The 2005 Jonathon Mann Memorial Lecture

Managing the Environmental Health of the River Murray: an economic perspective

Jeff Bennett*

Professor of Environmental Management, Asia Pacific School of Economics and Government, The Australian National University

Jeff.Bennett@anu.edu.au

Introduction

The initial response from some to the title of this lecture, suggesting as it does that there is an economic perspective on the environmental health of the Murray, may be that this will be a very short lecture. A widely held perception is that economics has nothing much to say about the environment … beyond perhaps it being something that can be exploited for short-term profit. Economics is seen by people holding this view as the tool of the ‘capitalist exploiter’ as represented by pin-stripe-suited talking heads on the 6.30 news discussing inflation rates, interest rates and the current account deficit.

Others contemplating the title may have the expectation that this will be the longest hour of their lives. These people may have experienced economists with a penchant for explaining what appear to be ‘common-sense’ notions using the most complex geometric or algebraic models. Economists after all have the reputation of attracting to their profession those who wanted to be accountants but didn’t have sufficiently vibrant personalities.

I will attempt to live up to neither of those expectations. I aim to do two things. First, I will demonstrate how economics can help in developing a clearer picture of what the environmental management issues are for the River Murray. Second, I’ll show how the economist’s toolbox can be used to improve environmental decision making for the Murray.

Some fundamentals

Let me begin by stepping to one side of the somewhat turbulent history of disputation that has surrounded water allocation issues in the Murray and look at some fundamental drivers. For an economist, not surprisingly, that means looking at supply and demand.

The key feature of water supply in the Murray is that it is variable. From season to season and from year to year, the pre-European flow of the Murray has varied around relatively stable long-term averages. Despite human efforts to control that variability, flows still fluctuate around long-term annual averages that are little changed, even though the temporal and spatial distributions of those flows are significantly different.

Demand for that water has, however, changed significantly over the past 200 years. The development of irrigation infrastructure, soldier settlement schemes, urban population expansion and the introduction of new horticultural crops for example have seen growth in extractions of water from the river[1].

Whilst at the beginning of the 20^th century, demand for extractions fell well short of supply, 100 years later, the available supply, especially in dry years, was stretched to the point where adverse environmental consequences were being experienced. Such was the level of extraction that remaining flows were both too small and too counter cyclical to natural patterns that vegetation communities (including river red gums), ecosystems (including wetlands) and species of fish and water birds were at risk.

At the same time as extraction demands were expanding, the population of Australia was growing more affluent, more educated and better informed. With these societal changes came greater interest in and awareness of environmental issues. The demand for the River Murray as a source of environmental ‘goods’ emerged and grew at the same time as the ability of the River to provide those goods was declining.

Put simply, more and more people exerted more and more competing claims on the resources of the River. Instead of the River being the font of largess for all who wanted something from it, the River became a scarce resource. Like any other scarce resource, tough decisions regarding how it is used and by whom have to be made.

Making resource allocation decisions

But why is this such a big deal? Why is there so much debate, controversy and contention when it comes to decisions regarding the management of the River Murray? After all, scarce resources are the norm for our society and as a society we deal with allocation decisions continuously without making them into headlines. Bay-side houses in Melbourne are scarce resources but everyday decisions are made as to who should live in them without a public debate. The baker makes only a limited number of cakes everyday yet as a society we seem to be able to work out who gets to eat them without civil strife. Likewise, our scarce labour resources are allocated amongst competing job opportunities without even making page 10 of the newspaper.

Every second of every day in Australia, decisions are being made about the use of scarce resources, by each and every one of us. And it all happens without us even being very aware of it. There is no grand central computer that we rely on for this function. Nor do we look to government (at least for the most part) to decide on these allocations. We do it simply by interacting with each other in the buying and selling of rights: Rights to Melbourne real estate, rights to cakes, rights to our own labour, etc. Choices about the allocation of scarce resources are by and large made by market exchange. The process is continuous and, mostly, uncontroversial. What results is a coordination of resource use that provides society with wealth and remarkable levels of harmony. Conflicts over resource use are resolved peacefully through trade. Those with the highest values for the resources are the ones entrusted with their use and so the wealth generated from the resources for society at large is maximized[2].

Making water allocation decisions

So what about water? Why don’t we see disputes between competitors for the use of the scarce water resources of the Murray resolved in this way? Why is there controversy, complaint and conflict?

