Investors call for greater transparency in Murray-Darling water trading

Investors have called for greater transparency and availability of information in the Murray-Darling Basin’s water trading market, as part of written submissions in response to an inquiry being conducted by the Australian Competition and Consumer Commission.

The ACCC has been seeking opinions on water market trends, drivers and transparency, the behavior and practices of market participants, and whether the water market is achieving the desired outcome of driving “an adaptive and productive irrigated agriculture sector, while supporting a sustainable level of water diversion.”

Among many submissions that were highly critical of private investors in water, particularly those who hold permanent water entitlements that are unattached to farming operations, investors broadly backed the status quo in the market while acknowledging that greater transparency would be beneficial.

Submissions to the inquiry that can be said to directly represent private investors include those from water investment vehicle Aware Water, institutional farm management company Australian Farming Services, and fund manager Riparian Capital Partners. Bodies that count investor-owned companies and farms among their membership, such as Australian Grape & Wine, have also made submissions.

Almost all submissions have called for greater transparency in water markets as a minimum, with varying opinions as to the effect that market participants have had on water prices.

Aware Water said in its submission that the “current water entitlement framework and its regulations should remain the backbone of the Australian water market.”

“The framework has attracted and facilitated capital investment into Australian agriculture and, in order to preserve that investment, it is paramount there remain high levels of certainty as to water entitlement rights and attributes,” it said, arguing that changes to regulations could lead to less certainty and lower levels of investment.

It added that it believed the introduction of a central exchange for water trades could increase transparency by establishing “a single reliable source for price, volume and liquidity” and better regulating the behavior of all participants, including water brokers.

Riparian Capital Partners argued that the main area for improvement in the water market was the  “relevance, accuracy, accessibility and timeliness” of market information.

It did not call for the establishment of a central exchange but proposed that all states should enforce the provision of pricing information on allocation trades, because of the distorting effect so-called ‘zero trades’ have on the market. A May 2019 report from the Australian Government and the Murray-Darling Basin Authority found that some 44 percent of trades in the MDB in 2017-18 were priced at A$0, which it called “implausible” and suggested some sellers were intentionally misreporting trades and states were allowing them to do so.

Riparian also called for the introduction of additional trade types and the removal of trade barriers and said that water brokers should be subject to regulation in a similar way to equities stockbrokers.

“It is RCP’s view that a fiduciary duty exists between a water broker and its client and therefore, appropriate ‘external’ regulations and oversight is required as is the case in the stockbroking industry,” it said.

The fund manager said that it did not support identifying the owners of individual water holdings “due to privacy concerns amongst other reasons.” It acknowledged that “a level of reporting” of ownership may be required to increase certainty among some stakeholders, proposing the disclosure of the ownership split in aggregate of water entitlements between landholders and non-landholders, but said the full disclosure of individual ownership could encourage “anti-competitive behaviour.”

Australian Farming Services argued that the increased number of participants in the water market had brought benefits, but acknowledged “there are numerous concerns that the practices and behaviours of market intermediaries are adversely impacting water market access, transparency, efficiency and competition.” In particular it said that water brokers could be subject to stricter regulations.

The ACCC published 63 written submissions to its inquiry late last week and will publish further submissions this month.

Its interim report is due to be submitted to federal treasurer Josh Frydenberg by May 31, with a final report due by November 30.