While Government water efficiency assistance is targeted to irrigators, regional communities are heavily impacted by the funding provided and the consequent economic health of the agricultural sector and infrastructure investment in their region.
The first part of this chapter examines how WUE funded projects impact regional communities, and measures to assist long-term transition and sustainability issues for communities affected by changing water use practices.
The second part of the chapter considers, as an adjunct to ensuring sustainable regional communities, how the investment in water efficient infrastructure impacts the long-term sustainability of communities.
Benefitting regional communities
As outlined in chapter 3, some submitters have argued that investing in efficient irrigation methods, compared to water buybacks, has additional social benefits to the surrounding community. However, others have argued that these programs are an inefficient way of achieving these regional social objectives, and may in fact not provide such benefits.
This section examines key social and economic issues for regional communities which are impacted by water use efficiency changes and investment.
In its submission, DAWR made the case for the broader social and economic beneficial consequences of irrigation infrastructure spending:
Australian Government investment in on-farm and off-farm programmes under the Basin Plan is also having positive flow-on effects into local towns and communities. Increased farm opportunities and profitability is helping to secure the economic base of communities, allowing for more local jobs, businesses and services. For example, investment by Murrumbidgee Irrigation through PIIOP [Private Irrigation Infrastructure Operators Program] Round One resulted in increased business for local contractors and suppliers. This quantum of work for local businesses can be expected to have a localised multiplier effect as they in turn spend a proportion of their increased revenue on other local goods and services.
Further, employment of contractors in the region to undertake the infrastructure upgrade works has also provided short-term economic flow on effects for the community and skill transfer opportunities.
The Northern Basin Review included social and economic effects as one of its key considerations, and DAWR noted that the subsequent Northern Basin Taskforce is working to achieve water recovery ‘in ways that deliver socio-economic benefits to communities’.
The MDBA submission outlined the findings of the Northern Basin Review, highlighting that buybacks can lead to significant change in the broader community:
The socio-economic analysis found that communities in the Northern Basin had been subject to a considerable period of structural change prior to the implementation of the Basin Plan. Consequently, environmental water recovery from buybacks can introduce an additional driver of change for northern communities. The adjustment challenges can be particularly significant when there are sudden changes in irrigation activity associated with the government purchase of large parcels of water entitlements in irrigation dependent communities. A more steady approach to buybacks can somewhat mitigate the social and economic impacts.
The NIC described the Northern Basin Review’s socio-economic impact assessment as ‘a game changer for the design of future schemes’ and argued that the findings suggest that:
Removal of further productive water will result in a real loss of capacity for Australia to produce the fresh food and natural fibre we use domestically and that generates export income, and that it will produce loss of jobs, loss of income and flow on impacts right through Basin communities.
Smartrivers, a group of irrigators from the Lower Balonne, also pointed to the broad social and economic benefits of water infrastructure spending, noting that:
From the point of view of the community, the program is money well spent. Continued irrigated agriculture means jobs and a sustained local economy whilst maintaining a critical mass in the population base. Delivery of the on-farm projects provides stimulus for local small business suppliers and contractors.
A similar point was made by the Goulburn Broken Catchment Management Authority, which compared the economic and broad social impacts of WUE programs to buybacks and explained that:
Buy back of water often leads to declined productivity on properties with reduced water available leading to reduced production and a greater chance that irrigation ceases on the property. Whereas the water use efficiency programs link the funding available to make water use efficiency improvements leading to productivity increases across the region. The water use efficiency projects and productivity benefits provide an economic stimulus, increased employment and population growth improvements across the region and beyond.
Box 6.1: Harvey Water Irrigation Area, WA
On 22 August 2017 the Committee conducted site inspections in Harvey, Western Australia. Harvey, which lies approximately 150km south of Perth, is the centre of the Harvey Water Irrigation Area (HWIA). The HWIA services approximately 30 000 hectares of irrigated area devoted to dairy, beef grazing and horticulture. Harvey Water manages three irrigation districts in the HWIA – the Waroona district in the north, the Harvey district, and the Collie River Irrigation District in the south.