To answer those questions, it is critical to recognize that the market allocation process is underpinned by a system of rules that enable trade to occur. A large part of those rules involves the legal system that creates property rights – the legal rights to possess, use and dispose of (amongst other things) a resource. Without property rights to a resource being well-defined and then defended against violations (such as theft), trade will not take place. How can you trade something you don’t own? Who would trade if the chances are what you’ve just bought will straight away be stolen? Hence, our decentralized system of market allocation is founded on laws, courts, police and jails.

Why is water different? Simply because property rights relating to water have been – and continue to be – difficult (and hence costly) to define, defend and hence trade. Because of this complexity, up until relatively recently, water allocation has been the province of government with private trade between individual extractors being heavily restricted. Over the past decade, changes have been instituted to ‘privatise’ water with rights to extract water (under a certain ‘cap’) being better defined and, importantly, being separated from land title. Trade has been facilitated through the relaxation of exchange restrictions.

Whilst these changes have resulted in marked impacts on water allocations – both in terms of where it is being extracted and for what purpose – and hence on the net value being generated from water, they don’t appear to have stopped water allocation from being contentious.

At least one reason for this is that the definition of water rights – and hence their defence – remains complex and costly. The process for example, requires a lot of information relating to the way water moves in the system: water purchased for irrigating a crop can return to the river via drainage canals and the groundwater system; forests planted in catchment areas may reduce runoff to rivers and so restrict supplies downstream; leakages and evaporation result in transmission losses between the river and an irrigated crop; etc. Collecting such information and embedding it into the property rights system takes time and money. Such costs reduce the payoff expected from water trade and so limit the extent to which trades emerge. Put simply, it sometimes just isn’t worth the effort to get the trading system going[3].

But such difficulties are not always insurmountable. They can be viewed as hurdles that will be jumped with increasing levels of experience both on the part of those defining the rights and also by those who are competing for the rights. For instance, knowledge of transmission losses will allow trading to take them into account. Knowledge of supply returns will be used to adjust ‘effective’ allocations.

Incorporating the environment

More difficult are rights issues as they relate to the environment. Most of us would agree that we each experience some benefit from the environment of the Murray … be it as direct users of the river for recreation, as passive users enjoying the vistas of water fowl on a wetland or even as ‘non-users’ knowing that the Murray Cod is safe from extinction. Yet defining rights to this complex array of environmental values is next to impossible. How do we know who is using the river for these values? Can a user be charged a fee for her happiness relating to the continued survival of the Murray Cod? The answer is “no” and because of that, market solutions remains illusive for environmental uses of Murray River water. Environmental allocations remain in the hands of government in different guises, primarily through the determination of environmental flow requirements.

And herein lies the core of the continuing controversial nature of the water allocation debate. The dispute is no longer about whether Joe, Fred, Helen or Jane gets the water to irrigate their crops. That’s now been largely taken care of by market allocation. The conflict now centres on the overarching allocation decision between ‘extraction’ and ‘environment’. And the conflict is high profile and public because it takes place in the political sphere. Competition doesn’t occur in markets with the alternative users matched in a bidding war. Rather it occurs in the media and in the corridors of power with lobby groups of both persuasions advocating their cases. Environmentalists argue that without increased flows there will be dire consequences for habitats and species. Irrigators attest that the future viability of communities along the river is at risk.

The critical question is whether or not we can rely on the political process to generate water use choices between extraction and the environment that make society as a whole better off.

Will the political process get it right?

Again, there are good reasons to suspect that it will not.

To understand these reasons, its first important to understand the motivation of politicians. For the most it is fair to argue that politicians act to maximize their chances of re-election. For the individual politician in the Australian electoral system, that involves the identification of the ‘marginal’ or ‘swinging’ voters and making sure that their votes are secured. For the government of the day, it involves identifying and securing marginal electorates. The political process is therefore likely to protect the interests of marginal voters/electorates at the expense of those whose political loyalties are well established and those resident in ‘safe’ seats. Whilst the result of the process may coincide with what is in the best interests of society at large, it is highly unlikely to do so.

Nor can we necessarily expect the public service advisers to our politicians to provide advice that will point to socially most desirable outcomes. This may occur because of a politicisation of senior public service appointments. It may also arise because ‘independent’ public servants have their own motivations that are independent of society’s best interests. For instance, staff members attracted to positions in environment departments are more likely to have environmental interests just as the staff of agriculture departments will have agricultural interests. Their advice will therefore be coloured by those prior beliefs. Even those senior staff members in departments with no prior vested interest are likely to be keen to build the importance of their portfolio and will provide advice toward that goal.

