Dear Taxpayer, Send Money

Alistair Watson

Freelance Economist

When the 'salinity tree' is given a shake, many proposals to tackle problems of dryland salinity fall out, ranging from recommendations based on well-researched scientific and economic analyses to the more common, apparently simple solution from salinity fixers that could be summarised as: 'Dear Taxpayer, Send Money'.

Unfortunately, the recommendation to spend more and more public money on dryland salinity programs is often unencumbered by much consideration of the human, technical, economic and institutional aspects of Australian agriculture that are critical to solving environmental problems. Even more unfortunately, the Australian Conservation Foundation (ACF) and the National Farmers Federation (NFF) have also been attracted by the spend first and think later approach. A defining event was the joint ACF/NFF proposal to spend AUD $65 billion over 10 years on mitigation of dryland salinity and other land management issues ( Virtual Consulting Group and Griffin nrm 2000 ). Pannell (2001, p.46) has suggested that if this proposal had been accepted the result would have been "one of the most poorly conceived, unproductive and wasteful programs of public expenditure in Australia's history."

The main conceptual and empirical issues surrounding dryland salinity are to do with issues like:

• How many farmers are capable of generating sufficient revenue to invest in environmental remediation that would yield on-farm benefits?

• How should programs be designed to account for the variability of commodity prices, farm income and investment and the time path for control and amelioration of dryland salinity?

• How does the endemic small farm problem in Australian agriculture affect farmer behaviour in relation to dryland salinity?

• Will the market for agricultural land eventually sort the problem out?

• What are the implications for government policy?

In this article, information about the magnitude of the dryland salinity problem is introduced as a starting point. Some observations are then made about on-farm and institutional aspects of dryland salinity.

Size of the problem

Estimates of the potential losses from dryland salinity for the major groundwater systems across Australia are detailed in Australian Dryland Salinity Assessment 2000, a recent report of the National Land and Water Resources Audit.

In summary:

• Australia has close to 25 million hectares of local groundwater systems. Approximately 3 per cent (0.75 m ha) of the area is considered to be at risk of developing some dryland salinity.

• Australia has around 40 million hectares of intermediate groundwater flow systems. Approximately 5 per cent (2 m ha) of these systems are considered to have a high risk of developing dryland salinity.

• Australia has around 45 million hectares of regional groundwater flow systems. Approximately 6 per cent (2.70 m ha) of this land is considered to be at high risk of salinity in the next 100 years.

The 'costs' of dryland salinity are difficult to estimate. Because of the difficulties involved Bathgate and Pannell (2000, p.2) suggested that there is 'almost no practical value' in estimating the cost of salinity. This has not stopped some rash estimates being made. Nor has it stopped policies based on these estimates.

A recent paper by Commonwealth Scientific and Industrial Research Organisation (CSIRO) scientists Walker, Gilfedder and Williams (undated) refers to a 1998 estimate by the Prime Minister's Science, Engineering and Innovation Council that dryland salinity costs $700 million in 'lost agricultural land' and $130 million annually in 'lost production'.

The use of estimates of the lost value of agricultural land and loss of annual earnings is double counting. Losses from salinity can be measured either as losses in the value of agricultural land, as indicated by the capitalised value of the losses in net annual returns to that land, or as the annual losses of net annual returns themselves. Furthermore, the CSIRO estimate does not distinguish between revenue and cost - losses of gross returns are advanced as if they were the same as losses of returns.

Losses from salinity should also be put in the wider context of Australian agricultural development. Knopke, O'Donnell and Shepherd (2000) estimated productivity growth on broadacre farms in Australia at 2.6 per cent per annum from 1977-78 to 1998-99. This is significantly greater than estimated annual losses from dryland salinity. In an aggregate sense, offsetting the losses occurring from dryland salinity by management improvements and technical innovation on non-affected areas is well within the bounds of previous productivity improvement in Australian agriculture.

Thus, on the basis of the estimates reported by the Prime Minister's Science, Engineering and Innovation Council, the estimated current losses of $130 million per year from dryland salinity do not loom large as an economic problem. Note that the annual gross value of Australian farm production is around $30 billion.

On the farm

Farmers do not deliberately damage the land they farm. Investment to change farming systems to reduce dryland salinity has implications for farm profitability and risk in both short and long terms, just as farm profitability and risk have implications for the capacity to invest on farms. In this regard, size does matter in farming.

