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Thursday, 22 May 1980
Page: 3097

Mr KERIN (Werriwa) -For much the same reasons as were given by the honourable member for Kalgoorlie (Mr Cotter), the Opposition does not oppose this Bill. We recognise that the money could have been better spent but we are not opposing the Bill, for the sake of the people of the area. They have put their money into the area and they are the people who have shown the determination. There is a fair amount of consensus in this debate in terms of the people of Kununurra and the Ord River area. However, I take issue with the honourable member for Kalgoorlie in that he misstated the case put by the honourable member for Blaxland (Mr Keating). He said that the honourable member for Blaxland stated that mining projects did not create jobs. The Australian Labor Party has never said that. All the honourable member for Blaxland was pointing out was Sir Charles Court's cargo cult mentality. Sir Charles seems to think that we should mine anything regardless of the circumstances. The whole point of the question is that it is harsh economics that determine whether various projects will be viable. Of course, it is harsh economics that have rendered the Ord River scheme such a disaster.

I will not go through the machinery aspects of this Bill. We all know what they are. Of the funds available, a sum is now to be diverted for the provisions of rice storage facilities. It is a great pity that the scheme has run into so much trouble, but it is not with hindsight that its critics have been triumphant. Mr Bruce Davidson and quite a few other economists have been debating the wisdom of irrigation throughout Australia for a long time. This was as far back as the early 1960s, if not the 1950s, when some of these schemes were being looked at with a new vigour for the first time. At best the project could be described as experimental- a $ 100m experiment It is indicative of its lack of success as an irrigation project that suggestions such as that to build a hydro-electric power station for another $90m, to drain Lake Argyle to mine for diamonds or, in the context of irrigation, to allow South East Asian migrants to farm the area, have been made. It is in the context that these comments have been made seriously that we can see the lack of success of the scheme.

There are few political points to be made by rubbishing the scheme totally but, if the blame is to be sheeted home, it must be laid at the feet of Sir Charles Court, or Cargo Cult Court as he is known. Sir Charles does not understand market economics. However, he certainly understands the pork barrel. In pursuing such a wildly rural socialist scheme he 'has effectively wasted scores of millions of taxpayers ' dollars with no gain to the national revenue. Quite apart from the agronomic problems, the scheme was doomed by the factor of transport costs which added to input costs and the costs of freight to market. Having spent the initial money, governments have been trying desperately to find some justification for it and have poured good money after bad. Once capital has been expended on the construction of a dam there is no turning back. Even if a project is an abject failure, the economist's dictum is the same as that of the understanding lover- let bygones by bygones. Many an interesting human relationship has been built on past experience and many an economic opportunity has been created by past expenditure. In economics, however, past mistakes are not validated by future successes.

The present Government recognised the problems of the Ord River project and in 1977 it appointed a joint State-Commonwealth review committee to review the project and report on the future development of the area. That report was tabled in this Parliament on 27 February 1979. The Bill which is before the House flows directly from that report. We all know of the various industries that have collapsed over the years. The review committee basically had two options- to recommend that the scheme be no longer supported by the Government or to recommend that support be continued in some way. The first option was seriously considered because of the controversy which has surrounded the Ord project since its inception and because of its present low level of productivity. The Committee found that in terms of contribution to net increase in national output the project has been of no benefit at all.

The review committee believed that a decision in effect to abandon the Ord project would not have been justified because, firstly, there was no basis for assuming that the adverse factors which had inhibited the development of the Ord project in the past, including in particular the failure of the cotton industry, would necessarily persist in the future; and, secondly, because further time was still needed in order to determine whether the combined results of research programs and commercial farming experience since the failure of the cotton industry were likely to provide a basis for profitable agricultural activities in the Ord region in the future. They are both basically status quo findings and they must be subject to the greatest doubt. In my mind they tend to represent a political rather than an economic finding.

Anyone who has looked at the report will know what the committee's recommendations are. I may as well read them into the Hansard record. The first one reads: the Western Australian Government should consider an expansion of agricultural research in the ORIA.

The second recommendation reads: the Commonwealth Government should reappraise its commitment to agricultural and environmental research in the ORIA, recognising that by and large the research programs of CSIRO do not have a direct relevance to the immediate problems of the ORIA.

The Committee also recommended: . . that the West Australian Government should provide support for commercial farming on the ORIA for a specific period.

I think last year it underwrote the safflower crop, but in the event no public money was needed. The review committee really only pointed to the possibility of rice and safflower production being commercially successful. It stated that the cultivation of the soya bean and the mung bean could be in prospect if technical and market arrangements could be overcome. The honourable member for Kalgoorlie has pointed to some of the research possibilities in that area.

