Australian Government response to the Productivity Commission inquiry on national water reform

April 2019

The Australian Government has responded to the Productivity Commission’s Inquiry on National Water Reform. More information on the inquiry is available on the Productivity Commission’s web​site.

Overview

The Australian Government welcomes the findings of the Productivity Commission’s (PC’s) inquiry on national water reform and supports renewing the 2004 Intergovernmental Agreement on a National Water Initiative (NWI).

The Australian Government will continue to work with state and territory governments to implement the existing NWI, and also to renew the NWI to help meet the future water challenges in Australia.

In the report’s overview, the PC notes that Australia’s reputation on the world stage is the result of forward thinking and, for the most part, co-operation by the Australian, state and territory governments in developing a national water reform agenda that has been pursued over the past 20 years.

The blueprint of Australia’s most recent phase of water reform efforts is the NWI. The NWI is a shared commitment by governments to increase the efficiency of Australia’s water use, provide investment confidence, supply security for rural and urban communities, and provide greater certainty for the environment.

Australia’s population is growing and the climate is becoming hotter and drier, and will continue to so do for the foreseeable future. These intensifying issues pose a challenge to how Australia best uses its limited freshwater resources.

Secure and affordable access to water affects life in Australia. Without adaptive improvement to water management, reliance on past reforms may leave Australia unprepared for the future, imposing economic, social and environmental costs.

Through the National Water Infrastructure Development Fund and the National Water Infrastructure Loan Facility, the Australian Government has been encouraging state and territory governments and the private sector to invest in new water infrastructure development. Many of the projects that are being supported include significant financial commitments by private investors, particularly agricultural interests.

The Australian Government agrees with the PC, there remains further work to do. Governments need to complete unfinished business from the NWI, including fully implementing entitlement and planning reforms, and respond to the challenges posed by population growth, climate change and changing community expectations.

The implementation of NWI reforms in jurisdictions where progress has lagged is critical to underpinning and further encouraging investment in new water infrastructure. Our ongoing commitment to these investments also provides an impetus to further press state and territory governments for the adoption and implementation of reforms.

Noting the PC’s recommendations to state and territory governments, the Australian Government is committed to working with those governments where national action is required. This includes urban water, environmental water management, water for Indigenous stakeholders and investment in water infrastructure. That said, implementing reforms should not be contingent on the development of a renewed NWI.

The PC’s insight into community expectations (in particular for water in towns and cities, liveability, way of life, tourism, recreation and amenity) have been especially beneficial. The Australian Government considers it necessary for further exploration and consultation with relevant stakeholders, including Indigenous communities, in renewing the NWI.

Government response, at all levels, to the challenge of water reform must be cohesive and well-targeted. The role of the Australian Government will be to demonstrate national leadership. This does not necessarily involve new spending, but does mean ensuring sustainability and adaptive learning in design and delivery of a range of policies and programs. Policy settings should facilitate a flexible and responsive approach.

Response to recommendations

Water entitlements and planning

State and Territory Governments should ensure that entitlement and planning reforms are maintained and improved.

Priorities are:

  1. Western Australia and the Northern Territory should establish statutory-based entitlement and planning arrangements that provide for water access entitlements that are long-term, not tied to land and tradeable
  2. State and Territory Governments should ensure that water entitlement and planning arrangements explicitly incorporate extractive industries, including ensuring that entitlements for extractive industries are issued under the same framework that applies to other consumptive users (unless there is a compelling reason otherwise)
  3. State and Territory Governments should develop a process to regularly assess the impact of climate change on water resources. Where this is considered to have been significant and detrimental, they should ensure that the next water plan review fundamentally reassesses the objectives of the plan (including environmental and consumptive) and the consequent balance between environmental and consumptive use of water, to ensure it is suited to a drier climate
  4. State and Territory Governments should ensure that, as water plans reach the end of their planning cycle, review processes are undertaken that allow optimisation of water use and system operation across all users, include explicit consideration of Indigenous cultural values, and involve adequate community and stakeholder engagement
  5. State and Territory Governments should explore opportunities to better incorporate water quality issues in water planning, particularly as water plans come up for review and renewal
  6. State and Territory Governments should ensure that their entitlement frameworks can incorporate alternative water sources, such as stormwater, wastewater and managed aquifer recharge, so they do not present a barrier to efficient investment in these supply options.

Australian, State and Territory Governments should revise relevant provisions in the National Water Initiative to align with recommendations 3.1 (b) to 3.1 (f).

The Australian Government supports this recommendation, noting implementation is a matter for relevant states and territories.