The Committee inspected Harvey Water’s gravity-fed piped irrigation network, which serves the northern two thirds of its customers, those in the Waroona and Harvey irrigation districts. The Committee also heard about the problems faced by irrigators in the southernmost Collie River irrigation district, such as saline water in the Wellington Dam. Harvey Water has applied to the Australian Government for funding to help it address this problem.
The visit highlighted how WUE programs can help to drive economic development well beyond the direct recipients of Government funding. The redevelopment of the Collie River irrigation district will likely lead to substantial and positive regional development outcomes, which would not have been possible without joint funding from State and Federal governments.
Against this case, Professor Lin Crase argued that the sheer expense of WUE projects should not be underestimated:
… the quantum of public monies used in WUE projects is itself worrying from a broader economic perspective. At a time when government bemoans the status of budgets and the demands on the public purse increase, it is difficult to rationalise WUE projects. They are costly, ineffective and leave serious challenges for the communities they purportedly support.
Drawing on his research in the area, Professor Quentin Grafton argued that, while some positive social and economic impacts are undoubtedly felt in regions as a result of irrigation infrastructure spending programs, those benefits have not been achieved in an efficient way:
Another stated objective [of irrigation subsidies] was to help irrigation communities. If you take money and spend money—someone else's money; because someone has to pay for it—I have no doubt that, if you spend money in a location and do not spend it someplace else, you will help the location where you have done the expenditure. But does that mean that that has led to an overall improvement in welfare? Indeed, we have a method to make that sort of judgement. It is called cost-benefit analysis. If we did a cost-benefit analysis in the context of irrigation subsidies on farm and off farm, they would fail that test. It is a public interest test.
Professors Grafton and Williams also took issue with the argument that the broad social impacts of WUE programs justify the expense of them, arguing that:
If community benefit is a goal of irrigation subsidies, it is puzzling that the communities themselves where irrigators reside have not been allowed to determine how to spend the money rather than have it decided for them in the form of payments to increase irrigation efficiency. It is further puzzling that if a key goal is to help poor and vulnerable in Australian irrigation communities that the most poor and vulnerable in such locations do not receive any direct payments or transfers. Indeed, the opposite is the case, as it is the wealthiest in these communities, the irrigators, who are the direct beneficiaries of the subsidies.
As a solution to this concern, Professors Grafton and Williams suggested that increased community consultation about where and how money is spent should be a priority:
Instead of providing subsidies to increase irrigation efficiency through more capital-intensive technologies, there should be a transparent and deliberative process that includes all relevant Basin communities, stakeholders and interested parties to spend the funds that would otherwise have been allocated for irrigation subsidies. This process should maximise participation to the poor and vulnerable within the MDB and explicitly consider the key bio-physical and socio-economic risks to Basin communities.
Speaking broadly about the issue, Professor Crase noted that there is a fundamental structural problem with policies that attempt to achieve disparate and unrelated goals. By seeking to solve environmental, social and economic problems, Australia’s approach to irrigation policy has not effectively addressed any of those, Professor Crase argued:
You asked me about the social impacts. More generally one of the problems with water policy in this country at the national level is that we've tried to put everything into one basket. Instead of having a separate set of social policies that are trying to deal with a social problem—a policy aimed at dealing with the environment, reallocating water to the environment—and another thing to do with economics, we've lumped it all in together and called it the Basin Plan. Then we've asked a single authority to come up with a magic instrument that does all of those things. It's little wonder that we've ended up with suboptimal outcomes on just about every level.
If you're worried about people's state of mental health in Griffith, why on earth would changing water policy be the most effective way to do that? I would have thought that, if you were worried about people's mental health in Griffith, you might want to invest some of that hard-earned taxpayers' money into suitable programs that'd deal with that. The difficulty is that you're trying to achieve multiple outcomes with a single instrument.
While the improved productivity and increased certainty brought about by irrigation infrastructure spending may have positive broad social achievements, research from academics at the University of Adelaide into the stress levels of people in the irrigation industry found that ‘distress levels of MDB irrigators were higher than Australian farmers in general, but they were also higher than the general population’.
Within that research, they noted that the main causes of day-to-day stress amongst horticultural irrigators were commodity prices (80.8 per cent) and electricity prices (74.8 per cent). Notably, they found that:
[i]rrigators who recorded high levels of psychological distress were much more likely to strongly agree that irrigation infrastructure investment had been wasteful, and should have been spent on rural health and/or education services instead.