Summarising then, what we have is a situation where normal market processes are unlikely to generate allocations of water that provide an optimal balance between extractive and environmental uses of water. But nor are we likely to see the political process deliver socially optimal outcomes, even though it is sure to keep the lobbyists and the media in business.

A way forward

Given the complexities of defining and defending environmental property rights, there is little doubt that the environment/extraction trade-off will continue to be made in the political sphere. The appropriate question is therefore how to ensure that the political process is both transparent and well informed. It is only when those two characteristics prevail that the decisions so made will be motivated more by broader social well-being than narrow vested interests. If for instance, a water allocation decision is made that makes society demonstrably worse off but panders to a special interest group, then transparency ensures the media and hence the general public is made aware of the situation and can censure the government for its actions.

Whilst political science has something to say about the design of processes to ensure transparency, economics has a role to play in informing decision-making. Put simply, economic techniques can be used to assess if allocations proposed under the political process make society better or worse off.

The overarching framework used by economists to perform such assessments is called benefit cost analysis. In the case of a proposal say to increase environmental flows in the Murray, benefit cost analysis involves the assembling of estimates of the environmental benefits so arising (more kayaking, more wetlands, better scenic vistas, more species protected from extinction, etc.) and the offsetting costs associated with reductions in extractions (less profits from irrigated crops and pastures, more social disruption caused by the structural adjustments, etc). Importantly, the estimates assembled are all made in monetary terms so that the net effect can be calculated. The interesting feature of benefit cost analysis as applied in this sort of assessment is that some of the benefits and costs involved are not usually associated with monetary estimates of value.

To estimate these so-called ‘non-market values’ in monetary terms, economists have devised a number of techniques, one of which is outlined here.

Estimating environmental values

Choice Modelling[4] is a stated preference technique in that it involves asking people in the format of a survey, to state their preferences for environmental outcomes. From their statements, monetary values for those outcomes are estimated. The specific format of a Choice Modelling questionnaire – for example, in the context of estimating the value of environmental improvements in the Murray – involves people being shown the outcomes of a number of different potential river management strategies and asked to select their preferred alternative. The outcomes of each alternative are described to the survey respondents in terms of a sequence of attributes: for example, number of native fish species protected, length with healthy river side vegetation and recreational opportunities. A further attribute of each alternative is a hypothetical monetary cost to be paid by the respondent if they want that alternative to be adopted. It is because of the introduction of the monetary attribute that it is possible to observe the trade-offs people are willing to make between money and environmental improvements. An example Choice Modelling question from a study undertaken in the context of determining environmental flows for NSW rivers[5] is displayed as Figure 1.

Figure 1. An example choice set

In Table 1, some results from the NSW rivers study are displayed. They illustrate the type of values that can be estimated through a Choice Modelling application. For example, the results indicate that households living within the Bega River catchment area value (on average) the re-introduction of an additional native fish species into their local river at $7.37.

The results of a Choice Modelling application provide a window into the values held by the general public for environmental improvements – in the absence of markets. They are of direct use in assessing trade-offs between environmental and extractive water allocations in rivers.

Table 1. Attribute Value Estimates ($ per household)

Sample/ River	Vegetation	Fish species	Waterbird species	Fishable	Swimmable
Inside catchment/
Bega	$2.32	$7.37	$0.92	$53.16	$50.14
Clarence	$2.02	$0.08*	$1.86	$47.92	$24.73
Georges	$1.51	$2.11	$0.67*	$48.19	$27.28
Murrumbidgee	$1.45	$2.58	$1.59	$53.43	$20.35
Gwydir	$1.49	$2.36	$1.89	$51.31	$60.21
Outside catchment/
Murrumbidgee	$2.17	$3.81	$1.80	$30.50	$60.68
Gwydir	$2.01	$3.43	$0.55*	$29.19	$30.35

* insignificant coefficients in model at the 5 percent level.

They also provide a vehicle for ‘community participation’ in the decision making process. By actively canvassing the views of people with regard to their preferred river management outcomes, the technique provides a direct conduit for community input.

Choice Modelling furthermore acts as a bridge between scientists who conduct research into biophysical aspects of rivers and the policy making process. The scientists’ predictions of the consequences of alternative management strategies on river health can be converted into policy relevant value estimates through application of the Choice Modelling results. For instance, if scientists can demonstrate that an additional 100 megalitre environmental flow would ensure that an additional species of native fish would inhabit the river then the Choice Modelling derived estimates of value arising from that additional species can be applied. This allows a policy relevant comparison to be made between that benefit and the monetary costs of lost agricultural production.

