Economising water: the changing status of water in the political economy

Abstract

The status of water in the political economy is changing. Economic and population expansion confront boundaries to water supply, redefining fresh water as a limited and vulnerable resource. The signalled potential for absolute limits to water use, and the need to determine allocation among competing users, initiates a critical re-examination of water management from environmental and economic perspectives. National water management policy is increasingly framed in terms of the principles that underpin environmental economic theory, with water management defined as an economic management challenge. Tradeable water titles and market exchange are adopted as the means by which to resolve questions of distribution among extractive users, to initiate the efficient use of increasingly scarce water resources and to effect environmental outcomes.

The incorporation of water into economic discourse, and more crucially the attempt to determine water values either through market process or through hypothetical valuations, is a pivotal stage in water management. This study highlights the location of contests over water use on the terrain of economic method, and maps the social and environmental developments that follow from the commodification of water. Rights to use water are increasingly linked to the imperative to use water for productive gain, an approach that does not provide a final resolution to contest between commercial and environmental interests in water use. 143This shift in policy emphasis challenges the environment to earn its right to water.

Introduction: economising water

Water is a crucial component of ecological systems, “part of the natural environment that performs important and irreplaceable functions” (Ekins, Folke & Groot 2003, p. 2). Water provides essential support services to human life: “a person can only survive five days without water. Besides the air we breathe, water is the most important resource for sustaining human life” (Hall-Wallace, et al 2003, p. 3). Water provides also for sanitation, recreation and leisure, and is used extensively in the production processes pursued by humans. Water endows both “use and exchange values to the objects that we build and the purchases we make” (Stroshane 2003, p. 34). In tandem, water supports the vast range of aquatic and terrestrial plant and animal life upon which humans depend.

The spectre of water shortage has become one of the pressing environmental parameters faced by the civilisations of the 21st century. Contemporary industrial and developing societies have flagged limits to both the availability of fresh water and the capacity of hydrological systems to accommodate the waste products of production processes. The existence of actual and absolute limits to water supply continues to be debated. Yet water limits have manifested in real and explicit ways, presenting examples of regional limits to further exploitation, and framing emerging conflicts in resource utilisation. Environmental boundaries, both physically and politically defined, have presented as tangible challenges to the sustainability of contemporary systems of production and trajectories of economic development.

As such, water provides new governance challenges to State bodies that have historically claimed responsibility both for developing water supplies and for establishing access to and framing the allocation of resources. In tandem, economic theory, as a study of the allocation of scarce resources between competing uses, lends itself neatly to questions of water management in the current era of emphasised water shortage. 144The development of economic theory to incorporate concerns of environmental scarcity provides solutions tailored to the infrastructure of contemporary economies. Australian water management is increasingly positioned as an economic management challenge, and water management policy increasingly references economic theory and economic instruments. Tradeable water titles and market exchange are adopted as the means by which to resolve questions of distribution among extractive users, to initiate the efficient use of increasingly scarce water resources and to effect environmental outcomes.

The incorporation of water into economic discourse, and more crucially the attempt to determine water values either through market process or through hypothetical valuations, is a pivotal stage in water management. The increasing references to the use of economic instruments in water management both redefine the economic status of water, and redefine the role of government institutions in water management. Water, conventionally perceived as an unlimited and free contribution to production (subject to technological constraints and to the costs of delivery), has been both recognised and formalised as an economic good. Some water is vested in private ownership arrangements, holding the ability to draw a market price. In association, unlimited rights to use water for productive purposes are being replaced by the need to realise gains from water use to maintain competitiveness as an economic user. As part of this reconceptualisation of water use, environmental claims on water are being challenged to prove value from use.

The identified change in water management will be explored in four synchronous processes or events in this chapter. The first is the anticipated arrival at environmental limits, or (with reference to H C Coombs 1990) a return to the challenges of scarcity. The second is the interrogation of water management and the contests over water resources that emerge from both anticipated and physically realised water limits and thresholds. The third process is the incorporation of water into economic discourse and the eclectic and broad support that this reinterpretation of the water problematic achieves. The fourth process is the subsequent traction of proposed market responses in informing water management discussion and directing the commodification of water. Within this progression of change in water 145management, both emerging environmental sustainability considerations and emerging business interests can be tracked as informing response to expanding water use and scarcity.

The present study then highlights the location of contests over water use on the terrain of economic method, and maps the social and environmental developments that follow from the commodification of water. Rights to use water are increasingly linked to the imperative to use water for productive gain, an approach that does not provide a final resolution to contest between commercial and environmental interests in water use. This shift in policy emphasis challenges the environment to earn its right to water.

The realisation of scarcity

Australia is conventionally described as an arid continent with regions of water wealth. Natural limits to water supply have been a periodic and localised concern for the expansion of Australian settlement (Pigram 2006; Powell 2000; Smith 1998). A ‘re-arrival’ at scarcity has forced reassessment of water management. The traditional expectations on the state to harness and facilitate water access are becoming increasingly subject to an emerging criteria of evaluation that incorporates economic and environmental sustainability considerations.

The states of Australia historically assumed responsibility for the provision of water for production and for consumption. Following the failure of early private and cooperative water supply schemes in the colonies, the governments of Australia assumed the role of water supply in terms of the public good (Paterson 1987; Quiggin 2001; Smith 1998). Sponsorship of the transformation of hydrological systems and the large-scale development of water infrastructures was defined and legitimated in terms of the provision of water for the development of irrigated agricultural activity and urban infrastructure. Systems of water access, distribution and use were moulded within the institutional and ideological framework of a development-focused society that sought both to settle and to productively utilise the interior of a recently claimed land mass. The establishment of closer settlement schemes and soldier-settlement schemes were progressed in the development of irrigation 146communities (Smith 1998). The development of urban infrastructures addressed sanitation (Powell 1997). Infrastructure-development projects were not expected to directly return government investments, but rather to provide impetus and opportunity for the expansion of economic growth (Smith 1998).

