Prof. Mike Young Research Chair, Water Economics and Management The University of Adelaide Griffith University Lighthouse Lecture Brisbane 2 nd June 2008 Future Proofing the MDB 2 The country that takes top prize in water management is Australia The next prize depends upon industry & community willingness to support pursuit of robust permanent solutions 3 Which future is best? One that gets the fundamentals right, now? A system that can be confidently explained as able to cope -- whatever future arrives One that commits all to more decades of reform and uncertainty? Incremental progress No guarantee of resolution of current problems 4 P5. Insufficient planning for less water - 1% - 3% 5 Adverse climate change Mean supply 10,000 River & Storage Evap 2,000 Flow to sea 2,000 Deliverable water 6,000 Environment Use 1,500 Consumptive Use 4,500 0 Mean supply 7,000 River & Storage Evap 2,000 Flow to sea 2,000 Deliverable water 3,000 Environment Use 1,500 Consumptive Use 1,500 0 In Mediterranean climates, a 10% decline in mean rainfall results in around a 30% decline in mean storage inflow 10% less rain water means a 67% reduction in allocations unless the system is resized 6 Planning for long drys DRY WET Total River Murray System Inflows (including Darling River) 7 Re-live from 8 Current Southern System Cap on Diversions Normal years NSW and Vic % Share inflows + obligation to supply SA SA gets 1850 GL + Responsibility for maintaining bottom of system + 100% entitlement but no carry forward Special accounting Each get ~ 1/3 Exceptional circumstances Special arrangements & new rules possible Volume of Water in the System Indicative template for sharing water among States and with the environment 10 Interception & double counting 0GL1,200GL2,400GL3,600GL Plus salinity interception Plus overland flow capture Solution Require interception to be offset (save GL) Surrender entitlements equal to deemed impact 11 Use it or sell it because you cant save it Back to empty Inflows have dropped 68% but use has only dropped 12 Got by running the system too low Solution Allow saving (Carry forward) of all water with an adjustment for evaporative losses Change MoU, Agreement and Act to allow SA to carry forward water. 12 Adverse climate change Mean supply 10,000 River & Storage Evap 2,000 Flow to sea 2,000 Deliverable water 6,000 Environment Use 1,500 Consumptive Use 4,500 0 Mean supply 4,000 River & Storage Evap 2,000 Flow to sea 2,000 Deliverable water 0 Environment Use 0 Consumptive Use 0 0 In Mediterranean climates, a 20% decline in mean rainfall results in around a 60% decline in mean storage inflow 20% less rain means the system has to either be reconfigured or abandoned! 13 System reconfiguration options (Reducing evaporation) More dams What will you fill them with? New sources None have yet to passed detailed analysis Leakage and seepage Most eventually reaches the river (for a gain most cant be shared) Better control A short term gain Evaporation Real savings Lakes, wetlands, weir pools, river height, etc 14 Environmental security The environment is the interest that always loses Irrigation Security at cost of Environmental Security 83% reductions from environment 17% reduction from users Solution Give the environment a share that has the same status as that given to all other users (as in NWI) Allow environment to carry over water {Entitlement purchases for environment are doing this!} First priority to maintenance water needed for conveyance, evaporation, etc 15 Future-proofing the Basin1.A sustainable sharing system for ground & surface water Maintenance water (conveyance, evaporation + min flow to sea) Shares for all non-flood water 2.Put all states under the same regime and give all the opportunity to save water Share inflows (no cap the diversions) Shares issued to environment and States 3.100% carry over of all water Continuous accounting similar to Dudleys capacity sharing system 4.Require off-set of all land use change that erodes entitlement reliability (forests, dams, SIS) State shares reduced as interception increases 5.An independent authority making allocations to shareholders 6.If still dry, review system configuration & size from top to bottom Search for evaporative savings 16 Market value of tradeable entitlements State / ValleyEntitlement MLEst. Value per MLTotal $ Value NSW Lower Darling General Security30,000$1,000$30,000,000 NSW Lower Darling High Security8,000$2,500$20,000,000 NSW Murray General Security1,669,000$1,100$1,835,900,000 NSW Murray High Security182,000$2,400$436,800,000 NSW Murrumbidgee General