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Water licences and rights

ACTING CHAIR —I would like to welcome Mr Ken Matthews of the National Water Commission. Thank you very much for coming along to talk to us today. I will read out a statement that I am sure you have heard many times, Mr Matthews. The Senate has resolved that an officer of a department of the Commonwealth or of a state shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted. Any claim that it would be contrary to the public interest to answer a question must be made by a minister and should be accompanied by a statement setting out the basis for a claim. That being said, the committee thanks the commission for its submission, which has been received as submission No. 25. Do you wish to make any amendments or alterations to that submission?

Mr Matthews —No.

ACTING CHAIR —I know that you would like to make some brief opening comments before we go to questions, so please do so.

Mr Matthews —I do not have a prepared opening statement, you will be relieved to know, but I do have some notes that I would like to talk around, which I hope are in the general space the inquiry is heading towards. I thought I would start by asking why there is such a focus on water rights and entitlements, because there has been in Australia a long-standing focus on water rights and entitlements. I think the origins are that, at about the time the National Water Initiative was being negotiated in 2003-04, it was part of the motivation for that national reform process. The experience was that irrigators were increasingly concerned that the legal security of their entitlements was not nearly as firm and strong as they had thought. The more they asked for legal advice and other advice about that, the more that proved to be true. The task of getting more security for water entitlements became one of the chief motivations for the original development of the NWI.

The secure, tradeable water entitlements that came out of the NWI are one of the foundations for dealing with drought and climate change pressures, and are right at the centre of the National Water Initiative and Australia’s own water reform process. There are also secure water entitlements for the environment, which are a real feature of the Australian approach. Both those things—secure water entitlements for the environment and much enhanced statutory security for consumptive entitlements—are admired internationally. I get a whole succession of people visiting my office from other countries who are very interested in our approach to water entitlements.

What would be the desirable characteristics of a well designed water entitlement system? I have a list of about a dozen characteristics. A good water entitlement needs to be very clear and specific. It needs to specify precisely what the entitlement to take water is and be quite unambiguous about it. Before the National Water Initiative, that was certainly not always the case; that specificity just was not there. A good water entitlement needs to be certain, stable and secure. There are a whole lot of adjectives there, but the concepts of stability and security and the idea that you can rely on an entitlement are a feature of the NWI and a feature of the whole Australian entitlement system.

The entitlements need to be statutory. The statutory basis for Australian water entitlements is another thing that is admired internationally and that gives it some of its security. They need to be exclusive so they cannot be eroded by others—that is, if they are shared, you get the tragedy of the commons where one party to an entitlement can raid it at the expense of the other party to the entitlement. So exclusivity is really important. They need to be tradeable and, as a part of that they need to be subdividable or amalgamatable, if there is such a word. Tradability of an entitlement is a really important feature that makes the system work, and I will come back to that.

Entitlements need to be mortgageable. That means that they become a separate financial asset from the farm. Traditionally in Australia the biggest financial asset that irrigators had was the farm. But over the last 10 years the tradability and the separation of land from water has led to two therefore more flexible financial assets, and part of that is their mortgageability. A good entitlement system is based on shares, particularly in a highly variable climate like Australia’s. If the actual rainfall or water supply each year is very peaky then having a volume based entitlement is a very unsatisfactory way of going about it, because it will impact on the entitlements of others, whereas a shares arrangement does not do that.

Entitlements need to be unbundled from land, which I know all the senators present will understand. But they also need to be unbundled from any other attribute: ownership, nationality and so on. A good entitlement needs to be protected from erosion through interception—that is, erosion of the security of the entitlement. An interception can be forestry, farm dams, overland flows or the taking of groundwater which might impact on surface water or vice versa. A good entitlement needs to be nationally compatible so that there can be trade across jurisdictions but also so that we have a genuinely national system that business can be comfortable and familiar with, rather than a separate system that needs to be relearnt in each jurisdiction. Finally, the commission thinks that a good entitlement needs to be publicly accessible through transparent entitlement registers.