The review committee concluded that the cultivation of sugar, sugarcane and cassava for ethanol, kenaf for the production of pulp or paper and cotton are all highly suspect as viable activities. Even with rice, it is my understanding that the submission by the Western Australian Government to the review committee considered rice viable only if a subsidy were involved and if a very efficient rice mill were constructed; hence the Bill before us. The rice project still has to overcome the problems of birds and transport once it can get over the problem of insects. One thing the review committee was not asked to look at was the cost of getting out. If such a project were entertained- maybe in five years time it will be- the cost would be considerable as Kununurra is now a minor administrative centre. The abandonment of irrigation works will entail much work to leave them in an environmentally safe condition.

I guess at this time it may be more sensible to talk about drought than irrigation. If we can combine the two concepts, it is generally agreed now that it is far cheaper to avoid the effects of drought by storing grain than by irrigation. I would like to spend the last of my few minutes talking about the whole ideas of the economics of irrigation because what has happened in the

Ord, I think, is symptomatic of what will happen with respect to any major irrigation project in this country in the immediate future. We all understand the pressure by various people for irrigation projects, particularly if they are in a river valley and where a dam and irrigation solve some of their immediate problems and give them an edge on their fellow farmers. By and large, it is the public purse that has to come good in these sorts of areas.

Very few, if any, of our public irrigation schemes, including the land settlements schemes established in the Murray-Darling basin after both world wars, have been regarded totally as an economic success. To many this seems incongruous. We have almost 1.5 m hectares under irrigation in Australia. Almost two-thirds of it is used for lucerne and pasture production for our efficient and profitable livestock industries. Irrigation accounts for almost all of our cotton industry; about 93 per cent of our tobacco crop; more than 20 per cent of production in our efficient sugar industry; two-thirds of our vegetables and grapes; and half of the national fruit crop. Over 250,000 hectares of cereals are grown on irrigated land.

Most of our community leaders are aware that irrigation, despite its trials and tribulations, has been an integral part of the development of rural Australia. So there is a paradox. We are reaping the benefits of some of the pasture irrigation projects in the past, but they do not stand up to the economic tests of today. I guess we can point to the paradox even further by saying that much of the development in Australia has been based on failures and the lessons of those failures. So what is the key to this paradox? Many of the pioneering efforts of our predecessors, if required to pass these rigorous cost-benefit analyses to which modern irrigation proposals are subjected, would never have been undertaken. Yet, in many cases, those very pioneering efforts have paved the way to growth, development and, in some cases, prosperity.

Some of Australia's foremost political, scientific and commercial people have concluded from this paradox that there is something fundamentally wrong with the way economists evaluate irrigation proposals. They say that economists have no vision and that their dollars and cents mentality is too narrow. If they had their way we would never build for the future. I believe this view is not well founded. Unfortunately for the proponents of the expansion of irrigation in Australia, it is not well founded. The answer to the paradox, of course, lies in the concept of sunk capital. When, eventually, someone begins to make money from production of something- we yet know not what in the Ord River- in some irrigation area, many will claim that the faith was justified and that the economic pessimists were proven wrong. I believe those who stake that sort of claim will not be vindicated and will deceive only a few voters in the very short term.

If uneconomic projects had not been undertaken, the funds would have been invested elsewhere or would have been spent by taxpayers on current consumption and would have indirectly generated further investment. The community would have benefited from the increased income yielded by the wiser investments. The economic opportunities opened by these investments would, a priori, have been at least equal to those opened up by the capital sunk into an uneconomic irrigation scheme.

It is certainly true that large amounts of expenditure by governments are allocated to areas not subjected to the same rigorous cost-benefit analyses that irrigation proposals are. However, that is very much a second-best argument in favour of irrigation schemes. The first-best solution is that similar economic tests should be applied to expenditure by governments in other areas and, it is hoped, this is a trend that is gaining some momentum. It is a pity that some of these analyses are not put forward on proposals such as the Casey University or whatever that idea is now called.

To assess the economic benefit of irrigation we have to look first of all at the key variables in agriculture, one of which is market prices for agricultural commodities and the relative costs of dry-land versus irrigation production and marketing. Here again, if we just talk about market prices, we need to add another qualificationthat is, that prices are determined not only by domestic and export demand but also by the exchange rate and the exchange rate itself is determined by other aspects of the economy. It is relevant to ask whether changes in the key variables that determine the economics of public expenditure on irrigation may have been such as to reverse earlier conclusions. These key variables include the production of agricultural commodity relevant to the cost of dry-land versus irrigated. The relative costs of irrigated versus non-irrigated production are affected mainly by technical change. For practical purposes, the latter issue probably comes down to whether technological progress has been faster in water rentention and reticulation and irrigated production or in dry-land farming.