These findings prompted the academics to suggest a range of approaches to respond to the high level of stress amongst irrigators, including the suggestion that buyback options might prove more beneficial than infrastructure investment:
We suggest beneficial policies in the water space could include reforming termination fees in irrigation districts, supporting exit packages for small irrigators, eliminating irrigation infrastructure subsidies and supporting the buyback of water entitlements (because of the lock-in and path dependent nature of irrigation infrastructure and the flexible nature of the buyback of water entitlements that allows for farm exit), increasing water market information and conducting further research on value-adding opportunities for irrigated farming. Further research on the drivers of irrigators’ mental health and their links with key social and economic infrastructure across the MDB is also clearly warranted.
While the focus of this report has been on the water use efficiencies benefitting the irrigated agricultural sector and the environment, regional communities are also heavily impacted by water policies and WUE programs. The Committee notes the importance of considering the social and economic strength of communities when discussing changing irrigation practices.
There is strong evidence that in some areas water use efficiency and infrastructure investments are demonstrating clear flow-on benefits to communities, and that a robust local economy can drive growth and diversification. This leads to regional resilience and will better equip communities to manage through diverse seasons and rainfall patterns.
However the Committee also notes criticisms regarding attempting to gain diffuse social benefits from WUE programs, and arguments for more direct investment in regional social services. It is clear that water policies and controls have led to changed irrigation practices, and in regional areas any change affecting the local agricultural sector dramatically impacts all tiers of the community. Consequently, driving greater water use efficiency should not be separated from assisting regional communities to also undertake this transition and to build resilience and independence.
Currently there is no consistent monitoring or response to the social and economic impacts on regional communities, and in particular on those communities beyond the Murray-Darling Basin. It is critical to understand how funding in one area may positively or adversely affect a neighbouring community and, just as close monitoring and evaluation of surrounding water systems is required, so governments should be aware of the dynamic impacts of these funding arrangements on regions.
The Committee considers that a coordinated and targeted approach to supporting regional communities through the transition process to water use efficiencies is required. The Committee notes that the Department of Infrastructure and Regional Development delivers a series of regional and community programs, including the Murray-Darling Basin Regional Economic Diversification Program, which are designed to improve regional economic diversity, growth, and resilience.
The Committee considers that the Government response should not be confined to the Murray-Darling Basis, and it is important that all regions impacted by water constraints and changing water practices are assisted through this process.
The Committee recommends that the Australian Government establish an integrated taskforce to assist Regional Development Authorities to:
develop targeted initiatives to assist regional communities which are impacted by the local irrigated agriculture sector transitioning to water use efficiencies, and
ensure ongoing monitoring of the social and economic health of these communities.
Infrastructure for the future
The Committee heard that irrigation infrastructure projects, while achieving immediate water efficiency gains, may result in future financial burdens for communities. In particular, infrastructure installed now will require upgrading and replacing in the future. However, there is not always a clear plan developed for how those works will be funded or who should be responsible for them.
Professor Lin Crase explained that communities which are currently receiving funding for capital infrastructure may possibly inherit significant financial legacy issues. Professor Crase noted that the two key drivers of the price of water are its scarcity value and irrigation capital infrastructure (e.g. pipes, pumps and channels). Governments are effectively gifting infrastructure to irrigation providers, and those new infrastructure facilities are not included in any water pricing structure:
Under the regulatory arrangements, if an asset is gifted to you, you aren't required to include it in the regulatory asset base. In other words, if you're a water utility, you don't have to count it; you can just pretend it fell out of the sky and it didn't cost anything. That means that, when you start to calculate the prices that you pay for the water, you are actually ignoring a big chunk of the cost, because you've just assigned it a value of zero.
Professor Crase suggested that, without any cost recovery through appropriate pricing, there is little capacity for infrastructure assets to be maintained into the future:
So that raises the obvious legacy question: if we've got all this infrastructure we've invested in, who's putting the money aside to pay for the depreciation and who's putting the money aside to replace it when it all falls over in 10 years' time?