The technocratic- and development-focused approach to water management was both widely accepted, and initially successful in its ambitions. An extensive irrigated agricultural sector has developed, accounting for an estimated 25 per cent of the total gross value of Australian agricultural output at around $7 billion per year (Cape 1997 in Quiggin 2001). The Murray-Darling Basin of the south-east of Australia, accounts for 70 per cent of total irrigated land (Quiggin 2001). Increased capacity enabled and encouraged the expansion and spread of productive uses and of population settlement, leading to further demands for water supply. The technocratic approach did not represent a ‘just add water’ recipe for economic growth. The Ord and the Burdekin irrigation projects are cited as examples of the failure of economic growth to respond to the development of water infrastructures (Smith 1998). The technocratic approach did allow a development trajectory that was unconstrained by water limits and that paid limited attention to the potential for physical limits to water supply. In contemporary assessment, water infrastructures have developed as both generous and physically inefficient in their husbandry of water resources. High levels of water have been lost in storage and conveyancing through high evaporation from dams and irrigation channels, open bores, poorly maintained (leaking) infrastructures, and stormwater and sewerage disposal. Systems of water re-use remain largely undeveloped. Contemporary levels of water demand are a measure of access, availability, and contemporary technology, and are therefore socially rather than physically defined.

Available water resources are fully committed in many of the areas in which settlement and economic activity are focused. Available and accessible water supplies are unable to meet the established needs or projected further growth of most cities and many towns. The major cities have been subject to water restrictions. In Victoria for example, Melbourne and more than 270 towns have had water restrictions applied 147(Edwards 2003). The inter-annual variations of Australian rainfall patterns manifest as water shortage and financial losses in catchments that are utilised at capacity. The Murray-Darling Basin, the largest and most extensively utilised catchment, is regularly unable to supply irrigation demand (Connell 2007). Currently established water demands are seen as unsustainable (Cullen 2006b; Connell 2007). The degradation of water sources further threatens current and potential supplies.1 The potential of human engendered environmental changes, such as global warming and land clearing to contribute to changes in weather patterns and thus compound freshwater supply concerns, is increasingly emphasised (e.g. Hennessy, et al 2006). Further, modifications to waterways have increased the vulnerability to environmental events, such as pollution, flood, salinity infiltration, and algal blooms, that may push a freshwater system beyond a critical threshold, making entire systems unusable (Galaz no date). Environmental parameters have presented boundaries to the scale of activity within a region. For some commentators, water presents as a potential constraint on development (Cullen 2006b). For others, the situation is perceived as a water crisis that threatens Australia’s economic sustainability (Masters 2001, cited in Isaac 2003).

Freshwater is increasingly recognised as a finite resource, both nationally and globally. Water shortage, as with water use, is socially constructed (Johnston 2003). Pressure on water resources has come from growing populations, economic expansion, enhanced technological capacity and changing use patterns. Water use rates exceed replenishment rates in important river systems and aquifers (Gleick 1993, Pearce 2006, WWF 2007a). In turn, water is increasingly recognised as a fragile resource (Gleick 1993).2 The scale and style of water use creates impositions upon ecological systems that threaten biodiversity, regeneration, and the ongoing viability of water supplies (Pimentel et al 2004). The

148experience of water shortage suggests the expansion of expressed human requirements beyond the capacity of the environment to provide and accommodate.

The potential for absolute limits to water supply and consequent limits to the expansion of human use both continues to be debated, on a terrain reminiscent of the classical economists predictions, of arrival at a stationary state, with Ricardian signalling of limits, Malthusian emphasis on increasing impact, and reference to the role of technology and human ingenuity in offsetting arrival at a stationary state.3 Redress is sought through technologically induced efficiencies in water use and proposed avenues of further supply. In the meantime, the realisation of limits to water supply manifests in the contests over water resources that arise from the inability of water supplies to satisfy all interests and demands in water use. Rather than absolute limits to water supply and economic activity, water scarcity becomes apparent in relative scarcities between competing interests in water use. Ward and Michelsen identify competition “among kinds of uses, between geographic location of use, between current and future uses, between endangered species saved from extinction and food production displaced from saving the species, and between water resources developed or used and other resources displaced by that water development and use” (2002, p. 424). 149

Water contest and the challenges of governance

Limits to available water, and the exclusivity of some water use processes, presage that not all water demands within a catchment can be satisfied. Emerging water scarcities from physical and predicted water limits and thresholds engender contest over available resources and conflict between competing needs (Stewart & Jones 2003). The range of conflicts is diverse, reflecting the spectrum of interests in water use. Two predominant conflicts can be identified in the contest over water resources: one conflict is between extractive uses and environmental needs; the second conflict is between competing appropriations for both production and for direct consumption.

The protection of river system health and associated aquatic life competes with the productive potential of water resources. From an environmental perspective, the movement of the economy towards full capacity utilisation of available water resources undermines the ecosystem services provided by hydrological function, such as biodiversity. Water extractions compete also with the human utilisation of water systems for non-extractive purposes, including general amenity, recreational fishing, and water activities. Environmentally-framed concerns draw attention to the role of increasing economic impositions in undermining the shared uses of waterways, and of the perceived threats initiated by the search for supplementary resources. The political activism of individuals and groups has sought to protect targeted resources and regions from appropriation or degradation, for example the promotion of environmental values over hydropower in the Franklin River Dispute (Hutton & Connors 1999), and competition between agriculture and identified environmental needs and allocations for wetlands in the Macquarie Marshes (Stewart & Jones 2003). Further, environmental lobbying has put environmental concerns on policy agendas, with the incorporation of environmental considerations into legislative and approval processes (Connell 2007; Hutton & Connors 1999). In this way, environmental interests provide politically defined parameters and constraints to the exploration/development of further water resources, and tangible challenges to appropriative uses of water.

