Chapter 3 - Issues to do with water access entitlements
3.1
A long standing item of the water reform agenda has
been the perceived need for more secure rights to water. This contrasts with
the historical situation where water has been granted by periodic licence, and
government could refuse to renew the licence, for whatever reason, without
compensation.
3.2
Secure title is necessary to encourage investment in
efficiencies of water use: farmers must have confidence that if they invest in
efficiencies, the water they save will not be taken away without compensation.
Secure title, with separation of water rights from land, is a prerequisite to
wider trading: it must be clear what the property is that is being traded.
3.3
The IGA commits the States to create a system of water
access entitlements separate from land. An entitlement is to be a perpetual
or open-ended share of the consumptive pool of a specified water resource, as
determined by the relevant water plan . Water access entitlements will be:
-
able to be traded, given, bequeathed or leased;
-
able to be subdivided or amalgamated;
-
recorded in a publicly accessible reliable water
register. (IGA, s28ff)
3.4
The last point is important to expedite informed
trading. Prof. Young commented that actions so far to separate water rights
from land have had the unfortunate effect of recreating old systems title for
the water, with all the costs and uncertainties that this creates for
transfers. He recommended, and the Committee
agrees, that a Torrens title system is preferable.[13] The Committee
notes that the NSW government wishes to have this in place within three years.[14]
3.5
Submitters to this inquiry, who were mostly rural
interest groups, approved the move to more secure title (although some did have
concerns about the related matter of water trading, considered in chapter 4).
The Committee comments on some concerns that
have been raised elsewhere:
-
whether secure title will impede environmental
management needs;
-
concerns about giving public property to
farmers.
Whether secure title will impede environmental management needs
3.6
Some environmentalists have criticised the scheme of water
access entitlements from a fear that it will lock in a certain amount of
irrigation water use, and this will make it harder to reclaim water for the
environment in future.[15]
3.7
The concern appears to rest on a misconception that the
proposed entitlement is to a certain fixed amount of water. This is not the
case. There are places in the world where rights are to a fixed volume, but Australia
is not one of them.[16]
In Australia an
entitlement has been, and will continue to be, a right to a certain share of the consumptive pool. The
consumptive pool is the water allowed for consumptive use, as determined by
government decision having regard to the season and the rules in the relevant
water sharing plan. The consumptive pool varies from year to year, and the years
allocation to entitlement holders varies
correspondingly.[17]
Security of entitlement does not
change that principle.
3.8
It is the rules in the water sharing plan which reflect
the trade-offs between competing interests, and which ought to take into
account environmental needs. These trade-offs will be decided by the normal
process of political debate. The Intergovernmental Agreement attempts to codify
and harmonise water planning, and it entrenches the principle that the purpose
of water planning is to provide for both ecological outcomes and resource
security outcomes.[18]
However it cannot decide, nor does it try to decide, those detailed debates.
Concerns about giving public property to farmers
3.9
The Committee notes
concerns that perpetual entitlements are in effect giving public property to
farmers.[19]
The Committee does not see this as a problem.
The consumptive pool, though public property in law, has long been used by
farmers under licence. They have made investments in private infrastructure
needed to use it, and rural communities have been built up around that use.
Giving current users longer term security has no opportunity cost for the
state, because there is no other way the state could use the water.[20] Thus it does
no injustice to the broader public. It has the overriding purpose of
encouraging greater efficiency in water use, which will benefit the economy and
the environment.
3.10
A related concern is that making entitlements more
secure may give the holders windfall gains - presumably when the value is
realised on sale.[21]
This is a reasonable concern. It raises the same equity and public interest
issues as other situations where an asset appreciates not because of the
personal exertion of the owner or the natural working of the economy, but
merely because of a government decision.[22] To what
extent should the state try to recoup the gain?