Security1,986,000$1,200$2,383,200,000 NSW Murrumbidgee High Security302,000$2,500$755,000,000 Vic Goulburn & Murray Connected High Reliability2,288,000$2,400$5,491,200,000 Vic Goulburn & Murray Connected Low Reliability784,000$200$156,800,000 SA Murray High Security550,000$2,350$1,292,500,000 Total7,799,000$12,401,400,000 Source: Waterfind, 2008 17 Waterfind buy-back warning 1.Purchase entire entitlement market would take 14 years to get 1500 GL. 2.If limit govt. to 30%, so some opportunities for structural adjustment remain, would take 47 years to get 1500 GL. 3.Warning that upward revision likely CSIRO Sustainable yield report Recent MDB report to Ministers says the collective effects of climate change, bushfire, afforestation, groundwater extraction, irrigation return flows and farm dams could reduce stream flow by approximately 2,570 GL per year by 2023 and by up to 4,690 GL per year by 2053. 18 $5 billion now or up to $10 billion over 10 years? Pay $3.5 billion just and fair compensation now to southern irrigators and irrigation companies for a future-proofed regime to commence in 3 irrigation seasons time. Waive all govt. water trading charges. Informed by CSIRO modelling, environments share could be phased in. (A confident step change, a new Agreement, a predictable sustainable future) 19 Off-market share buybacks Corporate experience reveals that large buybacks are best implemented quickly using an off-market mechanism. Coles Myer in 2005 provided one of the better known examples of a corporate buyback. 20 Coles-Myer Share Buyback Schedule 21 Coles Myer 2005 Press Release Price paid and volume shares purchased Off-market buy-back price $8.30 {All who offered $8.30 or below per share were paid $8.30} 70.4 million shares bought back for a total of $585m Secured 5.7% of Coles Myer shares on issue 22 Indicative structure of water buyback tender 1.Irrigators invited to tender to sell a proportion or all of their water licence with option to lease back until 30 th June (No change over the next two irrigation seasons). 2.Tender closes on 30 October. 3.Participants notified 2 weeks later on November 15 th. 4.For each type of irrigation licence, a single clearing price will be paid. 5.Payments made two weeks later on 30 th November. 6.Entitlements may be leased back for next two irrigation seasons at $300 per ML of allocation received. 7.This years allocation remains with licence holder for free. 23 Illustrative Offer form (High security entitlement) Type of Licence South Australian River Murray Licence Offer 1 .. not less than $2, per ML Offer 2 .. not less than $2, per ML Offer 3 .. not less than $3, per ML Offer 4 .. not less than $3, per ML Offer 5 .. not less than $3, per ML Signatures Licence holder Registered interest (if any) .. Will you be leasing back any allocations made to these entitlements at $300 per ML of allocation made until 30 June 2010? Yes / No 24 Future-proofing the southern MDB 1.Future-proofed entitlement systems First commitment is to maintain the system Then to share the remaining non-flood water 2.Environment as equal shareholder 3.Enforceable register and accounts 4.Efficient storage and adjustment markets Carry-forward - so we can all start rebuilding (some safety) Instantaneous, low cost trading 5.Require offset of all increases in un-metered and un-meterable water use Forestry, dams, salinity interception, leakage prevention, etc 6.No selective government investment in infrastructure A level playing field with full cost pricing Financial recompense paid to all entitlement holders and adequate warning about the nature of the once-off change to be made 7.Re- set the system as quickly as possible NWI Consistent investment Send out the money now and engage all in bottom-up process Options include Coles-Myer like buy-back Assist water supply companies to target and reconfigure inefficient areas 25 Recommended changes to the draft CoAGs MoU 1.Establish maintenance as a system responsibility. Authority to set aside enough and allocate the rest to States and the environment. Entire connected ground & surface water system (not just the River Murray stem) 2.Environmental entitlements defined in same manner as irrigation entitlements, on system register and fines to States for over-use 3.100% carry forward for all States and Environment. SA with storage rights the same as other States 4.100% offset of interception from Commitment to finalise foundations for the regime upon which a robust Basin Plan can be built within 6 months. Contact: Prof Mike Young Water Economics and Management Phone: Mobile: Download our report from