It is a commonplace of Australian agriculture that the distribution of farm size is uneven. This is usually expressed imprecisely as an '80/20 rule' - 20 per cent of farmers produce 80 per cent of the output and vice versa. Official data from the Australian Bureau of Statistics and the Australian Bureau of Agricultural and Resource Economics (ABARE) allow more accurate representation of the situation. For example, the McLachlan Taskforce on the wool industry reported in 1999 that only 2000 woolgrowers (four per cent of an Australian total of 46,000) produced 25 per cent of national output, with the largest ten per cent producing 40 per cent ( McLachlan, 1999 ) .

There is no simple way of interpreting data on the distribution of farm size and income. The data are confounded with social and economic variables associated with:

• Full-time versus part-time farming.

• Age and education of farmers.

• Succession and transfer of ownership of family farms.

• Location.

• History of land settlement.

The most important reason for concentrations of small farms with limited investment capacity in some areas of Australia is the history of settlement. A most dubious concept - the 'home maintenance area' - was the guiding principle of government settlement programs. The idea that farms should provide for the needs of an average family condemned many farm families to penury from the start. The development of Australian agriculture includes numerous government settlement schemes that had unintentional but serious environmental outcomes. Examples include dust storms in the Victorian Mallee in the 1930s, irrigation salinity and loss of high-quality timber and amenity with clearing of forests for dairying in Gippsland and on the North Coast of New South Wales. With such a poor track record, why should anyone be confident that government plans for the repair of previous environmental damage will be successful?

Australian farm businesses are small businesses distinguished from other small businesses by higher equity ratios, necessitated by the high variability of their income. Insolvency is a constant prospect in most parts of the grain-livestock areas of Australia. Occasionally, farmers have little choice and adopt short-term strategies when confronted with low incomes brought about by low commodity prices and/or drought. Large numbers of farms in Australia perform indifferently for much of the time. These farms have little or no capacity to invest in dryland salinity control.

In the short-run, the opportunity for farmers to change enterprises quickly is constrained by their past investment in capital equipment and fixed improvements on farms; that is, sunk costs. Neglecting the significance of sunk costs overstates prospects for new investment.

Unfortunately, proposals for salinity mitigation usually imply a regular pattern of expenditure. Attempts to encourage a regular pattern of investment will fall on deaf ears if farmers do not have the financial capacity to respond. Yet forums assessing policies to combat dryland salinity frequently proceed as if the profit and risk dimensions of farming are unimportant, or even non-existent.

Succession issues are also important to this question, especially on small farms. Older farmers who do not anticipate passing on their farms to family members have different attitudes to the future than other farmers. The cash surplus from farming operations does not have to be spread as thinly. Given the episodic nature of peaks in farm income and land values, the timing of exit from farming is an important objective for farmers. How life cycle affects investment behaviour - and environmental investment in particular - is far from clear?

Small full-time farms do not have the capacity to generate sufficient revenue to operate commercially, let alone generate the funds necessary for remediation of environmental damage. For part-time farms, the story is mixed. In the ranks of small part-time farms are represented some of the richest and poorest people in Australia. Rich part-time farmers are concentrated in desirable locations close to capital cities and in aesthetically pleasing countryside. As a general rule, these individuals are conservation-minded and have the resources to act accordingly. Various indicators of environmental concern, including participation in Landcare programs and related activities, suggest a 'Hume Highway effect'. Environmental enthusiasm (and government grants) is concentrated in the neighbourhood of the road from Sydney to Melbourne (and in similar favoured areas). If so, this is hardly the basis of a long-term program of dryland salinity control in the places most affected by dryland salinity that are concentrated in the truly commercial farming areas of Australia away from capital cities.

It is not sufficient for a proposal to be technically feasible or even profitable 'on average'. Salinity mitigation has to fit in with management of the farm business. An important determinant of the attitudes and behaviour of individual farmers will be survival of the farm business in an uncertain production and marketing environment. What appears to be sensible to an outsider may be unacceptable and inappropriate for the farmer. National salinity mitigation strategies will be most effective if they recognise and fit with the many goals of farmers, of which profitability and business survival is pre-eminent. Without profits, survival, resource improvement and other goals cannot be achieved.

