Watering Victoria: the good, the bad and the ugly

Alistair Watson, Freelance Economist, Melbourne aswatson@bigpond.net.au

Paper prepared for the Watering Victoria Symposium organised by the Centre for Public Policy of the University of Melbourne, September 24, 2008



This paper is a variant of others written on water policy in Australia over recent years (Watson 2001, 2003, 2005, 2006, 2007a, 2007b, 2007c, 2007/2008, 2008a, 2008b).[1] The major conclusion of this version is that public policy for irrigation and water in Victoria over more than a century has been based on poor arguments about local economic, environmental and hydrological conditions that should have been, and still should be, the basis of policymaking. The emphasis is on irrigation with only a few remarks on urban water.

Around three-quarters of the water drawn from Victorian rivers and streams is used for irrigation. The irrigation lobby jealously guards this share despite all the changes in the economy since the irrigation era began in Victoria in the late nineteenth century. The most obvious is ongoing urbanisation and the relative decline of the agricultural sector. Until the last twenty years, popular and political support for irrigation was unchallenged except by the few who had engaged in serious research and analysis on the topic. In summary, irrigation had the numbers but irrigation, at least on the scale and in the way practised in Victoria, was not well supported by economic, climatic and environmental logic. If there were a single explanation for this it would be that politics works on different time scales to agricultural production, market developments and hydrological and environmental phenomena. This is challenging enough with the standard electoral cycle. It is especially damaging when politicians succumb to the self-imposed pressures and seductions of a daily news cycle.

Time is part of the story in other contexts. Assets used in water supply and irrigation are long-lived and inflexible. The upshot is that there is a big difference between the economics of investment before and after the event. Thus, greenfields horticultural developments with privately owned irrigation infrastructure are more profitable than either new or established plantings in old irrigation areas. Trading of irrigation water in recent years has allowed this to be reflected in the spatial distribution of irrigation. Why should so much public money be spent on infrastructure upgrades in places where water is being traded out in response to market forces? It would make more sense for governments to be concerned with social and environmental consequences of water shortages and water trade.

Much the same constraints on retrofitting the existing capital stock affect urban water. Water saving techniques like recycling of wastewater, rainwater tanks and stormwater capture could be goers in new urban developments but they are less likely to pass investment tests in established suburbs because it is so expensive to disturb the existing network of pipes in distribution systems and households. Most of these techniques are time and location specific, not universally applicable as so often implied by unsophisticated observers.  

Water policy in Victoria over the years has oscillated between two competing and fundamentally illogical positions. Sadly, advocacy of simple solutions to complex problems has supplanted empiricism in water policy. After decades when damming every river and stream was a challenge to right-thinking men hell bent on establishing more irrigation schemes, a non-empirical version of environmentalism has surfaced as a political force in the last couple of decades. Blanket opposition to new dams for urban water supply is one of many unhappy expressions of such attitudes and influence.[2] Outright prohibition of new dams in favour of (say) rainwater tanks is manifestly foolish. There are decreasing costs of storage. The results of this obstinacy and green hair shirt mentality will be environmentally damaging as well as expensive. Investments more or less inevitable once new dams are precluded such as desalination and inter-valley pipelines have environmental effects that should be evaluated.

The tide began to turn against large-scale public investment in irrigation in the mid-1980s when it became obvious that irrigation was pressing against sustainable yield. And that was before a run of poor seasons in southeast Australia over the last ten years. Fiscal problems of state governments, particularly acute for Victoria, also meant that longstanding subsidies to irrigation needed to be re-examined. In essence, it was at last recognised that there was too much irrigation in Australia. Moreover, poor public administration had been a feature of irrigation for decades. Public water authorities saw themselves as servants of irrigators, or created for the benefit of their own employees, not the public interest.

The public sector struggles with contraction of activities that are a legacy of previous community attitudes and economic circumstances. Dealing with the consequences of over expansion of irrigation is not straightforward. Just because much past investment in irrigation was ill advised does not mean that existing public and private investments in irrigation cannot be used effectively. Today’s policy should be forward looking.

After a brief period of reform of irrigation policy and administration that flickered after the mid-1980s, irrigation policy has regressed in the last few years. Ongoing severe drought and associated political panic is the major reason for the retreat. The previous dominance of engineers has resumed with most emphasis given to engineering solutions, ostensibly in pursuit of water savings. Not only are the claimed water savings costly, and problematic for hydrological reasons, public investment in irrigation infrastructure goes against sound principles of public finance. Off-farm and on-farm irrigation infrastructure should be the responsibility of irrigators, not governments (that is, other taxpayers). Buyback of irrigation licences would be cheaper but has so far only attracted limited political support.

The thinker from Tambo Crossing

Exceptional in the small group of early Australian critics of irrigation was Bruce Davidson, whose books The Northern Myth and Australia: Wet and Dry published in the 1960s should have ended the unqualified confidence of irrigation enthusiasts in Victoria and the rest of Australia. His analysis stands the test of time. Many aspects of his approach are still relevant. Above all, Davidson was an empiricist in the best sense of that term. He recognised that genuinely interesting questions of economic policy are matters where economic theory and the facts and circumstances of particular cases should be carefully weighed up; decision-making should not be based on prejudice, ideology or whim. Unfortunately, irrigation enthusiasts were, and remain, disinclined to contemplate the basis of their assumptions and conclusions, and were, and are, immune from contrary evidence and interpretations.

