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Ken Henry on water « Previous | |Next »
March 5, 2008

Currently we don't have have well-functioning water markets; not in cities, or the irrigation areas in regional Australia.Instead, we have administered prices, legal protections on restraint of trade and, as a consequence, rationing. The states have really made a mess of water. They used cheap subsidized water to foster development in rural Australia, and they done little to deal with the negative consequences of their incompetent management. It's a mess.

Ken Henry argues that the state should allow the market to allocate water resources instead of the state governments rationing demand through regulation. Henry says:

About 2 1/2 years ago, I identified energy, water and land transport as three key candidates for the development of national markets, arguing that the case for governments facilitating the development of highly efficient national markets for key business inputs in a country as remote and geographically fragmented as ours is overwhelming. Our achievements to date have fallen well short of that goal. It may not be too much of an exaggeration to say that the only significant business inputs for which we do have national markets are financial capital, post, telecommunications and aviation.

Rationing is not a long term solution when there is a long term reduction in water supply due to global warming. Of course, the irrigation lobby talks in terms of a drought not climate change and puts its hand out for ever more subsidies to help it get through the "temporary" difficulties.

So why the deep resisitance to reform? Is it because of the National Party--those agrarian socialists---blocking the government buying back water entitlements as I have argued? Henry takes a broader perspective

The central explanation for slow progress in these areas is an aversion to the logic of markets. That aversion seems to be based on a fear of distributional consequences. Of course, there are legitimate reasons for governments to be concerned about the distributional consequences of markets. But Australian governments have numerous policy instruments available to them to ameliorate distributional consequences.And they have not been afraid to use them.

He says that though transfer payments are not without their problems, including adverse effects on work and saving incentives, but they generally achieve more transparent distributional - as well as more efficient - outcomes than interference in markets through administered prices and rationing.

In this article in The Canberra Tines Henry argues that:

If we had a well-functioning market in water, all users would pay a price that reflected the amortised costs of water storage and reticulation infrastructure, and also its scarcity value. Moreover, while water wouldn't have the same price everywhere, arbitrage would ensure that any difference in water prices between any two places and/or two points in time would be no larger than could be explained by the costs of transport and storage.

| Posted by Gary Sauer-Thompson at 6:35 AM | | Comments (8)
Comments

Comments

We as a nation should not provide water to those living West or East of the Dividing range until:

The Indonesians have the latest patrol boats; and, a fleet of up-to-date white Mercedes Benz autos are provided to PNG Government ministers. Then, and only then, should we worry about Australians.

So Adelaide is left to die and wither eh, until Rudd sorts out Papua New Guinea?

A water market eh. Something else the lower income rural townspeople have to pay through the nose for. Oh yea.

Now I know it all comes down to economies of scale but the fact is the coastal population earns more and thus it is more affordable for them to pay more. Now if they can get a market to work like that without turning to socialism or communism, then things would be fair.

Lets see rural people starting to complain about the fuel prices what 3-5 years ago, no one cared, then it hit the cities a year or two later then there was a big hullabaloo about it. What's the point in trying to get attention when all cities complain about their public transport which there is nothing wrong with, the commuters are just bad with time management. Just like there is nothing wrong with the Pacific Highway, its a dream compared to many other roads. The only problem on that road is fatigue and speed.

It was tongue-in-cheek Gary. It was a comment on how, for the last 20 or so years we've let our infrastructure go while we helped the struggling Soeharto family build up their family bank account.

Rumpole QC
Water is a toxic issue in SA. It may be raining along the eastern seaboard but its a heatwave here. We have little water, trees are dying and the parklands are turning to dust.

Basically we are tired of the other states putting their self interest first. No doubt you understand the constitutional issues about water management in the Murray-Darling Basin.

Vee.
the rural irrigation industries have had subsidised water for a century or more. Why should we continue to subsidize dairy farmers in Victoria who use so much water to produce a product of so little of value. The resources are better used to produce products of higher value.

The market will achieve that better allocation of a very scarce resource in southern Australia. As Henry says that on the demand side:

In times of drought, water prices would rise to equate demand and supply; just how high would depend on the severity of the drought and the price sensitivity of market demand and supply. In a well-functioning water market, drought-induced increases in the price would reallocate water among users, with a higher proportion of it flowing to those who valued it more highly. In any place, or time, at which its marginal value fell short of its price, water would not be used. On the other hand, if a suburban gardener valued her roses sufficiently highly, she wouldn't have to stand by and watch them die.

And on the supply side:
The supply response is even more important. The drought-induced price rise would provide the signal for investment in additional supply, including desalination plants, new dams and water recycling plants. When operating, these investments would reduce the price of water. That is the logic of markets: additional supply reduces price rather than increasing it.

I cannot see any other way out of the mess that has been created by the states. Is there a better way?

For all your ideas on water, energy, and transport, and for the 20 million people not invited to the Australia 2020 Summit, the online community created a wiki so people across Australia could post, discuss, and vote on the best ideas for the country. It’s totally a grassroots effort. It’s free, can be anonymous, and isn’t being sponsored by any political party, business, union, or special interests. It’s just people who want to encourage an online national brainstorming session.

The site is at Oz Ideas. There are pages for over 20 different issues (including water) and even an online petition to get the best ideas heard at the actual Summit.

The more people know about it, the more ideas are submitted, and the better the discussion. It’s a great way for everyone to participate in the summit.

Jim
Wiki Creator

Gary,

I very deliberately referred to the townspeople. So what they should all pack up and move to the city to put even more strain on the failing infrastructure?

People should be encouraged in the other direction to build up a critical mass so markets can achieve economies of scale in rural areas & ideally these people should be the younger people so we can all work together on infrastructure for that area. It takes the strain off the cities, creates employment, its a win-win.