Entitlement frameworks define how water is shared, held, used and traded. The Australian Government recognises that having a statutory water-planning framework in place assists with water-related economic development. Statutory-based entitlement and planning arrangements provide water users with a secure, legally-defined water rights, and transparency for everyone about how water will be allocated.

The PC’s inquiry found important areas for improvement to ensure entitlement frameworks were maintained and improved. The Australian Government encourages jurisdictions to account for all consumptive users within a water resource area in a way that supports investment certainty.

Secure entitlement frameworks are also key to promoting investment in new water infrastructure. The Australian Government has committed over $3.3 billion through the $1.3 billion National Water Infrastructure Development Fund and the $2 billion National Water Infrastructure Loan Facility, to identify and co-fund with state and territory governments the construction of new water infrastructure. Many of the projects already committed to include substantial financial commitments from the private sector. Implementation of NWI reforms will further help to promote more private sector investment and provide security for existing project investors.

State and Territory Governments should ensure that:

  1. Indigenous cultural objectives are explicitly identified and provided for in water plans
  2. progress in achieving Indigenous cultural objectives is regularly monitored and reported publicly
  3. there is public reporting of how Indigenous cultural objectives have been considered in the management of environmental water — both held and planned.

The Australian Government supports this recommendation, noting implementation is a matter for relevant states and territories.

The Australian Government notes that the definition of cultural flows as defined in the National Cultural Flows Research Project extends beyond the definition used by the PC:

Cultural Flows are 'water entitlements that are legally and beneficially owned by Indigenous Nations of a sufficient and adequate quantity and quality, to improve the spiritual, cultural, environmental, social and economic conditions of those Indigenous Nations'. 

This highlights the importance of understanding how Indigenous communities define, relate and view water rights, and the outcomes sought from these rights.

The Australian Government led the development of the NWI module: Engaging Indigenous peoples in water planning and management. The module is not prescriptive, but provides guidance and examples on:

  • recognising Indigenous values and needs in relation to water resource planning and management
  • facilitating effective representation and engagement of Indigenous peoples in water planning
  • incorporating Indigenous values, objectives and needs in water planning and management activities.

The Australian Government supports actions that normalise the explicit inclusion of Indigenous water requirements in water plans and Indigenous people meaningfully engaged in water planning processes.

Where State and Territory Governments provide access to water for Indigenous communities for economic development they should:

  1. source water within existing water entitlement frameworks, such as by purchasing water on the market or as part of transparent processes for releasing unallocated water
  2. ensure adequate supporting arrangements (such as training and business development) are in place to enable Indigenous communities to maximise the value of the resource
  3. involve Indigenous communities in program design
  4. specify and implement future governance arrangements
  5. regularly monitor and publicly report on these provisions (such as the volume of entitlements sourced, water used and supporting arrangements) and their outcomes.

Australian, State and Territory Governments should revise relevant provisions in the National Water Initiative to align with recommendations 3.3 (a) to 3.3 (e).

The Australian Government supports this recommendation, noting implementation is a matter for relevant states and territories.

Indigenous leaders have been clear that economic development must strengthen and be integrated with cultural concerns rather than culture being seen as separate, because:

  • the decisions and outcomes of leaders and institutions must have legitimacy with the people for whom they are made, and
  • there is evidence that investing in cultural strength of individuals and communities will lead to greater wellbeing and sustainable development.

The importance of ensuring cultural and spiritual values are recognised and provided for in water plans is recognised in the NWI, however the importance of access to water to promote Indigenous cultural activities, including economic development, is still progressing.

The Australian Government's commitment to Indigenous investment in water includes
$40 million over four years to support Indigenous Basin communities by investing in cultural and economic water entitlements and associated planning activities.

Water trading

Australian, State and Territory Governments should maintain trade reforms to date and improve arrangements to facilitate open and efficient water markets.

Priorities are:

  1. State and Territory Governments should remove those residual trading rules, policies (whether or not explicitly stated) and other barriers that prevent water being traded, or otherwise transferred, between the irrigation and urban sectors
  2. the Australian Government should commission an independent review of the effectiveness and efficiency of service standards for trade approvals. The review should consider whether the standards should require shorter approval times
  3. the role of governments in providing water market information should be focused on ensuring the quality and accessibility of water resource, market rules and basic trade data. In fulfilling this role, State and Territory Governments should improve the quality and accessibility of trade data in water registers.

Australian, State and Territory Governments should revise relevant provisions in the National Water Initiative to align with recommendation 4.1 (a).

The Australian Government supports in-principle recommendation 4.1 (a), noting implementation is a matter for relevant states and territories.