The economics that underlies Davidson’s work is relatively straightforward – essentially, application of the principles of production economics and comparative advantage to a large arid agricultural exporting country like Australia. However, the supporting empirical research and documentation is extensive and meticulous. What Davidson brought to the table in the irrigation debate was a detailed knowledge of farming systems and agricultural technology, the realisation that water is one input among many in agricultural production and that commodity markets and farm structure are also pertinent to policy making. Davidson emphasised the significance of Australia’s endowments of natural resources and market prospects to the success of agricultural industries and public investment in agriculture.

Davidson had a keen sense of the need for rigour in considering the appropriate role for government in a mixed economy. He was also clear headed about distributional issues. Most of these insights are missing from the contemporary policy debate. Politicians, so ready to trash their immediate partisan opponents, are apparently unaware or reluctant to admit that their predecessors have dealt them a very weak hand in dealing with increasingly difficult problems in water policy. Sometimes the same analytical error re-appears in different guise. Support for irrigation was often based on invalid observations on production per unit of land. These days, the innocent are often seduced by comparisons of gross value per megalitre (Perry 2007). This error – essentially, relying on partial productivity ratios – finds its silliest expression in ratbag ideas from the inner suburbs like virtual water and food miles.  

As industrious and original as Davidson was (Watson 2007b), he must have obtained his ideas from somewhere. Davidson always acknowledged that the principal sources of his ideas were his teachers at the University of Melbourne, Yvonne Aitken, G.W. Leeper and S.M. Wadham (Batterham, Mauldon and Ockwell 1994). Wadham’s understated scepticism on the role of irrigation in Australia is revealed in the standard reference work Land Utilization in Australia that he first co-authored in 1939 (Wadham and Wood 1939). The book had numerous editions published into the 1960s that influenced a whole generation of officials and teachers. Wadham was also part of the (second world) wartime Rural Reconstruction Commission that sought to redress the glaring mistakes of Australian agricultural policy of the interwar period, and earlier. The Eighth Report of the Commission on Irrigation, Water Conservation and Land Drainage remains a rigorous, and often droll, account of the pitfalls of the dogmas of irrigationism that still afflict contemporary policy.

For any unreconstructed irrigationists, several other ingredients of the Davidson critique are worth noting. Davidson turned conventional wisdom on its head. Contrary to driest continent rhetoric that had encouraged public and political interest in irrigation, Davidson pointed out that Australia has abundant water resources relative to its population even if water is usually in the wrong place at the wrong time. As stated above, the essential point is that more than one input should be considered in the design of public policy for land management. Land is abundant in Australia but capital and labour scarce. Where is the sense in concentrating available water on a small part of the landscape?

The extreme variability of Australian rainfall and runoff meant that capital requirements for water storage and distribution were high compared with other parts of the world where irrigation is practised. Davidson emphasised that the economics of irrigation worked best when water was being transferred between seasons of the same year rather than between years. Similarly, the variable length of the irrigation season increased the burden of on-farm capital costs. Arguably, contemplation of climatic variability is the key consideration that should inform irrigation policy because it leads immediately to consideration of the risks of irrigation and how, and by whom, these risks should be borne.

The irrigation cargo cult and its varied ramifications

The most influential figure in early Victorian irrigation development was Alfred Deakin. It was Deakin who encouraged the Canadian Chaffey brothers to come from California and found Mildura. Less well known is that Deakin’s influence on the development of irrigation was already felt before his thirtieth birthday. Deakin was under the patronage of David Syme, proprietor of The Age. And that newspaper has struggled with its coverage of water issues ever since. Deakin was also a spiritualist. He was into channelling in a big way, in more than one dimension. Also well known for his protectionism, the most positive contribution Deakin made to Australia was his role in federation.

Initial political decisions favouring irrigation were largely prompted by the difficulties of coming to terms with Australia’s uncertain climate. It turns out, as argued above, that more careful examination of the implications of rainfall variability and episodic drought leads to exactly the opposite conclusion. Irrigation is a dubious proposition because of the effects of rainfall variability on capital costs.

As Davidson and others pointed out, a further reason for widespread political and popular support for irrigation was the push for closer settlement in pursuit of poorly thought through egalitarianism in land ownership. In his 1981 book European Farming in Australia: An Economic History of Australian Farming, Davidson – by temperament, an extraordinarily egalitarian fellow – provides a devastating critique of the inadequacies of closer settlement as the basis of Australian farming systems, given the financial risks of farming brought by a fickle climate and dependence on export markets. With a concentration of farms of similar vintage and size, closer settlement areas also found it difficult to cope with technical change. Once irrigation was built on closer settlement with farms of sub-economic size, any opportunity for irrigation to help to manage drought risks went out the window.

In effect, the misplaced egalitarianism of closer settlement condemned irrigators to a frugal existence and/or dependence on government support through home consumption price schemes and other devices. More so at the time of writing Australia Wet or Dry, irrigated industries were characterised by higher rates of assistance than dry land industries (grains, meat and wool) ‘where large areas of land could be combined with a limited labour force to produce commodities for which an export demand exists’ (Davidson 1981, p.424). Severe low-income problems persist in the old irrigation districts to the present day.

