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Impact of the Murray-Darling Basin Plan on regional Australia

CHAIR —I now welcome representatives of Barossa Infrastructure to today’s hearings. 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. We have received a written submission to this inquiry from you. Do you wish to present any additional submissions or make an opening statement?

Mr Shanks —I would like to make an opening statement. I want to give a bit of background on Barossa Infrastructure to start off with. Because the Barossa is not in the Murray Basin strictly, we are making our submission on what impact the plan has on us. In 1998 a group was formed to look at alternative water sources in the Barossa Valley. The wine industry was being impacted by increased salinity of the underground watertable, limits to the amount of surface water available and a risk to viability associated with the variability of the climate. So Barossa Infrastructure was basically set up as a drought protection for the Barossa but also to enable further plantings which would enable the sustainability of the industry in the Barossa.

The result is an unlisted public company which supplies between 5,000 and 7,000 megalitres a year of supplementary irrigation water to about 5,000 hectares of vineyards. We get our water from the Warren reservoir. The water is transported to us by SA Water. In exchange for that we give them River Murray water rights equivalent to the amount of water that we take. The Warren is essentially a catchment reservoir which is supplemented from the Mannum-Adelaide pipeline, so it does have some River Murray water associated with it, as well.

BIL’s customers are shareholders in proportion to their contracted volume. It is a community rated scheme. You have to be a shareholder to get water from us and the amount of water you get is proportional to the number of shares you hold in the company. It cost about $30 million in the year 2000 to set the scheme up. About two-thirds of that was funded by loan money and the rest by the shareholders’ investment. We still have a debt of about $8½ million, so the company is viable but it is very much dependent on individual income on an annual basis.

The other point I want to make very strongly is that Barossa Infrastructure strongly supports a Basin Plan. We are not here to argue about the Basin Plan; we are talking about some of the issues raised within the plan. The points that were made by the previous submission on the value of the water for South Australia and the impact on the South Australian environment are very much supported by us. The first point we wanted to make was that South Australia, we think, is quite disadvantaged by the plan, just because of the history of the way water and irrigation has been developed in South Australia. I think a number of South Australians are making that point but the point I would like to make is that in South Australia we only have one type of water and when you start to ration that you start to impact on permanent planting very quickly.

In South Australia if the cutbacks that are made are done by including the critical human needs, instead of being a 27 per cent cutback for a three gigalitre reduction in water you could have up to a 50 per cent reduction in water entitlements. If that was all done by buybacks that would have a very dramatic impact on the viability of the scheme.

One of the other points I wanted to make was that we were looking at some of the details of the scheme and we were also concerned about the way in which the actual allocations to South Australia were determined at the present. We have just gone through a major drought and it seemed to us that the average allocations—the burdens—which were taken by South Australia are significantly impacted by that compared with a long-term Murray Basin cap which South Australia has adhered to since, I think, 1968 although 1994 was the official impact of the cap.

Like most irrigators we would support most changes being made by methods other than direct buyback of irrigation allocation entitlements because direct buyback of irrigation allocation entitlements impacts the communities very directly yet there are other alternatives which are provided for in the scheme which improve the irrigation efficiency and also improve the efficiency by which environmental water is delivered.

In South Australia there is very little opportunity to improve the irrigation efficiency, so that if all the reductions in South Australia were to be taken out of the South Australian allocation then that would include a much higher percentage of buybacks than what may occur in other states. Hence, we would have a larger impact on the South Australian communities. That may mean that South Australians will have to go and buy water interstate to make up for what they have lost locally, which does not seem to be a particularly good result of what is intended. I am paraphrasing my submission so that I do not take up too much time.

One of the key issues I want to make about the Basin Plan is that averages are used to determine the amount of water that will be left in the system. We have gone through years of very high water flows, we have gone through years of very low water flows. I think we have gone through the lowest water flow year on record in the last 10 years. It would seem to me that if the Murray-Darling Basin Authority is preparing a plan, on which we can make honest and accurate comments, then we should look at what those impacts will be over those different flow regimes rather than just looking at an average impact and at the socioeconomic impacts associated with those impacts. We have had a very low-flow year. We know how much reduction in the output of the basin occurred because of the very low-flow year. But I think that impact can be modelled and a better understanding can be gained of what the total impact of the reductions in allocations will be. There are issues that I feel will impact on irrigators if we have that low-flow year again. We have had the three or four gigalitre reduction in the amount of water available for irrigators and that was done mainly through buybacks, so in South Australia we may well find that there is no allocation at all and that all the permanent crops will die.

