimate of the benefit translated into monetary terms is necessary to understand policy choices. This is the approach we recommend the Productivity Commission take. Thank you.

CHAIR: The evidence we have heard all the way through has been that the environment is benefitting and the environment needs more water. The argument that has come back is that the environment needs more than just water, and just adding more water is not necessarily positive to the environment. We have struggled to find any economics other than the loss of agricultural production. If you were the Productivity Commission, if you were doing a cost-benefit analysis, how would you reconcile those sorts of claims?

Prof. Davidson : The Murray-Darling Basin Authority talks about a triple bottom line, which basically looks at people, planet and profit. When you have a look at what they actually do, and certainly what they talk about and what they are very proud about on their website, they are really concentrating on the water. Water is obviously not trivial, but they have not actually looked at the people and the profit. I think that is where the problem is. There has not actually being explicit, consistent and comprehensive analysis done of people, planet and profit in this particular analysis. If you are explicit, consistent and comprehensive you also automatically introduce responsibility and accountability, which also seem to be very absence from all of this analysis. It is very troubling when you see the argument that monetary values cannot be put on the environment. Monetary values might not be well put on the environment but, nonetheless, they can be done. We have seen a lot of this. The Treasury modelling of the carbon tax in 2009 and again in 2012 was exactly such an exercise. There is no reason why it cannot be done again in this particular context.

So I would start off by saying they need to emphasise all three elements of the triple-bottom-line, which they claim to look at, put monetary values and actually have a summative score at the end of a whole range of different policy scenarios, and then pick from that what is to be done. That also would give us a forward-looking approach where we can actually then look and see how well the Basin Authority's plan is actually rolling out, as opposed to very numerous impact studies that have been commissioned after the fact, which are not quite as helpful as a comprehensive up-front plan. That is what is lacking from all this.

CHAIR: I do not mean to trivialise them, but is it feasible to put an economic value on native fish, bird breeding, frogs—

Prof. Davidson : Many people worry about this putting a price or a value on social items, because they have in their minds some sort of crass commercialism. But money is not just a medium of exchange. Money is also a unit of account and a store of value. In this particular context we would be looking at money as a unit of account—a common denominator that we can use to compare things. Lord Kelvin very famously said that if you cannot measure something your knowledge is of a meagre and unsatisfactory kind. And, of course, even when you can measure something your knowledge may still be of a meagre and unsatisfactory kind, but it will still not be as meagre. We can value fish, we can value breeding grounds and we can value them in terms of tourism, for example. We can value them as intrinsically valuable of themselves. We can value them in biodiversity terms. This has been done. We may not do it precisely as well as we would like, but we can establish lower bounds. We can say that these breeding grounds are worth at least this much, or we could say at most that much. So it does give us a basis for trade-offs and for understanding what is going on. The Basin Authority has to optimise, and how you can optimise in the absence of a common denominator is a difficult thing to understand. That is what I do not understand about how they have gone about their task.

CHAIR: One of the propositions put to us was actually from Dr Marohasy, which is that the lower lakes were historically estuarine, and if we were really to be focusing on the best environmental outcomes we would allow them to be returned to an estuarine condition. In South Australia you can almost get yourself lynched for saying that. It seems to me that that is primarily emotional. If you were to do a cost-benefit on that, you would have to take into account perhaps risks to Adelaide water, although that could be avoided; perhaps risks to irrigation water, although that could potentially be avoided; and the effects on tourism around the lower lakes area. Is that all quantifiable, or is it again a bit like putting a value on frogs?

Prof. Davidson : I have seen that Dr Marohasy has put a money value on it. I have not seen her actual calculations, so I cannot be sure if it is a good or a bad value. But, yes, the Productivity Commission could very easily do it. They already have the skills and the knowledge base to evaluate that as an option. I would throw all of those things into the mix to be evaluated as part of a broad comprehensive thing.

But what we want to talk about today is really the process of doing things, as opposed to recommending specific outcomes. Dr Marohasy has made a suggestion and I think that should be thrown into the mix, as should almost everything else. Bear in mind that a lot of these decisions are locked into place. It is also troubling why we have a PC report five years into a seven-year rollout. That does seem to be very much after the fact.

