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Murray-Darling Basin water markets need major changes: ACCC

Grain Central, July 30, 2020

WATER markets in the Murray-Darling Basin need major changes to allow for open, fair and efficient water trading that benefits water users, communities and the economy, the Australian Competition and Consumer Commission (ACCC) has found.

The ACCC’s interim report for its Murray-Darling Basin Water Markets Inquiry, released today, finds that the $1.5 billion-a-year basin water markets have outgrown the frameworks that govern them, and that change is needed for a market of this scale to operate efficiently and for the benefit of industries that depend on it.

The report sets out the ACCC’s preliminary views on the Basin’s water markets, including the issues it has identified and potential options for addressing them.

“Water trading has brought substantial benefits to water users across the Murray-Darling Basin, including by allowing irrigators to manage the amount of water they use , to earn income by selling excess water or their water rights, and to release capital to invest in their businesses,” ACCC deputy chair Mick Keogh said.

“However, these markets have significant problems. In basic terms, there is overly fragmented or complex regulation in some areas, not enough regulation in others, and a concerning lack of regulatory oversight and robust enforcement in important areas.

“This has led to a lack of trust in the markets among many water users and has undoubtedly reduced the benefits generated by those markets.

“These problems exacerbate distrust when water is scarce or when demand is increasing. They make a difficult situation worse.”

The ACCC has identified problems in several key areas, particularly with the current governance arrangements for the Basin’s water markets.

A significant issue is that a range of different bodies oversee water markets in the Basin under different legal frameworks. Roles and responsibilities overlap in some areas, while leaving significant gaps in others.

“The Basin’s water markets, and the bodies that oversee and interact with them, operate in a complex, fragmented and inconsistent system,” Mr Keogh said.

“To make real and lasting improvements, we need to rethink how these water markets are governed.”

Market integrity must be improved

The ACCC said the integrity of water markets also needed improving, with insufficient regulatory oversight of some market participants, including brokers and investors.

Water brokers, exchange platforms and other intermediaries have no industry-specific regulation, meaning brokers’ roles are often unclear and their interests can diverge from those of their clients.

There are very few rules to prevent market manipulation or similar conduct, and no regulator charged with monitoring trading behaviour in water markets.

Potential responses include a licensing scheme operated at the Federal or Basin State level for brokers and other intermediaries, or extending the financial regulation framework to all water products.

Appointing a single regulator to oversee trade in Basin markets, similar to arrangements in place in the financial services or energy markets, could also help address these issues.

Lack of transparency

The ACCC said a lack of transparency in the markets was also an issue for water users.

It said different record keeping by different states and trade processes meant participants cannot get a full, timely or accurate picture of water trading, and the same information was not available to all water market participants.

Information crucial to the business decision-making of irrigators and traders, such as allocation policies and river operations policy, is not always well communicated or easy for users to access.

The ACCC said market transparency could be boosted through practical measures such as the use of standardised identifiers across the Basin, like ABNs.

Trade rules may not reflect physical constraints

The ACCC said increased trade and the resulting changing patterns of water delivery and use were creating new challenges for the management of the river system, its infrastructure, and the environment.

The rules and operational frameworks that manage the trade and delivery of water may not always reflect the physical realities of the river system, particularly in the Southern Basin.

The ACCC said delivery risk, conveyance loss and storage limitations needed to be properly reflected in trade rules, and where limitations existed, mechanisms were needed to efficiently manage these.

“It is clear that the Basin’s markets need decisive and comprehensive reform,” Mr Keogh said.

“There are many problems, but we do not believe that dismantling existing water markets is the answer. This would mean farmers, communities and the Australian economy would miss out on the substantial benefits these markets provide.

“The Murray-Darling Basin’s water is a precious and often scarce resource. Water trading has the potential to ensure this resource is used to its greatest benefit, particularly for irrigators, but this can only happen if markets are efficient and fair and are underpinned by an environmentally healthy river system.”

Source: ACCC

The full interim report, including a list of options for feedback, is available at https://www.accc.gov.au/focus-areas/inquiries-ongoing/murray-darling-basin-water-markets-inquiry/interim-report

The final report will be provided to the Government by 30 November 2020.

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Irrigators’ response:

National Irrigators’ Council (NIC) chief executive officer, Steve Whan, said it was pleasing to see that the interim report mirrored many of the key positions put by NIC.

