water for irrigation and the environment?
Some problems and prospects for worthwhile investments.
Road, Toolamba VIC 3614
Because of a growing concern about the
riverine environment, there are calls to increase environmental flows in
the Murray-Darling Basin (WWF Australia, 2002). Allocations for
consumptive use in the connected Murray River system would fall under a
series of proposed scenarios by 350 gigalitres (GL), 750 GL or 1500 GL (MDBC,
2002); and by 750 GL, 1630 GL or 3350 GL (Young et al, 2002) as shown
in Figure 1.
1: Schedule of increased environmental flows proposed for the Murray
System (after Young et al, 2002)
environmental flows on this scale is a big idea. While there may be some
complementary outputs in river management, environmental flows and
consumption are ultimately competitive uses. On an area basis, the
increased environmental flow scenarios contemplated by Young et
al have the potential to reduce the area of irrigated agriculture
by 95,000 hectares, 200,000 hectares or 420,000 hectares. This is
equivalent to wiping out irrigation in Northern Victoria.
the efficiency of irrigation water use is seen as a way to offset reduced
allocations. Indeed some see increasing water use efficiency as the next
quantum leap in water resource development. Options such as reducing water
storage and transmission losses, improving irrigation efficiency and
improving plant water use efficiency can help maintain production under
reduced water availability. And switching from production of “low
value” to “high value” commodities can increase gross value of
returns. However the costs of implementing these options must constitute a
critical economic constraint to the adoption of these solutions.
provide a basis for analysis, inefficiencies in water use are defined, the
illusory nature of some proposed savings is explained and a method for
valuation of real savings in comparison to costs of proposals is
described. The simple treatment of these issues here is not complicated by
the unique attributes of local situations. This is not a major difficulty
if real options are examined in detail using benefit:cost analysis
principles before policy changes are made or investment is sunk.
limited prospect for obtaining a significant volume of real savings is
discussed. This highlights the need for a sound policy for achieving the
best allocation of limited water resources to competing uses.
Nature of Inefficiencies
Irrigation System Losses
Outfalls and Paddock Tail water
exceeding demand spill over the end of the channel or drain off the end of
the irrigated paddock. Estimates of combined gross losses range from
25-50% of stream diversions. Figure 2 shows a hypothetical irrigation
system where paddock tail water and channel outfalls do not return to the
river. Of gross diversions of 100 GL only 60 GL are used for crop
production. The remaining 40 GL comprising channel outfalls and paddock
tail water is lost from the system. Net diversions are 100 GL.
Figure 2: Schematic illustration of water flows
for an irrigation system with 40% gross outfall and paddock tail water
losses. Arrows show flow volume and direction, star symbols indicate
consumptive use and dotted circles show volume of losses
magnitude of real or net losses depends on the ability to recycle within
the irrigation system or return excess flows to the river. Returned flows
contribute to environmental flows.
3 shows the same system where diversions exceeding irrigation demand flow
back to the river via the farm and district drainage network. In this
example excess flows of 40 GL return to the river. Net diversions are 60
Figure 3: Schematic diagram of water flows for an
irrigation system with 40% tailwater and outfall losses returning to the
that seeps below the channel bottom or the root-zone in the irrigated
paddock supplements existing groundwater resources. Gross surface system
losses depend on channel/pipe materials, length of irrigation season, soil
type, irrigation technology and management.
Magnitude of real or net losses depends on the proportion of
groundwater returning to the river and the ability of sub-surface drainage
systems to recycle groundwater accessions.
losses are in the order of 15-20 ML/ha of water surface depending on
climate. These losses are not recoverable, except that within irrigation
areas increased humidity from evaporation may moderate plant water demand.
Plant Water Use Inefficiency
are diminishing returns to increasing water use intensity (irrigation or
rainfall) as other factors of production become limiting.
assumption here is that, given the market for produce, water resources are
irrationally allocated to low value enterprises.
Identifying prospects for real savings
Irrigation System Losses
Outfalls and Paddock Tail water
returned flows already contribute to downstream allocations there are no
system savings obtained from reducing return flows. This simple algebraic
reality obliterates the major forlorn hope of increasing catchment water
resources. Figure 4 shows that eliminating tail water losses and channel
outfalls and supplying only crop irrigation demand does not create new
water. Net diversions are still 60 GL and downstream flows are not
increased above 140 GL.
Figure 4: Flows in system when perfect control in
water delivery and irrigation water use is attained.
