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Journal of the Communist Party of Australia

ISSUE 53October 2010

Water lies

by Kenneth Davidson

The National Water Initiative is an abject failure for the large majority of the Australian Population. … There is no real scientific or economic justification for the great Australian urban water failure. It is man-made and the National Water Commission seems part of the problem.

Terence Dwyer, Crawford School of Economics and Government, Australian National University

The political allure of the (irrigation) water use efficiency chimera shows no signs of weakening. The genuine redistribution of a tightly-held resource in favour of broader environmental interests was always going to be viewed by the polity as a serious zero sum game as best. Convincing the electorate that more water can be “created” in order to satisfy environmental interests whilst maintaining the existing distribution of (economic) rents remains far more politically palatable, even if this approach results in long run negative outcomes. Regrettably, it would appear that national governments drawn into the politically appealing, but flawed logic of water use efficiency are just as capable of presiding over degradation of the Murray Darling Basin as are the states.

Dr Lyn Crase, Dr Sue O’Keefe and Brian Dollery, Latrobe University, Albury-Wodonga

This evidence is contained in two of the submissions to the National Water Commission (NWC) Biennial Assessment of Progress in the Implementation of the National Water Initiative (NMI). The report of the assessment was published in October 2009. The two submissions quoted make the point that Australia’s politicians, bureaucrats and most of the experts responsible for water policy are incapable of facing up to the truth, that their water policies are aimed at creating a water market fit for privatisation rather than focusing on security of supply at the lowest possible cost.

After five years, a second biennial report of 285 pages and responsibility for developing the NWI the NWC still hasn’t come up with a management plan or a budget for it. Worst of all, even though the report makes the assumption that climate change could mean 30 per cent less water in the Murray Darling Goulburn Basin (MDGB) in the years ahead, there is no discussion of the options available for bringing new water into the basin nor is their any discussion of options for increasing supplies of urban water for major cities.

There are three locations with both surplus water and infrastructure potentially suitable to augment the MDGB. They are North Queensland and the north-west Western Australia which are unsuitable and north-west Tasmania where it is possible to take waste water from Tasmanian Hydro power stations and pipe the water via gravity to Melbourne. This water could replace the 70 per cent of Melbourne’s water supplied by the Thompson Dam which would be available to pipe through the divide and into the Goulbourn River. This in turn could flush the Murray mouth and prevent acidification moving up the river and threatening water supplies to Adelaide and other South Australia cities and eventually the Riverland, Mildura and Goulburn Valley irrigation districts which between them generate about $25 billion in farm gate revenue.

Preliminary estimates suggest this option could supply water to Melbourne at a fraction of the cost of desalination. Tasmania’s opposition to the proposal is inexplicable. It has a surplus of water available for any conceivable need. The waste water from the hydro generators is potentially Tasmania’s greatest resource as potable water. The value of the water is estimated by authors of the scheme to be worth about 30 times the present value used to produce electricity alone. It is the only potential option to prevent the death of the basin which underpins the production of 25 per cent of Australia’s Gross Domestic Product (GDP). It is a loss on a scale which would have a catastrophic impact on the whole of Australia. Yet the governments of Victoria, South Australia and Tasmania and the Commonwealth have refused the offer by the group making the proposal to undertake a detailed engineering study of the proposal at their own expense providing they received a memorandum of understanding which would protect their intellectual capital. This invites the question: what have these governments got to lose?

The miniscule risks associated with a detailed examination of the only real option for saving the MDGB must be seen against the “business as usual case” which is in reality the policy of the four governments and the NWC. Well before the voluntary purchase of water licences (most of which receive only a fraction of their annual water allocations due to 12 years of drought) can make a difference, the acidification and more extensive strikes of algae bloom will have taken the river past the tipping point where it can be resuscitated.

The only other solution on offer, which has a realistic chance of saving the river, is closing down one of the major irrigation districts based on Mildura or Shepparton. No government will face up to this decision so it is on the cards that the basin is facing death by a thousand cuts unless the Pooh-Bahs in charge of basin policy face reality.

The big lie

The big lie that the Victorian Government is hiding behind is the so-called Food Bowl Modernisation Process (FBMP). It is claimed that by upgrading irrigation channels, 225 Giga litres of water will be saved to be distributed equally between the environment, the irrigators and Melbourne Water via a billion dollar N-S pipeline which will pump water at huge expense from the already distressed Goulburn River Basin — where irrigators are already leaving the industry because they are only getting 30 per cent or less of their water entitlements and are having to chop down their fruit trees.