The yeoman ideal of the late nineteenth century that underpinned closer settlement was a poor farming model for Australia. But it left a pervasive political legacy with the spatial concentration of farms with poor economic prospects. An electoral system based on single member electorates leverages the political influence of irrigators. Political activity works best if plenty of colour and movement, and a sense of grievance, real or imagined, can be injected into campaigning. Playing to the gullibility of journalists and their craving for excitement does no harm either. An example is the Plug the Pipe group in northern Victoria that is energetically resisting proposals to transfer water to Melbourne. Twice the volume of the proposed transfer has already left the Goulburn Valley via water trading to irrigators in northwest Victoria. Just as much again will be traded in the next few years from the Goulburn Valley because of the contracted water requirements of corporate horticultural plantings already in the ground. This has escaped the notice of the Plug the Pipe group and newspaper and television outlets. The fears of the Plug the Pipe group that the planned water savings to supply the pipeline will not eventuate may prove to be well grounded.

It ironic that the structure ostensibly built up over a century to protect against drought has finally failed to cope with drought. Although many commentators want to do so, there is no need to invoke the phenomenon of climate change to explain current water shortages. Recent rainfall is within the bounds of past experience. Not just low rainfall, water shortages have been exacerbated by other factors that have diminished runoff – more farm dams and plantations in upper catchments, bushfire regrowth, increased groundwater extraction and lower return flows associated with increased on-farm water use efficiency (WUE).

Making climate change the starting point in discussions of irrigation policy muddies the key issue. There is too much irrigation in Australia brought about by political romanticism and poor public administration, including the excessive influence of testosterone charged engineers. Moreover, for those who want to appeal to climate change as the source of current difficulties, surely it would follow that infrastructure renewal in established irrigation areas is a chancy proposition. Future rainfall might not be there to support so much irrigation. Yet, the prospect of climate change was recently claimed by Premier Brumby as a justification for substantial publicly funded investment in irrigation infrastructure.[3] Whatever the technical merits and water saving potential of the Food Bowl Modernisation Project (FBMP) in northern Victoria, climate change is a poor rationale.

Irrigation farmers and irrigation areas vary in economic efficiency and their environmental effects. The relative profitability of irrigated industries has changed radically in the past and will in the future. Improvements in irrigation technology are also major determinants of these changes. Supporters of irrigation behave as if every part of the irrigation network is equally efficient and has to remain intact. The political argument over irrigation has sharpened in the last twenty years not only because of water shortages related to rainfall and runoff, but because the wool industry, once dominant in inland Australia, was poleaxed by the collapse of the reserve price scheme in the early 1990s. Graziers switched to irrigated industries partly by default in the Northern Valleys of the Murray-Darling Basin, undermining the stability of interstate sharing arrangements within the Murray-Darling Basin. The mixed fortunes of agricultural commodities continue to influence the economics of irrigation in Victoria. There is a serious slump in the wine grape industry exacerbating the adverse effects of water shortages. Unusually high prices for dairy products have the opposite effect.

Within the Murray-Darling Basin, the states have adopted different approaches to risk management. New South Wales and Queensland have a higher proportion of irrigated annual crops and Victoria and South Australia more permanent plantings. A difference is between the interruptibility of the activities. Water allocations to the much-maligned rice and cotton industries can be easily matched to available water supplies. Dairying – an intermediate case with respect to interruptibility of the production system because purchased feed can substitute for irrigated pasture – is particularly important in Victoria. Whether the irrigated dairy industry would survive a return to historical prices is moot. Local objections to rice and cotton production are naïve; the salient issues are the amount of water extracted from the river system and environmental effects not how the water is used, which should be a purely private decision. Worse still, constant bleating about rice and cotton is counter-productive – alienating farmers, and making resolution of already-intense interstate rivalries less likely.

The political fascination with irrigation is international in both developed and developing countries (Leslie 2005). Despite all the well-publicised difficulties, Australia has managed irrigation and water far better than most other countries. In particular, the record of centrally planned countries is appalling. Unlike food exporting and urbanised Australia, a lot of countries are playing for keeps in water policy because of the possible threats to food supply for their substantial rural populations. Water shortages and declining water quality in northern China are a serious threat to continued Chinese economic growth. Not dissimilar issues afflict India. For both countries, management of groundwater is a particularly serious problem; made worse by better pumps and rural electrification in recent years.

Few economic activities can claim to have stimulated the development of an entire sub-field of economics – benefit-cost analysis – that was originally conceived in the desire to bring some discipline to the evaluation of public investment in irrigation projects in the United States. The application of benefit-cost analysis to irrigation proposals reached its zenith in Australia in the 1960s and ‘70s, not that much notice was ever taken of the results – of which, the Ord River Scheme in Western Australia was the most invidious example. That white elephant is supposed to multiply following the recent change of government in Western Australia. Whether that turns out to be an improvement on previous election promises to pipe water from the Kimberleys to Perth – the infamous far canal project – only time will tell.

Hand waving about environmental effects statements, due diligence and business cases still occurs in Victoria. But usually after the political decisions have been taken. For example, a report by the Victorian Auditor-General’s Office (VAGO) indicates the haste with which decisions were reached to go ahead with the FBMP (VAGO 2008). The Victorian Water Plan of June 2007 – incorporating the FBMP, a pipeline from the Goulburn River to Melbourne and a desalination plant – was prepared in six months, with minimal consultation with those affected. This is an echo of the way drought-induced panics triggered Australian adventures with irrigation in earlier times. The old saw that ‘when there is an election, politicians feel a dam coming on’ has reappeared in modern dress.