3.11
The Committee agrees
that in principle there is no reason why individuals deserve windfall gains
resulting from the states administrative decisions. In practice, as in many
comparable situations, it may be hard to do much about it. It may be hard to
distinguish appreciation resulting from more secure entitlement from
appreciation resulting from a more mature water market, or the general long
term appreciation resulting from the balance of supply and demand.
3.12
On the other hand, there are situations where the state
gives water to users extremely cheaply. For example, the Committee
heard that water harvesters of the lower Balonne
River in south west Queensland
pay $3 per megalitre for water.[23] It would not
be right for the state to give entitlements at fees that represent cost
recovery pricing, which individuals might then be able to onsell at enormous
profits.
3.13
For the state to charge more than cost recovery for
water would effectively be appropriating a resource rent. In theory this is
detrimental to economic efficiency. However, the water is a community resource,
and if rent is going to be made is should belong to the community as a whole,
not to individuals who happen to be in the right place at the time when
tradeable entitlements are given out.
3.14
The Intergovernmental Agreement is silent on the question
of who tradeable water access entitlements should be given to, and at what
price.
3.15
Windfall gains would be prevented by auctioning
entitlements, rather than giving them out, in the first instance. This idea of
course will not win the favour of water users. A more politically acceptable
option would be to find some way of clawing back excessive gains when an
entitlement is first sold.
3.16
Trade of entitlements will be subject to capital gains
tax. However the Committee does not think that
this is a sufficient answer to the problem. The problem is not the normal
gradual appreciation of an asset, which capital gains tax is directed at. The
problem is a transitional problem concerning a possible sudden jump in value
when an existing licence is converted to a secure tradeable entitlement. The
problem only relates to the first sale of the entitlement.
3.17
The Committee believes
that COAG should consider ways of preventing windfall gains on first sale of
tradeable water access entitlements.
Conditions under which entitlements may be cancelled
3.18
Under the Intergovernmental Agreement water access
entitlements may only be cancelled at ministerial and agency discretion where
the responsibilities and obligations of the entitlement holder have clearly
been breached. (IGA, s32(i)).
3.19
The Committee has a
concern that the concept of cancelling an entitlement seems to run counter to
the principle of secure title. In other situations the penalty for prohibited
act does not usually include confiscation of property. For example, if a
property owner builds an illegal structure, this might result in a fine or an
order to demolish the structure. It will not result in the land being
confiscated.
3.20
A matter of concern is how the risk of cancellation
would affect banks willingness to use entitlements as security for loans.
3.21
The Committee urges COAG
to clarify the intention of this section and the situations in which it might
be used. Policies on this point will have to be nationally consistent.
Effects of separate water title on land values and council rates
3.22
The Local Government and Shires Association of NSW
raised concerns that if water is separated from land, the land value would be
reduced - sometimes dramatically. This would reduce ad valorem council rates.[24]
3.23
This is an important issue. Increasing the general percentage
rate on land values to compensate could seriously disadvantage those who have
land only already. It implies the need to give every parcel of land a notional land
without water value (comparable to the unimproved capital value of urban land),
to value water entitlements applicable to the land separately, and to levy
rates on both.
3.24
This may restore the status quo in respect of land with
water, but of course it does not solve the problem of the declining land value
and rating base where water is traded out of a district. That is a matter for
structural adjustment assistance.[25]
3.25
As well, the Committee
has a concern that that water entitlements valued separately may have a value
more volatile than the value of land, since the value of entitlements is
subject to the uncertainties of future government decisions to do with water
plan reviews or allocation decisions. This could make Local Council budgets
less reliable.
3.26
The Committee notes
the approach to the problem in the recent Victorian White Paper, Securing Our Water Future Together:
After unbundling, the Valuer General intends that valuations
take into account the capacity of
land to be irrigated (covering such matters as the existence of a delivery
service, on-farm irrigation works, and access to drainage). This will capture
some of the value presently derived from water rights, though not all.
Councils will be able to maintain rate revenue by adjusting
rates in the dollar, but without other action the rate burden would shift
slight from irrigated properties to dryland farms and towns.