No water savings benefit is obtained.
difficulties occur when only parts of a system are considered. Outfalls
are in fact spillovers. They may be negative spillovers as losses from one
part of the system. But they are also positive spillovers providing
inflows for the downstream component.
the basin scale there is basically only one outfall, through the barrages
at Goolwa, close to the mouth of the Murray. Calling transfers between
jurisdictions “losses” and then aggregating “losses” from each of
the n jurisdictions introduces
an iterative process of nonsensical double counting between jurisdictions
all the way down the system.
the interconnectedness of surface and groundwater systems, seepage losses
are also spillovers. The prospects for real savings depend on the extent
to which seepage is used as a water resource and the time lag between
accessions and groundwater pumping.
seepage is already being recycled by existing groundwater pumps, the only
real savings from seepage reduction are reduced operating and maintenance
costs for the groundwater pumps.
for real savings depend on opportunities to decrease specific exposure by
reducing the surface area exposed to evaporation and/or increasing the
water depth of storages. Options include piping open channels and changing
system operating rules and decommissioning shallow storages such as Lake
Mokoan and Lake Alexandrina (Anon, 2001).
Plant Water Use Efficiency
a reasonable standard of management, increased production per unit of
water can only be obtained by investing in developing and adopting new
production technology. The adoption of higher harvest index semi-dwarf
wheats in the 1980s is an outstanding example. Other options include
regulated deficit irrigation of peaches and partial root zone drying of
winegrapes using drip irrigation technology, amelioration of physical and
chemical constraints to soil fertility and development and/or introduction
of plant types more suited to the climatic conditions experienced. An
example of the latter option would be the replacement of temperate C3
photosynthetic pathway species with more water use efficient sub tropical
C4 plants for summer production.
is often suggested that because horticulture has high gross margins per
megalitre, and modern horticulture can deliver high water use efficiency,
that the best policy solution for increasing water use efficiency is to
mandate or subsidise horticultural use.
the market reality does not support this policy option (if the objective
of policy is to increase net social welfare). Commodity composition is in
loose equilibrium with capital markets because the mobility of capital in
market economies leads to equal rates of adjusted
net return in all activities. For commodity composition to
change dramatically, extensive changes in demand for irrigated produce is
necessary. This may be engendered by trends in global demand (Hooke, 1997)
and development of new production technology conferring a comparative
advantage to local production. Until then, too rapid expansion into
horticulture is a recipe for financial ruin.
Valuing Water savings
markets have been operating for more than a decade (Simon and Anderson,
1990). Average prices for permanent transfer of water right in recent
years in a number of irrigation areas is shown in Figure 5. The price
dispersion can largely be explained by the expected mid to long run
average allocation on different systems, by immediate seasonal allocations
prevailing and by other factors such as locational variability in terms of
institutional arrangements, prices for inputs and commodities and climate
(Colby et al, 1993). When these factors are taken into account a price of
$500-$600 per megalitre of permanent entitlement to annual delivery seems
a reasonable estimate of the recent market price of water.
Figure 5: Average recent prices for permanent
water right. Because of different allocation policies on different
irrigation systems the figure does not indicate the price of permanent
entitlement to annual delivery of one megalitre. (Data after Marsden Jacob
in ACIL (2002))
Are Market Prices Appropriate?
the existence of contestable water markets, and land and water management
plans to manage or tax the external impacts of irrigation, market prices
should represent the social value of water at the margin of resources.
facilitate the transfer of rights between willing buyers and willing
sellers. Trade occurs when willingness to pay (WTP) at least equals
willingness to accept (WTA). Provided buyers and sellers are equally well
informed, the equilibrium market price of water will represent the net
present value (NPV) of the future stream of benefits flowing from the
water entitlement in either use. Buyers and sellers will base their
estimate of the value of water on the expected timing and magnitude of the
additional production from irrigation using the entitlement, the expected
market value of the additional produce, the magnitude and timing of
additional costs and the required rate of return on marginal or core
capital, whichever is appropriate.
seems to be some underlying policy apprehension that reluctant sellers are
seeking inordinately high rents from speculation. Despite the fact that
the use of futures trading to manage risk in agricultural markets relies
purely on speculation, some consider it inappropriate to speculate on the
value of water. Yet, given the uncertainty inherent in the estimation
outlined above, a non-speculative valuation is impossible.
Reconciling Willingness to Pay and Willingness to Accept
large part of the commonly perceived gap between the NPV of water in
“high” and “low value” uses is due to the inappropriate use of
unadjusted gross margins as a means of comparison. The annualised
additional capital development costs should first be deducted from the
gross margin of the expanding enterprise. This substantially reduces the
annual net margin for the “high value” use. The relative
present value of the “high value” net margin will be further reduced
when discounted at the desired rate of return on marginal capital rather
than the low discount rates used for sustainability of core capital
advocated by Quiggin (1992).