Water use efficiency – a cargo cult for the new Millennium

With severe drought superimposed on an irrigation system characterised by over-allocation of available water, interest shifted to potential remedies if increasing conflicts between irrigators and accelerating environmental damage were to be avoided. First thoughts turned to improvement of irrigation efficiency as a way of providing additional water. This seems natural enough. But on closer examination the popular and political fixation on WUE turns out to have similar failings to the earlier fascination with irrigation. A raft of state and Commonwealth Government programs has been established in the name of WUE culminating in the multi-billion dollar Howard-Turnbull National Plan for Water Security of early 2007, now operating more or less unchanged as the Rudd-Wong Water for the Future Plan, except that the Rudd-Wong version gives more emphasis to water buyback. In both cases, substantial public investment in off-farm and on-farm irrigation infrastructure is envisaged.

Several questions arise. First, there are matters of public finance and public administration. What happened to implicit and explicit government objectives since the early 1990s for irrigators to stand on their own feet? How does government provided infrastructure stack up with an alleged objective of cost recovery, sometimes referred to as full cost recovery, which has been bandied about since the 1994 Council of Australian Governments (COAG) water reforms? Post COAG, price regulators turned economics handsprings to conjure up the spurious distinction between upper bound and lower bound pricing for urban water and irrigation water respectively. How do they treat capital investment that will eventually have to be replaced now that government is paying rather than irrigators?

Second, there are questions of implementation and incentives. What criteria are available for governments to choose between competing off-farm and on-farm infrastructure investments? Prima facie, water authorities and irrigators are best placed to judge what investments best suit their own circumstances. In the absence of clear criteria, would grants-based funding of irrigation infrastructure degenerate into a political contest along the lines of the whiteboard episode of a decade or so back? What message is sent to water authorities and irrigators who have already invested in water saving projects on their own account? In this context, it is worth noting that there are already powerful private incentives for water authorities and irrigators to invest in water saving in the era of water trading. The price of traded water is now more important for farmer decision-making than the price charged by water authorities.

Third, and probably most contentiously, are the claimed water savings from investment in irrigation infrastructure – whether public or private – all they are cracked up to be? Are what are being called losses really losses, or merely transfers of water between irrigators or within the landscape?

The remarks that follow are partly based on papers by Perry (2007) and Lin Crase and Sue O’Keefe of La Trobe University (Crase and O’Keefe 2008). Perry emphasised differences between engineering ideas of water efficiency and those of hydrologists and economists.[4] Many so-called losses are recaptured for use elsewhere. This applies to return flows and outfalls from channels in gravity irrigation networks. Claimed losses may be available at a later date, such as when water that seeps from channels to groundwater is subsequently pumped for irrigation. Perry argued that at the wider scale of basin analysis, clear distinctions should be made between consumptive uses, which remove water from the current hydrological cycle, and non-consumptive uses, which return the water for potential re-use.

Similar ideas were brought to local attention in an unheralded paper by Oliver Gyles (2003).[5] His insights were informed by observations and experience of irrigation in the gravity irrigation districts of northern Victoria where seepage from the channel system and other losses are supposed to account for 750 gigalitres, or 30 per cent of the water available to Goulburn-Murray Water (G-MW) (Hopkins 2008). This line of argument is being pushed as part of the case for the FBMP, now often described as the Northern Victorian Irrigation Renewal Project (NVIRP) or the Northern Dog in less polite circles.

Gyles recently elaborated his thinking about the FBMP/NVIRP in an unpublished letter to the editor of The Age that he kindly provided to the author.

The letter was as follows:

 The Editor

“The Age”

John Brumby’s claim that significant real water savings can be made will only stand up if he can either show how the water in irrigation channels that is not delivered to customers is irretrievably lost or where it is accumulating.

This undelivered channel water can only be truly lost from the integrated water management system of northern Victoria if it flows into a very saline water body or evaporates.

Otherwise it is already being used for environmental flows or irrigation.

G-MW and DSE’s own data show that aquifer levels are falling. Therefore any seepage from the irrigation system is being recycled by groundwater pumpers, including G-MW itself which is funded by governments to pump groundwater back into the channel system.

If surface water that has escaped from the channel system does not flow back to the river or is not diverted for irrigation it must either completely evaporate or accumulate. An 800 square kilometre lake would be needed to completely evaporate the 800 GL claimed to be “lost”.

Find us a vast area of evaporation surface Mr Brumby, or admit the “Food Bowl” project is a scheme to appropriate 150 GL of irrigators’ bulk water entitlement.

Oliver Gyles

Agriform P/L


5th June, 2008

Supporters of FBMP/NVIRP also often claim that metering errors of around 10 per cent on average represent losses that could be eliminated with implementation of this expensive project (Hopkins 2008). This is a typical example of the accounting conundrums that have bothered analysts of inter-temporal phenomena through the ages. Surely, savings from eliminating metering losses are not savings of water as usually understood but instead are losses to irrigators who were previously using under recorded water in irrigated production. There may be equity issues caused by inaccurate metering at different rates but the FBMP is an extraordinarily expensive way to correct these errors.

A full benefit cost analysis of the FBMP would also account for any changes made necessary to on-farm irrigation layouts. Total channel control has lower flow rates in channels and thus slower irrigation on farms. Slow irrigation results in waterlogging problems, slower pasture growth, lower quality pasture and increased groundwater accessions.

