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“Developing a Water Market Readiness Assessment Framework”

12th Annual Meeting IWREC, World Bank, 13th Sept 2016

Sarah Wheeler, Adam Loch, Lin Crase, Mike Young & Quentin Grafton

Centre for Global Food & Resources

The need for markets?

• Far greater demand than supply of water resources– 55% gap by 2050

– Supply augmentation options limited

– Demand incentives (e.g. pricing) work to a point

• But … practical understanding of the usefulness and implementation realities of water markets is limited

• Once it reaches scarcity it may already be too late to intervene cost-effectively

• Arguments of efficient reallocation v. vulnerable party impacts

University of Adelaide 2

Terminology

• i) Short-term or temporary transfers of water that is already allocated and available for immediate use;

• ii) Medium-term leasing of water allocations in a manner that enables a water user to plan secure access to water for a period of time; and

• iii) Permanent transfers of water entitlements - the on-going property right to either a proportion or fixed quantity of the available water at a given source.


More is needed to make them work!

BUT:

• Water is complex and fugitive

• Trade is often costly to effect

• Third-party impacts may arise

SO:

• It does not necessarily solve socio-economic issues around water use, nor readily address environmental externalities

There are lots of things to consider:

• Grafton et al. (2011)

– Allocation of rights, legal frameworks, administrative capacity and nested arrangements

• Perry (2013)

– Accounting, bargaining, codification, delegation and feedback

• Young (2014)

– Break rights into component parts, assign institutions to set objectives, ensure hydrological integrity, minimise transaction costs etc.

• OECD (2015)

– 14-point health check on water institutions

The list is complex and arduous; many contexts will struggle to comprehend the complexity and requirements, and will often end up with ‘accidental’ rather than planned market arrangements.

This drives negative perceptions of, and higher transaction costs in, water market formation.

We seek to address this in our paper.


Methodology: Stage One

– Instigated by the National Water Commission (2005-2015)

– Expert Panel basis

– Identify prerequisites

– Establish structured yet non-prescriptive arrangements to evaluate the need for, and path towards, water markets

– Review lessons from Murray-Darling Basin in Australia

= set of market enabling and constraining factors


• 1,000,000 km2

• 14% of Australia (size of Spain & France)

• 80% of basin is agriculture• 60% of Australia’s

irrigation • 40% of Australia’s farmers• Australia’s “Food Bowl”• Population 2,000,000; • Supports 20 million• 5 jurisdictions • Significant environmental

values• Australia’s three longest

rivers• Home to 34 major

Indigenous groups• Drought is the recurring

issue

The Murray Darling Basin (MDB)


Millennium drought

Market development


Fundamental Issues Key example questions to guide discussion/thinking

Property Rights:

Unbundled, individuals versus

environment, risk assignment,

adaptive etc.

Does legislation exist which gives a clear understanding of rights to water

for individuals/corporations and other legal entities? If so, is the degree of

attenuation clear, and which legislation (or pieces of legislation) are

pertinent?

Hydrology:

Connected systems, salinity and

water quality considerations, limit

& consequences of breach →

environment → end of system, do

we know what we don’t know etc.

Is the hydrology of the system well understood, well documented, and

monitored and reported on in a way that is supportive of trade and is

sympathetic to:

The resource constraint, and

The extent to which the knowledge of the resource is complete?

Adjustment:

Heterogeneity → Gains from

trade, societal pressures, early-

mover advantage etc.

Is there a sufficiently diverse (potential) market for water use in the system

so as to facilitate trade (willing buyers and sellers with different use

profiles in terms of value add per $ of water) and what is the likely

magnitude of these gains (ex-transaction costs)?


Fundamental Issues Key example questions to guide discussion/thinking

State Planning:

Legislation, water sharing plans,

registers, information availability,

water allocation announcements,

compliance etc.

Are enabling resources such as information, planning resources and

registers available, reliable and trustworthy?

System Type:

Regulated/unregulated, surface

water/groundwater, connectivity

etc.

What is that status of infrastructure and what are the costs of accessing

water in the system, and at various parts of the system?

Material Externalities &

Governance Considerations:

Sleeper/dozers, known change of

use and hydrology inputs,

unregulated “use”, metering,

compliance, information, reversal

decisions etc.

Does the supplier have the systems, resources and technology to monitor

use, and to ensure use is within licences/entitlements?

Methodology: Stage Two

Jurisdictional case studies:

1. USA

2. Spain

3. Tasmania

• Test the framework and questions in these contexts

• Global focus long-term


Nevada, USA

• Unsustainable groundwater aquifer use

• Recognition that new allocation regime and trade could provide long-term viability

• 5-year trial of sequenced reforms to achieve this

• If not convinced at end, revert to existing rights

• Capital increase expected

• Unbundling now agreed to


Guadalquivir, Spain

• EU blueprint country for water trade

• Drought and over extraction scarcitydrivers

• High groundwater use, that is illegal but not curtailed

• High transaction costs to trade – consolidated rights

• Advanced reforms, but caps on further use, rights unbundling, administrative capacity building and private transformations toward reliance on trade are necessary


Tasmania, Australia

• Very recent irrigation development basedon private-public partnership modeland business-case

• Uses National Water Initiative as thebasis for assessment and trade

• Ability to learn from past mistakes in MDB

• Investments in administration, registers, trade platforms, information gathering, farm planning and reduced barriers to trade

• Environmental externalities also accounted for



Step 1:

Background

context

Step 2: Market

evaluation,

development and

implementation

Step 3: Monitoring

and continuous

review/ assessment

Hydrology

considerations and

system type

Existing planning and

property right

arrangements

Potential benefits from trade?

Basic assessment of costs and benefits:

- externalities

- governance/institution costs

- transactions costs

- number of users/sectoral activity

Yes NoMarket scale:

Management regime

commensurate with

potential market/trading

activities

Market initiating change II -

water market institution changes

(e.g. trade rules, registers)

Trade enabling mechanisms:

Monitoring externalities and new

market developments. Changes as

required

Maintain status quo: -

with enablers for trade and

further monitoring if

future demand or context

changes

Market initiating change I -

water market policy changes (e.g.

legislation, plans)

Case study:

Diamond

Valley, USA

Case study:

Tasmanian

Irrigation,

Australia

Case study:

Guadalquivir

Basin, Spain

The WMRA – Water Market Readiness Framework

Highlights:• Underlines importance of

property right unbundling

• Sequencing of reforms is critical in each jurisdiction

• Never waste a good crisis!

• Water markets are not the be-all and end-all for water management issues


Methodology: Stage 3

– Current UNESCO project

– International context tests (China & Italy)

– We want to expand this further to a book or larger project with case studies across a wide number of countries

– Apply the questions with experts to determine case study specifics and trial the usefulness of the WMRA across contexts

= generalisability indicators of the framework – or weaknesses to be addressed


Thank [email protected]

mailto:[email protected]

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