17 January 2006

Water Study
Productivity Commission
Locked Bag 2, Collins Street East
MELBOURNE  VIC  8003
By email: waterstudy@pc.gov.au

Dear Sir/Madam

Submission to Productivity Commission Study ‘Rural Water Use and the Environment: The Role of Market Mechanisms’

The Water Services Association of Australia (WSAA) was established in 1995 and currently has 29 members and 26 associate members from across Australia and New Zealand. WSAA’s Members provide water services to more than 15 million urban based customers, including many of Australia’s largest industrial and commercial businesses. The Association provides a forum to discuss issues of importance to the urban water industry and, where appropriate, is a focal point for communicating the industry’s views. In this context WSAA has a major interest in the future sustainability of water supplies to Australia’s cities.

The key functions of WSAA include:

•	The production of WSAAfacts on an annual basis which is the compendium of approximately 120 indicators on the urban water industry.
•	The management of the AAAAA water efficiency labelling scheme.
•	Development of codes of practice for water supply and sewerage networks
•	Appraisal of new products for the industry.
•	Delivering projects and research of national significance.
•	Representing the urban water industry at the national level.

After reading the Productivity Commission Issues Paper it is clear that the scope of this study concerns the agricultural use of water as 90% of all water extracted from the environment is used by the agricultural sector.  

Nevertheless, WSAA believes that it is important that the Productivity Commission, when undertaking this study, be aware of the importance of water markets in providing water to our growing cities in the future.  The Productivity Commission would already be aware that one of the outcomes in the National Water Initiative for the urban water section is to ‘facilitate water trading between and within the urban and rural sectors’ (Section 90 sub-section iv). 

There are only a limited number of examples currently where there is water trading between the urban and the rural sectors has taken place.  While it is expected that such trading will grow in the future as the cities confront increasingly more difficult and expensive options of providing water for rapidly growing populations, it is important to keep into perspective that these volumes, whilst crucial to the efficient allocation of resources to the cities and to industry will represent only a very small proportion of total water use.  

The challenges confronting our cities from a water perspective can be summarised as follows:

1	Serving a rapidly growing urban population – the population of Australia’s major cities is predicted to increase by 35% by 2030.

2	Achieving ongoing savings through water conservation – most of the easy and cheap water conservation measures have already been targeted and further measures are likely to be intrusive, more expensive and unlikely to deliver the magnitude of water savings experienced in the past.

3	Increasing variability of rainfall has resulted in inflows to water storages serving our cities decreasing quite rapidly over the last decade.  Perth has experienced the most dramatic reduction in inflows where for the last eight years (including 2004) the stream flows have been 64% less than those experienced up to 1974.  Reductions, although not as dramatic, have been experienced by all other urban water supply systems.

4	The urban water industry must play its part in ensuring that our streams have sufficient flows to ensure that they are healthy.  This might mean additional environmental flow releases from urban and rural water systems.

5	Increased affluence and community expectations of improved levels of service.  As the affluence of our community increases their expectations of reliable supplies of water increases.  There is evidence that the community will not accept intrusive water restrictions on an ongoing basis and many people still value green gardens and gardening as a recreational pursuit.  

6	All of the above challenges need to be addressed in a sustainable manner.  This is why the industry now broadly adopts a triple bottom line assessment of projects to ensure that projects do not result in adverse environmental and social outcomes.  There is often a direct trade off between a water outcome and increased energy consumption.  This trade off needs to be understood so that the urban water industry does not respond to drought without understanding the greenhouse gas implications.

What is not widely understood is that, with the exception of Sydney, the other capital cities in Australia have opportunities to trade water with the agricultural sector without the need to build any infrastructure.  There are further opportunities to create greater inter-connection between rural and urban water systems with minor capital works. Compared to other options such as desalination and recycling, water trading is very attractive from both a financial and environmental perspective.  

An argument is often promoted that if the cities were able to trade with the agricultural sector that it would lead to the demise of irrigated agriculture.  The figures do not support this argument.  Given that households only use 9% and manufacturing and other industries 7% (ABS Water Account 2000-2001) trading between the cities and agriculture will always be at the margin because of the sheer difference in the magnitude of the volumes of water used by agriculture compared to the cities.

From an efficiency perspective there is a great deal of merit from having a trading system that involves the cities as the use of water in a city represents a higher value added use than the majority of irrigated agricultural uses.  A trading system will have the advantage of revealing the willingness to pay of various water using sectors.  WSAA is currently undertaking a study on the economic value of urban water using the COPS model at Monash University to model water trading scenarios.

There can also be environmental benefits for rural to urban water trading. There are instances where it makes sense for farmers to retire their irrigated land where productivity is marginal and environmental impacts significant. Separation of water allocation rights from land and a free trading system could allow transfer of water to an urban sector which could afford to financially assist these farmers to retire (or indeed improve their farm). This could benefit the farming sector, the environment and urban water users.  

Whilst trading may give rise to environmental benefits it is also possible that it could be associated with environmental negative externalities (i.e. salinity or adverse impacts on biodiversity).  In such circumstances governments may choose to introduce pricing instruments to address such externalities.  We would argue strongly that in such instances these instruments should be applied in a non-discriminatory manner so as to not to preclude water trading between urban and rural areas. 

Another area that is not widely understood is the inter-dependency between water trading and third party access to infrastructure.  There is little doubt that third party access is going to become a significant issue for the urban water industry and an active water market involving the agricultural sector would open up many opportunities for third parties to sell water directly into an urban market.  Two possible scenarios that could unfold are as follows:

1	A group of farmers who no longer wish to farm could sell their water to a large urban based industrial user and then apply for third party access to the urban water utility’s infrastructure to enable it to convey the water to the customer.

2	A large industrial user in the city could purchase a farm with water rights and apply to the urban water utility for access to infrastructure to enable the water to be conveyed to the city.

Of course water trading between rural and urban utilities is also a possibility.  The above examples assume that the rural and the urban systems are already interconnected.  

For the above reasons it is strongly suggested that the Productivity Commission consider the implications of rural to urban water trading even though the brief for this study restricts the scope to rural water use.  As outlined above, the days of thinking about urban and rural systems separately are fast fading given that the systems are already connected to a degree and that the cities face significant challenges in providing water for rapidly growing populations.  Water markets will become an increasingly attractive option for the cities in the future, as the greenhouse implications of desalination and recycling become more widely known in the community.  

For your information I have attached a copy of the WSAA Position Paper ‘Testing the Water’ which outlines the achievements of the urban water industry since the 1994 COAG reforms, the challenges it confronts and the responses from State governments and urban water utilities to these challenges.  

If you wish to discuss any aspect of this submission please do not hesitate to give me a call on 03 9606 0678 or email at ross.young@wsaa.asn.au.

Yours faithfully

Ross Young
Executive Director

Att