A final comment on WUE follows from reflecting on research on the actual behaviour of irrigators. Other resources are used in the production of irrigated commodities. Detailed studies of irrigation in practice revealed that labour saving was just as important in choosing water saving techniques like laser levelling as water saving per se (Cary and Wilkinson 1997, Cary et al. 2002). Concentration on water on its own is an example of the dangers of taking a narrow view of the complexities of farmer decision-making. The implications of sunk costs are usually ignored. The costs of retrofitting elaborate capital equipment and irrigation layouts are easily underestimated. New horticultural developments based on modern production systems are already shifting away from the FBMP gravity irrigation area to the Victorian Murray Valley and South Australian Riverland for several reasons – including greater water security and the operational advantages of private irrigation infrastructure.

Understanding and dealing with environmental issues associated with irrigation

The debate over irrigation is now also concerned with the environmental effects of irrigation. Environmental policy is difficult. In part, this is because of tangible and measurable long-term effects of irrigation on the riverine and riparian environment. But the political economy of the environment is fraught because an increasingly affluent Australian community places a higher value on the natural environment. Irrigation was once a state-sponsored activity with all that implies for the attitudes of the current generation of irrigators. The interplay of these influences leads to complex policy problems – technically, economically and politically. The politics is especially tricky because of interstate rivalries and the shared responsibilities of state governments and the Commonwealth in managing the Murray-Darling Basin.

The riverine environment has numerous dimensions including waterbirds, riparian vegetation and associated avian fauna, floodplains, wetlands, fish – native and introduced, macro-invertebrates in the river, water quality and more. All these dimensions are affected by the extraction of substantial amounts of water for irrigation. Some environmental changes are irreversible – analogous to the sunk costs of irrigation infrastructure, and are no longer worth bothering about. Making this call is not straightforward, as indicated in the current controversy over the future of the Coorong and the Lower Lakes of the Murray River.

Occasionally irrigators try to deny that taking so much water out of Australian river systems has had deleterious effects on the environment. But this is scarcely credible and is probably counter-productive in solving the political problems associated with competing claims on varied services provided by the environment. No more productive are environmentalists’ arguments prefaced on the notion that restoring some original state of nature is desirable, or even possible. A lot of environmental disputes are ultimately empirical questions. An interesting example from outside irrigation is logging in Melbourne’s water catchments. Ending the small amount of logging that now exists, as so strenuously urged by some, would make a minuscule difference to the amount of water available to Melbourne, and then with a considerable time lag.

In the context of environmental policy, it is also worth noting that there are positive effects from a regulated river system – flood control, for example. Water storages and weir pools in rivers regulated for irrigation provide recreational amenity to residents and non-residents alike. Bird life is abundant in the man-made environment of a river system regulated for irrigation.

By far the hardest conceptual issue in dealing with environmental issues associated with irrigation is establishing the starting point for analysis. A subtle paper by Hillman (2007) in the recent collection of essays edited by Lin Crase is a fine introduction for non-scientists. Hillman carefully distinguishes between the environmental aspects of a regulated working river that are flow and non-flow-related. His stance is similar to that which should be adopted in economic policy making, carefully establishing where we are, and then deciding what, when, and how, environmental improvements can be made.

The unusually long run of poor seasons has seen water storages in the southern-connected Murray-Darling Basin at record low levels, to the extent that even permanent horticultural plantings are now at serious risk. There have been numerous indications of the increasingly deleterious environmental effects of irrigation. Increasing salinity has been recognised as a serious issue in Australia at least since the 1970s – for irrigated land, dryland farming and waterways. Salinity has been an issue for irrigation since time immemorial, although apparently not enough of an issue for early Australian irrigation schemes to be developed taking account of timeless knowledge about the threat of salinity (Barr and Cary 1994).

Substantial progress has been made in dealing with salinity. The Murray-Darling Basin Commission, and its predecessor organization the River Murray Commission, has dealt with salinity via monitoring programs and salt interception schemes, with the latter another ingredient in reduced river flows. New developments have been restricted to less salt prone areas in the last fifteen years via zoning rules based on local government planning powers. The test for control of salinity will come if a return to wet years mobilises accumulated salt from floodplains.

A defining moment for community acceptance that environmental problems of irrigation were significant was the spectacular blue-green algal bloom over 1000 km long that occurred in the Barwon-Darling River system in October and November of 1991. More recent events reinforce those concerns. The Lower Lakes of the Murray and the associated Coorong ecosystem have been damaged, possibly beyond repair. The equanimity with which some advocate removing the barrages and flooding the Lower Lakes beggars belief. It may be too late to avoid serious damage but the reality is also that large parts of the Lower Lakes would be become hyper marine (saltier than seawater) and biologically inert following flooding. OK for water skiing, but not much else.

The Wentworth Group (2008) has just entered the fray on the Coorong and Lower Lakes with a detailed submission to the current Senate Inquiry. The submission makes a strong scientific case that removing the barrages and flooding the lakes should be an absolute last resort. Contestably, but consistent with their previous approaches to environmental policy for the Murray-Darling Basin, the Wentworth Group emphasise the aggregate flows required to restore the Basin to environmental health. The amounts suggested are substantial and not likely to be acceptable in irrigator and political quarters. The Wentworth Group over the years has concentrated on the endpoint rather than the process of environmental evaluation and remediation. This has attracted a lot of attention. But has it achieved comparable results? Arguably, a superior approach is to deal with environmental issues project by project. Given so much uncertainty in markets, climate and the efficacy of environmental programs, an adaptive stage-by-stage approach is probably better than any long-term plan.

