As anyone who has been involved in water investing in Australia’s Murray-Darling Basin will know, there have been what feels like countless reports, reviews and inquiries into the Murray-Darling Basin Plan and how the market itself operates.
The latest, the culmination of an inquiry launched in 2019 by the Australian Competition and Consumer Commission into MDB water markets, feels a little different.
It’s certainly one of the most comprehensive reviews yet conducted into the trading of water in the Basin. And while the ACCC itself does not have the power to enforce changes or set rules, its recommendations are usually listened to closely by the federal government.
When reading the report, what is striking is its comprehensive nature and how balanced it appears to be.
The competition watchdog seemingly left no stone unturned in trying to address the concerns of many that water markets were not operating efficiently, or that certain parties were acting to manipulate water prices for financial gain.
In what is rightly being seen as a positive outcome for private equity investors in the still-emerging asset class of water, the ACCC found no evidence that market manipulation had occurred. Its robust analysis showed the high water prices experienced in 2018 and 2019 were mostly caused by a combination of drought and increased demand for water due to horticultural plantings, particularly in the Southern Basin.
This reinforces what investors have said all along and supports analysis done in prior years by organizations including ABARES and Aither.
But it is also impossible to avoid the ACCC’s finding that water markets need “comprehensive reform,” despite the substantial benefits that water trading has brought to Australia’s agricultural production as whole.
First, it seems clear that those benefits are not being shared equally among all participants.
Nor should they be expected to in a free market, it could be argued, but there are social and political considerations at play here with regards to what we want Australian rural communities to look like in future, as well as the need to balance the health of the river system itself with economic needs. Those questions are yet to be satisfactorily answered in many cases.
Just as importantly, the ACCC made it very clear that the market needs to become much more transparent and needs much stricter governance and regulation.
It has proposed the creation of a new Water Markets Agency to enforce these rules. While an additional layer of bureaucracy in Australia should be treated with caution, this is still a proposal that most will be able to get behind if implemented effectively.
While it found no evidence that manipulation had occurred, the ACCC did say the rules governing the market as they stand do not actually outlaw these practices and the current levels of transparency would make insider trading, for example, “difficult to detect.”
This is a vital element that needs to be fixed to help the market grow further and attract more institutional capital.
There will certainly be another review into water markets and/or the Murray-Darling Basin Plan. In fact, the next one may not be too far away. But at least now investors have a robust report that helps vindicate their place in the market.