150Environmental considerations more broadly defined present a theoretical challenge to the conventional preoccupation with the delivery of water to sustain production. The expression of environmental interests challenges the disengagement of water from complex ecological systems implicit in the utilisation of water as a resource for production. The impact of systems of production and consumption upon hydrological systems identifies economic activity as a concern for water management. Tensions involving water use and management can usefully be understood as having been driven by the opportunities and demands of economic development as a commodity-defined process. In response to the focus of policy and practice in harnessing water for economic purposes, there is growing statement of the importance of the function of water within ecological systems, and the dependence of all life on the direct provision of water and on the ecological services that water provides (Beder 2006; Connell 2007). The monetary and employment gains of the utilisation of waters for production purposes are posed against the longer term costs of environmental degradation. Identified losses include the loss of ecosystem services4, environmental amenity, future incomes following unsustainable practices, and the potential costs of redress and reparation. Losses include also the opportunity costs of forgone alternative uses. This strategy seeks to interrogate the conventional benefits and gains associated with water development projects, and demands an environmental accountability in water use decisions.

Agriculture, as the primary user of water resources – an estimated 67 per cent of total water consumption (ABS 2005 in Pigram 2006) – has received critical attention. The environmental impacts of irrigation have included land degradations, increased land and water salinity, water quality problems, including turbidity and eutrophication, and loss of biodiversity and habitat (Quiggin 2001). Capital investment is diverted towards remediation and repair, including “elaborate drainage and salt disposal measures to address water logging and salinisation of irrigation areas” (Paterson 1987, p. 181–2). Consideration of the degradations

151associated with irrigation has led to argument that irrigation, as currently practised, is not sustainable (Smith 1998). The total costs and benefits of dryland agricultural and pastoral land use in the arid and semi-arid regions have also been subject to examination. The limited contribution of agriculture to the economy is contrasted to the impacts and costs of soil loss, loss of vegetation, and the increased salinity of land and waterways (Watson 1992, Smith & Finlayson 1988). The export of agricultural goods initiates a questioning of the export of water embodied in products, ‘virtual water’, and the adequacy of remuneration (Pigram 2006). Drought is emphasised as a cyclical occurrence that should be budgeted for by individual water users rather that cushioned by state support and subsidy (Botterill & Fisher 2003). The continuation of some farming activity is seen to depend upon government subsidy, drought relief payments, and that land use profits are privately earned while environmental losses are publicly shared and remain largely unpaid for, transferred or postponed.

From a contemporary economic management perspective (and with reference to the Australian taxpayer), the States are subject to accountability considerations. Favourable international per capita comparisons suggest that Australia is not water poor. Rather, water shortage is the result of poor management (Edwards 2003; Young & McColl 2003). In the context of both contemporary water challenges and economic accountability considerations, the states are criticised for having provided water in a manner that has facilitated and condoned a high water use culture that does not reflect the eventual limits to supply. The use of public funds to develop water infrastructures, and the lack of profit or competition imperatives, has historically freed the state from economic accountability or economic discipline regarding water management. Until recently, the charges for water supplied by government infrastructures have been negligible, and have not reflected or generated sufficient funds to meet the cost of amortising government investments (Smith 1998). Nor have the degradations of water use been systematically accounted for, costed or charged. Generous and free/cheap provision of water is seen to have enabled unrestrained and unrestricted use, and subsidised both production and consumption activities that may not have been viable without State support. Water supplied by nature has been a free good. The supply of water, effectively 152at ‘zero cost’ (Paterson 1987) has distorted the potential for efficiencies in water use.

Environmental parameters have combined with economic considerations to challenge the capacity of technological solutions to provide for further water resources. The technocratic character of water use, in retrospect, is seen not to have considered water as a finite resource or attempted to understand the function of hydrological systems. The economic and hydrological resources are not necessarily available for new water projects, and the technical ability to harvest water potentially exceeds the capacity of the environment to accommodate the impositions of use and waste (Gleick 1993). The role of dam construction in meeting water needs has been reassessed in terms of the social and environmental impacts associated with the disruption of river systems and land use (World Commission on Dams 2000). Questions remain regarding the availability of appropriate sites, and of rainfall, to fill future dams. The costs of water harvest rise with increased power and technology expenses involved in the access of remote water supplies, including the capital intensive transformation of saline waters, or the access and relocation of remote water resources. In addition, transportation and transformation projects threaten environmental costs (WWF 2007a). Proposed water infrastructure developments are subject to evaluation in terms of environmental costs, greenhouse gas contributions and social impacts (Cullen 2006a).

Limits to water use, environmentally and politically defined, present as a critical concern for individual actors within the economic system. In the context of scarcity, contest emerges between urban and rural users, between emerging productive activities and pre-existing uses, and between uses that degrade water systems and users who depend upon access to healthy river systems. The effects of increased demand are exacerbated by the impacts of cyclical and longer term reductions in rainfall. In the context of diminishing supplies, established systems of allocation between established users are also challenged. Examples of conflict include competition between agriculture and coal-mining in the Hunter Valley (Stewart & Jones 1993); between irrigation industries and graziers in the Paroo river (Kingsford 2002); between cities and agrarian users in South Australia; and over water use regimes expressed in cities 153experiencing water supply limits, such as Sydney. Economic dependence on water by vested interests leads to a need to ensure the reliability of future water supplies (Stroshane 2003). Water users seek to obtain security (certainty) in their rights to use water resources. Pressure on governments to ensure access to water supplies comes from agricultural, urban and industrial users, both as a response to actual physical shortages to water supply and as a response to the social parameters introduced by the successes of the environmental lobby.

The confrontation with limits to the availability of freshwater thus presents as a punctuation in the evolution and expansion of economic activity. The realisation of water scarcity has disturbed established systems of water management and trajectories of water use, and initiated ongoing change - a process of flux and adjustment - in systems of water management. The system both seeks and is forced to adapt/adjust to new challenges. From an economic perspective, Australia has arrived at a ‘mature water economy’, with the emphasis changed from developing to efficiently managing water resources (Pigram 1999; Randall 1981, cited in Quiggin 2001; Young & McColl 2004). Additional resources are not easily available in cost-effective terms. The inability of water supply to satisfy competing demands presages the need for allocation decisions to be made between uses of the major inland water systems, coastal rivers and underground water resources (Freebairn 2003). Irrigation uses, urban demands, and environmental services all require consideration (Edwards 2003).