“Greater consistency between the different exchanges, more transparency and considering an overarching regulator for the market and regulation for brokers – all worth doing, as long as they practically improve competition, improve ease of access to the market for irrigators, are effective and do not increase cost or administrative burden,” he said.

“Some of the specific comments in the interim report that are welcome include:

The need to ensure market operation reflects physical constraints;

The need to look at how conveyance losses are dealt with;

Needing to deal with delivery constraints and whether further unbundling is needed;

Further consideration of how different products are dealt with, including carry-over.

“There is much detail in the interim report, it will take a little time for industry to digest it and provide considered responses.  In that sense it is disappointing we have been given such as short time to respond to such complex issues.

“The interim report is a good start.  This final report could be a catalyst for positive reform in the operation of the market and provide a basis for ensuring that it continues to boost agricultural product, while also providing a fair competitive environment.

“There is, however, a note of caution.  Going from a draft, with much positive intent, to real reform, will take a lot more work and, following that, commitment from Basin Governments. Firstly, to careful consultation with market participants and then to action.

“We already have recommendations, from reports like the Productivity Commission’s five-year Basin Plan review, sitting on the shelf.  We need to see constructive elements of reports turn into action.”

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Ricegrowers’ response:

The Ricegrowers’ Association of Australia (RGA) said the 544-page report highlighted many of the RGA’s long-standing concerns, and supported its suggested improvements.

In particular, the report provides that:

  • water market intermediaries such as brokers and water-exchange platforms operate in a mostly unregulated environment, allowing conflicts of interest to arise, and opportunities for transactions to be reported improperly
  • there are scant rules to guard against conduct aimed at manipulating market prices, and no particular body to monitor trading activities
  • there is a lack of market transparency and public information which favour better-resourced and professional traders who can take advantage of opportunities such as inter-valley trade/transfer openings
  • differences in trade processes and water registries between the Basin States prevent participants from gaining a full, timely and accurate picture of water trade, including price, supply and demand
  • important information, such as allocation policies and river operations policy, which can significantly impact water pricing, are inadequately communicated to the irrigators and traders who rely on these to make business decisions
  • there is a disconnect between the rules of the trading system and the physical characteristics of the river system. For example, in-river delivery capacity, conveyance losses and adverse environmental impacts are not considered in the processing of trades that change the location of water use, except through some blunt and imprecise rules, such as limits on inter-valley trade/transfers
  • overarching governance arrangements, which result in regulatory fragmentation and overlapping of roles of different governing bodies, contribute to many of these problems, or prevent them from being addressed in an effective and timely way. The water market needs decisive and comprehensive reform.

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NFF response:

National Farmers Federation (NFF) chief executive Tony Mahar said the report was clear and unequivocal about the need for decisive, rapid and comprehensive reform.

“The report notes that ‘the Basin’s water rights markets have serious problems that have to be fixed now, to generate more of the potential benefits of water trade’.

“This independent assessment must now be considered and acted upon. There must be a pathway mapped out to meaningful reform of the water market.”

In its report, the ACCC found the market was poorly regulated and poorly governed.

“It is clear that duplicative and inconsistent rules and processes between Basin states have led to significant information failures which has created potential opportunities for exploitation,” Mr Mahar said.

“This has undermined confidence in the water market.”

The report also cites a ‘disconnect between the rules of the trading system and the physical characteristics of the river system’.

“The market does not sufficiently consider delivery capacity, conveyance losses nor adverse environmental impacts and ultimately, it is farmers, communities and the environment who lose out. This is clear in the communities we have visited and consulted with,” Mr Mahar said.

“We need clear and robust rules and governance in a system that farmers and Basin communities rely on for their livelihood.”

The report also finds that water markets have brought significant benefits to water users and communities across the Basin. The ACCC clearly articulates that the solution is not to dismantle the system, but to reform the system, to provide greater clarity and confidence.

“The ACCC has proposed a number of reform options. The NFF and its members will consider these in detail in developing a response,” Mr Mahar said.

“Ensuring clarity and confidence is that way the water market operates will be a key focus and critical outcome of this process.

“The NFF notes that over 40 reports into the Murray-Darling Basin have now been released.

“By not implementing recommendations to improve the Plan, Governments are perpetuating the pain suffered across the Basin and demonstrating utter contempt for farmers, communities and the environment.

“The first order of business must be the adoption of the 38 Productivity Commission report recommendations.

“We also keenly await the release of the Sefton socio-economic and Water for the Environment Special Account (WESA) reviews currently with the Water Minister.”

 

 

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