In the last drought we were able to overcome that problem by a very large purchase of water from interstate, from the annual growers, who could afford to sell their water at a higher price to maintain permanent plantings. But if buyback has reached such an extent then there will not be that market of water available in the pool of water available in the trading market to be able to buy back. So it occurs to me that those types of impacts, with a buyback, need to be assessed rather than looking at a system of irrigation efficiency and environmental efficiency as methods of improving the environment of the Murray-Darling Basin. That is the point I want to make very strongly.

Although it is covered in the Basin Plan, water trading is an important part of the act. I want to emphasise that we very strongly support water trading. I think that the Basin Plan should be more prescriptive on how water trading is to be managed so that it can be done on an equitable basis. We are relying on clear and transparent information. The extended period for purchasing of water rights is impacting on the current market. In the case of Barossa Infrastructure we rely on a mixture of water rights to provide our customers with water, which is some water we own, some we lease long term for maybe up to 10 years and some water we have got via the annual market. We would like to increase the amount of water that we own but, because of the uncertainties of the market associated with the government being the major buyer in the market, it makes it very difficult for us to actually come into the market and buy water in a way in which we would be able guarantee our shareholders were paying a fair value for their water in the long term. If that is the case for us, it has also got to be the case for anybody else who wants to make a new investment in the Murray Basin. But the government being in the business of buying water makes the buying of permanent water rights for investment purposes a much more risky process than it would otherwise be. So I think there should be a limit to the time the government can be involved in buying water rights so that we can get a more equitable market.

Water trading is an important part of the market. We need to make sure that the costs are realistic, that there are not any barriers to trade. At the moment there are some barriers imposed by the state governments, both in New South Wales and Victoria, to the transfer of water. I think the Victorians provide a physical limit. In New South Wales there is a tax, basically, put on the transfer of water interstate so that the market is not a fair or free market and there is not an equitable decision between irrigators for each state. So our South Australian irrigators pay. I know I pay quite a substantial charge each year to have water transferred from New South Wales on a long-term lease which we entered into well before the Basin Plan even came out. That has added significantly to our cost structure associated with the transfer of that water, and I think that adds to the ability to make sure the water moves to the most economic use.

I think it is also important that the Basin Plan provide for good regulation of the people who provide the intermediary services in the process—the marketers and brokers. In our case, a few years ago we went through a trader, paid a lot of money and actually never got the water. Obviously, once burnt you are a bit more cautious. But, again, it is still an issue. The transparency and reliability of a market is very important for a market to work properly. That did not occur in the past.

Environmental works and measures are an important part of improving the efficiency. We have seen an example of that. You have been to the Lower Lakes, but I recently went up to Chowilla and had a look at the new weirs they are putting in at Chowilla. That is an example of the way in which a very important wetland can be irrigated and looked after with much lower flows than would otherwise occur and probably a lot less impact on people upstream. To get the kinds of flows necessary to irrigate Chowilla a lot of land in the upstream areas needs to be flooded. So by making environmental works you can maybe achieve the environmental objective rather than relying on occasional floods to achieve the objective. The fact that the river is fully regulated at the moment with lots of weirs gives you the opportunity for that same thing to occur elsewhere.

We heard talk about the Lower Lakes. We have a property on the river between Blanchetown and the Lower Lakes. Our property has a large lagoon on it which has been full since the barrages were installed. If you go there, you can see that there are fence lines across the property. That was more of an ephemeral wetland than a permanent wetland. That change is the kind of thing that can occur which can improve the efficiency but maybe even return environmental benefits as well.

The last point I would like to make is that we have just gone through a very wet period after a long drought. I do appreciate that a lot of people are stressed by both the drought and the floods, but I think it also gives us a chance to step back and look at the implementation of the plan over a longer period of time than the current one allows so that communities can adapt more to the change and also to see that what you put into place actually achieves the objectives that are required, rather than taking a lot of water off irrigators and then finding that you do not achieve the environmental benefits that you thought would be achieved because the regulation of the river and other causes are causing the environmental degradation rather than just the lack of water and the lack of flow down the river. That means looking at grazing, land clearing and all these other issues that occur in the catchment which are not really part of the Murray-Darling Basin Authority’s remit but which also impact very strongly on the water quality and the environment around the river itself. That is the end of my opening statement.

