Drowning in red tape

Issue 20 | Spring/Summer 2007

The mouth of the Murray River.

The proposed centralisation of control of the Murray--Darling Basin has been one of this year's biggest environmental debates. Monash economist Dr Edwyna Harris explains how the history of Australian irrigation provides some important insights.

History shows the outcome of high levels of government intervention in the water sector lead to significant inefficiencies.

Victoria's experience this century is a case in point. It was the first state to introduce large-scale government-sponsored irrigation and its institutional framework was adopted in both New South Wales and South Australia.

The introduction of irrigation during the 1880s was intended to drought-proof farmers and 'make the deserts bloom'. However, until the turn of the 20th century, the plan struggled under poor management, economic depression and the experimental nature of irrigated agriculture.

As a result, the regional-based administration framework was replaced in 1905 with a centralised government agency, the State Rivers and Water Supply Commission (SRWSC). 

While the intention was to create a water authority independent of politics, it never was, leading to a highly inefficient irrigation sector. Inefficiencies resulted from successive governments preventing the SRWSC from increasing water prices due to electoral repercussions. In addition, water allocations to individual farms did not take into consideration the specific topography, soil and crop type being produced. 

As a result, some farmers got too much; others too little and because farmers could not trade their water rights, there was no correction mechanism.

These inefficiencies were reinforced because farmers had to pay for a minimum quantity of water, regardless of whether they used it or not. This led to substantial overwatering and other environmental problems.

While these findings suggest high levels of government involvement is not the best response to the perceived challenges facing the Murray-Darling Basin management, the Howard Government reforms are set to increase government involvement.

Originally, the proposal required each Basin state to refer its powers over water allocation and associated operational issues to the Commonwealth. Responsibility for Basin administration would then be given to a newly formed, again independent, Commonwealth Government department.

However, there is no reason to suggest the new plan will be any better at achieving this than the Victorian Government's plan more than a century ago.

Since the release of the original plan, proposals have been 'watered down' because of Victoria's unwillingness to refer its powers to the Commonwealth, attracting much criticism by members of the Howard Government. Such criticism might be valid, but also deflects scrutiny of the plan itself, particularly the economic consequences of centralised water administration as outlined.

The Prime Minister's plan proposes to overcome economic inefficiencies within the irrigation sector by improving on-farm efficiency. To achieve this, the plan incorporated the allocation of $15 million to provide information to irrigators on water use. In the past, state water authorities have provided this information to farmers, but with little success.

This suggests it is not information that farmers need, but incentives to use water more wisely.  Incentives can be provided by extension of water markets, agreed to by the states at COAG in 1994 and reaffirmed by the National Water Initiative in 2004. The advantage of water markets is not only the incentives they create for on-farm efficiency improvements, but the attainment of these improvements at a much lower economic cost by encouraging the reallocation of water away from less efficient irrigators. The Howard plan appears, in part, to ignore these considerations.

Moreover, political economy theory suggests that centralised water administration results in inefficiencies because it encourages lobbying by interest groups. Interest groups can manipulate policy outcomes by using political currency (votes and campaign contributions) to attract a larger share of government funds to their 'cause'. To date, Howard's plan has not detailed the process by which large proportions of infrastructure improvement funding will be allocated, encouraging lobbying by various groups.

For all of these reasons, and the fact that 2007 is an election year, one might suggest that the plan to 'save' the Murray-Darling is motivated less by pragmatism and more by politics.

This is an edited extract of an article by Dr Edwyna Harris, published in Monash Business Review, July 2007.

Dr Harris is a lecturer in the Department of Economics.