Governance systems are attempting to manage water flows and stocks whilst responding to pressure from various stakeholders to ensure agricultural, industrial, urban and environmental supplies and to protect economic outcomes. The range of interests embodied in hydrological function and water use indicate that water management is more than a technical exercise. It necessarily involves the mediation of conflicting interests. The theoretical and political process of testing systems of water allocation provides both an impetus for rethinking how water utilisation and water priorities are determined and initiates changes to water management as the state is petitioned to mediate disputes of water utilisation. The mediation of contest can be seen to be, in the context of the short-term timeframes of democratic decision making, a 154management challenge more immediate than sustainability and viability considerations.

Economics and water

In a concurrent development, water has been targeted as a concern for economic theory. As water has presented as a concern for economic systems, so it has also presented as an object of analysis in economic theory. The interpretation of water in terms of value generally, and as an economic good specifically, has a range of implications and practical repercussions.

The economic preoccupation with scarcity – specifically the allocation of scarce resources between competing uses – positions economic theory to comment on emerging contests over allocation. Economic theory thus lends itself neatly to questions of scarce and limited environmental resources, and provides a range of tools to revalue environmental resources and systems. Environmental economics defines the unresolved contests over environmental goods, and the external and unmet costs of environmental impacts, as problems of market failure. Three environmental services provided by the environment to the economy are identified: resource provision, the absorption of the waste products of production processes, and environmental amenity. These are economic functions because they have a positive economic value: these functions would all have positive prices if they were to be bought and sold in the market place. Environmental services are used inefficiently because the positive prices for these economic functions are not manifest: the exchanges that occur through the marketplace do not necessarily cost environmental use. This is not intrinsic to modern economies, but rather the result of the ignorance of these economic functions in the personal and social aims of individuals, groups, communities, pressure groups and politicians (Pearce & Kerry 1990). Environmental economics theory positions the market as the appropriate structure through which to effect allocation. Attention is then turned towards the incorporation of environmental considerations into economic processes. Economic instruments include the implementation of taxation and subsidy schemes, the establishment of property rights in tradeable commodities, and the corporatisation of 155resource delivery infrastructure (Pearce & Kerry 1990). Taxation and subsidy schemes are increasingly referred to as ‘command-and-control’ instruments due to the interventionist role required of government in their implementation. The property rights and corporatisation processes, in contrast, are seen to allow a greater role for markets and the expression of rational individual preferences in deciding environmental outcomes.

Water has been widely reconceived and accepted as an ‘economic good’ since the Dublin Conference on Water and the Environment in 1992 (Savenije 2002). The expansion and resource appetites of industrial economies focus attention on the role of contemporary trajectories of economic development in determining the journey towards capacity utilisation of water resources.5 The role of water in economic growth, and the potential of water scarcity and diminishing quality to challenge regional economic growth, is being broached (Barbier 2004). The status afforded to water is reassessed in the context of scarcity and the need to decide distribution between competing uses.

Within the conventional conceptual economic framework, the increasing scarcity of water relative to demand is associated with an enhanced value that should be reflected in price. Water only has economic value when its supply is scarce relative to demand (Ward & Michelsen 2002). The recognition of water as an economic good has provided a growing impetus both to find the ‘real’ price of water and to ensure that water resources are put to their most economically efficient use. Economic theory frames water management as a question of the allocation of a scarce resource between competing users, considering imperatives for efficient and high-value use (Johansson et al 2002; Edwards 2003; Freebairn 2003; The Economist 2003). The water management question posed within economic method is: considering the range of possible and competing uses, what may be the best distribution and utilisation of limited water resources? Historically, because water has been a public good provided without reference to the disciplines of the market, emerging value has not been recognised. Neither have impositions upon water systems been costed or accounted for, this being a problem of

156unpriced externalities. Maximising the total economic value of water has become an essential concept, yet considerable debate remains regarding how this can be achieved (Ward and Michelsen 2002, p. 426). Pricing is recognised as important, but there is a lack of consensus on an optimal water pricing policy (Johansson et al 2002, p. 175).

An alternative approach to defining the ‘value’ of water has looked to determine the range of alternative or non-monetary values associated with water systems. Although these approaches adopt the stated objectivity of economic/scientific method in seeking to measure values expression, they are inherently political projects in that they seek to interrogate systems of prioritising water as a disassociated economic resource. Alternative economic valuation processes emerge from the Ecological Economics project that identifies economic production as a sphere of activity embedded within the ecological domain, and therefore dependent upon functional ecosystems. Ecological economics, as a theoretical positioning in debate regarding the utilisation of environments, maintains a consistent emphasis on scale of use and constraint of economic expansion. Ecological Economic valuations indicate the comprehensive values and economic support provided by ecosystem services. Other valuation projects seek to assess the range of ways in which water contributes to human welfare in terms of cultural values or social values, and how impositions upon water systems detract from human welfare (that are not conventionally accounted for in economic processes and systems). These values may be broadly indicated or expressed as hypothetical values / shadow costs – the potential monetary value of these services if they were to be bought and sold on the market. For example, studies in relation to wetlands include the papers: ‘The economic value of wetland services: a meta-analysis’ (Woodward & Wui 2001); ‘The value of wetlands: importance of scale and landscape setting’ (Mitsch & Gosselink 2000); ‘Approaches to valuing the hidden hydrological services of wetland ecosystems’ (Acharya 2000); ‘Ecosystems, contingent valuation and ethics: the case of wetland re-creation (Spash 2000); ‘The economic valuation of saltwater marsh supporting marine recreational fishing in the southeastern United States’ (Bell 1997); ‘The effect of distance on willingness to pay values: a case study of wetlands and salmon in California’ (Pate & Loomis 1997); and ‘Private and social returns from wetland 157preservation versus those from wetland conversion to agriculture’ (van Vuuren & Roy 1993).