That is a longish list, but that is about what we think characterises a good water entitlement. The system that then flows from a good water entitlement requires a number of other attributes. First of all is a water plan. There is no sense having entitlements unless there is a plan in the valley or the groundwater system to define the consumptive pool and to set out the rules of trading. So an entitlement and a water plan go hand in hand. One thing we have said in our biennial assessment of progress in water reform is that water plans are dragging the chain.

A good entitlement system requires that tradability that I mentioned and it requires adequate science to determine the consumptive pool. This is an absolutely critical thing which is now being borne out in the Murray-Darling Basin. Unless there is adequate science it will be an inferior decision. But that does not mean, in the view of the commission, that these decisions should be science driven. They should be science rich but not determined by scientists. There are other issues that need to be taken into account as well. But, whatever issues are taken into account, they need to be taken into account mindful of the best available science.

In the system there needs to be adequate management of those interception problems or risks that I talked about. There needs to be good metering monitoring and reporting and, flowing from that, adequate compliance and enforcement. Again, we think that the compliance enforcement arrangements in Australia are deficient. It is pleasing to see that COAG initiated some work on that just a few weeks ago.

The final thing I wanted to open with was to draw the committee’s attention to some of the biennial assessment findings and recommendations. You would know that the biennial assessment is our two-yearly review of how water reform is going in Australia. There are 68 recommendations and 140-odd findings, but here are eight or 10 to do with entitlements. The commission found that implementation of that NWI-consistent entitlement framework is going pretty slowly across Australia. That is a big pity because the entitlement framework, as I was trying to describe before, is something that Australia can rightly be proud of. But it is not being implemented nearly as quickly as it needs to be for the benefits to flow to both the environment and producers.

We found that there is an urgent need to complete all the water plans that were promised by the states. When the states and territories and the Commonwealth government signed the National Water Initiative, they made commitments about completing a whole lot of water plans, and most states are well behind their commitments, so we have drawn attention to that and encouraged a renewal of effort there. Again, COAG has pointed also to the states needing to lift their game on that.

In Western Australia there is still no fundamental water reform legislation in place, and in our recommendations we have said that that threshold condition—getting the legislation in place—really needs to be done without any more delay. Western Australia are the last jurisdiction to introduce—they have not yet introduced—their water reform legislation, and we have been pretty pointed in saying that they really do need to honour their commitments. It is not for us to tell them what to do, but their commitment was to make these reforms, and we are pointing out that those promises have not been delivered on.

In our recommendations in the biennial assessment we have said that we as a nation need to complete those conversions of water entitlements which are not NWI consistent to NWI-consistent forms. I hope that does not sound like double Dutch. In New South Wales, for example, something like 87 per cent of entitlements, by number, are under the old act and have not been converted to the new form. That sounds worse than it is, because most of the ones that have been converted are in the critical areas—the Murray-Darling Basin and water systems under stress—but, by number, there is still a lot of converting yet to be done.

The commission expressed concern about how robust and transparent the entitlement allocation systems were during periods of critical water shortage. We have had in mind that there are sometimes entitlements for the environment where ministers have a prerogative, when it is really necessary to do something, to vary those entitlements and make that water available for communities in particular. We can absolutely understand that, but we point out that, where those variations do happen, it would be better to have a transparent process according to clear, pre-announced principles and that the reasoning, the logic and the evidence should be made publicly available for people to consider. We are not arguing with the prerogative of ministers to intervene when the going really gets tough, but we are saying that it would be good to have transparency.

We have made a number of recommendations about the need for statutory security for environmental water entitlements, which is close to the transparency point I just made. We also said in our recommendations that it was time to bring the mining, forestry and other large-scale industrial users properly into the water entitlements framework, which at this stage generally only deals with irrigation, environment and urban communities. It is time to move mining into it, and I know the Senate has recently had its other inquiry into mining.

