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Californian water market follows in Australia’s footsteps

The director of the Public Policy Institute of California’s Water Policy Centre sees the transparency and clarity of water regulation in Australia as highly instructive for California's opaque water market.

A recent report from California’s Water Policy Centre says the state can gain by emulating Australia’s efficient and transparent market for trading water without reshuffling water allocations that some growers see as an inalienable right. Australian water-allocation regulations allow water sources to be bought independently of land rights and are politically controversial in America.

Michael Blakeney, investment director at Blue Sky Alternative Investments, told Agri Investor that Australia’s robust market for trading water rights and allocations has driven innovation in farming efficiency and a shift to more water-efficient crops. Blakeney offered the transition from rice to cotton production in Australia as a prime example. The firm was created out of a strategy to invest solely in water rights, and is deploying a second fund which combines its water strategy with a private equity and infrastructure strategy.

“As soon as you ascribe a value to a unit of water, and you regulate the use of that water, the community will then appropriately use it for whatever attains the highest economic value,” he said. Rather than yield per acre, Blakeney prefers to describe investments in terms of dollar returns per unit of water.

Ellen Hanak, director of the Public Policy Institute of California’s Water Policy Center and co-author of the recent report on water allocation reforms in California, sees the transparency and clarity of water regulation in Australia as highly instructive.

“There’s a very transparent accounting system. Everybody knows what their permanent rights are and how much water they’re getting in any given season with those rights,” Hanak told Agri Investor. “And there are pretty clear rules for how much water you can trade in any given season to users in other locations.”

By contrast, her Water Policy Centre report described California’s system for water allocation as “fragmented, inconsistent and lacking in transparency and clear lines of authority”.

Some of that inconsistency stems from a system that regulates water differently depending on the type of water source (for example ground or surface) and the date of the original water allocation. But any plan to fundamentally change the current allocation system would face strong pushback from California’s agricultural community. Instead, the Water Policy Report says market-based improvements to water use can be achieved by improving transparency and accountability in the system.

California’s irrigation districts and other consumers have traded water for decades. But the complexity of the system creates prohibitively high transaction costs. A patchwork of local, federal and state authorities enforce inconsistent rules for water sharing that vary between different regions and types of water sources. Permitting for a single trade is a lengthy and costly process, making it difficult for all but the largest users to participate in the market.

“It’s still fairly cumbersome even to make just a temporary trade,” said Hanak.

A big part of the problem, she added, is that in many cases, neither consumers nor authorities have any way of knowing how much water is available for use. Although recent legislation has created new reporting requirements for water users, the state still lacks adequate accounting methods for water use in many areas.

The water trading that takes place in California does not occur in a transparent market. Brokers connect buyers and sellers, said Hanak, but prices are set on a deal by deal basis.

“They’re just handshake deals, followed up with signatures of course, but the negotiations happen between the parties that are buying and selling,” said Hanak.

The establishment of an efficient market would create opportunities for new investment. As previously reported by Agri Investor, companies like SWIIM Systems are already developing products to help growers use water more efficiently in order to take advantage of water trading opportunities, and venture capital is flowing into similar projects in California.

Having watched his own country grapple with water crisis, Michael Blakeney believes California, and other American states, will eventually establish efficient market mechanisms for dwindling water supplies.

“You get to the point where you nearly break your water system and your aquifers before you realise that you have to come up with a solution,” he said. “You have to come up with a mechanism that appropriately allocates water and rations it on an economic basis.”

But one water-right model that California could end up emulating might be designed precisely to buy water sources out of the market. Australia’s model has allowed the government to purchase water rights for environmental priorities, and Hanak believes that if push comes to shove, a similar system could be possible in California.