Mr Berg : The cost-benefit analysis gives you an opportunity to work through the assumptions that you are making. You do not come up with a definite single dollar value on all of these things, but you get a range and it gives you an opportunity to work out what decisions we are actually making and what comparable trade-offs we are making, and then debate, within the constraints of that cost-benefit analysis, and then ultimately within policymaking and parliamentary circles, whether those assumptions are justified or not. The cost-benefit analysis gives you a baseline to work with. From our assessment of what the MDBA and other organisations have done, we have not had that baseline. We have not come up with a comparable analysis. We have a lot of studies, a lot of impact studies, a lot of environmental studies, and some socioeconomic studies. They are all very useful but they have never been collated in a way that gives policymakers an understanding of the trade-offs involved.

Senator DAY: Water is a very emotive subject. Wars have started over water. It has often been described as our most precious resource, and you hear a lot about it. I want to ask you a few questions about the perceived value of water. As the Chair said, you can get lynched for even raising some particular topics. I come from South Australia and if you just question if we are getting good value for $X billion worth of water evaporating out of a lake, it is almost heresy. Regarding the water buy-back, which runs into billions of dollars, we have had a lot of witnesses claim that all the bought-back water has delivered very good value for money in terms of environmental health, river tourism and so on. Would you say that that would stand up to economic scrutiny? Have you scrutinised that?

Mr Berg : I am not sure that we can answer that question in the absence of this comprehensive study of trade-offs. It is absolutely true that if you shift water around an ecosystem and around an economy then you are going to get benefits in one area, but you are also going to get costs in another. What we are calling for is a way to compare those costs against those benefits in a inconsistent way so that policymakers can decide what those fundamental trade-offs are. As to how effective the system has been so far, our major concern is with the policymaking process, the implementation and the analysis that has been done, which is why we are calling for a Productivity Commission inquiry.

Senator DAY: Have you done any comparisons of international studies of water as a component of farming and so on, and how Australia compares in the relative aspects of water as a component of farming in Australia compared with other places?

Mr Berg : I have not, but I am happy to follow that up for you.

CHAIR: You might like to think about this while you are answering some other questions: we have heard quite a lot of evidence, and then again this morning, in relation to water trading. There is a lot of disquiet amongst irrigators as to how the water market is operating. There are all sorts of allegations—and we do not necessarily accept them—that there are speculators, that the market has been distorted and that it is not a market they are comfortable with. I would like your thoughts on what would make it a satisfactory market, if you like, to participants in it, perhaps in a similar model to the stock exchange, which is generally perceived to be transparent enough for most people.

Prof. Davidson : The issue as I understand it with the water markets in the Murray-Darling Basin is that people are concerned about the rules changing. So there is a security of property rights problem in this particular market. It is a new market, and of course there is a learning dynamic process as you introduce any new market. People are worried that they might sell their entitlements and not be able to buy them back again in the future. That of course basically points to the lack of explicit consistent and comprehensive analysis that has been done up front. So people cannot actually form their long-term expectations. That really is the problem. It is a problem that bedevils all new markets. It is going to be a problem here, and, unfortunately, the inability to make explicit up-front ironclad promises as to what property rights will be going forward is going to bedevil this particular market, as it does any other market.

Add to that of course that in any sort of decision-making process in a democracy a lot of people have an anti-market bias to begin with. People are suspicious of markets in any event, but when they cannot be clear as to their property rights and clear expectations going forward, that is simply going to exacerbate the doubts and suspicions I may have before the fact.

CHAIR: Late last year the water price rose fairly sharply, and there were lots of accusations, if you like, that it was not rising for normal demand and supply, basically—consistent demand but declining supply; it was not operating in that fashion. The issue for the committee to consider is what sort of water trading environment would be most conducive to people involved in that trading, accepting that it is a demand and supply situation and it is not a result of distortions introduced by third parties or—the term that kept coming up all the time is 'speculators'; I cannot see the difference between a speculator or a trader, but that is the word that kept coming up.

Prof. Davidson : Speculators have a bad reputation in almost all markets, but we do know that speculators tend to smooth out peaks and troughs in supply and demand at prices. I would have thought that if there is some sort of unhealthy speculation then the ACCC would probably be the agency that should be looking at that sort of stuff. I do not normally recommend that the ACCC do anything! But I would have thought that the ACCC would be the agency, if any, that is specifically tasked to investigate market manipulation. I would be very surprised if they found egregious behaviour, but they are the agency that investigates those sorts of things.