CHAIR —Thank you. Geoff, have you got some comments you would like to make?

Mr Davis —There is really not much more to supplement what Paul said. The important thing is that the origin of the Barossa infrastructure scheme required that the local growers acquire those River Murray water rights. So any reduction in those will have a significant impact on them, both on leasing temporary water and standing in the marketplace buying additional water. Whilst the Barossa, if we cannot access River Murray water, will not stop, it will have a significant impact. We were trying to do some back-of-the-envelope calculations before. A 30 per cent reduction would be close to an increase of around 35 per cent in the cost of water in the valley, just assuming trading of temporary water rights around $200 a megalitre. So it will have a significant impact on growers there, and it would have considerable environmental impacts as the growers resort to underground water, which is highly saline, for supplementary irrigation.

CHAIR —Are there any questions the committee would like to ask?

Mr SECKER —You mentioned that if you had a 30 per cent decrease in allocation that would lead to a 35 per cent increase in the price of water. If, for example, it was 40 per cent, 20 per cent or whatever, will it also have an effect on your viability as an organisation?

Mr Davis —It would have quite a significant impact. Like any of these irrigation organisations, all the costs are fixed. As the price of water goes up, there is going to be less reliance on that water, especially with the state of the wine industry at the moment, and therefore we run the real risk that, as the reduced volume goes through, the cost per unit of water delivered increases exponentially, and that has to be passed on to the customer.

Mr SECKER —What sort of effect would, say, a 10 per cent decrease over the whole basin—which would include you—have? Would it be a 12 per cent increase in price?

Mr Davis —It would have to be in that 10 to 15 per cent range.

CHAIR —You talked about buyback and cutbacks and the market mechanism at work with temporary trades or permanent transfers. One of the things the committee is looking at is the socioeconomic impacts to communities of, potentially, reductions in access to water. How do you reconcile the contradiction, in a sense, that the farming communities support trading of water in and out of different communities to higher value uses with the relevance to the communities that actually lose that water through the market mechanism? I see you are going for a more relaxed market than we have even now. Do you see any contradiction in the argument there, supporting trading out of one economic zone into another, because it has the potential to have a higher value use, as opposed to some communities saying that any removal of water from their community, whether it be through government policy or trading, would have an impact on the viability of their communities. Do you have any comments?

Mr Shanks —On an annual basis I think you could probably say it is in the interests of all the communities that the water is traded to the highest value in the years in which there are water shortages. If you look at an annual grower who has got water which is not enough to provide full economic value for his crop, if he can trade his water on that basis and he stays in business, where if he was not able to trade his water in the long term, because of the impact of the drought, he may actually go out of business, which would impact on that community. So on an annual basis I would find it difficult to see that there would be an impact on communities of water trading. It would mean there is less produce in that particular community, but there was going to be anyway, but the farmer would still stay viable.

On a long-term basis I am not sure if the volumes are significant enough as yet in trading to actually impact on the long-term viability of some communities. Look at the differences in volumes between what is traded on a long-term basis between communities and what is traded on annual basis. I think we are talking about two different things. I think the annual trading is the very large volumes.

CHAIR —Are there any questions?

Mr ZAPPIA —I have a question. Mr Shanks, are you aware of any water being traded out of South Australia into the eastern states on a permanent basis?

Mr Shanks —Yes, that has occurred, I think because of the nature of the market. Up until the time of the last drought, South Australia had what was regarded as extremely secure water and permanent water rights, and interstate the percentage of water which was held in high security was low. So there was some incentive to trade out of South Australia before the start of the drought. I do not know of much being traded since, but especially with the restructure of the lower swamps, the Lower Lakes, some of the irrigators were basically given an offer to move out. I think they traded their water rights then interstate.

CHAIR —Thank you for your attendance. Have you any additional information that you would like to leave with the committee?

Mr Shanks —Thank you very much for taking our submission and listening to us. I appreciate that very much.

CHAIR —It was a pleasure. Thank you for being here. This is a recorded proceeding, and a transcript of the Hansard will be sent to you. So if you have any issues with the correct recording of your comments—I am sure you will not—please let us know.

[9.42 am]