The Australian Competition and Consumer Commission published its long-awaited interim report last week, following its inquiry into water markets in the Murray-Darling Basin.
There weren’t any great surprises. Market observers had told Agri Investor over the last few months they expected the competition watchdog to primarily recommend greater transparency and regulation, steering clear of calls from some quarters to return to a system where water rights are tied to land.
This is pretty much exactly what happened, with the ACCC unequivocally ruling out the latter and recognizing the benefits private investors have brought to the market since its inception through increased liquidity and the provision of products like forward contracts and leases that can help irrigators manage risk.
This is all reassuring stuff for investors, who have come under fire in the last year or two as drought has gripped the Basin, which, combined with an increase in permanent plantings and water purchased for the environment, has led to very high water prices.
The ACCC report backs up the arguments many of them have made for years about the positives that have resulted from unbundling water rights from land and, specifically, investors’ role in that.
“Investors like ourselves bring this ability for irrigators to restructure their balance sheets around water as an input,” said Kim Morison, managing director at Argyle Capital Partners and a long-time water investor.
“For instance in almonds, we know that you’re going to need to expend something like A$60,000 ($42,500; €36,100) per ha to plant the trees, build the infrastructure and grow them out to when they first start to yield. If you had to own the water rights to underpin that hectare of trees at maturity, today that would cost you around another A$90,000 per ha.
“The alternative is to lease it from someone who is a non-landowning water holder, which comes with a lease rate of, say, 5-7 percent per year, rather than have the capital tied up in the water rights themselves. Some developers will be better off using the capital to plant more hectares of almonds instead.”
Greater transparency and regulation should be welcomed by investors, as it will help to further legitimize water as an asset class and stave off any suspicions investors are manipulating markets (something which the ACCC has found no evidence of yet, it should be noted).
It is in this area where more substantial reforms have been proposed.
“We note several of these changes have been discussed or raised in the past, and there are likely to be some high-value, near-term and relatively straightforward enhancements that could be made,” said Chris Olszak, director at water consultant Aither.
“Some of these are focused on data collection and reporting issues. However, the ACCC has also identified some more substantial reforms, which are likely to need much more careful consideration.”
The detail of how these reforms will be implemented is yet to be worked out and the ACCC has proposed multiple potential solutions around licensing of water brokers, for example, which could yet be extended to investors.
But the fact that there needs to be a conversation about licensing water brokers, when this is already the norm for brokers in other markets, shows why these changes are long overdue.
“The foundation of this is to get that transparency in place so that trade data can be easily accessed in a form that is usable,” said Nick Waters, managing partner at Riparian Capital Partners and another long-time water investor.
“Once you’ve done that, proper regulatory oversight is possible. Any mature market should have oversight to ensure there isn’t market manipulation, the same as a share market or any public market.”
And it shouldn’t be forgotten that investors are already licensed by Australia’s regulatory authorities too, although further oversight should not be anything to fear.
The Murray-Darling Basin’s water markets have evolved beyond their original design, so it was perhaps inevitable that changes to how it operates would come.
But this inquiry should now help accelerate the maturity of the market. Increased regulatory oversight and transparency can make Australian water a more investable asset class than it already is, opening it up further to institutional investors from around the world.
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