The environmental economic and ecological economic projects are not, however, exclusive. The recognition of some environmental and alternative flow requirements, combined with recognition of the finite capacity of the environment to provide flows, demands a setting of limits to water use. Within the establishment of limits, markets are signalled as the most appropriate mechanism for allocation of water resources. This suggests the potential for a water management model that establishes allocation between a range of uses, realising the highest returns across a range of water needs. This extends the economic concept of optimal allocation to incorporate multiple values. Market solutions, as a process of cap and trade, thus suggest the ability to manage and resolve the challenges presented by previously unrestrained trajectories of economic demand and the subsequent competition over water resources.

Property rights combined with market approaches are gaining policy prominence over the potential for ‘command-and-control’ legislation and taxation. Advocates recommend assigning property rights to previously public good or shared common property, with the establishment of markets as a system to regulate allocation. There are two prominent processes towards the establishment of property rights in water that are directed towards meeting the respective differences in urban and rural systems of water use. In relation to urban supply infrastructures, there is promotion of the privatisation/corporatisation of water supply infrastructures, with the efficiencies of private ownership and profit incentives proposed as effective forces for water management. It is expected that water prices will increase to reflect scarcity. Appropriate pricing will both encourage efficiencies in use and provide incentive for new suppliers to provide water resources. In agricultural areas with high demand for water for irrigation, the establishment of tradeable water titles and of water markets is promoted. Markets are seen to provide flexibility, physical efficiency through opportunity costs, opportunity for new market entrants, economic efficiency gains, transfer to higher value uses, the ability for inefficient 158users to exit from the water industry, and the potential for the government to acquire licences through market processes (Pigram 1999).

Privatisation complies with a broader ideological framework that both prioritises the market as the medium for allocative decisions, and promotes the responsibilities and incentives within private property regimes (as opposed to the interpreted anarchy of public property regimes as identified in Hardin’s 1968 ‘Tragedy of the Commons’). The shift towards water markets as a policy instrument has been promoted by international organisations such as the UN, The World Bank, FAO and the OECD (Bjornlund 2003). The OECD has expressed commitment to the idea that when an individual/group has an ownership interest in maintaining the value of a property or resource, it will be maintained. The role of the market, as the sum of individual interactions, is promoted as preferable to the authority of government: governments are seen to be servicing their own interests and entrenched community interests, an application of public choice theory. Command-and-control policies are critiqued for costly implementation and enforcement and their potential to hamper longer-term economic development. Property rights are argued as superior to command-and-control processes in terms of flexibility, efficiency, low cost and their ability to enable rather than inhibit growth (OECD 1997, 2004).

The establishment of property rights in water presents particular challenges. Ecological considerations point to the ways in which water is not a conventional commodity. Water defies simple categorisation both in its physical properties and in its economic characteristics. Water is a mobile resource, it exists as both a stock and a flow. It takes the form of ice, liquid and vapour. Water supplies vary spatially and temporally. Hydrological systems defy political borders. Water supply is variable and uncertain. Extreme water events, such as floods and droughts are impossible to control. Water use has environmental impacts with economic repercussions that are not typically or easily incorporated into market processes or accounting systems. Defining water as commodity or capital disguises the uncontrollability of water, and the difficulties in defining partial ownership of hydrological systems. The unique characteristics of water therefore challenge the systems of resource ownership that are typically associated with stationary or quantifiable 159stocks and that fail to recognise natural resources in the context of complex ecological and hydrologic systems.

The distinct social relationships in and of water use further complicate the interpretation and treatment of water as a commodity. Firstly, water has public and common good characteristics. Secondly, the unique value of water as a truly essential resource is worthy of consideration. If, as proposed by Ward and Michelsen, “people will pay thousands of dollars for a quart of water if it keeps them alive” (2002, p. 443), the potential for centralised ownership suggests capacity to set prices far above a competitive intersection of supply and demand. Thirdly, concerns regarding equity to access have been raised in response to pricing arrangements (Beder 2006). Fourthly, the critique of common property regimes remains a point of dispute, with retort to the presumed inability of communal coordination and presumed optimality of individual private property. The establishment of water markets threatens to compromise existing management regimes that are defined by social imperatives. A new institutionalist economics searches for resource management regimes of a more democratic and communal organisation (Ostrom et al 1999; Quiggin 1988). Fifthly, critique addresses the costs of establishing and participating in markets. Markets and property rights are a social creation that require infrastructure, including new laws, new institutional forms, and the protection of new property arrangements. Markets may create the illusion of reduced government responsibility yet inherently require an extensive government support role in providing stable and appropriate institutions for their effective operation (Johansson et al 2002). The transaction costs of water markets, privately or publicly borne, may be significant (Connell, Dovers & Grafton 2005).

Water therefore presents as a unique commodity. In an article titled “Why water is not an ordinary economic good, or why the girl is special”, Hubert Savenije proposes that while water is recognisable as an economic good, it also possesses a number of distinguishing characteristics, the combination of which makes water a special economic good (Savenije, 2002, p.741). He argues that water is essential, scarce, fugitive, an ecological system’s component, bulky, non-substitutable, not freely tradable, and complex. Water is complex because it is a public good, bound by location – a complicating political 160factor, has high production and transaction costs, and experiences non-homogeneity in markets, macro economic interdependencies between water using activities, threat of market failures in supply, and high merit values. Therefore a complex set of economic interests needs to be taken into account. He concludes that “saying that water is an economic good does not necessarily imply that a market price needs to be paid for it to make the allocation efficient. In fact, it does not mean that it should be paid for at all” (Savenije, 2002). While water can be treated as a commodity, the production of water is unlike any other commodity As Polanyi has observed regarding land and labour (1944), water is more appropriately regarded as a ficticious commodity in that it is not produced for the market. The environmental supply of water has no relationship to the logic of the market. Unlike land and labour however, freshwater can be produced from alternative water supplies, and thus is increasingly a produced good.