Water markets are now well developed in the Murray-Darling Basin and in some other areas and could efficiently allocate water between alternative water users, both within and across sectors, including the urban sector. However, water trading within and between sectors needs to be more transparent and have similar costs and administrative rules. This is particularly important given the scale of agriculture water use relative to other sectors. 

The Australian Government agrees in-principle recommendation (b).

The Australian Government acknowledges there is potential for shortening of the approval times requirement under the trade approval service standards set by governments, noting the standards have not been updated since 2009. These standards do not apply to non-Basin jurisdictions, although some non-Basin states have chosen to report against the standard.

The Australian Government supports in-principle recommendation (c), noting implementation is a matter for relevant states and territories.

A key outcome of the NWI is for parties to facilitate the operation of efficient water markets (para. 58). This depends on market participants having complete, accurate, and timely information, supporting well-informed trading decisions and, in turn, promoting market confidence and increased trading activity. The Australian Government continues to observe issues arising from the lack of transparent and timely data, including: the price and volume of trades, the type of trade, and details of alternative products (such as carryover and other forms of storage).

The Australian Government will consider these recommendations with states and territories in the context of the renewal of the NWI.

Environmental management

Australian, State and Territory Governments should ensure that their policy frameworks provide for the efficient and effective use of environmental water to maximise environmental outcomes and, where possible, provide additional community outcomes relating to water quality, Indigenous values, recreation and economic benefits.

Australian, State and Territory Governments should enhance the National Water Initiative to align with this recommendation.

The Australian Government agrees with this recommendation.

The Commonwealth Environmental Water Office is already involved in and tracking towards better integration of environmental water into Murray-Darling Basin-wide river operations. Local engagement officers are working alongside state and local land and water management agencies and providing outreach to local communities throughout the Basin.

The Water Act 2007 was amended in 2016 to provide increased flexibility to the Commonwealth Environmental Water Holder (CEWH). The changes allowed the CEWH to use proceeds from the sale of water allocations to fund environmental activities. These changes recognise that environmental outcomes in the Basin require both water and other complementary activities. The majority of annual water allocations assigned to the CEWH will be used in rivers, wetlands and floodplains to meet environmental needs.

In June 2018 the Australian Government  issued a directive under the Water Act for the Murray Darling Basin Authority (MDBA) to report publicly each year on how holders of environmental water have considered Indigenous values and uses and involved Indigenous people.  The MDBA must provide the first report by end 2019.

State and Territory Governments should ensure the management of environmental water is integrated with complementary waterway management at the local level.

To achieve this:

  1. State and Territory Governments should ensure that consistent management objectives govern the use of environmental water and complementary waterway management activities
  2. where possible, one planning process should be used to set objectives for both activities but, if not, State and Territory Governments should ensure planning at the local level is aligned and coordinated. Planning processes should also provide explicitly for other public benefit outcomes where these are compatible with environmental outcomes.

Australian, State and Territory Governments should enhance the National Water Initiative to align with recommendations 5.2 (a) and 5.2 (b).

The Australian Government supports this recommendation, noting implementation is a matter for relevant states and territories.

The Australian Government recognises that water is only one of many things that affect ecosystem health and there is merit in integrating management of environmental water and waterways.

Where governments own significant environmental water that can be actively managed, they should ensure that decisions on the use of this water are made by independent bodies at arm’s length from government.

The Australian and New South Wales Governments should review current governance arrangements to ensure that held environmental water and environmental contingency allowances are managed:

  1. independently of government departments and political direction
  2. by statutory office holders with an appropriate range of expertise.

Australian, State and Territory Governments should enhance the National Water Initiative to align with this recommendation.

The Australian Government agrees in-principle with this recommendation.

The CEWH is a statutory office holder, whose functions are defined in legislation. They manage a large portfolio of environmental water – entitlements with annual allocations that are acquired through the Australian Government’s investment in water-saving infrastructure and strategic water purchasing throughout the irrigation districts of the Murray-Darling Basin.

The CEWH operates with a high degree of statutory independence under the legal framework established in the Water Act. Decisions about the trade and use of Commonwealth environmental water are not subject to the direction of the Minister. The CEWH is responsible for the day to day management of the Commonwealth’s environmental water holdings and makes the judgement (within the bounds of the legal framework) about how Commonwealth environmental water holdings can be best used, carried over or traded to conserve and protect the Basin’s environmental assets. This judgement is exercised subject to the Public Governance, Performance and Accountability Act 2013, which requires the efficient and effective use of Commonwealth resources.

Australian, State and Territory Governments should ensure there are clear roles and responsibilities for managing environmental water in water resources that are shared across jurisdictions, with no duplication.