CHAIR: In the selling of stocks, of shares, the market is regulated to the extent that you have to do it either on the ASX or the NSX. I do not think any of us could go out and set up our own stock exchange. I understand that there are regulations against that. If something similar was to be the basis upon which water trading occurred, do you think that would contribute to greater confidence in the market, or is it not relevant?

Prof. Davidson : Certainly the view of most economists is that markets are institutionalised exchange. There need to be institutional mechanisms, there need to be rules that are obeyed that are clear and transparent, that can be changed in an orderly, known, understood process, and I would expect that having all those things in place would certainly contribute to a healthier market—bearing in mind of course that people always dislike speculators. Even on well-know, well-established markets we hear these sorts of claims as well. The real issue is whether or not people can buy water when and where they need it at a price. And people are always going to complain about high prices; that is almost certainly true.

Senator McALLISTER: You made some remarks earlier about structural problems in the water market associated with uncertainty in relation to property rights. What is the source of that uncertainty?

Prof. Davidson : Basically I would have thought that because it is a rollout plan people do not know what the rules will be going forward or if they will change unexpectedly. This is a new market, and all new markets have the disadvantages that we learn as we go, and we change the rules as we go, from our learning. People feel that they may be disadvantaged by those changes. This would lead to less liquidity in the market than might otherwise have been the case, which will lead to price fluctuations, which would lead to disruptions to supply and demand. This is what people are worried about. This is a common characteristic of almost any new market.

Senator McALLISTER: You would acknowledge that there is not uncertainty in access to the property right, though—that that has been dealt with in the legislation in establishing the arrangements under the National Water Initiative?

Prof. Davidson : To the extent that legislation is changed, yes. I would not be as confident perhaps as other people might be. The fact that it is enshrined in legislation does not mean that much, to be quite honest. Legislation can be changed.

Senator McALLISTER: You do not think that conventions and constitutional protections around property rights are adequate? I can see that there is some space for discussion around the operation of systems.

Prof. Davidson : There is a great quote by the American philosopher—comedian, perhaps, some people might say—Mencken, who said that nobody's property is secure while Congress in in session. Maybe it is a bit harsh, but I am inclined to that view that our property is not secure while the parliament is in session. While people's livelihoods are on the line, they are going to be cautious, and I would never say to them, 'Don't be cautious.'

Mr Berg : I think in this case what we are trying to do is explain an observed concern about lack of property rights that shows up in the prices and price fluctuations, and I do not think dismissing a potential expectation that those property rights not be as secure as the parliament asserts that they are is one possible explanation for those fluctuations.

Senator McALLISTER: The reason for my questioning is to try to understand whether you are asserting a policy failure that you believe ought to be rectified or whether you are describing a perception, which seems to be your evidence.

Prof. Davidson : I do not think we can ever do anything about that. I do not think we can correct that per se.

Senator McALLISTER: That is all I need to know. My second line of questioning—and I do not have any after this—is that in your opening remarks you are advocating for a cost-benefit analysis that would involve a valuing of environmental assets to evaluate the overall benefits or costs of the plan. You made some reference to mechanisms by which environmental assets are valued. Are you aware of any international examples of the scale of the Murray-Darling Basin where such a process has been undertaken?

Prof. Davidson : There is a paper in an environmental journal where they look at the Murray-Darling, they look at an Indian river and they look at I think an American river as well. It is the paper I was going to send to Senator Day in response to his question earlier on, where there have been comparisons between large river systems. That particular paper, from memory, suggested that Australia was doing a reasonable job compared with other countries.

Senator McALLISTER: But in terms of using it, rather than just in a comparative exercise, as a decision making tool, in a policy sense, are you aware of any environmental management process that has been driven in that way at that scale by the—

Prof. Davidson : Yes. The Stern review did it for the entire planet. The Treasury modelling in 2009 and again in 2012 did it for the entire country.

Senator McALLISTER: Well, the Treasury modelling was not actually valuing environmental values; it was looking at the cost of abatement, which is a quite different question—and a much narrower question.

Prof. Davidson : Well, it was a cost-benefit analysis.

Senator McALLISTER: Of the cost of abatement, yes, not of the—and it did not in any way seek to deal with the losses.

Prof. Davidson : And they also calculated the benefit, because I remember quite well that there was a huge argument over discount rates.

Senator McALLISTER: Yes, but it did not seek in any way to deal with the values of ecosystems.

