Social and economic impacts of the Basin Plan in Victoria February 2017

Executive Summary

The Victorian Government has committed itself, in partnership with water corporations and catchment management authorities (CMAs), to work to achieve balanced outcomes from implementing the Murray-Darling Basin Plan in Victoria. As part of that commitment, it commissioned this report to assist it undertaking its own analysis of the socio-economic impacts of the Basin Plan in Victoria. This report aims to inform discussions with the Commonwealth Government and to help ensure that all future water recovery from Victoria is based on robust evidence that it can be done with neutral or positive social and economic impacts.

The report sets out a systematic, methodical and repeatable way to analyse the impacts of the Basin Plan in Victoria. It is not a comparison of irrigation before and after the Basin Plan. Rather it is a comparison of what happened after the Basin Plan was implemented with what could reasonably have been expected to have happened if the Basin Plan had not been implemented. Such comparisons between the “with” and “without” scenarios are standard practice in economics.¹

Understanding the southern-connected Basin as a whole

Understanding the socio-economic impacts of the Basin Plan in Victoria depends on an understanding of the various forms of water supply and demand in northern Victoria, southern NSW and the irrigation areas of South Australia. Collectively, these regions are referred to in this report as the southern-connected Basin. The physical connections between these regions enable water to be traded throughout the southern-connected Basin in ways that in effect, create a single integrated water market. Consequently, although water recovery under the Basin Plan has affected water supply in each state differently, the socio-economic impacts of water recovery depend on how water demand changes in response. This report is concerned with developing an understanding of those changes in supply and, more particularly, demand, under current and future water scenarios.

The different water allocation frameworks in each state mean that allocations against the five main types of water entitlements in the southern-connected Basin vary markedly, from each other, and from year to year (Figure ). Allocations against NSW General Security entitlements have the most impact on market prices because they constitute the largest pool of entitlements, and the allocations against them are the most variable.

Figure : Water allocations against the five main entitlement types in the southern-connected Basin since water recovery commenced.

For the purposes of this report it is helpful to think about water in the southern-connected Basin being used for three main types of irrigated enterprise. These are:

• 
  horticulture
  
• 
  dairying and mixed farming
  
• 
  rice-based and cotton-based annual cropping systems.
  

Irrigated horticulture in the southern-connected Basin is concentrated in the Mallee regions of NSW, South Australia and Victoria, around Griffith in NSW and around Shepparton in Victoria.

Irrigated dairying and mixed farming is concentrated in the Goulburn-Murray Irrigation District (GMID) of Victoria, with smaller levels of production in southern NSW and a low level of production in the Lower Lakes region of South Australia.

Rice-based and cotton-based annual cropping systems are concentrated in the Murrumbidgee and Murray regions of NSW.

Figure : Estimated water use by different irrigated industries in the southern-connected Basin since water recovery commenced.

At the system-scale, the mix of irrigated enterprises that are non-interruptible (e.g. perennial horticulture), semi-interruptible (e.g. dairying) and interruptible (e.g. cropping) have traditionally helped irrigators to adjust to variable water supplies (Figure ). Because the Basin Plan reduces the volumes of the different entitlements in different ways, it is also changing the proportions that each contributes to the whole. As irrigators adjust to these changes, they will change the mix of non-interruptible, semi-interruptible and interruptible irrigated enterprises, and they will reduce the total area of irrigation. It is the nature of those responses that determine the socio-economic impacts of the Basin Plan.

Impacts at the farm scale

Water recovery started in 2007 in the midst of extreme drought. Since 2011/12 the Commonwealth’s purchasing has slowed. It now concentrates on water recovery through on-farm and off-farm efficiency measures. Most of the Victorian water entitlements purchased by the Commonwealth were transferred into Commonwealth ownership in the three years from 2009/10 to 2011/12. In many cases contracts were exchanged in the year before the transfer took place.

As outlined in Chapter 4, there is no doubt that the money the Commonwealth paid irrigators for their entitlements, or for their on-farm efficiency measures, helped these irrigators to adjust to the drought. In many cases it helped people to exit farming with better financial resources than they would otherwise have had. As outlined in Chapter 5, during the same period, water recovery helped many irrigators cope with the collapse of the wine boom in similar ways. It also helped to prevent a significant disruption to the horticultural expansion when two major managed investment schemes became insolvent. The investors who salvaged those orchards often sold their entitlements to the Commonwealth and continued to purchase allocations in order to irrigate.