Professor Crase cited an example where the capital infrastructure investment was not accounted for:
The work we did in Goulburn-Murray Water showed that they were already underpricing water by two-thirds. They would have to increase prices by about 300 per cent to fully cover the cost of capital. And now we are giving them more capital that they do not have to count, which makes the situation even worse.
When asked about the necessity for irrigation providers to account for capital infrastructure assets and depreciate them over time, Professor Crase suggested that irrigation providers would simply ask the government of the day for more funding. Professor Crase also suggested that certain groups in the broader farming community may be leveraging more money to fewer people for less benefit.
In response, DAWR argued that investments in water use efficiency are not ‘setting up regional communities with unmanageable future costs’, since the new or modernised infrastructure ‘will result in reduced operational and maintenance costs’ in some cases.
DAWR further noted that these projects entail no on-going financial commitments from the Australian Government other than that specified in the original project:
We note that projects funded under Sustainable Rural Water Use and Infrastructure Program are intended to improve the efficiency and productivity of water use and management. Program guidelines, for both on- and off-farm sub-programs, inform participants of eligible and ineligible funding conditions and activities. Funding is not applicable to on-going maintenance costs associated with new or existing infrastructure. Participants are encouraged to take these costs into consideration when drafting their applications.
Participation in all Commonwealth infrastructure programs is voluntary with infrastructure upgrades initiated and owned by proponents who have ownership and responsibility for the infrastructure over time. Feedback from participants in on-farm programs indicates that government-funded works have helped to accelerate the process of renewing old and outdated infrastructure, covering costs that would have otherwise been solely incurred by irrigators.
The Committee notes the importance of infrastructure funding and the vital contribution of these projects to ongoing water efficiencies and productivity. However it is essential that this infrastructure does not result in legacy issues which become a funding burden of communities or for the Government. As has been noted throughout this report, the long-term goal must be financial resilience and independence for the irrigated agricultural sector and for regional communities.
The Committee notes its concerns in regards to infrastructure funding and ensuring this is a capital investment for the future – not a capital legacy requiring support. The Committee considers it would be irresponsible for funding or assistance to be provided which did not incorporate detailed plans for future costs, such as maintenance, repair and eventual replacement. Further, the Government must ensure that infrastructure funded delivers a defined public good and represents value for money against defined outcomes.
To this end, the Committee notes the September 2017 Productivity Commission’s draft report and recommendation on water infrastructure for agriculture:
Productivity Commission Draft Recommendation 7.3
Governments should not provide grant funding for irrigation infrastructure, or that part of infrastructure, that is for the private benefit of irrigators. Rather, Australian, State and Territory Governments should ensure that:
National Water Initiative-consistent water entitlements and planning are in place before any new irrigation infrastructure is considered (including infrastructure being financed under the Northern Australian Infrastructure Facility)
government grant funding is limited to those projects, or parts of projects, delivering a public good. Any grant funding should be subject to an independent analysis of the project being completed and available for public comment before any government announcements on new infrastructure are made. The analyses should establish that the project will be:
economically viable and deliver public benefits that are at least commensurate with the grant funding being provided
government financing (such as loans) for infrastructure generating private benefits should only be provided after:
an independent assessment has confirmed the finance can be repaid on commercial terms. The assessment should be released for public comment before any announcement on new infrastructure is made
robust governance arrangements have been put in place to deliver merit based decision making and the ongoing monitoring of (and public reporting on) the government’s investment
sufficient water entitlements have been sold to reduce the project’s risk profile and provide assurance the finance will be repaid.
Australian, State and Territory Governments should enhance the National Water Initiative to align with recommendations 7.3 (a) to 7.3 (c).
The Committee notes its support for this draft recommendation and urges the Australian Government to consider the Productivity Commission’s final recommendation on water infrastructure funding when it is released.
Further the Committee recommends that, where funding is provided for water infrastructure, application assessment should include detailed consideration of the defined public good outcomes, and also account for full life cycle costing, including asset depreciation and replacement.
The Committee recommends that the Australian Government require any water efficiency infrastructure funding or assistance provided to set out:
the defined public good benefit,
detailed plans for the full lifecycle costings of the infrastructure, including asset depreciation and replacement, and
a detailed intention of how these lifecycle costings will be funded.
7 December 2017