For non-economists, a good starting point for understanding the way economists think about environmental problems is a seminal paper ‘Environmental economics and the Murray-Darling river system’ by John Quiggin (2001). Quiggin elaborated various economic theories and their policy implications for environmental management – the idea of externalities associated with Pigou, ideas about property rights originating with Coase and contemporary developments flowing from the idea of sustainability. Quiggin argued that all these theories are applicable to different aspects of environmental management. Getting the balance right is a challenge to public administration. Creating the right climate for disciplinary cooperation is also a challenge that is not always achieved in Australia as reflected in constant changes in administrative arrangements for government environmental agencies. Restructuring administrative arrangements usually means those in charge are not sure what they should be doing or are unable to resolve underlying political conflicts. Both explanations apply in the contemporary debate over the environmental effects of irrigation in Australia.

The work of Pigou leads to an emphasis on taxes and subsidies to align private and social incentives. In principle, taxes could be applied to parties damaging downstream water users but the complex hydrology of the Murray-Darling makes identification of offenders nigh on impossible. Further, the state has been involved in the creation of the environmental problems. Their belated involvement in their correction has to be carefully handled. The history of Australian irrigation gives a sharper political edge to the widespread belief that ‘government got us into this mess, now it can help get us out of it’. 

The analysis of Coase is the basis of the property rights approach. Coase challenged the reliance of Pigou on government intervention. Quiggin explains how the approach of Coase cannot cope with situations where ownership of rights needs to change because of difficulties with their initial assignment. Interest in property rights has led to research on the implications of common property in the irrigation system and potential for local management (Marshall 2008). Australian interest in water trading is in part derived from the property rights school. Recent support for buyback of irrigation entitlements and allocations extends the property rights approach into the realm of environmental policy.

Reasonably, farmers are at pains to assert the security of their property rights. Less reasonably, farmers’ organizations resist steps to allow non-farmers to own water rights and for governments to engage in water purchases for environmental purposes. It is an odd property right that limits how the right can be exercised and who can hold the right. In fact, there is a big difference between what individual irrigators think and the way they act, and industry statements ostensibly made on their behalf. Increasing water purchases by governments for the environment and urban use have positive effects on irrigators’ wealth and are not as unpopular with irrigators as the irrigation establishment would have it. Much of the opposition to water trading for environmental purposes comes from businesses and residents in country towns.

Interest in sustainability is not associated with a particular person or school of economics. Pannell and Schilizzi (1999) argue that the multi-faceted nature of sustainability can be reduced to three basic concepts: environmental stability, intergenerational equity and economic efficiency. In their view, the term sustainability is worthwhile as an expedient but actual decision-making should be based on measurable objectives. Sometimes the idea of sustainability is used loosely to include social objectives. At times, the term sustainability has degenerated into a catch phrase – a statement of principle, without any real content. Too often, the cloying rhetoric and mind numbing obsessions of environmental politics transcend human appreciation of the physical and biological world and the management of the environment for sustainability in any meaningful sense.

Similarly, the idea of integrated catchment management is vague. Catchment authorities are being given more responsibility in providing environmental services to farmers but have no independent funding base. The ambiguity of the catchment management concept has created many problems in Australian environmental management. What does integrated catchment management really mean? Catchment management suffers from the uncertainties and bad practices associated with excessive reliance on grants-based funding. Catchment management is a further symptom of the erosion of the influence of science-based professionals in environmental management over recent years. Catchment management is an odd basis of organising services to farmers in a large flat country.

Sustainability principles lead to thinking about discount rates and the development of rules that will maintain natural systems. The river system has multiple environmental attributes, flow and non-flow related. The clues to environmental policy are to recognise the difference between reversible and irreversible environmental damage; to separate on-site and off-site effects; to distinguish public and private responsibilities for the environment; and, consider the appropriate division of financial responsibilities between Commonwealth, state and local governments. Environmental policy in Australia is unfortunately trapped in the mire of cost shifting and tortuous financial arrangements. There is a bad mismatch of the availability of money at the Commonwealth level and technical skills and local knowledge in the states.

Quiggin concluded that an eclectic approach drawing on externality, property rights and sustainability approaches is appropriate for Australian irrigation policy. While this conclusion is appealing, a problem with eclecticism is that it is hard to maintain the discipline and rigour necessary to sustain an eclectic approach. It is easy to slide from eclecticism to opportunistic decision-making. The defence is strong public agencies keeping their distance from special interests. Environmental policy making is often compromised by well-intentioned concerns for the welfare of farmers and other rural people. The size of farms is relevant if farmers are to undertake environmental remediation on their own account. The so-called triple bottom line is an inadequate criterion. Social concerns that are interpreted as requiring Government support of small farms may be inimical to the resolution of environmental problems.

Figures for fools – virtual water and food miles

This part of the paper will offend some. Not deliberately, or with the intention of being an ageing smart arse – although ageing would be accurate – but because the concepts of virtual water and food miles are flawed and damaging when taken seriously. Sadly, taking virtual water and food miles seriously seems to be the case judging from numerous contributions from the eccentric ranks of letter writers to newspapers.[6] However, the ideas behind virtual water and food miles are silly and can be shot down with not that much effort.