Record-breaking floods were recorded immediately after the buyback of entitlements stopped. The extraordinary levels of carryover built up during those La Niña years meant that the total combined volume of allocations and carryover against Victorian water shares were greater than the volume of use by irrigators in Victoria for four years after buyback was complete (Figure ). This served to mask the impacts of the Basin Plan until early 2015/16.

Figure : Private water availability, use and allocation price, Murray and Goulburn systems (DELWP, 2016a)

Note: The bars for 2015/16 are hatched to indicate that the season was not complete at the time the report (DELWP, 2016a) was being prepared. DELWP was unable to update this figure in time for this report. An updated version would provide insight into high levels of concern about allocation prices in 2015/16.

An analysis of water register data involving a sample of Victorian irrigators who sold entitlements to the Commonwealth showed that before the Commonwealth purchase, the irrigators in the sample mostly relied on their own allocations for their water use, although many also traded water and were net purchasers of water allocations. After the sale of entitlement to the Commonwealth, there were many changes to their approaches in sourcing water.

Because water entitlements are no longer linked to land, there are complexities involved in linking water share transfer data in the water register back to affected properties. There are further complexities involved in considering how water use has changed for the affected properties. In the time available to complete this report, DELWP was able to provide us with an analysis of a sample of 11% of the population of those irrigators who sold entitlement to the Commonwealth and continued to irrigate. DELWP compared the characteristics of this sample with those of the population, and as explained in Chapter 4, judged the sample was representative of the population.

As explained in Chapter 4, a key finding is that Victorian irrigators who sold water entitlements to the Commonwealth are now more reliant on allocation purchases than they would have been without the Basin Plan. As explained in Chapter 6, for dairy farmers in particular this increased their farming risk, and dairy farmers sold more entitlements to the Commonwealth than any other group of farmers.

After the buybacks stopped, the Commonwealth’s Sustainable Rural Water Use and Infrastructure Program became the key mechanism to recover water. Most of its funds were directed to projects for improving the operation of off-farm delivery systems and helping irrigators improve on-farm water use efficiency. Those water savings are shared between the government for environmental use and irrigators for consumptive use.

Most water recovery through infrastructure savings has been in NSW regions (Figure ). Because it does not differentiate between the impacts of on-farm and off-farm saving the different types of savings are not separately reported. In our analysis we consider them to have different impacts. Therefore, to the extent possible, we have tried to disaggregate the volumes recovered through the two approaches in Victoria.

Figure : Infrastructure water recovery (ML LTAAY)

Source: Pers. comm., DAWR, 16th September 2016.

On-farm efficiency programs are intended to reduce diversions in ways that have neutral or positive economic outcomes, but the story is more complex than that.

On-farm projects aim to improve water use efficiency; maintaining production levels with reduced volumes of water. However, where the water savings are shared between the irrigators and the Commonwealth, the irrigator is, by definition, retaining more entitlement than would have been required to maintain production. In such cases the irrigator is free to expand production or sell surplus entitlement or the allocations against it.

Similarly, because the Commonwealth is willing to pay a premium above the market rate for the saved water, the irrigator is also free to take advantage of arbitrage to replace the water assigned to the Commonwealth. The extent to which this has happened is unclear, but Vignette 1 published by the MDBA (MDBA, 2016) (a fuller excerpt of which is reproduced in Appendix 14) suggests there may have been instances of arbitrage:

We’re saving water but we’re being more intense and more productive. Because we’re using it more efficiently and being more profitable that drives us to want more water to do more things. It has that driving effect. We gave water back but we went straight back to the market and bought it again.

In these cases the net effect on the consumptive pool is the same as direct buyback by the Commonwealth.

The most important point, however, is if the savings come from dairy or rice farms, when allocation prices are so high that it is more economic for rice and dairy farmers to sell allocations rather than irrigate, the allocation volumes they put on the market will be lower than it would be if they had not undertaken the efficiency savings. As explored in more detail in Chapter 3, the volume of the savings given to the Commonwealth will reduce the volume of the consumptive pool that would otherwise have been available for horticulturalists to keep their crops alive in dry and extremely dry years.

For our analysis, we consider it valid to assume that on-farm water savings have similar characteristics to off-farm water savings in wet-to-average years. However, as we elaborate in Chapter 3, in dry and extreme dry years the on-farm efficiency savings gained from interruptible and semi-interruptible enterprises will serve to reduce the consumptive pool of allocations available to be used for non-interruptible enterprises. We note however that given the average to wet water availability conditions that have prevailed since these programs commenced, with the notable exception of 2015/16, the effect of on-farm efficiency measures in this regard have not yet been manifested.