Prof. Davidson : Well, the planet as a whole is an ecosystem.

Senator McALLISTER: But it did not seek to deal with that; it sought to deal with the—

Prof. Davidson : But the thing is that we are not saying that you have a precise value of the entire thing; what we are saying is that there is a process we go through whereby we evaluate options and think about costs and benefits of different ways of doing things. The cost-benefit analysis itself is not the decisions, which I think a lot of people get carried away with. It is not the decision; it is the process that is important. Decisions are made by people with the cost-benefit analysis as one input. And although it is only one input, it is an important input. That input is actually missing from what has happened to date, and that is what we are saying should be done. That input should be put into place.

Senator McALLISTER: Should we accept your recommendation, how would you imagine that the values of these assets would be established? Would this be a technical process, or would this be something the community would be involved in? How would it practically work, do you think?

Prof. Davidson : I would have thought that the Productivity Commission would take off the shelf a whole series of pre-existing, established models and apply them to the issues that are identified in the Murray-Darling Basin as being the drivers and decision points and the assets in place that are valuable, and that that would then feed into a process whereby there would be consultation with actual local communities on the ground: are these assets as valuable, or not as valuable? And a discussion would move from then.

Senator McALLISTER: Okay, well that is useful. So, you think there would be local community input?

Prof. Davidson : Yes. It actually does worry me that when you look at the Murray-Darling Basin Authority they say, ‘This is being done from a national perspective.’ The fallacy of composition here is that what might be in the national interest might not be in the interest of any of the people affected by the actual decisions and the processes that have been put in place. I would expect that we would not be ignoring the local people in this particular decision-making process. I see in the submissions that a lot of people feel they have not been taken seriously. They are actually being affected by this, and that has not been accepted into the process.

So, yes, I would expect that there would be local consultation and also international consultation. I mean, what is the value of Australia’s environmental assets to the world as a whole? Certainly, a full, comprehensive analysis that puts a quantitative basis to our decision-making process is required, which we do not have. I would not want to leave anything out.

Senator McALLISTER: Thanks, Professor. I suspect we disagree about how useful a numerical assessment of the value of these assets would ultimately be in the decision-making process, but I appreciate your contribution.

Prof. Davidson : You could argue that they are too low or too high, but I think the process must be in place.

Mr Hargreaves : I might add that in terms of the triple bottom line, what we are looking for also applies to the social impacts. There is certainly an impressive amount of socioeconomic research being commissioned by the MDBA. But what we are looking for is what the decision-making process is by which this information, along with the assessment of environmental values and economic benefits or disbenefits, is brought back into meeting the requirement of section 20 of the act, which is that the plan optimises economic, social and environmental outcomes. The descriptive socioeconomic analysis that we are seeing in publications by the authorities are excellent descriptions of the local communities, but we do not then see the link back to the decision-making process. Again, as Professor Davidson said, what we expect the Productivity Commission to be able to advise on is the best-practice approach to integrating those decisions: taking that information and actually using it rather than just putting it on your website.

CHAIR: We actually have an ex-Productivity Commission senator here, who I think wants to ask you some questions.

Senator CANAVAN: I am not responsible for anything they have done or said, thank you, Chair! On this question of environmental evaluation: you mentioned earlier, Professor Davidson, that you do not refer things to the ACCC much. I might hazard a guess that you might not agree with Dr Ken Henry all that much at times, but I do refer you to a speech he made a few years ago when he said:

But in a world with readily available market measures of things like income and employment, the lack of similarly accepted measures of the value of the environment creates the risk that government policies and project approval processes will fail to get the balance right.

It is important, therefore, that we invest appropriately in techniques for estimating the value of the environment.

So you are basically on a unity ticket with Dr Henry in this area, are you?

Prof. Davidson : It is a sad day! As with Senator McAllister, we are going to disagree on the prices. I think we see that a lot in cost-benefit analysis, especially of the environment, where environmentalists believe that the processes undervalue the environment and other people believe that they overvalue the environment. But that is actually a starting point for discussion, debate and decision making. We cannot debate feelings and taste. Or, certainly, economist do not believe that you can debate feelings and taste. But we can debate numerical values. We can say, ‘It's too high,’ or, ‘It's too low.’ That actually gives us a basis to move forward and make decisions on the basis of best available knowledge, bearing in mind that as the process unfolds knowledge will reveal itself—we will know more.