Calculations of how much water it takes to create a beer or a steak serve no useful purpose in the development of water and environmental policy. Nor does the distance food travels from producer to consumer. A virtual industry is being established by academics with nothing to better to do making calculations of what is known as virtual water. Virtual water and snake oil do mix. Virtual water does not distinguish water falling from the skies and used in situ from water obtained by irrigation from regulated rivers or pumped from groundwater. Water is added up willy nilly irrespective of the place and time water is available, its opportunity cost or its environmental implications. Calculations of virtual water ignore spatial and temporal issues at the heart of rational discussion of environmental policy for irrigation – groundwater connectivity, farm dam and plantation effects on run-off, and return flows.

Oddly, given the way the idea has been abused in Australia, the concept of virtual water had respectable origins (Appels et al. 2008). The idea of virtual water was first introduced by international officials concerned that arid countries in the Middle East were pursuing policies of food self-sufficiency when it made economic and environmental sense to import water-intensive products. In the hands of some unsophisticated Australians, virtual water morphed into arguments in favour of restricting exports of water-intensive products. Probably befitting a meaningless concept, not much thought goes into calculating virtual water. Often, data from European production systems are carelessly transferred to Australia. There is a vast difference between grain-fed beef production in the northern hemisphere and the rangelands and grazing-based production systems important in Australia. Policy prescriptions have also been made to wind back the Victorian dairy industry without even noticing that Victoria has a mixture of irrigated and natural rainfall dairy farming (Appels et al., p.9).

How much water should be used in food production depends on the alternative uses of the water, including environmental uses that can only be decided by valuing the environmental services of rivers and considering the design, cost, funding and sequencing of environmental programs. Apart from being confused about space and time in water use, enthusiasts for virtual water also reflect widespread public ignorance of water measurement, hardly surprising the way politicians and journalists shift lazily from litres to megalitres, adding and subtracting zeros at random. In any case, if we took seriously calculations of virtual water, we would not feel guilty. Instead, we would conclude that Australia should export plenty of water embodied in its agricultural exports. Australia has much more water in relation to its population than most other countries. Ratios like average rainfall per unit of area and dry continent rhetoric were the basis of Australia’s flawed irrigation policy, all the way back to Alfred Deakin.

It is annoying and disturbing that the Victorian Water Trust (VWT) has funded virtual water studies at a cost of around $200 000. The VWT stands condemned not just for wasting public money on nonsense calculations of virtual water but also for its expenditures on water saving in public housing. The VWT recently contributed to the $1.2 million spent installing greywater recycling in a deprived public housing estate in Melbourne to save two megalitres of water. The estate is almost opposite the headquarters of the Brotherhood of Saint Laurence who have much better ideas on how such sums might be spent.

Sometimes, calculations of virtual water are presented as an argument for vegetarianism. This is to miss the point. Vegetarianism is a perfectly legitimate personal choice based on attitudes to animals or doubts about their ethical treatment in modern livestock production. The dubious empirics of virtual water should have nothing to do with that choice.

A (dodgy) cousin of the concept of virtual water is the equally vacuous idea of food miles. Food miles often surfaces in the epicurean columns of newspapers and in the musings and ravings of youthful wireless announcers, echoed by their nuff nuff talkback callers. A charitable view of food miles could be that it is a carelessly-put case for eating fresh food in season when it is plentiful and cheap, as if such a case were needed for anyone with taste buds and a limited budget. It is not surprising that restaurant proprietors and anxious chefs are on the look out for new angles in the constantly changing and competitive food trade. Food miles is the latest in a long line of stunts designed to get customers through the door.

Like virtual water, food miles is, somewhat ironically, not a home-grown product. It appears to have been dreamed up in Britain as a roundabout argument in favour of self-sufficiency in agricultural production. Hence, the imperial measurements used in the standard hundred mile limit applied to their purchases by food miles enthusiasts. A lot of great things have come out of Britain. Matters to do with cuisine are not one of them.

Distance travelled is an inadequate proxy for any environmental damage associated with food production. Not all modes of transport have the same environmental effects. Transport by sea is less costly than land transport. An obvious counter case to the doctrine of food miles is the grain trade. China and India, for example, would now do far better to concentrate on imports of grain to feed coastal cities rather than maintain economically and environmentally damaging policies of self-sufficiency. Expanding grain imports, ignoring stupidity like food miles, would ameliorate pressure on stressed land and water resources in China and India.

The recent fashion for virtual water that ignores the where, the when, and the how much of water use, is yet another blind alley in the discourse on water policy. Appallingly, for a society that has enjoyed the benefits of mass education for a century or more, concepts like virtual water and food miles have achieved undeserved credibility. Neither has anything useful to contribute to water or environmental policy.

The worst thing that could happen if the queer quinella of virtual water and food miles continued to be taken more seriously than warranted would be if burdensome labelling standards displaying virtual water calculations and distances food has travelled were imposed on food retailers, to be passed inevitably to hapless consumers.