Finally, we have said in our recommendations that action on water interception needs to accelerate. The commitment under the NWI was that action be taken by 2011. With the honourable exception of South Australia, there is a lot for the states to do to get there. By and large they are not behind, but there is a lot to do to achieve it by 2011. So we made recommendations in those areas as well. I was really just trying to offer something in the area of water entitlements, which I know is part of your terms of reference; it is certainly something that we hold dear as custodians of the National Water Initiative. I hope that might start the discussion. Thank you.

ACTING CHAIR —Thanks very much, Mr Matthews; it has been very useful.

Senator SIEWERT —Thank you. You have covered a lot of the areas that I wanted to ask some questions about. We will go back to the comment you made about a science-driven process for determining the consumptive pool. You said it should not be science driven or that that is not the only thing that determines what that is. Could you go through some of the other things that you think need to be part of that decision-making process.

Mr Matthews —Under the National Water Initiative, the process requires the best available science to get the hydrology and the ecology as clear as possible. But there are other objectives that are legitimate as well. They are economic and social and Indigenous spiritual, cultural and customary objectives. They all need to be taken into account, and the broad principle is to make those things as evidence based and as transparent as possible. Under the Water Act, the same general philosophy applies, and the MDBA, who needs to speak for itself on that, has launched a lot of science work to try to get that science richness that I was talking about as transparent as possible.

Senator SIEWERT —Because in the past the problem has been that it has largely been based on social and economic rather than the science. We have had CSIRO’s sustainable yields study, which seems to have been invaluable in providing a lot of that science base, but we do not have the same science base in terms of the ecology for the system—for example, the Murray-Darling system—as we have for water yields.

Mr Matthews —If I may, I would not be quite as harsh about it ‘being driven by economic and social only’. Our assessments—and we have had a series of assessments looking at the quality of planning processes—are that the quality of the processes to take account of science has been improving. I certainly agree with your second point: that the science about hydrology is better than the science about ecology. Science has been important and has been taken into account reasonably well, although we have been critical of governments at various times for not being quite good enough. But I would not see it quite that black and white.

Senator SIEWERT —I accept the point that it has been improving, but I still think the system is massively overallocated, and I think the political/economic process is partly responsible for that overallocation. I made a note and now I cannot understand what the note was, so I will come back to that issue. You made the point a number of times that implementing the water access entitlements process remains slow in some jurisdictions. Queensland was arguing this morning that it has been making excellent process. Can you articulate a bit further on which jurisdictions are still being a bit slow? Should this committee in our recommendations be making any specific recommendations about how that issue is dealt with?

Mr Matthews —The commission has tried with this biennial assessment not to be a ‘gotcha’ sort of auditor. Generally speaking, we have tried to avoid giving a scorecard. But, having said that, the information that you are after is in the biennial assessment report. There are some tables there that you might be able to have a look at. If you do not mind, I would prefer not to say that one state is better than another state, because every state has its strengths and weaknesses. Queensland are right when they say that they have made pretty good progress since we closed off the biennial assessment. If that was what they were arguing, I think that is true—they have made more progress.

Senator SIEWERT —In relation to the interception issue, you class interception as mining, forestry et cetera—so other uses of water. Does that include illegal interception?

Mr Matthews —Yes, that has the same effect. The problem with interception is that, if there are a number of entitlement holders within a system and they have all got a certain share, and forestry or something comes along or illegal take happens, then the amount that is actually allocated must be less. So there are third-party impacts, and we argue that that is unfair and arbitrary and needs to be avoided. The usual collection of examples is that plantation forestry is likely to have an impact, and the NWI spells out the circumstances in which an entitlement should be considered for a plantation; farm dams; overland flows; illegal take; and sometimes the interaction between connected surface and groundwater systems. If there are entitlements issued for a groundwater system which turns out to be connected to a surface water system and, therefore, the take from the groundwater system will impact on third-party holders of surface water entitlements, that is unfair and wrong. That is why interception action is really important and that is why the integrity of entitlements will require that every management effort be made to deal with that interception.