At the moment we have a process where the first external review will take place five years into the rollout. At that point we are two years away from rolling—it seems to me a very strange way of actually ensuring accountability for what is a process which affects four states and a territory, most of the eastern seaboard and the two million people who live there. This is not nothing. We have not gone about it in a process that I can say is open and transparent, a priori.

Senator CANAVAN: Just on a Productivity Commission review, or the proposal for one: they did do a review of the Murray-Darling Basin Plan back in 2010, although there was not a cost-benefit study like you are calling for. In that review they did recommend that the government should rely more heavily on buybacks than saving water through investments. We have had evidence this inquiry that buybacks have had a particularly pernicious detrimental impact on communities. Would you expect the Productivity Commission to come to a similar conclusion in that regard? What is your particular view about the relative value of buybacks to investment?

Prof. Davidson : I would have thought, on a purely professional, a priori bias, that economists would prefer market mechanisms to direct action—which would be an investments-type thing. I think, though, we need to trade off the opportunity costs of markets, which starts off with the property rights issue. That is not a true issue that people are worried about. I would expect that a clear instruction to the PC to say, 'Please fully compare the costs and benefits of buybacks to the costs and benefits of infrastructure spending or direct action,' would be a good start, and to actually say when each will succeed and when each will fail.

Senator CANAVAN: You would expect, in that cost-benefit analysis, that on that direct action or investment side they would be taking into account the social and community potential impacts of buybacks.

Prof. Davidson : I think the triple bottom line perspective of people, planet and profit is actually a nice one, bearing in mind the argument here is between economic or human use of the water compared to environmental use. We cannot actually get away from that. I think that is a valuable contribution to make, but there is no reason why a full cost-benefit analysis cannot be embedded into a triple bottom line process. They are not actually competing methodologies.

CHAIR: We are really running out of time. One question, Senator Madigan.

Senator MADIGAN: Earlier today we heard the submission by Waterfind, and they pointed to the fact that there are a lot of competitors in the market in their space. Gentlemen, would you support the need to have market integrity—a level playing field, so to speak—a regulator or policemen on the beat with credible deterrents to illegal behaviour that hurts the reputable players in the market like farmers and irrigators, so they have got confidence that there are rules there?

Prof. Davidson : I think it is very important to have clear and precise rules and to have secure property rights so that people can form expectations. As I said before, in the beginning of a market, that is a learning process which occurs. I am always a bit reluctant to say we should have another regulator. I think we have too many regulators as it is, but I think a pre-existing regulator would be the people to look at for this sort of thing. We have market regulators, and the ACCC could deal with it if there is a problem such as a manipulation at some margin. Bear in mind, in the early days of any market, anything that people do not understand that is new may be perceived to be manipulation. Before we set up a whole new regulatory framework, I would have an existing regulator come and have a look and ask whether we need a unique regulator for this, or can an existing regulator do the job? To the extent that there are rules, they must be enforceable.

Senator MADIGAN: But do you acknowledge that there need to be rules around markets so that the public has confidence in the operation of that market and confidence that they cannot be ripped off?

Prof. Davidson : Yes. I am a professor of institutional economics, so this is actually my discipline area. Yes, you need to have rules.

Senator MADIGAN: Finally, do you believe that claimed environmental outcomes and impacts are subjected to the same scrutiny and accountability as are the claimed social and economic outcomes and impacts, such as those on farmers, irrigators and small business people, of the Murray Darling Basin.

Prof. Davidson : At the moment, no, simply because they have said that they cannot actually put quantitative measures to it. At the same time, of course, it is not as easy to do this as it is for other things—you cannot just count. But I do not think it is happening, simply because they have actually said that it has not.

Mr Berg : The purpose of a cost-benefit analysis, in this context, would be to add the transparency to the process, so it can be immediately comparable—the analysis of benefits and costs—across economic, environmental and social indicators, and so that we, and the parliament, and other policymakers and interested groups can go and scrutinise those asserted claims in a comparable way. We find that is the process value of a cost-benefit analysis as opposed to what we have at the moment, which is a diverse range of reports and some cost-benefit analysis that is trumped by other claimed environmental benefits and so forth. That does not give policymakers much to work with, it does not give the community much to work with and it encourages the lack of confidence in some community groups that their claims are not being taken seriously.

CHAIR: Thank you gentleman. I do appreciate you coming and at relatively short notice as well. It is very much appreciated.