Consistent with this principle, The Living Murray program should be wound down as there is no clear rationale for its continued existence in the context of the Basin Plan. Each Basin jurisdiction should manage its share of former Living Murray entitlements as part of its broader portfolio of held environmental water. The Murray-Darling Basin Authority should complete the divestment of its holdings.

The Australian Government agrees in-principle with this recommendation.

The MDBA and the jurisdictions are working to achieve efficient and effective environmental water management with clear roles and responsibilities, and no gaps or duplication. The Commonwealth Environmental Water Holder is similarly working with state agencies to reduce duplication and coordinate watering activities whilst ensuring required environmental outcomes are being achieved.

The Living Murray Initiative and its governance arrangements, environmental water portfolio, icon site management and monitoring, and Indigenous Partnerships programs, have been progressively transitioning under the Basin Plan. The complex nature of the initiative and its relationship with the Sustainable Diversion Limits (SDL) adjustment mean that transition is being undertaken carefully and appropriately. While MDBA is divesting the Living Murray entitlements it holds back to the states, disbanding the portfolio requires further consideration, including the long-term home of the various components of the initiative.  The best timing for this consideration is likely to be post 2024, once the reconciliation of the SDL adjustment mechanism are known.

Over time, the Australian Government should devolve the management of Commonwealth environmental water to the lowest practicable level in situations where:

  • the environmental water could be effectively managed by an accountable local or state and territory partner
  • the involvement of the Commonwealth Environmental Water Holder is not required to achieve whole-of-basin outcomes, including by managing trade-offs between catchments and jurisdictions.

Management should initially be devolved where an environmental asset has well-specified, relatively routine water requirements, but arrangements could evolve to encompass more complex management needs.

The New South Wales, Victorian and South Australian Governments should also devolve the management of held environmental water where equivalent conditions apply.

Australian, State and Territory Governments should enhance the National Water Initiative to align with this recommendation.

The Australian Government notes this recommendation.

The CEWH is responsible for the management of the Commonwealth environmental water holdings to protect and restore the environmental assets of Murray-Darling Basin.

Complete devolution of functions would be inconsistent with the underlying rationale in establishing the CEWH as an entity capable of decision making on environmental priorities at the Basin scale, specifically anticipating the transfer or trade of water allocations between catchments and jurisdictions. A Basin-wide approach to trade-offs over location and timing across State boundaries is best achieved by the CEWH.

Only where it is practical, the CEWH is working towards devolution of day-to-day decision making, by entering into partnership agreements with local entities. For example, with the Renmark Irrigation Trust, where Renmark irrigations are seeking to be proactive and responsible environmental stewards. The Australian Government sees this as the way to incorporate the expertise, experience and support of local communities whilst maintaining Commonwealth accountability. Partnership agreements are published on the Department of the Environment and Energy's website.

Australian, State and Territory Governments should improve monitoring, evaluation, auditing and reporting to demonstrate the benefit of allocating water to the environment, build public trust in its management, keep managers accountable and make better use of environmental water over time.

Priorities are:

  1. Australian, State and Territory Governments should increase their focus on monitoring environmental and other public benefit outcomes — not just water provision — where additional effort would be commensurate with the risk to, and value of, those outcomes
  2. monitoring and evaluation should involve collaborative and complementary partnerships, consistent approaches that enable the synthesis of outcomes across different temporal and spatial scales, and long-term investment. In the Murray-Darling Basin, governments should develop a strategy to coordinate monitoring and evaluation of the outcomes of environmental water provision, both planned and held
  3. all managers of environmental water should publicly report on outcomes that are not achieved, in addition to those that are, and the reasons why
  4. to improve transparency, Australian, State and Territory Governments should establish arrangements for independent auditing (at least triennially) of environmental water outcomes and supporting management arrangements
  5. managers of held environmental water should use the results of monitoring, evaluation and research to improve water use as part of an adaptive management cycle. To achieve this, responsibility for adaptive management should be clearly allocated and adequately resourced.

Australian, State and Territory Governments should enhance the National Water Initiative to align with recommendation 5.6 (e).

The Australian Government agrees with this recommendation.

The Australian Government has focused on building community knowledge, trust and confidence that environmental water is competently managed throughout the Basin. The Commonwealth Environmental Water Holder is working to build public understanding about the improvements in the health of rivers, wetlands and floodplains across the Basin that have resulted from environmental watering. The Long Term Intervention Monitoring Program monitors and evaluates the effectiveness of Commonwealth environmental water use. Over time as Commonwealth environmental water has been delivered, the results of monitoring has fed back into assessments of the effectiveness of the water used, enabling adaptive management.