Figure 6: Present value of continuing existing
irrigated grazing enterprise or developing new irrigated horticulture or
irrigated dairy activities.
6 shows how inclusion of development costs and risk adjusted discount
rates reconciles a large disparity in gross margins between enterprises.
In this example, the NPV of irrigated development in horticulture and
dairy generating gross margins of $600/ML and $163/ML respectively is much
the same as that of an existing irrigated grazing enterprise with a gross
margin of $30/ML.
Estimating impacts of reduced agricultural allocations
the long run agricultural development costs are already sunk, the present
value of the future loss of gross margin should be used to estimate the
agricultural opportunity cost of heightened environmental demands. Using
recent market prices, the cumulative cost of purchasing water entitlement
for the full implementation of the scenarios outlined in Young et al (2002) is $1.8 billion. The present value of the cost of the
scheduled program of acquisition is $940 million. Given that the market
price of water will rise as the supply for consumptive use is restricted,
this must be very much an underestimate. Yet this very underestimate is
roughly double the estimate made by Young et
al of $450 million using an economic model for a scenario where there
is no adjustment through investment in increased water use efficiency.
What is the reason for this
extreme discrepancy? Some increases in future environmental flows may be
released from storages during seasons of high inflows and low irrigation
demand. Depending on inflows and demand in following seasons, this
approach may moderate the impact on agricultural output at the margin of
regional water resources. The potential for this moderation would tend to
disappear at the higher levels of proposed increases in environmental
flows. Higher environmental flow regimes may bring some benefits to
downstream users through lower salinity levels. But the value of these
benefits is relatively minor and comparatively low cost engineering
options for salt interception are available. Further Quiggin (1988) has
shown the rational national adjustment to salinity is to move salt
sensitive uses upstream.
an if economic model is to be effective in guiding profitable investment,
its structure must entertain all feasible options and its output must
reconcile with the reality of market prices.
Rationale for investment in water use efficiency
Private and public
investment should yield increased profit and net social welfare. The
corollary of this is that it is foolish to promote a state of higher
technical efficiency if the benefits of being there don’t exceed the
costs of getting there. Thus the appropriate evaluation of proposed
intervention should be based on a conventional financial or benefit: cost
analysis and its implementation should be driven by cost sharing
arrangements recognizing private and public net beneficiaries (Mishan,
While there is a growing realisation that investment in unprofitable efficiency gains is
nonsensical, there is a continued clamour by vested interests for funding of unprofitable projects.
In some instances there may be complimentary benefits or other trade-offs
to bear in mind which may complicate decision making. These aspects may be
made explicit in the benefit:cost analysis but are not central to the
issue of identifying real water savings considered here.
The most complicated
proposals are for the funding by government of water authorities’
projects to reduce outfalls
in exchange for increased environmental flows. These arrangements must
attenuate the property rights of water entitlement holders. This is so
because the net effect on environmental flows is zero as shown in Figure
4. Hence additional water must be released from storage to keep the
bargain to increase environmental flows. The additional releases mean
allocations to irrigators are reduced. It can be seen as a scheme by water
authorities to appropriate and sell part of irrigators’ bulk water
entitlements. Such schemes promote an opposite view to that of Randall
(1981) who advocated that “The simplest solution, it seems, would be to
vest ownership of all tailwaters with the original water title holder”.
Another scheme to reduce
water losses is the proposal to improve the accuracy of measurement of
water deliveries to farms. The major assumption here is that water
deliveries are significantly underestimated. Be that as it may, very
little if any real water savings will result from improved measurement of
deliveries per se because crop water demand will remain unchanged. Given
that farm practices and technology remain the same, either the same real
volume of water will be delivered to satisfy crop demand or a reduced area
of crop will be grown under a limitation imposed by a cap on diversions.
In the former case there is no increase in environmental flows and in the
latter case increased environmental flows will come at an agricultural
opportunity cost in addition to the cost of improved metering.
much publicised proposals for saving water by piping irrigation delivery
systems (West and Walker, 2002) are clearly uneconomic. This is except
perhaps for the replacement of open channels in some stock and domestic
and some horticultural development schemes where pressurised delivery can
reduce pipe costs and assist the adoption of improved irrigation
technology. For these schemes the cost of water savings is around
$1,300/ML to $10,000/ML (Marsden Jacob et al, 2002) or roughly twice to
twenty times the market price. Extensive replacement of open earthen
distribution channels with pipelines is even more expensive costing
$20,000/ML to $50,000/ML, (Marsden Jacob et al, 2002). This is forty to
one hundred times more than the market price of water. And, when it is
considered that seepage losses are already recovered by groundwater pumps
in irrigation areas, the cost of the real physical savings of evaporation
is more like eighty to two hundred times more expensive than the market
price. On this basis how can the use of government-backed water bonds for
superannuation savings to fund pipeline schemes (West and Walker, 2002)
possibly be prudent?