Senator SIEWERT —Okay. Why do you think progress on dealing with that has been slow?

Mr Matthews —I was at pains to say that, so far, the states are not behind schedule. The message I was leaving was that there is a lot to do by 2011, and I am warning now that there is so much to do I think they will shortly be behind schedule.

Senator SIEWERT —I should not put words in your mouth. That was my interpretation of what you said. They have got a bit over 12 months—

Mr Matthews —Yes.

Senator SIEWERT —so it seems to me it could be argued that they have been a bit tardy. It still goes back to the priority issues: what are the priority issues they should be dealing with in 2010 to meet their deadline?

Mr Matthews —One of the things that need to happen is working out the meaning of the terms ‘significant’ and ‘threshold’, because the NWI talks about developing a threshold at which entitlements need to be considered, and that is a calculation that will take months to work out for a given system. The NWI tries to avoid just every trivial piece of interception, just to be practical, so ‘significant’ has to have some meaning as well, and jurisdictions will need to settle the approach that they are taking. A concern that we as the National Water Commission have is that there be reasonable national consistency in that.

Senator SIEWERT —That was my next question.

Mr Matthews —So we hope to be able to encourage some national consistency, and I know the jurisdictions are talking about it as well. But I would just go back to our first point: there is a lot to be done by 2011.

Senator SIEWERT —Can you go into a little bit more detail about ‘threshold’. I get the issue about ‘significant’, but does ‘threshold’ here mean the threshold at which it becomes significant? I am struggling a bit, sorry. It is after lunch!

Mr Matthews —There are different circumstances for different water systems. If, for example, there are water systems at full allocation or approaching full allocation—

Senator SIEWERT —Okay. Yes.

Mr Matthews —or nowhere near full allocation, you can expect they would be handled differently.

Senator SIEWERT —Yes. Thank you. I might leave my questions there and come back if we have time.

ACTING CHAIR —Sure. Senator Troeth?

Senator TROETH —Mr Matthews, how much water trading has there been since the foundation of the NWI? At what level is it running?

Mr Matthews —The commission released its second annual water markets report last week, and I wish I had brought it along. I do not have the number with me, but that publication records that the rate of growth of the market has been very fast and that as a proportion over last year it is, in some areas, getting up to double. We think that is a good thing, not just because trading is a good thing but because of all the things that flow from that, be it adjustment, the opportunities to deal with climate change or drought, the opportunities to deal with commodity price changes and so on—and to manage your farm operations better. Those opportunities are much richer because trading is increasing so much. I do not have a number but I could take it on notice.

Senator TROETH —If you could provide us with that, that would be very helpful.

Mr Matthews —It is growing very quickly and it is growing very quickly among the private sector. There has been a sort of misapprehension that trading is dominated by government buyback. The figures that we released last week show that the Commonwealth purchases in the Murray-Darling Basin—and it is not much different nationally—is about 3.9 per cent, so it is small. To be fair, next year it will be bigger, partly because of a statistical artefact because some trades that have been exchanged but not registered this year will appear in next year’s figures. Still it will not be nearly the elephant in the room that some people have thought.

Senator TROETH —I do not expect you to comment on political will, but going back to this disparity between the states—and I certainly do not expect you to name any particular states—

Senator SIEWERT —He did already—WA.

Senator TROETH —I was glossing over that.

Senator SIEWERT —I am coming back to that.

Senator TROETH —Is it because of administrative difficulty or practical problems why some states are faster than others? If you do not want to comment on either, that is okay.

Mr Matthews —I do not mind saying that it is a mixture of all things, including the political will. COAG has renewed its commitment to accelerating the reform program, which is good and which is about political will, but it is devilishly difficult. The administrative side of things is complicated and will always take more time than people expect.