Emerging water scarcity itself creates new stakeholder interests in water resources. Water presents as a business opportunity, a means to complement or replace traditional state provision of water supplies (World Business Council for Sustainable Development 2006). More radical perspectives identify water commodification as the inevitable focus of capitalist expansion. Scarcity value suggests the potential for rental, speculative, and monopoly incomes related to the private ownership or control of water resources. In addition, the ownership or control of water provides opportunity for the exercise of social and political power (Boelens, Zwarteveen & Roth 2005). Pressure on governments to privatise delivery of water services and water ownership has been exerted by corporate interest and written into trade and aid agreements (Bjornlund 2003, Johnston 2003). Accusations of poor public management and the improved management techniques of private enterprise support this agenda. From this perspective, water privatisation is both an enclosure of a previously publicly owned resource, and a process of accumulation by dispossession (Swyngedouw 2005). Struggles to retain or regain local control over water have emerged in Canada (Biro 2002), America and Bolivia (Johnston 2003), Spain (Vidal de Llobatera 2003), and South Africa (Bond 2004).

161Recognition of the complexities of water as a commodity, and the potential for market dynamics to produce ‘sub-optimal’ social and environmental outcomes, defines the need for ongoing government monitoring and regulation of the use of markets in water management. The establishment of markets for permanent water trades are seen to require sophisticated institutional arrangements, social acceptance, and social resource capacity (Bjornlund 2003). Acknowledgement of the role required of governance bodies in implementing markets informs the reticence of some commentators to unequivocally recommend water market instruments in developing countries (Pigram 1999). Markets for permanent water have been introduced predominantly in developed countries including Australia, the USA, and Chile (Bjornlund 2003).

The purchase of economic instruments

Australia is identified at the frontier of the establishment of water markets (Bate 2006; Pigram 1999 2006; Young & McColl 2004). This puts practice ahead of experience: “arguably, policy reform is now ahead of theory and empirical analysis that is publicly available and, hence, contestable” (Young & McColl 2004, p. 4). The role of markets in water management, an approach predominantly conceived in the abstract, is now being tested.

National policy has initiated and prioritised water rights and water markets as the means to realise monetary values of water and to provide the framework for distributive decisions regarding water use, in conjunction with a raft of strategies that seek to encourage more efficient water use through research and technology development. This approach references economic method to inform interpretation of water questions and policy response. Market trade in water entitlements emerged in the early 1980s (Bjornlund 2003). The Council of Australian Governments’ 1994 Water Policy Agreement committed to: address allocation of water to the environment, pricing reform, widely implement tradeable water entitlements, and clarify property rights to water (COAG 1994). The 1995 National Competition Policy linked substantial federal government payments to the states on the basis of a commitment to implement agreed reforms. This agenda was restated and progressed by the National Water Initiative 2004 (summary in 162Pigram 2006). In tandem, within the Murray–Darling Basin, a 1995 moratorium on future diversions was formalised with a permanent upper limit cap in 1997, set at 1993/4 diversion entitlements (Quiggin 2001). Limits to use are being drawn, although the appropriateness and permanency of parameters are uncertain, and new ownership and allocation arrangements established. In practice, and subject to differences across states, this has entailed the formalisation of pre-existing licences to water in the form of a tradeable entitlement to a given share of water. The available share or allocation is determined on an ongoing basis subject to policy and seasonal flows.

Water trading is one aspect of a suite of strategies within emerging water policy, yet the formalisation of water property rights and markets has received a prominent focus in the implementation of water management regimes (Connell 2007; Connell, Dovers & Grafton 2005; Pigram 1999). The Minister for the Environment and Water Resources states “Water trading is a key plank of the Commonwealth’s water policy blueprint, the National Water Initiative (NWI), and critical to national water reform” (Turnbull 2007a, p. 1). In the contemporary political climate, reliance on market forces and an enforceable system of property rights is preferred to rule-based and subsidised management (Pigram 1999). The adoption of property rights in water is seen to both reflect the ascendancy of the market in Australian public policy and an international trend among industrialised countries to use markets for water management (Isaac 2003). To Commonwealth and state interests, markets suggest the ability to ensure high value use and allow for continued economic growth despite resource limitations. This is arguably an important criterion to a federal government that continues to emphasise economic growth as its primary objective and responsibility (Howard 1997, 2007). The potential to propose policies that limit growth is not seen as politically feasible (M’Gonigle 1999). At the same time, it could be argued that market determination of allocations provides for political disengagement from the messy business of mediation between economic uses, although the task of formalising a division between economic and environmental flows remains contested.

The development of the market model for water distribution has been facilitated by a broad and eclectic, although not comprehensive, support. 163It is important that the use of economic instruments in water management has been supported by both business representative interests and prominent environmental interests, two positions that have a history of opposition in contesting the use of natural resources and environments. Water markets have been supported by interests who perceive water management primarily as a concern for the sustainability of businesses and economic growth, and therefore a question of efficiency and allocation of a scarce resource between the competing demands of economic interests. To business interests seeking to ensure access to flows in a climate of both physical and political uncertainty, it offers some security of entitlement (Business Council of Australia and New South Wales Irrigators Council, in Geoghegan 2006). Market advocates who remain ambivalent toward the assumed merits of environmental flows can be identified (one such example is Dwyer 2006). Water markets have been supported also by a more ecologically-defined position that seeks to establish the need for environmental flows as a primary objective. This includes the Wentworth Group of Concerned Scientists (Wentworth Group 2003) and the Australian Conservation Foundation (Fisher 2004; Hechtman 2006). There is an accepted logic in the idea that water has value and therefore should be priced accordingly (e.g. Stewart & Jones 2003). From the environmental perspective, markets are recognised as both a means to ensure efficiency and appropriate pricing in the allocations assigned for production and consumption, and provide facility for governments to buy back environmental flows in over-allocated systems.