Scope for profitable investment in Water Use Efficiency
Adam Smith said “It is the maxim
of every prudent master of a family never to attempt to make at home what
it will cost him more to make than to buy.” On this basis it would
seem difficult to justify investment in water savings projects that cost
more than the market price. An estimated supply curve for water savings is
shown in Figure 7. A market price of $500/ML is also indicated. The fact
that there are no savings identified below the market price and very
limited volume is available at the market price indicates the market is
well informed and operating efficiently.
Figure 7: Estimated cost and possible yield of
water savings projects. Note that white circles indicate projects where
savings are at best dubious, illusory or non-existent. (Data after Marsden
Jacob in ACIL (2002) and Anon (2002))
considering the dubious, illusory or non-existent nature of the water
savings claimed for many of the proposed projects (indicated by white
circles) Figure 7 shows that the prospects for obtaining high volumes of
real water savings at any cost are very limited.
Figure 8: Volume and cost of potential real water
savings identified in the connected Murray system
comparison to the proposed increased volumes for the environment, Figure 8
shows only a couple of projects with significant potential real savings
identified in the interconnected Murray system. These are 123 GL for
on-farm options and channel sealing in the Murrumbidgee irrigation area (ABARE,
2001) and 800 GL for reduced evaporation losses from Lake Alexandrina and
Lake Albert (Anon, 2001). These savings may come at a cost of $1000/ML and
Policy Options to Cope with Scarcity
Taking $500/ML as the
market price for permanent entitlement to delivery of irrigation water,
Figure 7 shows that there are no economical technical solutions to the
problem of overuse of water resources by competing uses. Because catchment
yield is limited by biophysical factors and the efficiency of use is
limited by economic constraints to the adoption of technical solutions, a
system of rational allocation is needed if unacceptable levels of
degradation are to be avoided (Hardin, 1968).
One existing possibility is
the water market where
economist can imagine circumstances in which, for example, organised
groups of recreationists and wildlife enthusiasts would purchase water
entitlements and leave them unused to augment, at their own expense,
in-stream flows beyond the required minima. Realistically, one would not
expect such behaviour to be especially prevalent. But it is hard to
conceive of any resource misallocation which would result from its
occurrence” Randall (1981).
the ACF recently indicated it would not support property rights for water
for the environment while it could obtain increased environmental flows
more cheaply through the political process (Moss, 2002).
Discussion and Conclusion
This examination of the nature of water
losses due to inefficiency has outlined basic principles and a detailed
analysis should be carried out to evaluate major prospects. But
notwithstanding this caveat, the majority of anticipated savings from most
projects promoting increased water use efficiency are illusory due to
errors in logic and the inability or reluctance of the promoters to view
water flows in a systems context.
The indisputable conclusion is that the
economical opportunities for real water savings in the connected Murray
system can only be measured in hundreds, rather than thousands of
gigalitres. Thus increasing environmental flows beyond some hundreds of
gigalitres will have nationally significant opportunity costs measured in
billions of dollars rather than millions.
To the extent that LWMPs tax and manage the
external impacts of irrigation, market prices indicate the social cost of
moving water out of agriculture. Little is known of the demand curve for
environmental flows but institutional reform properly defining water
rights and allowing wider access to the water market would make the
derivation of environmental demand an academic exercise.
Market prices indicate the net present
value of existing and new irrigated agricultural development opportunities
at the margin of regional resources.
That governments have indicated willingness to pay double the market price
for water savings projects (ACIL, 2002) may indicate either a reluctance
to allow an adjustment to policy decisions through the market or an
anticipation that market prices will rise dramatically in response to
increasing scarcity. This further underscores the prevailing gross
underestimation of the agricultural impact of reduced allocations based on
some economic modelling.
While there are no currently economical
options for greatly increasing water resources in the connected Murray
system some may become so as market prices rise in response to reduced
allocations for consumptive use. A promising prospect for real increases
in effective water resources from reduced evaporation is the
decommissioning of Lakes Alexandrina and Albert as irrigation storages
Some very high cost proposals such as
pipelining are being promoted on the basis that water savings will be
transformed into expertly marketed produce of “high value” far
exceeding the cost of water savings. Yet a moment’s reflection will show
that, however financially successful such developments may be, the
economic value of the water savings can not exceed the least cost
alternative source of supply.
Well defined property rights and soundly
constructed markets can value and provide that source of supply.
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Irrigation intensity of 8
Adjusted for market risk,
existence of sunk capital, production uncertainty etc.