This risible claim of new water from water efficiencies — mainly from lining channels with plastic — is explained well in the evidence from the experts from Latrobe University quoted above. They point out that such savings come mainly out of the water available to other irrigators down stream. There are unlikely to be any savings for the basin as a whole: “adopting a basin-wide perspective invokes the ‘water efficiency paradox’ since when water is used, a substantial part of it is not ‘used up’ but retained within the hydrological system. … Thus, given the intensified sectoral competition under conditions of severely limited supply, it becomes increasingly important to conceptualise water use at the basin level”. It must be asked, why isn’t this being done? Isn’t this the whole point of the Commonwealth takeover of the basin? Why did the Commonwealth hand over a billion dollars for this irresponsible project?

The La Trobe authors cite a study of Egyptian irrigation on the Nile which would be well-known to hydrographers, including those who are employed defending the FBMP. This study shows that when measured at a basin level, water efficiency is twice as high compared to when measured at a field level, for the simple reason that water “lost” or “leaked” from upstream is frequently recaptured by downstream users.

There are no savings available from the basin as a whole. Any water saved from the FBMP will come at the expense of irrigators further downstream or from environmental flows needed to flush out the mouth of the river.

Before the MDGB was tapped for irrigation about 24,000 GL flowed into the ocean. Before the long drought and before governments began to over allocate water to irrigation from the 1970s, the ocean flow was reduced to 12,000 GL. Now only 300 GL reaches the mouth of the river and the river is only kept open by dredging. The river needs at least 900 GL to keep the saline water and acidification at bay and even this will only work with major surgery on the lower lakes. This would involve cutting Lake Alexandrina in half and allowing one half to be filled with salt water in order to keep the other half above sea level so water continues to flow into the sea. A sensible government would look first to the Tasmanian option. No sane government would want to make the choice between losing Mildura or Shepparton without seriously examining whether the Tasmanian option is viable. Even if the Tasmanian option proved unworkable, there is still no reason why Melbourne and even Adelaide have to go down the desalination route involving buying water for about six times the cost of dam water.


The problem for Adelaide is not lack of rain in the catchment area. The problem is that much of Adelaide’s rainfall comes at all at once every three years leading to flooding. It can’t be captured because of inadequate storage. Adelaide’s biggest priority is to build much bigger storage capacity. The problem is political. South Australia has already lost control of its water to the French multi-national water utility, Veolia which, like its French sister multinational, Suez (which has won the contract to build the Victorian desalination plant at Wonthaggi), have a vested interest in seeing the development of expensive water which they can ultimately control.

Dwyer, in part of his submission to the NWC, questioned whether the national water policy envisioned including dams which were planned years ago to meet expanded needs for Melbourne (Mitchell), Canberra (Tennent) and Sydney (Shoalhaven). He asked “if these long-planned dams are not included in the urban water supply strategy, why not? Where are the cost benefit studies which require these water supply solutions to be ruled out before we start? What is the logical basis for ruling out cost-effective solutions?

“A veto on dams may be due to ideology, pantheistic views on Nature as Deity, political pressure groups or the vested financial interests of monopoly infrastructure ‘owners’ such as state treasuries but dogma it remains. Saying urban water is ‘scarce’ is like saying Sydney office rental space would be ‘scarce’ if building codes vetoed any building over one storey high. The criticism is that water price increases are being allowed to be dictated solely by so called ‘demand management’ imperatives where there is no genuine scarcity”, Dwyer said.

To add insult to injury Dwyer argues that the water authorities are being used as cash cows by state treasuries behind the rubric of “user pays”. Most of Australia’s urban water infrastructure was paid for by rates on land values which were boosted by the value added to the land by the infrastructure.

According to Dwyer, “thus, suppose a town was built over 90 years and dams and water works and pipes were financed by levies on ratepayers. A normal person might think these capital works had been paid for and therefore should not be charged for again. … Yet ‘reform’ has meant water users are being asked to pay again for costs already recovered or never borne by State Treasuries”. The net result is, according to work done by Professor of Accounting at Sydney University, Bob Walker and economist Betty Con Walker (who was a former Treasury official), after adjusting for revaluations and placing accounts on a common historic cost basis “water authorities were far more profitable than listed industrial companies”, Dwyer said.

Everybody is in for their chop. When the Queensland Government got wind of the Federal Government’s decision to spend over $3 billion to buy back water licences, the State Labor Government issued water licences to irrigators who had in the past simply built dams on their properties to capture periodic flood water to irrigate rice and cotton crops. As a result these new licences will be eligible for compensation from the Commonwealth. They will be in the compensation queue alongside genuinely distressed farmers in the MDGB.

Fortunes to be made

Financial institutions, led by Macquarie Bank and VicSuper are buying up water licences in competition with the government buyback scheme and selling the annual water allocations attached to these licences to pay the interest expense on their borrowings. They expect to make a fortune when the water market is opened up to full participation of those with only a financial interest in water and a water exchange is established to trade in water and water derivatives.