Concluding comments

Irrigation in Victoria has a chequered history. Irrigation was conceived in response to drought but the most recent, and continuing, drought has exposed yet again the vulnerability of irrigated farming in Victoria to the realities of settlement history, markets, climatic variability and the costs of other inputs. Recent evidence is that inherent economic disadvantages persist for some irrigated industries. Migration policies are now being adjusted so that some horticultural crops can be harvested.[7]

There is a genuine low-income problem in some parts of Victorian irrigation. This is most acute in horticultural districts where a large number of smaller irrigators switched in the 1990s from previously protected dried vine fruit production to wine grapes dependent on a competitive world market. While wine grape production is profitable when conducted on sufficient scale to allow mechanisation and a spread of varieties, it is a risky business for small producers.[8] The problem is most acute for small producers with uncontracted grapes of now unfashionable varieties. The low-income problem was hidden during the expansion phase for wine grapes when prices were higher and new commercial plantings provided plenty of part-time work for smaller producers.

Horticulture is not a big user of water and the cost of water is not a high proportion of total costs. While this might appear an advantage in times of acute water shortage, the counterpoint is that smaller horticulturists did not benefit as much from the financial windfall that occurred when water trading was introduced around fifteen years ago.

The story is different for the irrigated dairy industry in northern Victoria. The effects of drought on the irrigated dairy industry are mitigated by exceptionally high prices for dairy products that allow, at least for the time being, profitable production systems based on annual pastures and purchased feed. Dairy farmers in Victoria were more significant beneficiaries of water trading because they acquired substantial assets. Not only that, dairy farmers entered the current drought advantaged by a most generous adjustment package after the dairy industry was deregulated in 2000. Painful as it might be, dairy farmers and mixed farmers in the Goulburn Valley will be able to adapt to water shortages while dairy prices remain high.

The rules of the game with respect to financial management and farm survival have changed radically with market deregulation and water trading in irrigated industries. This is especially so in Victoria where the irrigation system was traditionally run conservatively. Timing of water sales and purchases is key to success in the volatile market for temporary water. The role of government is limited when it comes to competition for water between industries and farmers within the one industry.

Genuine public policy issues can arise in the water market because of the threat of insider trading. Announcement effects on water markets following from government decisions on water allocations and buybacks for environmental purposes should be more transparent.

Irrigation policy is not helped by ongoing optimism and posturing over public investment in water use efficiency in the quest for water for environmental purposes. Several programs have been in train for many years – Water for Rivers to obtain water to return to the Snowy, the National Water Initiative, the Living Murray exercise of the Murray-Darling Basin Commission and state-based initiatives like Riverbank in New South Wales and the Victorian Water Trust. Then along came the multi-billion dollar Howard-Turnbull plan closely followed by the Rudd-Wong plan. Water shortages and water trading provide plenty of incentives in any case for water saving by the private sector.

The public sector has been trawling for additional water savings for years. It is about time the penny dropped and governments recognised that further water savings are not readily available, at least for any projects with even a faint chance of passing benefit-cost tests. The FBMP/NVIRP (or Northern Dog) is the paradigm Victorian case of undue faith in engineering solutions to water policy problems that has plagued irrigation for aeons.

Buyback of water for environmental purposes is a far better bet for public expenditure provided that greater discipline is applied in the buyback process emphasising how environmental improvements will be achieved, how much society values them and how the various schemes (local to interstate) are to be coordinated. Unlike investment in on-farm and off-farm irrigation infrastructure, progress in environmental management and dealing with welfare problems in irrigation areas is still dependent on government action.


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[1] Plagiarism of your own work is unfortunate but is excusable when the work reflects mainstream professional opinion that is neglected in the formulation of public policy. I thank many colleagues for their comments on this and earlier papers. Several endure the restrictions and conformity of the contemporary water bureaucracy and cannot be acknowledged. Frank and Fearless took voluntary redundancy from most of the Australian public service about twenty years ago. Grants-based funding has encouraged an uncritical response to water policy from the timid ranks of the academic and research community. People who know little economics think that grants-based funding is like competition in markets.

[2] One commentator on an earlier paper described this stance as like a plague on both their houses approach. Not so. A pox more like it. The plague would be too kind to both groups.

[3] Mr Brumby also appealed to the vision thing in defence of the FBMP, likening its supporters to the visionaries who backed the Snowy Mountains Scheme in the 1940s and 1950s. A stretch that suggests either a poor sense of political history or a highly developed sense of humour. He might not have his present job if the Snowy Scheme were universally appreciated.

[4] Stripped to its bare essentials, the confusion comes about because different specialists are thinking of problems at different scales. What might be true for an individual project or part of the river system is not true at the basin scale. Confusion over water accounting occurs because of confusion over stocks and flows, much the same as confusion over capital and income in financial accounting, tax administration and on the screens of overpaid financiers.

[5] In an unhealthy, intemperate display, a crass attempt was made by someone on the periphery of the Victorian water bureaucracy to stop publication of the paper by Gyles in a professional publication of the Australian Agricultural and Resource Economics Society. Gyles was in good company. Bruce Davidson ran foul of the CSIRO establishment and the Commonwealth Government who tried to block publication of his research on the Ord River Scheme in the mid-1960s.

[6] A non-Victorian reader of a draft of the paper pointed out that virtual water and food miles are mainly Melbourne afflictions.

[7] It would be a different story if the changes applied to all seasonal industries. This is yet another example of exceptionalism in the treatment of Australian farmers. The phenomenon is most apparent in the social security system where different rules apply to farmers.

[8] The boom and slump in the wine industry was exacerbated by the arrival in the wine industry of self-serving boofhead brewers. Victorian officials poncing about pronouncing export targets for wine (and agricultural products generally) were no help either.