Shire Councils have managed to spread rate burdens equitably by
striking differential rates. At present, some councils strike a special, lower
rate for irrigated farms. When water rights are not in valuations, they may in
some cases decide that a higher rate is fair.[26]
3.27
Logically the capacity to be irrigated approach to
valuation should consider not only the physical
capacity, but also
-
whether the use would be environmentally
permissible under use licence rules (in the case of already irrigated land,
presumably the answer would usually be yes); and
-
whether water would be available in the market
and at what price.
3.28
In a situation where water can be bought (whether as
entitlement or annual allocations), the value of irrigation land without an
entitlement would not suddenly drop to the value of dry land (as some witnesses
seemed to fear). The value would be expected to reach a level which reflects
its irrigation potential, subject to a discount which is the cost of the water
that must be paid for separately. The situation is analogous to the situation
where the value of urban vacant lots will track the value of developed
properties providing it is permissible to build on the land, and subject to a
discount which is the cost of the building that must be paid for separately.
3.29
The amount of the discount would still reduce the property
value; so if the differential rate approach is not taken, the water would still
have to be valued and rated separately if the aim is to preserve the same
relative rate burden on irrigation and dryland farmers.
3.30
The Committee draws attention to the urgent need for
governments to address this problem and develop a uniform approach.
Effects of review of water plans
Risk sharing rules
3.31
The value of an entitlement, in economic terms, will be
the value of the water that can be drawn under it, as decided by government
from year to year pursuant to the rules in the relevant water sharing plan.
3.32
The IGA has risk sharing rules to limit the effect on
users of uncertainty about future changes to allocations. Users will bear the
risk of reduced allocations resulting from seasonal or long term changes in
climate, or natural events such as fire or drought. Users will bear the risk of
reductions required by bona fide improvements in the knowledge of water
systems capacity to sustain particular extraction levels, up to 2014.
Therafter, users will bear the risk of up to 3% reduction in allocations per 10
years; government will bear the risk beyond that. Government will bear the risk
of reductions required by changes in government policy (for example, new
environmental objectives) (s46ff).
3.33
These rules do not apply to recovering water in
response to cases of known overallocation or overuse. Arrangements for this are
either covered by National Competition Council endorsed implementation plans,
or left for further consideration (s41ff).
3.34
Recovering water which is at the governments risk will
presumably be based on buying entitlements or allocations in the market (IGA,
s79(ii)(a)).[27]
Thus changing allocation rules in revised water sharing plans may have a direct
cost to government. This raises the risk the governments may be tempted to
understate environmental needs in order to avoid the cost. It implies the need
for a clear budget for recovering environmental water in the longer term. Mr
Cosier of the Wentworth Group suggested
there needs to be a 20 year investment plan.[28] It has been
argued that the current $500 million 5 year First Step project for addressing
overallocation in the Murray-Darling Basin
is just a start.
3.35
It will be important to provide continuity of action
after the First Step program expires, noting that the need is not limited to
the Murray-Darling Basin.
The Committee recommends that COAG should
negotiate an ongoing shared program for funding the IGA reforms.
Recommendation 2
3.36
COAG should negotiate an ongoing shared program for
funding the reforms in the Intergovernmental Agreement on a National Water
Initiative.
Timing of reviews of water plans
3.37
Review of water sharing plans, if it foreshadows
changed (presumably reduced) allocations, may be expected to influence the
market value of entitlements. There is a need to coordinate review of plans
interstate to prevent speculative trading across borders in the hope of
profiting from differently timed changes.
3.38
The IGA has agreed guidelines for water plans, and it
says, A plan duration should be consistent with the level of knowledge and
development of the particular water source (schedule E). However it does not
suggest a standard plan duration or any commitment to coordinate reviews. The
NSW Department of Planning, Infrastructure and Natural Resources noted that it
is discussing coordination with Queensland
and Victoria.
3.39
The Committee draws
attention to the importance of coordinating reviews of plans, as least over
areas within which water may be traded.