Because of this science/policy bridging potential, pressure is also put on scientists to focus their research efforts on predicting socially relevant effects of actual management approaches. In other words, Choice Modelling calls for policy relevant scientific research.

These advantages of Choice Modelling are tempered by some cautions. Questions regarding the ethics of estimating environmental values in monetary terms arise. But these can be countered by the observation that the allocation decision made by the political process involves an implicit valuation of the environmental impacts rather than an explicit valuation based on community preferences. Put simply, the decision will embody an environmental valuation. The only question will be whether or not it is explicit or implicit. Other cautions are of a more technical nature and relate to the accuracy of the values estimated. Research into these technical issues is on-going and advances continue to emerge.

… for the Murray?

So where, you might ask, are the results of Choice Modelling applications in the context of the River Murray? Given the iconic status of the River’s environment (the Murray Cod, the Barmah Millawah wetlands, the river red gums, the Murray Mouth, etc.) and its importance to the Nation’s agricultural production, electricity production, Adelaide’s water supply etc., one might expect that a thorough benefit cost analysis of management options incorporating environmental impacts would be an important ingredient in policy formulation.

In short, there are no Choice Modelling results and there is no benefit cost analysis.

This situation bears witness to more serious challenges to the use of Choice Modelling specifically, and benefit cost analysis more generally in the context of informing the water allocation policy decision.

Is the transparency and information rich setting provided by benefit cost analyses of water allocation decisions – inclusive of non-market environmental values – what the various stakeholders in the decision want?

There is a risk for all parties that the benefit cost analysis will show that their position is not the preferred one from a society wide perspective. At least without the benefit cost analysis each party can remain hopeful that there is the chance that their qualitative/emotive/subjective argument will prevail.

For the politician, whilst the benefit cost analysis can provide a ‘scape-goat’ for the decision taken, it also takes away an opportunity to decide in favour of a particular vested interest group that would afford better electoral prospects.

It is interesting to contemplate these possibilities in light of an aborted Choice Modelling application that was funded by the Murray Darling Basin Commission. The work involved innovative linkages being developed between the Murray Flows Assessment Tool or ‘MFAT’ decision support tool designed by the bio-physical scientists to predict river health outcomes under alternative management strategies and the attributes used to describe alternatives in a Choice Modelling questionnaire. However, the project was abandoned just prior to its surveying phase given the failure of all the Commission partners to agree to proceed.

In the absence of the environmental values study results and hence a complete benefit cost analysis of alternatives, the Federal Government announced the allocation of $500m to support environmental improvement works along the Murray.

Unanswered questions

What remains to be answered is whether or not this amount is too little or too much? Without information on the extent to which society values the environmental improvements that will result from the $500m investment, we will never know. With such substantial sums of public money involved, it is my view that the public should have access to information that will enable it to see if a sound outcome is being achieved. That involves two types of studies being performed. The first involves bio-physical science: What are the outcomes for river health of the investments being proposed? The second involves economics: What is the benefit being enjoyed by society as a result of the river health improvements and are they greater than the costs they impose on society.

My call is for greater attention to be paid to scientific research so that it is directed at providing reliable predictions of alternative river management options (“policy relevant science”) AND for policy makers to ‘bite the bullet’ and commission benefit cost analyses (including non-market environmental valuation studies such as Choice Modelling applications) on those alternatives. It is only in such an information-rich setting will decisions regarding the future of the River Murray be protected from political expediency and directed toward improving the well being of the broader Australian society.

References

Bennett J. and R. Blamey (2001). The Choice Modelling Approach to Environmental Valuation, Edward Elgar, Cheltenham.

Coggan, A., S. Whitten and N. Abel (2005). ‘Accounting for Water Flows: Are entitlements to water complete and defensible and does this matter?’, in J. Bennett (ed), The Evolution of Markets for Water, Edward Elgar, Cheltenham.

Harris, E. (2005). ‘State Administration versus Private Innovation: The evolution of property rights to water in Victoria Australia’, in J. Bennett (ed), The Evolution of Markets for Water, Edward Elgar, Cheltenham.

Kasper, W. (1998). Property Rights and Competition: An Essay on the

Constitution of Capitalism, The Centre for Independent Studies Limited, St Leonards.

Morrison M. and J. Bennett (2004). ‘Valuing New South Wales Rivers for Use in Benefit Transfer’, The Australian Journal of Agricultural and Resource Economics, 48(4): 591-612.