Water—The development of rural water markets in Australia: Assessing progress, looking ahead

Chloe Munro, Chair, National Water Commission

ACCC Regulatory ConferenceJuly 2011

Profile of Australian water markets All states and territories support trading but market activity is mostly concentrated in the MDB

402

666

VIC

12761479

NSW

150119

SA

2413

WA

27

4

TAS

Entitlement trade

Allocation trade

70214

QLD

Notes:Not drawn to scaleTrade volumes in gigalitresTrade volumes for each state equal to the sum of Internal state trades plus outbound trades

Entitlement and allocation trade in 2009-10

Trade has been a huge successEntitlement and allocation trade - southern MDB 1983-84 to 2009-10

0

250

500

750

1,000

1,250

1,500

1,750

1983-84 1987-88 1991-92 1995-96 1999-00 2003-04 2007-08

GL

sMDB allocation trade sMDB entitlement trade sMDB entitlement trade to CEWH

Large volumes of water reallocated

Why trade?

Largest imports and exports of allocation trade 2007-08

Flexibility and resilience in changing conditions

Largest imports and exports of allocation trade 2008-09

Why trade?

Flexibility and resilience in changing conditions

Largest imports and exports of allocation trade 2009-10

Why trade?

Flexibility and resilience in changing conditions

Rice production, rice prices and water allocation price, Murrumbidgee 2005-06 to 2009-10

0

200

400

600

250

500

750

1000

1250

2005-06 2006-07 2007-08 2008-09 2009-10

Pric

e ($

)

Prod

uctio

n (k

iloto

nnes

)

Rice (kilotonnes) Water allocation price in Murrumbidgee ($/ML)

Fundamental elements of efficient water markets

Efficient water market

Clear rightssupported by

planningRobust

governance

EffectiveadministrationInformation

access

Monitoring& compliance

Scarcity-induced demand for tradePhysical capacity to trade Many potential traders

STRUCTURALELEMENTS

EXOGENOUS FACTORS

Initiatives in progress for market strengthening

Principal initiativesBasin Plan water trading rules

Water market rules Water charge rules National Water Market System

Australian Water Resources Information System

National Water Account National compliance framework

Clear rightssupported by

planningMonitoring

& complianceInformation

accessRobust

governanceEffective

administration

Outstanding issues

Planning & entitlements in unregulated systems

Trade processing methods

Conflicts of interest in the market

Allocation announcement processes

Availability of price information

Confidence in intermediaries

Need for institutional strengthening in formative markets

Key outstanding issues and gaps

Clear rightssupported by

planningMonitoring

& complianceInformation

accessRobust

governanceEffective

administration

Summary of key priorities

Information access

Rights and planning Governance Administration Monitoring and

compliance

Unbundling &improved planning

Simplification of trading rules

Disclosure on processes

Establish complaints

handling

Streamline handling

Disclosure of potential conflicts

Ring-fencing or separation

Compliance against codes of

conduct

Mandatory collection and

disclosure

Verification, monitoring and

compliance

Disclosure of processes and

outcome

Compliance with disclosure rules

Disclosure of business practices

Formalise complaints

handling

Compliance with code of conduct

Limited groundwatertrade

Conflicts of interest

Transparency ofapproval processes

Inadequate priceinformation

Transparency ofallocation processes

Confidence in intermediaries

Informationaccess

Recommended actionsInformation disclosure and access

• Prices for all trades• Allocation determination processes• Trade approval processes• Processing times at granular level • Conflicts of interest• Broker compliance information with

industry code of conduct

Recommended actionsPlanning and rights definition

Clear rightssupported by

planning

• Adopt a systematic approach to improve planning and rights in groundwater systems to promote trade- Benefit-cost analysis

- Public reporting of results

- Review trade rules and simplify

- Investigate new rights-based instruments

Effective administration

Recommended actionsAdministrative reforms

• Simplification of trade approvals where multiple authorities are involved

• Consideration to be given to- Rationalising the number of

approval authorities- Cross-delegating approval

functions for interstate trades

Monitoring& compliance

Recommended actionsMonitoring and compliance

• Improved monitoring and compliance enforcement systems are needed

• Compliance with- Codes of conduct- Performance standards- Allocation determination and

trade approval processes- Price disclosure

Robust governance

Recommended actionsGovernance

• Formal complaints handling processes– Trade approvals– Water intermediaries

• Prevention of conflicts of interest– Ring-fencing – Structural separation

Benefits of the reforms

•Increased market confidence•Detection of market irregularities•Reduced perceptions of conflicts of interest•Additional security of water rights

•More efficient allocation of groundwater•More efficient investment in assessment

Information access

Monitoring & compliance

Governance

Administrative reforms

GW planning & rights

•Reduced transaction costs•More timely price information•Lower risk to traders from market movements prior to settlement

•Supports self regulation•Better performance through public disclosure•More educated market

Benefits

Pathways for implementation

• The package of reforms is substantial

• Will require leadership and commitment through COAG

• Coordination of water market policy and design will be needed

www.nwc.gov.au