The Australian Government agrees these efforts must continue and improve to obtain the best outcomes from Commonwealth environmental water.

Urban water

State and Territory Governments should:

  1. ensure that roles and responsibilities for system and major supply augmentation planning are clearly allocated between governments and utilities, recognising that ultimate accountability rests with government
  2. require that decision-making processes are consistent with good planning principles, in particular that they consider all options fully and transparently, including both centralised and decentralised approaches (including indirect and direct potable reuse, and reuse of stormwater), and are adaptive in response to new information.

Australian, State and Territory Governments should enhance the National Water Initiative to align with recommendation 6.1 (b).

The Australian Government supports this recommendation, noting implementation is a matter for relevant states and territories.

The Australian Government agrees that clarifying roles of governments and utilities, including the provision of traditional and non-traditional urban water management services, can assist in the efficiency and effectiveness of decision making around supply augmentation.

The Australian Government supports the PC’s call for rigorous principles-based planning, including stakeholder engagement, to improve long-term water security and better weigh up costs and benefits of different approaches. The COAG National Urban Water Planning Principles provide a good planning framework for urban water and parties should recommit to make the principles central to all urban planning processes. This commitment extends to ensuring long term water plans are developed and regularly reviewed (see also recommendation 6.2 regarding integrated water cycle management (IWCM)).

State and Territory Governments should ensure that decentralised integrated water cycle management (IWCM) approaches are considered on an equal footing alongside other water supply and management approaches, particularly in the planning of new developments to support urban growth.

Priorities are:

  1. ensuring that place-based IWCM plans are developed for major growth corridors and significant infill development locations
  2. ensuring that options identified in IWCM plans are considered in water system planning, including both high-level system-wide planning and detailed investment planning, and in land-use planning
  3. ensuring that IWCM projects are implemented when they are shown to be cost-effective (considering their full range of benefits)
  4. reviewing the role that developer charges play in planning for new developments.

Australian, State and Territory Governments should enhance the National Water Initiative to align with recommendations 6.2 (a) to 6.2 (d).

The Australian Government supports this recommendation, noting implementation is a matter for relevant states and territories.

Under Paragraphs 90-92 of the NWI, governments agreed to implement innovative water supply sourcing, treatment, storage and discharge to move toward water sensitive cities (also known as IWCM).

The PC noted that decentralised and IWCM infrastructure options such as wastewater recycling and stormwater harvesting are considered through separate planning processes to those used for traditional sources like dams.

IWCM needs to be considered at all planning scales as part of overall planning and compared consistently with other feasible options, incorporating a valuation of the full costs and benefits including social and environmental benefits, rather than through a separate water supply plan for which responsibility and accountability is unclear.

State and Territory Governments should ensure that current environmental regulations protect urban waterway health as cost-effectively as possible, and do not prevent the achievement of other public benefits.

Priorities are:

  1. reviewing existing regulatory regimes for wastewater discharges, beneficial use of wastewater and sewer overflows to ensure that they are sufficiently flexible and outcomes-focused
  2. considering the need to amend relevant national policies and standards.

The Australian Government supports this recommendation, noting implementation is a matter for relevant states and territories.

A key element of the NWI is integrated management of water for environmental and other public benefit outcomes (Paragraph 24). The Australian Government agrees with the PC’s recommendation to ensure environmental regulation is as cost-effective as possible, provided the measures adopted continue to deliver required outcomes. Flexible regulatory arrangements have the potential to lower costs and better address diffuse source pollution, delivering a broader range of benefits than traditional regulatory approaches based on volume or load limits alone.

State and Territory Governments should ensure that independent economic regulation is in place for all urban water service providers of a sufficient scale, to further promote efficient service delivery.

Priorities are:

  1. extending independent price regulation to retailer-distributors in south-east Queensland and the Northern Territory’s Power and Water Corporation
  2. establishing a standing reference for the Economic Regulation Authority in Western Australia and the Queensland Competition Authority to set or review prices
  3. establishing common national principles to raise the standard of economic regulation across all jurisdictions. These should include that:
  • the objective of regulation is to promote the long-term interests of customers
  • regulatory decisions should include transparent customer engagement
  • prices should reflect the full efficient cost of service provision
  • utilities should have incentives to innovate and improve their efficiency
  • regulatory decisions should consider the long-term viability of utilities
  • regulatory frameworks should be adaptable and flexible, and allow the economic regulator to incorporate feedback into its approach
  • the economic regulator should be transparent and detail the rationale underlying any regulatory decisions
  • regulatory decisions should facilitate effective competition in potentially contestable parts of the industry.

