Don’t water down this initiative

A key part of the national water initiative (NWI) is promoting the efficient operation of water markets. This is not just a noble genuflection to the memory of Adam Smith. If water rights are freely tradeable, they, like any other scarce resource, will be used by the more efficient producers.

Water markets enable value to be set by the free choices of people in the market, not by government decree. Markets are better at picking winners than governments. As long as recurrent charges for water access and delivery are properly priced so as to recover the costs of provision (another NWI objective) the most important (but not the only) test of whether water is being used efficiently is whether that user is making a profit.

Water markets enable us to adjust to change and to reallocate water resources over time in response to changes in market requirements and environmental conditions. They also let us deploy resources efficiently.

There is already water trading in Australia, but it is severely constrained: most irrigation districts limit the amount of water that can permanently be traded out of the district; water trading between states is hampered by a lack of uniformity in the way water rights are characterised or exchanged from one type (e.g., different levels of reliability) to another; trades between urban and rural areas are seen by some sectors of the community as a no-go area; and purchasing water for the environment is viewed as a threat to stability in markets. The NWI is designed to ensure that some of the critical so-called pre-market conditions are in place to enable markets to develop. These include:

* Clearly defined and secure water access entitlements that are separate from land and able to be mortgaged. Registers of water entitlements and trades should be compatible across the nation.

* Nationally consistent water accounting to ensure that water accounting methods and the measurement of water across Australia meet common standards. This is especially important in rural settings where water use accounts for about 70 per cent of Australia 's total water resources.

* Effective planning for water systems to settle the trade-offs between consumptive use and the environment and to deal with instances of significantly stressed river and groundwater systems by reason of overallocation and overuse.

There has been good progress on many of these areas in almost all jurisdictions. But still much more needs doing, especially in water accounting, and extending the coverage of effective water plans. Even if these conditions for effective water markets were to be met, there are still significant barriers to water trade. For this reason, the NWI also contains specific reform commitments made by state governments to remove barriers to trade within catchments, and between catchments (where physically possible), including of course water trade between states.

One deadline in the NWI for opening up trade within jurisdictions and between states has already passed. There has been a lot of genuine effort by jurisdictions to enable trade in the southern Murray-Darling Basin in particular. This effort intensified after Prime Minister John Howard wrote to the premiers of NSW, Victoria and South Australia to express his concern at the slow progress towards cross-border trading. The National Water Commission (NWC) has indicated that it will be closely examining trading in its 2005 National Competition Policy assessment of states' water reform progress.

Nevertheless, the fact remains that effective trade between these three jurisdictions is still not a reality. The NWC assessment report is due to come to governments in the next few weeks.

A very advanced water-trading system, Watermove, is operated by Goulburn Murray Water in Victoria . Users can trade water on the Watermove website and the system breaks down the right to water into its component parts, including access and distribution.

Past experience indicates that the water market will create its own momentum once some of the most explicit barriers to trade are removed. But no one should pretend that it will take any less of a concerted effort by state governments to remove barriers that are exposed in this process, and to resist new barriers to trade as the market develops.

Malcolm Turnbull is the member for Wentworth and Parliamentary Secretary to the Prime Minister. This is an edited extract of a speech to The Centre for Independent Studies, on February 22