The changing terrain of water distribution

In economic terms, the effective operation of markets has been progressed. Irrigators are seen to be increasingly treating water as a commodity, another input into farming, to be bought and sold on a seasonal basis (Bjornlund 2003). However, early market exchanges have been limited, or ‘thin’, with problems of inefficient information flows, spatial restrictions and a range of administrative restrictions to trade (Bjornlund 2003; Crase, O’Reilly & Dollery 2000;). Water trades are occurring predominantly in temporary water rather than permanent 164water entitlements (Shi 2006).6 The preference for temporary trades over permanent sales has been identified as reflecting the reluctance of entitlement holders to relinquish their claims on an increasingly valuable resource, as well as exploitation of the economic gains from resource rentals7 (Bjornlund 2003; Freebairn 2005; Shi 2006). Some entitlement holders are using water titles as a means to remain on the land. Water itself has become a cash product (Clarke 2006). Speculative activity in water trades has been identified (Bjornlund 2003, p. 70). The uncertain future of the physical availability of ‘permanent’ allocations is seen to be a consideration in limiting the market in permanent titles (Bjornlund 2003). New enterprises have been established through market purchase of water entitlements, substantiating argument that water markets create opportunity to increase economic activity (Shi 2006; Young & McColl 2004)8. The expectation that permanent water will move to high value uses has been partially fulfilled (Bjornlund 2003). Media attention has highlighted the movement of water from small holdings to larger corporations, such as Timber Corp and Macquarie Bank (e.g., Clarke 2006; Knight 2006).9 The consolidation of water holdings may be consistent with a general trend towards the increased scale of farming enterprises. Urban users are predicted to be competitive participants in water markets (Young, cited in Knight 2006). It should be emphasised that highest value users are those who are able to pay the most for the resource, rather than those who necessarily achieve physical efficiency or use the water for the most productive gain per unit of input.

The operation and facilitation of water markets has emerged as an area of scholarship. Maturing water markets are seen to produce more rational outcomes (Bjornlund 2002). However, “we have a long way to go before we have a fully functioning market” (Treasurer Peter Costello, in Peatling, Marriner & AAP 2006). The limited trade in permanent

165water is seen as an impediment to market efficiency (Crase, O’Reilly & Dollery 2000). The Productivity Commission has undertaken research to assist in the implementation of water markets, with a focus on a nationally compatible market, regulatory and planning systems of management (NWI clause 23) and the facilitation of water market and trading arrangements (NWI clause 58). The Commission recommends refining and clarifying existing property rights, and relaxing or removing restrictions on who can participate in water trade (Productivity Commission 2006). A recent National Water Initiative paper has promoted the opening of markets to non-users as a means to promote efficiency (ABC 2006). The differences and complexities in titles and trading arrangements between state systems, and the need to clarify property rights, has been emphasised as requiring address if markets are to function effectively on a national basis (Brennan & Scoccimarro 1999; Crase, O’Reilly & Dollery 2000; Freebairn 2004; Shi 2006; Young & McColl 2003). The statement of need for a national coherence in water titles and administration pre-empted, and arguably provided an inevitable impetus, to the 2007 water plan that seeks to establish Commonwealth management of the Murray-Darling Basin (Howard 2007).

The environmental implications of water markets are being monitored. The outcomes of water trades demonstrate the potential to amplify the differences between natural flow regimes and extractive flow regimes (Tidsell 2001). It is recognised that more physically efficient utilisation will return less run-off to hydrological systems, and that efficiency gains in irrigated agriculture do not translate into environmental flows without management intervention (Heaney & Beare 2001; Watson 2003; Young & McColl 2003). Water markets are seen to be moving water to high value businesses rather than to crops that are efficient in environmental terms. This is interpreted as the outcome of relatively low water prices, and water remaining one factor of many in shaping agricultural decisions (e.g. Isaac 2003). The movement of water to emerging enterprises threatens additional salinity problems as new lands are developed for agricultural use. The potential remains for land-use developments, particularly forestry, to reduce water yield (Young & McColl 2003). An increasing dependence on groundwater has been recognised (Cullen 2006a). The failure to cancel unutilised and under-utilised entitlements, 166‘sleeper’ and ‘dozer’ entitlements, has led to an increase in the number of active water users as these entitlements are traded and activated (Isaac 2003). The problem of economic use impacts and environmental quality continues. The need for salinity mitigation and water quality protection prompts arguments for a more comprehensive use of economic instruments to manage water quality, including the extension of property rights to externalities (Beare & Heaney 2002).

The establishment of water markets, and the associated drawing and enforcement of parameters to use emphasised by the environmental lobby, suggest a very different water management role for the states and Commonwealth – from the political and physical facilitation of access to water resources to the management of a given supply. However, governments, at both state and federal level, appear unable to concede their involvement in this historical role. There is a continued search for resources and ongoing proposals to fund further infrastructures. Examples of this process include: the establishment of a federal taskforce to examine the potential for water resources development in the tropical north of Australia (Howard 1997); the proposed 3700km pipeline from the Fitzroy River to Perth in Western Australia and the muted Clarence River diversions in NSW (Pigram 2006); Victoria’s Goulburn to Melbourne pipeline and desalination plant proposals (Hughes 2007); and the desalination plant development recently approved for Sydney, NSW (AAP 2007). In addition, emphasis on pricing water is promoted as a means to stimulate private interest in the search for and development of further water resources (Dwyer 2006). Citigroup, the Business Council of Australia and Infrastructure Partnerships Australia have advocated competitive water pricing as a means to stimulate private investment in water infrastructure developments (Hepworth 2007). State governments are increasingly looking to private enterprise to invest in further infrastructure (NSW in Hepworth & Midalia 2007; WA in Burrell 2007). The introduction of demand to previously marginal water resources initiates further environmental contest.

