The Government’s $10 billion, 10-year water plan for the Murray-Darling Basin is under increasing scrutiny after Treasury Secretary Ken Henry raised concerns about its economics.

It’s certainly true that a number of key questions have not been answered yet, at least not publicly. For starters, is The National Plan for Water Security (the plan) cost-efficient? In order to justify spending collectively almost $9 billion on modernising irrigation and buying back water entitlements, the plan should be able to yield at least the same amount in public benefits.

If not, it would be better to spend the money on alternatives (schools, hospitals, etc), or to tax less rather than spend money on irrigation infrastructure projects that would occur without the water plan. Policy-makers will need to resist calls by irrigators to direct public investments into projects that generate the highest net private (rather than public) benefit.

A major economic challenge in the plan is that while it may be technically feasible to achieve very low rates of evaporation in irrigation delivery, this could come at a cost many times higher than alternative measures that would save the same amount of water. Expenditures of public money for public benefits, as announced in the plan, should not be constrained to particular investments or infrastructure, but should be allocated to those approaches that generate the highest marginal water savings.

The plan includes expenditures of up to $3 billion to buy back water entitlements held by irrigators in the MDB in order to reduce the overuse of water, whereby too much is consumed and not enough is left to maintain healthy river systems. But this approach could hit a few snags. In the current irrigation allotments, there exist entitlements that have never been used, so-called sleepers, and more particularly, dozers — entitlements that have previously been used but are not currently in use.

It’s difficult to determine the extent of water over-allocation, but where it exists, there’s the very real possibility that the plan will end up simply purchasing dry water (entitlements not currently in use). Where dry water is purchased there will be no public benefits in terms of consumptive use or environmental flows.

The plan is a major step forward in terms of the willingness of the Commonwealth Government to invest in a better water future. It would be a great pity if the proposed funds were not spent in a way that generates the largest public benefits per dollar of expenditure.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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