I think—and this is a slightly unpopular view—there are insufficient resources in the state governments to deal with the issues. No-one is in favour of adding to departments, but I see every day how slow it is for most states to respond on reform issues when they are just trying to keep 100 balls in the air. That is an unpopular view, but it is our view and that is again in the biennial assessment.

Each state when it signed the National Water Initiative developed an implementation plan with dates by which they would do things and in almost all areas almost all states are behind. The commitments, including time commitments and promises that were made, are not being observed.

Senator TROETH —Your submission also says:

… the Commission is concerned about the robustness and transparency of allocation systems during periods of critical water shortage …

Could you expand on this and tell us what the behaviours of concern are in that area?

Mr Matthews —The best example is the one I gave in my opening remarks about how in certain jurisdictions decisions have been taken to take water previously allocated for the environment and use it for probably very good reasons for towns and communities and other activities. But that means that the security of the entitlement for the environment proves not to have been sufficiently secure. One of the principles of a good water management system is that there is no less security for environmental water than there is for consumptive water. That is an example where the security of environmental water has been less than consumptive water.

Senator TROETH —Does the commission have a view on how sleeper licences should be treated? We explored to some extent with the Queensland government this morning how they would be treated. I would be interested to know the view of the commission.

Mr Matthews —I am afraid we do not have a particular view about sleeper licences. It is difficult to manage them, and the essence of the sleeper licence issue is the same as the interception discussion that we just had: there are third-party impacts—sometimes unexpected third-party impacts. I am afraid we do not have a particular view.

Senator TROETH —That is fine.

Senator SIEWERT —I will pick up on the sleeper issue; I have a couple more questions I want to ask. If we already have an overallocated system with those licences that are already active, surely sleepers are going to ratchet up the pressure because they are seen to have a right to the water as well when the system is already overallocated.

Mr Matthews —Yes, we would agree with you. Different states take different approaches. I think, for example, the Queensland approach, as they form up their plans, has in mind taking a certain amount from active licences and making a pool available that can then be used if sleeper licences are activated.

Senator SIEWERT —They seem only to have done that for the lower Balonne.

Mr Matthews —That may well be right.

Senator SIEWERT —I understand from what they were saying this morning that they have done that for the lower Balonne—they have taken a bit off—but for the others they are calculating it as if they are active licences.

Mr Matthews —That may well be right. But I agree with your proposition: sleeper licences will have a third-party impact. The difficulty is what you do about that. We as a commission think that a really important principle is security of licences, including sleeper licences. If there is an arbitrary change to licences which are otherwise described as sleeper licences, that sets an undesirable precedent. I think all governments are searching for some way of going about it. You would be aware that there have been efforts on groundwater in New South Wales in the restructuring program there, where a formula was developed that took more account of active licences than sleeper licences. There is a certain amount of justice to that. So there are different ways of going about it.

Senator Siewert —So you weigh it.

Mr Matthews —That was one way of going about it. I am not necessarily recommending it as the only way, but it seemed to me to have a lot to commend it. It preserved and found a balanced amongst the security objective, not unilaterally and high-handedly taking away an entitlement even if it had not been actively used and the overallocation issue. You have said twice that you think there is overallocation across Australia. The commission agrees. The commission in its report has drawn attention to overallocation and has recommended that there be faster action on overallocation. Indeed, COAG picked that bit up immediately: even before the biennial assessment has been fully analysed by officials and advice provided to COAG, COAG has said they would like action taken to deal more effectively and speedily with overallocation.

Senator SIEWERT —I have one more question on sleepers. We were talking about Cooper Creek this morning. The point there is that there are two large sleepers up there that our witness Dr Morrish was suggesting had an issue. There has not been a solution to it yet. When they were doing the ROP there, there were about 10,000 megalitres between these two larger sleepers. His argument is that (a) those two sleepers could be an issue and (b) when the properties that have those two sleepers have been sold there has not been additional value paid for those licences. In that instance where they have not paid additionally for it, his argument was that they were granted 30 years ago and had never been activated. The issue of whether they then had value is a slightly different situation.