The NWC has hopes of being the regulatory body which sets the rules for water trading and the Victorian Department of Sustainability and Environment (DSE) sees itself in the box seat to become manager of the water exchange. DSE already earns considerable income from managing water trading in Victoria.

At the centre of this development is the Victorian Labor Government which has been sold the idea of “one market” for water by senior bureaucrats in the DSE with the tacit backing of the economic rationalists in the Victorian and Commonwealth Treasuries and the Productivity Commission (PC). The latter produced a report in 2008 which implicitly supported the building of seven desalination plants across Australia and the creation of a privatised, competitive water market. Why?

Environmental vandalism

This policy of prioritising desalination water is an act of sheer economic and environmental vandalism. In all cases the cheaper options of conservation and recycling are available and the greenhouse gases produced by such plants would be equivalent to putting an additional 700,000 to 800,000 new cars on the roads. Worse, the push for desalination plants financed as PPPs — which are the favoured financing vehicle by rent seeking financiers such as Macquarie Bank and their government sponsors through the Federal Department of Infrastructure — means billions of dollars will be syphoned away from smaller-scale water infrastructure projects that are genuinely aimed at water conservation and keeping down water costs to households and industry.

But the official spin on the policy of prioritising desalination is that it will promote a competitive water market. This will of course open up the industry to full privatisation. Victoria is well on the way to creating one water market by linking the city water reticulation systems to the irrigated areas via the N-S pipeline.

As the PC report on water said: “In theory, competition in water supply ultimately could deliver efficient market prices without the complexity attached to administered pricing. … A private desalination operator could sell desalinated water to urban users through long-term contracts … (to customers) willing to pay a premium for highly secure supplies to prevent the risk of incurring high costs from water restrictions”.

Apparently the PC doesn’t know that a desalination plant is a factory. It is subject to breakdowns and power interruptions, as occurred in Western Australia recently when the Perth plant was out of operation for weeks due to a major interruption to gas supplies necessary to generate the plant’s electricity. Dams and pipes, even under the sea, rarely break down because they have few moving parts.

But the Brumby Government has stepped up to the plate in order to turn the theory of competition as outlined by the PC into practice. The N-S pipeline is designed to allow investors to buy water (or virtual water) from the Eildon Weir and sell it to Melbourne via the N-S pipeline, to Geelong via the Interconnector and to Ballarat and Bendigo via the Goldfields Superpipe.

The Interconnector still has to be built for an estimated $136 million at the expense of the citizens of Geelong in order to force them to take the expensive water from Wonthaggi.

No conservation incentive

Geelong wants to be allowed to increase supplies from Geelong’s Gellibrand catchment area and develop their own water purification systems to keep water costs down and protect Geelong’s industrial competitiveness. This has been ignored by the Brumby Government. Geelong households will join Melbourne and other regional cities paying $2,000 a year on average for water after the desalination plant — which will have the capacity and the authority based on a “take or pay” contract to supply 40 per cent of Greater Melbourne’s water. There will be no water shortages but no incentive for conservation measures or cheaper water alternatives either. The N-S pipeline is strategically important to the State Government’s vision which is to allow urban populations throughout Victoria to source their own water.

The government is divesting itself of its core responsibilities to ensure potable water as a basic human right and to supply water for other uses at lowest possible cost to users and minimise damage to the environment. When the system is put in place towns which want water will be told to go into the water market and buy it in competition with other towns. The government will claim that its responsibility ends with the building of the pipeline infrastructure which ensures a competitive market. It will point out that network of pipes will link five million people in one market so that the water will be free to move where it is most highly valued by consumers.

Efficient? Equitable? No. The reality is that the water will go to where it can achieve the highest profits for its vendors and the most political leverage for the government. How this leverage is exercised can be seen on a minor scale already in Victoria. Bendigo and Ballarat are Labor seats. They know the water they are getting from the Goulburn Dam is at the expense of irrigators who also depend on water from the river but happen to be non-Labor voters. The citizens in these towns have a powerful incentive to continue to vote Labor.

The pattern of development for Victoria’s water is the exemplar for the other states that are planning to build desalination plants to supply their own capitals even though there is no necessity to go down this route. Only 15 per cent of urban water needs to be potable. Even in the worse drought years in each of the capital cities there has been far more water falling on their catchments than is captured and reticulated by the water authorities. The storm water is the major source of pollution in the creeks, streams, and bays in these cities.

Recycling can solve water shortage

It is obvious there is scope for conservation and recycling to solve potential shortages by boosting the supply of non-potable water which is all that is necessary to meet 85 per cent city needs and would clean up the urban environment at the same time. Unfortunately this approach does not meet the needs of powerful financial institutions such as Macquarie Bank who demand multi-billion dollar infrastructure projects especially when, like desalination plants, they come with government contracts which effectively guarantee an income for decades well above the cost to government if the money to finance the schemes had been raised through the issue of government bonds. And now, with the excuse provided by the Global Financial Crisis, governments wedded to PPP financing, are offering guarantees for the borrowings to finance the projects — as has occurred with the Wonthaggi desalination plant.