Institutional arrangements

The principal technical solution to the on-farm problems associated with dryland salinity is to lower water tables by increasing transpiration by plants. This requires modification of farming systems in salinity-prone areas. Where problems are localised, the financial resources necessary to mitigate dryland salinity have to be generated from the receipts of farming operations on the farms directly affected. There is no case for government assistance when dryland salinity is a problem contained within the boundary of a farm.

When dryland salinity is a problem with public ramifications, selecting the best institutional arrangements is critical to success of policies to ameliorate the problem.

Catchment management has been popular in recent times, even though not many agricultural problems are suited to management on a catchment basis. Australia is a relatively flat country. Traditionally, climate, history of settlement and soil type have been regarded as being more important than topography in determining the pattern of agricultural production and requirements for services by farmers.

Catchment management has advantages and disadvantages. There are certain classes of engineering problems that need to be managed on a catchment basis - flood mitigation, for example. While catchment authorities have been established widely, they do not have an independent funding base. They are funded by and responsible to state governments. In some cases, there will be external effects of dryland salinity on other landholders. Previously, the significance of external effects was overstated. External effects were incorrectly regarded as the norm rather than the exception until the last few years. However, where there are external effects on water quality in streams in a definable drainage area, catchment levies are appropriate. Still, attempts to establish catchment levies in Victoria to fund a range of environmental programs were singularly unsuccessful ( Watson 2001 ).

Engineering solutions are applicable to many problems caused by dryland salinity in country towns. While not all damage is worth repairing, local government rates are an ideal funding instrument to finance these engineering works. There will be cases where the local funding base is inadequate and state or Commonwealth support is justified for valuable assets. Much the same goes for roads, railways and other infrastructure affected by dryland salinity. Provided the necessary repairs can pass a cost-benefit test, the best strategy will be recoupment of costs by user charges.

In theory, there are legal remedies when the actions of one individual have adverse effects on others. This is not a practical solution in this instance. For one thing, long lags in the effects of land clearing on agricultural productivity mean that changes of ownership make it impossible to sheet home the source of damage. Some enterprising lawyers have claimed that there is an argument in law for farmers and others affected by dryland salinity to seek compensation from governments. This is because of past government policies that encouraged excessive land clearing. Investment allowances, accelerated depreciation, concessional credit and other previous inducements operating through the taxation and financial system spring to mind. Official settlement policies also wreaked economic, social and environmental havoc on the Australian countryside. The essential difficulty is that all these policies were widely supported at the time by all governments and the community. In any case, their ill-effects (and, of course, benefits) are not confined to dryland salinity.

It would be a grim outlook - except for the legal profession - if every past mistake of government brought about by ignorance, opportunism and/or misplaced enthusiasm could be settled in the courts.

Conclusion

Political imperatives and pork-barrelling predilections frequently conspire to confound sound policy. With this possibility in mind it is important that the science and economics of farm salinity measures are not only sound, but also widely known. Good science and good economics pursued with vigour in public debates may help slow the adoption, if not the promulgation, of less sensible policy measures. In so doing, they may contribute to the public policy objective of spending money well - or, at least, striving for the situation once described by an observant ex-agricultural bureaucrat, Chas Savage, as 'wasting money wisely'.

References

Bathgate , A. and Pannell, D.J. 2000, 'Economics of deep-rooted perennials in Southern Australia', SEA Working Paper 2000/05, Agricultural and Resource Economics, University of Western Australia, Web Page:
www.general.uwa.edu.au/u/dpannell/dpap0005.htm

Knopke , P., O'Donnell, V. and Shepherd, A. 2000 , 'Productivity Growth and the Grains Industry', ABARE Research Report 2000.1, Canberra.

McLachan , I. 1999, Report of the Wool Industry Future Directions Taskforce, AGPS, Canberra.

Pannell , D.J. 2001, 'Public funding for environmental issues: Where to now', in Public Funding of Environmental Issues, 4 th AARES Annual Symposium, October, Melbourne.

Virtual Consulting Group and Griffin nrm 2000, National Investment in Rural Landscapes: An Investment Scenario for NFF and ACF with the assistance of LWRRDC.

Watson , A.S. 2001, 'Money and Environment', Agenda , vol. 8, pp. 89-96.