Mr Matthews —I understand that argument. I do not know the specifics. I am not going to take a position on it, but I understand the argument. If his claim is correct, then I can follow the logic. I do not think I can say anything more than that.

Senator SIEWERT —I will go back to the WA reform issue. My recollection of that, and I must admit I did not check it before I came in here, is that the WA government’s position, they are suggesting—and I am not arguing for the WA government—is that they have said all along that they would do the reform at the end of the process?

Mr Matthews —No. Their argument has been closer to this. They have been saying that, for various reasons, it will take the Western Australian parliament a long time to deal with this issue. In the meantime they are trying to do as much as they can under the previous legislation, and they have made some progress on that. It is not that nothing has happened in Western Australia. The time frame for the legislation is now well beyond their original commitments. For them to finalise and get the statutory foundation for planning, entitlements and so on in place and all the benefits that flow to the environment and irrigators for that, they will need to produce the legislation itself, which is why I mentioned Western Australia specifically. It is conspicuous among the states, even though they have been trying hard under the old legislation, for not having the new legislation.

Senator SIEWERT —Have they given you a time line for when they intend to introduce the legislation?

Mr Matthews —Yes, but again I would have to take that on notice.

Senator SIEWERT —That would be appreciated. I have one more question. I may be channelling Senator Heffernan, which is a terrible thought, as he and Senator Xenophon initiated this inquiry. When it was initiated was when there was a rather large station in Queensland on the market. There were comments about whether it should be acquired or not. One of the arguments put forward was that, because there had not then sufficient regulatory reform, buying it would just shift the problem. It would not solve the problem; it would just shift the problem because the same legislative process would apply to whoever bought the farm or where the water went next. If I understand what those from Queensland were saying this morning, they have introduced a significant amount of regulatory reform and have separated water from the land. I think they said that they have implemented 67 per cent of the provisions under the NWI and that where they have ROPs they have now separated all the land and water requirements. Is that correct? It is my understanding that therefore some of those issues, particularly related to the overland flow, have now been addressed.

Mr Matthews —I did not hear what they said, so I do not know about that. What I do know is that the shepherding arrangements that would need to be in place would still need to be in place—

Senator SIEWERT —That still needs to be addressed.

Mr Matthews —and that includes New South Wales.

Senator SIEWERT —So the issues around the regulatory reform, in terms of land and water issues, are now starting to be addressed at least in Queensland, but the shepherding arrangements still have not been addressed?

Mr Matthews —The shepherding arrangements, in that particular situation and in a number of others, would always need to be negotiated until there is a statutory change.

Senator SIEWERT —That brings me to my next question: what is your understanding of where we are up to with statutory change in terms of shepherding arrangements? You do not have to name each of them. I would prefer that you would, but, if you do not want to, can you give us an overall picture?

Mr Matthews —I think the department would be better placed to answer that. One thing I would add, though, is that the other way of tackling it would be in the Basin Plan. Some provisions could be implemented within the Basin Plan to deal with situations like that as well.

Senator SIEWERT —But we have, as you know, a significant period of time before the Basin Plan is in place and operationalised.

Mr Matthews —Yes, that is right. There will be a draft next year and a final plan six months after that. One of the things that the NWC have said is that we have encouraged the MDBA to try to put out interim and progressive guidance about what the plan might look like, what the environmental assets might be, what some indicative rules of water management might be and so on, just to gradually build public understanding over time. The latest release about sustainable diversion limits is a good example of what we had in mind, trying to get information out there instead of whipping the cover off the new car model all at once.

ACTING CHAIR —As there are no further questions, thanks very much, Mr Matthews, both for the commission’s submission to this inquiry and also for appearing before us this afternoon. We appreciate your assistance.

Mr Matthews —It is a pleasure.

ACTING CHAIR —Thank you.

[2.48 pm]