The contest between environmental and economic flows remain and the stated objective to return an adequate level of environmental flows is yet to be realised (Lewis & Wilkinson 2007). The Australian Conservation 167Foundation has raised opposition to the creation of water entitlements with unlimited tenure (Quiggin 2001). Concern has been expressed regarding the tacking of water rights onto pre-existing regimes of water use. This has been seen to consolidate existing economic interests in water: “a more immediate concern is that we may well be locking away our public water resources in private hands without any quid pro quo for the environment” (Fisher 2004, p. 25). Environmental interests have expressed dissatisfaction with limited progress towards acquiring environmental flows (Connell 2007; Cullen 2006b). This has been interpreted as a problem of political incentive in the face of an effective agricultural lobby (Fisher 2004). The economic perspective however, emphasises that achieving reductions in extractive uses is not a costless exercise (Cope no date). Securing environmental flows has two economic dimensions. The first is the costs of reclaiming flows in over-allocated catchments, and the associated need for a revenue stream. The second is the opportunity costs of not utilising available water for productive use. In the context of the costs of acquiring flows, and the opportunity costs of production forgone, environmental flows are being asked to both earn their way and prove their worth.

The acquisition of environmental flows, in a competitive market, requires targeted funds. Governments can buy water, as in the NSW Riverbank scheme. This is an increasingly expensive endeavour in the context of increases in water prices: the economic value of water can be seen to have contributed an additional dimension to the challenge of returning environmental flows (Lewis & Wilkinson 2007). The Federal Government scheme to buy back water saved through increased efficiencies has attracted minimal interest.10 The Federal Water Resources Minister concluded that the offered price was too low: “the reality is, water is becoming more valuable and the cost of acquiring water is more likely to rise than fall” (Turnbull, in Farmonline 2007, p. 1). Alternatively, the government must compulsorily acquire entitlements or reduce allocations, and is thus subject to compensation claims (these claims may be of tenuous legality, but have a demonstrated political traction). An “across-the-board pro-rata purchase of a

168percentage of each water entitlement” has been recommended as a means to address the limited availability of water for sale and the potential for market distortions of a water plan voluntary buy-back proposal that is 15 times greater than the annual maximum trade in permanent entitlements (Young & McColl 2007, p. 1). The Commonwealth Water Bill 2007, introduced to parliament in August, includes commitment that water entitlements will not be compulsorily acquired. However, “the Commonwealth agrees to take on its share, together with the State Governments, of the liabilities for future reductions in water availability” (Turnbull 2007b, p. 5). The participation of environmental water trusts in water markets – buying water in times of plenty when prices are lower, and selling during periods of scarcity to take advantage of higher prices – has been suggested as a means for environmental interest groups to fund their interests in acquiring environmental allocations. Alternatively, facilitating donations of water to the environments has been proposed as a cost-effective option (Young & McColl 2004).

The means to raise funds for environmental flows requires further thought. If the creation of wealth is linked to environmental transformations, as has been explored in the emerging thermodynamic/bio-economic discourse (Boulding 1966; Georgescu-Roegen 1972), or more generally within ecological economic thought (Hornborg 2005; Perez-Rincon 2005), the process of raising money itself requires a process of environmental appropriations. At the very least, the raising of funds is dependent upon a prior participation in market processes.

The opportunity costs of preserving water for the environment present significant challenges to the defence of environmental flows. More water for the environment is less water for direct production and consumption. It is estimated that the 1500 gigalitres of environmental flow indicated for a healthy and functional Murray River system, roughly translates into 150,000 hectares of irrigated agriculture (Fisher 2004). Even where flows have not been overallocated, and need to be preserved rather than returned, the preservation of environmental flows is not ‘costless’. From the economic perspective, the preservation of environmental flows has opportunity costs in developments forgone. 169These opportunity costs can be expected to exist in perpetuity, and will only increase as water becomes scarcer and more valuable. In both contexts, environmental flows will face ongoing expectation that they demonstrate value from use. For economic efficiency, available water resources need to be allocated to “where they are most valuable to society” (Edwards 2003, p. 196). The provision of environmental water is ‘to meet human needs” and “people’s demand for environmental services”. (Edwards 2003, p. 197). Water savings programs will be subject to a questioning of whether “marginal benefits equal or exceed marginal costs” (Ward & Michelsen 2002, p. 426). In the face of uncertainties in ecosystem requirements, Pigram warns against ‘ambit’ claims and states that the environment needs to be held accountable for the water assigned to it (2006). Further: “interest groups, who are largely succeeding in acquiring substantially greater amounts of water for the environment, should now be expected ‘to do better with more’ – to account for the water placed under their stewardship and to service more effectively the environmental purposes specified” (Pigram 2006, p. 159). In this context, the provision of environmental flows is expected to demonstrate a clear and competitive benefit to society.

Defining environmental water use in terms of value is an extension and prioritisation of a specific conception of water that re-emphasises the need for water uses to produce gains/output. While the focus of alternative valuations entails either a redefinition or a reconceptualisation of value itself, a project to reclaim the meaning of value from a pure equation with monetary price, the contest is being played out on the terrain of economic method. The prominence of value as a means to petition for use rights suggests the dominance of utilitarian interpretations of the environment. It indicates also a complicitness, although perhaps reluctant on the part of some who participate in alternative valuation projects, with the economic concept that the most deserving water users are, by definition, those who can demonstrate the greatest utility from use. The positioning of this discussion on the home ground of economics, and the use of price as a value default, suggests an inevitable benefit to those who produce monetary gains from their water use (the home team). Within the decision making processes of the contemporary political economy, it will be an ongoing challenge for 170hypothetical or argued values to compete with the tangible economic gains of water utilised in productive activity.

The range of outcomes from the early experiences of water market development and operation suggest that the changes following from the establishment of water markets will be more extensive than the immediate stated objectives of water market policy. The pricing of water, and the associated changes to rights to water, appear to provide access to water to competitive economic enterprises. This process in itself will initiate a range of social and environmental adjustments. The award of environmental flows however, remains open to contest and subject to a new terrain of competition. The challenges that follow relate to the ability of environmental and longer-term sustainability interests to compete with immediate economic interests in the setting of parameters to water use.

Acknowledgements

Thanks go to Stuart Rosewarne, Leith Boully and Gavin Birch for review of drafts of this chapter.171

References