ACCC finds Murray-Darling Basin water markets need ‘comprehensive’ reform

The Australian Competition and Consumer Commission has found the Murray-Darling Basin water markets are in need of “major changes to allow for open, fair and efficient water trading.”

The Commission’s interim report following the MDB Water Markets Inquiry also acknowledged, however, the “substantial benefits” water trading has brought to water users across the region.

In particular, the ACCC rejected calls to return to a system where water rights are tied to land, saying unequivocally it “does not support this position,” in a statement that will be welcomed by investors.

“Dismantling existing water markets would mean the benefits that markets provide to many water users would be lost, and this would be to the detriment of the Australian economy. It would also significantly diminish the value of water entitlements, which make up a substantial proportion of the assets owned by irrigation farmers,” it said.

The ACCC did identify some issues that could be harmful to open and efficient water trading but found that most of these were caused by deficiencies in governance and regulation.

A lack of effective governance has led to “significant distrust” by some water users, it said, and a “lack of rules and oversight of trading conduct” had created opportunities for some market participants to exploit flaws in the market.

It did not say it had found evidence of market manipulation by investors or other market participants, as had been suggested by some submissions to the inquiry, but said its efforts to gather and analyze trading data to assess the impacts of market conduct had made it challenging to assess participants’ behavior.

“There is no institution responsible for, or capable of, gathering the necessary data to effectively monitor trading behavior in the Basin. Better data collection and coordination across the Basin would be central to better market oversight,” it said. The ACCC added it had not formed any conclusions at this stage “except to observe the potential opportunity for various well-resourced market participants to exploit the complex market arrangements.”

Investor analysis

One of the chapters in the interim report examined the activities of four of the largest investors in Murray-Darling Basin water markets: Argyle Group, Aware Water, Duxton Water and Kilter Rural.

The ACCC used its compulsory information-gathering powers under the Competition and Consumer Act 2010 to obtain information on the investors’ water holdings, transactions and trading strategies.

It found most water allocation holdings are in the Southern Connected Basin, and the four investors collectively held 230 gigalitres of high-security entitlements, 138 GL of low-security entitlements and 4 GL of supplementary entitlements as at June 30, 2019.

The ACCC reiterated it was not possible to track trades from any single source of information and said it was “seeking to better understand the objectives, incentives and capabilities of different types of water investors.” It’s aims to find out if these create opportunities for harmful conduct. This will be concluded in the inquiry’s final report, which will be submitted to the treasurer in November.

The ACCC did say, though, that investors provide benefits to water markets by providing new sources of capital to irrigation farmers, by increasing liquidity in the market, and by providing products such as leases and forward contracts that help irrigators manage water risk.

“These products provide irrigators with flexibility in terms of on-farm production decisions, managing water supply risks and forward planning specific to their business, and the option of reducing their exposure to the allocation market,” the report said.

The other major area for proposed changes surrounded water brokers, where the ACCC said there was a “strong basis for concern” about the lack of obligations brokers owe to clients and inadequate regulatory oversight of their practices. This means brokers could “engage in behaviors that would not be permitted in other markets,” it said, such as providing incomplete or misleading market information, or acting for a client despite an undisclosed conflict of interest.

The ACCC said it was considering options for broker-specific regulations, with the potential that these could apply to other market participants like investors in some form as well.

ACCC deputy chair Mick Keogh said in a statement: “The Basin’s water markets, and the bodies that oversee and interact with them, operate in a complex, fragmented and inconsistent system. To make real and lasting improvements, we need to rethink how these water markets are governed.”

He added: “It is clear that the Basin’s markets need decisive and comprehensive reform.

“There are many problems, but we do not believe that dismantling existing water markets is the answer. This would mean farmers, communities and the Australian economy would miss out on the substantial benefits these markets provide.