Developments in the technology of water retention and reticulation are well outside the field of an agricultural economist, but we need to point out that extensive agriculture seems to be becoming more and more economic relative to intensive production under irrigation. Large scale grain production has increased in profitability because much larger machinery has increased the efficiency of dry-land farming. Greatly improved timeliness in cultivation, sowing and harvesting has substantially improved the farmers' capacity to capitalise on limited supplies of soil moisture.

The only other matter I would like to touch on is the question of the price of irrigation water. First of all if we look at the way the price of irrigation water is administered through all the complex of Commonwealth and State government departments with respect to the River Murray irrigation systems in the various States, we really do have a dog's breakfast and not something related to market economics as such. I think the whole question of economic organisation and administration of irrigation in Australia is something that needs to be looked at one day. If I can use an analogy in terms of the way I believe irrigation water should be priced, we can take the supposed rationale behind the Government's policy of charging consumers of liquid fuels the full economic cost of those fuels. The rationale for that has two fundamental premises: When fuel is cheap, consumers will waste it; when fuel is cheap producers will not search for undeveloped new fuels and new methods of using fuels. One can argue about whether that is the main motivation of the Government. I think the main motivation is revenue. That is the stated rationale and in economic terms there is some sense to it if the Government were being honest about its implementation.

If we can apply that sort of reasoning, there are really two basic ways of rationing supplies and stimulating production of scarce resources in a mixed enterprise economy like that of Australia's. One is to charge the correct economic price, and this method involves decentralised decision making, fewer administrators, and the prospect of efficiency losses through political patronage is low. If an early experience of the fuel pricing policy is any indication, we seem to see that there is still an amount of political, if not patronage, indecision because the Government is not following its policy through.

The alternative method, if I can come back to the subject of water, is the basic method of regulating production or regulating prices by means of a complex set of administrative procedures, regulations and rules of thumb by which production decisions and the needs of individual consumers are determined centrally. This method is administratively costly and, to my mind, its effectiveness is a matter for empirical investigation. Historically, price has played only a very minor role in determining the quantity of irrigation water retained or the allocation of water among competing uses in Australia. Prices have generally been set to cover only annual servicing charges, excluding the capital cost of structures. For example, in the initial study of the Bundaberg scheme, the Bureau of Agricultural Economics in 1 974 estimated the economic cost of water as $39.38 a millilitre. Charges in that year ended up being $13 a millilitre. So we can point to many places where the price of irrigation water is not charged at an economic rate.

I would say that in straightforward terms the price paid for most water used in irrigation in Australia is too low. If prices were increased, a number of improvements in the economic organisation of irrigation could be expected. First, high prices would result in reduced use of water by current users. This would free some water for use by existing irrigators on other parts of their land for other crop or livestock production or for application to new land. Secondly, a recognition of the true value of water would result in many irrigators increasing their use of other inputs, particularly fertiliser. This again would result in increased efficiency in irrigated agricultural production. Thirdly, new producers would be able to enter irrigated agricultural production, thus increasing the efficiency of production on some existing dry land holdings. Fourthly, strong incentives would be given for the reduction of water wasting.

One could point to a few other benefits in a strictly economic sense. I do not think strict economics will prevail in this matter. It is subject to so much political bargaining and farmers have so much at stake in their existing level and mode of production. That is the whole problem with respect to the Ord River scheme. We have this concept of sunk capital. The money has been put there. The farmers have put money in. Some of them have gone bust, some have stayed and some are farming at less than the optimum level; but they are stuck there. That is the way many farmers feel about irrigation throughout Australia.

The basic problem of the Ord is not just the economics of water and of irrigation. In fact we can produce large quantities of agricultural commodities without irrigation. The basic factors that have always prevailed against the success of the Ord scheme have been agronomic factors and the distance from supply centres and markets. The cost of getting inputs for agricultural production in that place, some 3,500 kilometres from Perth, has been overwhelming. That is why the project has not succeeded. To sum up, the Opposition does not oppose this move by the Government. It will involve only a small amount of money, considering what has been spent there. We do not oppose it for the sake of the people who are stuck there, the people who have put their own money in, and because of the determination with which they are trying to continue to make a living in that part of the world.

Question resolved in the affirmative.

Bill read a second time.

Message from the Governor-General recommending appropriation announced.

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