Australian, State and Territory Governments should revise relevant provisions in the National Water Initiative to align with recommendation 6.4 (c).

The Australian Government supports in-principle this recommendation, noting implementation is a matter for relevant states and territories.

Under Paragraph 77 of the NWI, governments agreed to independent pricing regulation to give effect to the objectives of consumption-based pricing, full cost recovery and price transparency. The proven benefits of economic regulation include improved service standards, lower customer prices, more efficient investment decisions, and improved financial viability of utilities and the sector as a whole.

The common national principles proposed by the PC are consistent with achieving the water pricing reforms in the NWI, as well the Organisation for Economic Co-operation and Development’s Best Practice Principles for Regulatory Policy and the objectives of leading regulators internationally.

To promote competition by comparison, Australian, State and Territory Governments should ensure that performance monitoring data are publicly reported for providers of all sizes and subject to independent scrutiny.

Priorities are that:

  1. the Queensland Government extend the public reporting of financial information to service providers with fewer than 10 000 connections
  2. the New South Wales and Queensland Governments require appropriately qualified independent bodies to review financial performance frameworks to ensure that the pricing practices of regional service providers are monitored for consistency with National Water Initiative pricing principles
  3. State and Territory Governments, through the National Performance Report and state-based reporting processes, require providers to report a financial return metric that excludes developer charges and contributed assets alongside the economic real rate of return metric.

The Australian Government supports the recommendation, noting implementation is a matter for relevant states and territories.

The Australian Government agrees that publicly reported performance monitoring data supports competition by comparison (performance benchmarking).

The National Urban Water Utility Performance Reporting Framework (the NPR) provides annual benchmarking of utilities with more than 10,000 connected properties to evaluate their performance, and compare urban water usage and costs in major cities and towns nationally. The Australian Government, Water Services Association of Australia and jurisdictions have agreed to conduct a thorough review and upgrade of the NPR (the Review).

The Review will examine the current performance indicators, reporting structure and information management systems, and provide recommendations for enhancements in all areas. It supports current urban water reform work across governments as well as the PC’s recommendations above. The Review commenced in August 2018 and is expected to conclude by April 2019, with findings implemented in the 2019-20 NPR reporting period.

Governments should not use capital grants to address affordability concerns for urban water users. These concerns should be addressed through Community Service Obligation payments.

To give effect to this principle, the New South Wales and Queensland Governments should replace existing capital grants to regional water utilities with transparent Community Service Obligation payments that are not tied to capital expenditure, and that are targeted at unviable (high-cost) regional and remote services.

The Australian Government supports this recommendation, noting implementation is a matter for relevant states and territories.

The PC makes the case for replacing grants with Community Service Obligation (CSO) payments so they are provided on the basis of demonstrated need and to discourage inefficient infrastructure investment and capital bias. This analysis and recommendation is consistent with the objectives of the NWI and promotes economic efficiency.

Under Paragraph 65 of the NWI, the states and territories agreed to full cost recovery and price transparency. However, the NWI also recognises that full cost recovery may not be realistic for some small and remote communities with low capacity to pay for social and public health standards. The NWI established that in such cases the Australian Government should make up the shortfall via transparent Community Service Obligation payments (Paragraph 66), which should be removed when no longer needed.

Local water utilities and State Governments in New South Wales and Queensland should strategically examine opportunities to improve service delivery through collaboration. Contingent Community Service Obligation payments may provide an opportunity to promote this collaboration.

The Australian Government supports this recommendation, noting implementation is a matter for relevant states and territories.

In rural and remote Australia, alliance arrangements are an effective means to improve service delivery functions, including coordination, collaboration, capacity building and knowledge sharing in areas such as procurement, recruitment and service management.  The Australian Government agrees the efficiency of funding and water service provision can be increased by local government collaboration and alliances, including by linking CSO payments to collaboration, without necessarily changing existing institutional arrangements.

Water for agriculture

State and Territory Governments should ensure that the delivery of government-owned irrigation infrastructure services is underpinned by full cost recovery and economic regulation that is proportionate to the scale of the regulated service.