Apart from the financial institutions which specialise in setting up and financing PPP packages, the other big winners in the evolving State and Commonwealth water strategy are the French multinational water utilities, Suez and Veolia who have a record of corrupting governments elsewhere in the world in order to take over water and other services to the ultimate cost of the people they claim to serve. In Victoria Veolia’s subsidiary, Connex, lost the urban rail franchise because of community dissatisfaction with its performance even though the taxpayer subsidy eventually became double the subsidy when the system was run by the public monopoly.

Veolia built and operated Adelaide’s water purification plant which caused so much stink throughout the city in its first couple of years of operation that it became known as the “big poo”. This did not stop Veolia getting the franchise to operate the Adelaide water utility. The State Government announced in August it would sue Veolia’s SA subsidiary, United Water, for tens of millions of dollars for alleged overcharging, deceptive and misleading conduct and breach of contract since the management contract was signed in 1995.

Veolia’s track record

According to a report commissioned by Ralph Nader in 2005: “Despite Veolia’s global track record of corruption, broken promises, environmental degradation, price gouging, obfuscation, misdirection and secrecy, the world’s largest water company continues to enjoy substantial support within powerful pockets of financial and political circles”.

French politicians and directors of a Suez subsidiary were jailed over a $3 million bribe to facilitate the privatisation of Grenoble water. The French courts also found Suez overcharged customers, using fraudulent accounting methods, and ordered Suez to return all water fees from 1990 to 1998 and cancelled the contract with Grenoble. Forty French municipal governments have cancelled water contracts with the two companies and the popular long-term mayor of Paris has announced he will not be renewing private water franchisees when they expire at the end of 2009.

Suez was part of the consortium which has won the contract to build the plant at Wonthaggi. Veolia, which missed out, was promised $10 million for its cost of putting up the losing bid after it was announced that it would not get the new franchise to operate Melbourne’s urban train system. Governments don’t usually make “grace and favour” payments without good reason and certainly not to foreign multinationals without a better reason than that offered by the government.

Given the international and interstate record of the French companies it would have been prudent if the Brumby Government had processed the desalination decision by the book. On the contrary, during the 2007 state election the government announced it would not build the N-S pipeline or a desalination plant anywhere.

The reason was that it would have lost most of its support north of the Great Divide and Green preferences. Soon after the election it announced that both projects would go ahead without proper process. The decisions should have been preceded by public enquiries — both a cost benefit analysis which looked at the potentially cheaper alternatives, (including the Tasmanian option because of its potential benefit for the Murray Goulburn Basin) and an environmental impact statement — before any decision was made, especially as the decisions were announced by political ambush after the election.

Secrecy and sham consultation

Major decision making in Victoria under Labor is now characterised by secrecy, sham consultation with the public, and arbitrary decisions justified by the necessity to “fast track” projects and “commercial in confidence”. There is now a widespread stench associated with the PPP method of financing public infrastructure which the government does nothing to staunch, despite resolutions passed at State Conference to open up the process to public scrutiny. Instead the government relies on a weak opposition, and a general public apathy and the diabolical complexity of the arrangements to avoid public scrutiny.

The pattern is being repeated in other states. All Australian capital cities have had the option of conserving potable water for drinking, cooking and washing and expand the supply for uses such as gardening, flushing and industrial processes by conservation and recycling storm and grey water where potable water is not necessary. Apart from Tasmania, all the major cities appear to be determined to go down the desalination route which is expensive, unnecessary and will contribute massively to Australia’s carbon footprint. The underlying problem is that the other states and the Commonwealth are following Victoria in that they are evolving into corporate states where executive government is making major decisions, particularly in regard to infrastructure, without reference to parliament (including their own party members), let alone the public. In its place Australian executive government manages major decisions in a tight loop with the relevant corporate rent-seekers which excludes the public. At best they merely pay lip service to proper parliamentary processes, which were designed to ensure reasonably open government and a check on bad government.

The governance problem as it affects water policy is systemic. It won’t be solved by getting rid of a few politicians or bureaucrats looking for a life after government rather than attending to the public interest. The situation will only be turned around by an informed and enraged public opinion. Once the full implications of these policies become apparent — as the Murray dies and households are paying $2,000 a year rather than $400 a year for water once the planned desalination plants are in full production — it will be too late.

Reprinted from D!SSENT Magazine, Summer 2009/2010, #31, with kind permission of Editors, Lesley Vick and Kenneth Davidson. Tel/Fax: 03 9347 7839

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