Priorities are:

  1. any terms of reference issued to the Queensland Competition Authority by the Queensland Government for advice on the pricing of irrigation infrastructure services should be aligned to the National Water Initiative Pricing Principles. The reasons for any Government decision to diverge from price recommendations based on those principles should be published
  2. the Western Australian Government should amend the role of the Economic Regulation Authority (ERA) so that irrigation bulk water customers can request the ERA to review the infrastructure prices and/or services proposed by Water Corporation (WA) as part of bulk water supply contract negotiations
  3. the Tasmanian Government should amend the role of the Office of the Tasmanian Economic Regulator (OTTER) so that irrigation bulk water and distribution customers of Tasmanian Irrigation can request OTTER to review the infrastructure prices and/or services of Tasmanian Irrigation
  4. an equitable share of the cost of any price review requested by users should be treated as a regulatory cost and passed through to users at the discretion of the independent regulator in Western Australia and Tasmania.

The Australian Government supports this recommendation, noting implementation is a matter for relevant states and territories.

Governments endorsed the NWI pricing principles on 23 April 2010. They provide a set of guidelines or road map for rural and urban pricing practices and assist jurisdictions to implement the NWI water pricing commitments in a consistent way.

The Australian Government supports the application of NWI pricing principles in a consistent way across all water services.

Relevant jurisdictions should ensure that the efficient cost of joint state infrastructure, such as River Murray Operations (RMO) and the Border Rivers

Commission (BRC), are recovered from water users. RMO and BRC costs should also be subject to a periodic independent review. Specifically:

  1. South Australia should improve transparency on how RMO costs are recovered in their jurisdiction by publishing information on how costs are apportioned between different users and the extent to which current mechanisms are achieving full cost recovery
  2. RMO should be subject to transparent and independent five-yearly efficiency reviews overseen by the economic regulators in New South Wales, Victoria and South Australia. The next review should be completed by 31 December 2019
  3. BRC costs should be subject to a coordinated review process conducted by economic regulators in New South Wales and Queensland to inform pricing decisions.

The Australian Government supports this recommendation, noting implementation requires cooperation through the River Murray Operations (RMO) joint venture arrangements.

The Australian Government sees merit in periodic and transparent independent efficiency reviews of the RMO. Reviews on a more ad hoc basis have previously been arranged by MDBA, on behalf of joint venture partners, by engaging an independent reviewer (reports are published at MDBA).

These reviews have already achieved efficiencies and greater transparency on cost-sharing arrangements. Future independent reviews could be overseen by the economic regulators in New South Wales, Victoria and South Australia, or alternatively, MDBA could convene reviews in a similar arrangement to past reviews.

There would be establishment and administration costs in implementing any new charging approaches for RMO. Detailed consideration would have to be given to a number of issues including the treatment of existing RMO assets and jurisdictions’ different cost recovery mechanisms.

Water infrastructure

Governments should not provide grant funding for infrastructure, or that part of infrastructure, that is for the private benefit of users. Rather, Australian, State and Territory Governments should ensure that:

  1. National Water Initiative-consistent water entitlements and planning frameworks are in place before any new infrastructure is considered (including infrastructure being financed under the Northern Australia Infrastructure Facility)
  2. government grant funding is limited to those projects, or parts of projects, delivering a public good. Grant funding should not be provided until after an independent analysis of the project has been completed and made available for public comment. This analysis should establish that the project will be:
  •  environmentally sustainable
  • economically viable and deliver public benefits that are at least commensurate with the grant funding being provided
  1. government financing (such as loans) for infrastructure generating private benefits should only be provided after:
  • an independent assessment has confirmed the finance can be repaid on commercial terms. The assessment should be released for public comment before any announcement on new infrastructure is made
  • robust governance arrangements have been put in place to deliver merit-based decision making and the ongoing monitoring of, and public reporting on, the government’s investment
  • sufficient water entitlements have been sold to reduce the project’s risk profile and provide assurance the finance will be repaid.

Australian, State and Territory Governments should enhance the National Water Initiative to align with recommendations 8.1 (a) to 8.1 (c).

The Australian Government agrees in-principle with this recommendation.

The Australian Government supports the principles of water resources development, as expressed through the NWI, also recognising that water infrastructure provides both public and private benefit. Therefore the Australian Government co-invests where there is demonstrable beneficial outcomes for economic development and increased regional productivity. Many actions of the NWI, if fully implemented, would directly support informed investment by the private sector by providing greater certainty around the rights, responsibilities and likely costs for water users.

In line with recommendation 8.1, the investments through the National Water Infrastructure Development Fund ($1.3 billion) and the National Water Infrastructure Loan Facility ($2 billion) are conditional upon implementation of operational arrangements that are consistent with the NWI. The intention is to increase development and implementation arrangements agreeable with the principles of the NWI in States and Territories. Commonwealth investments in water infrastructure are in part designed to leverage and expedite the implementation of the national water reform agenda and drive the profitable and sustainable use of new and affordable water for regional economic development.

Key supporting elements of the NWI

Australian, State and Territory Governments should:

  1. identify the key knowledge and capacity building priorities needed to support the ongoing implementation of the National Water Initiative (including the revisions and enhancements recommended in this report)
  2. develop mechanisms through which the jurisdictions can work cooperatively and share knowledge to build overall capability and capacity.

Australian, State and Territory Governments should revise relevant provisions in the National Water Initiative to align with recommendations 9.1 (a) and 9.1 (b).

The Australian Government agrees with this recommendation.

There are many examples of how parties to the NWI have already progressed in sharing knowledge and capacity building. The Water Planning Guidelines (2010), the Risk Module (2010), Next Steps for Water Reform (2013), Indigenous Engagement Module (2017) and Climate Change Module (2017) support implementation of the NWI and are informed by experience.

Examples of Australian Government initiatives that advance knowledge and capacity are the National Centre of Excellence in Desalination Australia, the CRC for Water Sensitive Cities, and the Bioregional Assessment Program.

Where governments consider there are significant and rapid adjustment issues affecting communities as a consequence of water reform, the response should:

  1. avoid industry assistance and subsidies
  2. consider all the factors affecting the community (not just water reform)
  3. target investment to developing the capacity of the community to deal with the impacts of structural adjustment
  4. be subject to monitoring and publicly reported evaluation of outcomes.

Australian, State and Territory Governments should revise relevant provisions in the National Water Initiative to align with recommendations 9.2 (a) to 9.2 (d).

The Australian Government agrees in-principle with this recommendation.

The Australian Government does not support market interventions, such as subsidies, as farmers are best placed to make decisions about their business. In turn, this achieves the best outcomes for Australian agriculture. The nature of Australian Government support to communities should not impede structural adjustment.

The Australian Government makes a range of social and business support measures available to help farmers and their families prepare for and manage through tough times. Australian Government programs aim to build resilience and capacity, and encourage better farmer preparedness to manage known risks.

The 2013 Intergovernmental Agreement on National Drought Program Reform (IGA on drought reform) is a relevant example in the context of rural adjustment as a consequence of water reforms. This agreement focuses on encouraging preparedness and self-reliance. It guides in-drought assistance policy based on preparedness, risk management and support in times of hardship. 

The IGA on drought reform was due to expire on 1 July 2018, but was extended by Agriculture Ministers in April 2018 until a new agreement is finalised. At the National Drought Summit in October 2018, the Commonwealth, states and territories agreed that a new agreement would be discussed at the COAG meeting in December 2018.

Progressing reform

Australian, State and Territory Governments should recommit to a renewed National Water Initiative through COAG by 2020. This should:

  1. maintain the achievements in water entitlements and planning, water markets, water accounting and compliance, water pricing and institutional reform, knowledge and capacity building, and community engagement delivered by the current National Water Initiative as the key foundations underpinning sustainable water resource management and efficient infrastructure service delivery

  2. revise a number of policy settings:
  • incorporating extractive industries and alternative water sources into water entitlement frameworks
  • water planning to take account of climate change and enable ongoing optimisation
  • Indigenous access to water for economic purposes
  • arrangements for water trading between irrigation and urban sectors
  • improving the quality and consistency of economic regulation
  • key knowledge and capacity building priorities
  • better targeted adjustment assistance
  1. significantly enhance policy settings relating to:
  • urban water management to ensure innovative and efficient provision of services in the future under the combined pressures of population growth and climate change
  • environmental water management to ensure maximum return on government investment in this area
  • decision making on building and supporting new infrastructure.

The Australian Government agrees in-principle with this recommendation.

The Australian Government agrees that while the content of the NWI remains sound and relevant, a renewed NWI would better prepare Australia for the challenges ahead, including a drying climate and population growth. A renewed NWI could incorporate enhancements to reflect lessons learnt and changing priorities in water reform. The renewal should examine barriers to the implementation of existing NWI commitments.

In developing the renewed National Water Initiative, Australian, State and Territory Governments should:

  1. consult with relevant stakeholders, including by establishing an Indigenous working group to provide advice on the development of relevant provisions
  2. ensure that progress with implementing a renewed National Water Initiative continues to be independently monitored and reported on every three years.

The Australian Government agrees in-principle with this recommendation.

The Australian Government will work with jurisdictions and Indigenous leaders to ensure a process for meaningful engagement with Indigenous stakeholders is established. The Australian Government supports actions to establish consultation processes with other relevant stakeholders in the development of a renewed NWI.

Under the Water Act, the PC is required to conduct an NWI-related inquiry every three years.