Imagine trying to sell a house when you have no independent and reliable way of assessing the market prices in your area. Meanwhile your real estate agent could be angling to buy the property herself at a knockdown price without telling you about her conflict of interest.

Then imagine that once the sale is done, nobody is able to reveal who sold the house or for how much, or identify the new owner. And the tax office would have a challenge should it want to check that capital gain had been correctly declared.

That’s a reasonable analogy for the picture emerging from the Australian Competition and Consumer Commission’s 542-page interim report into Murray–Darling water markets, which was released by the treasurer at the end of last month but largely overshadowed by the Covid-19 pandemic.

The report – which is economically, politically and environmentally sensitive – found that water markets need wholesale reform and are open to manipulation in an atmosphere of inadequate or absent regulation. It described these markets as having outgrown a haphazard, old-fashioned architecture, bedevilled by lack of transparency, and declared a need for “decisive and comprehensive reform”.

Murray–Darling Basin (MDB) water markets were created by a series of reforms from the 1980s and ’90s, in which water licences were separated from the ownership of land. With variations in terminology between the states, irrigators buy licences that are either high security, low security or – the most common – general security. They are then allocated a percentage of their entitlement in each growing season. Both the licence itself and the seasonal allocations can be traded. According to the ACCC, the value of water can be up to 40 per cent of the total capital assets of an irrigated farm. The water is sometimes worth more than the land.

Water markets underlie the health and character of our agricultural industries and govern what we grow and where we grow it. They influence our economy and our food security. The taxpayer has a stake, too: the markets determine the price we pay to buy back water from irrigators to restore the health of the environment. And yet, on the evidence before the ACCC, the information about these markets is so lacking it is hard to know what is going on within them, let alone judge if they are being honestly run.

It is difficult even to know the value of the market with precision. Data on trading is collected by state governments, but information on price is extremely suspect. Many trades are entered with a zero value. Others are recorded with values that are clearly not commercial – ridiculously high or low. There can be reasons for zero values – such as moving water between properties owned by the same person, or moving environmental water around the system – but the ACCC report says current data collection and recording makes “analysis of market participants’ trading behaviour difficult, time consuming and resource intensive”.

The ACCC report states the average value of water trades in the basin was $1.5 billion a year for the past 11 years, but there are big variations within that. Chris Auricht, head of natural resource management consultancy Auricht Projects, says he has run a ruler over the numbers on trade value and water demand in the ACCC report and can’t consistently align them with either Bureau of Meteorology trade information, or other water data sources such as the Australian Bureau of Statistics. He says this is one example of a systemic problem in data integrity and lack of clarity across numerous recent government reports.

One of the architects of the Murray–Darling Basin plan and the water-trading system, Professor Mike Young of the University of Adelaide, says the report makes it clear the whole of the Murray–Darling Basin Plan should be reviewed now, rather than waiting for the scheduled date in 2026. The National Farmers’ Federation, which says there have been 40 inquiries in the past few years, is also pushing for concrete reform.

In Canberra, there is now widespread recognition that this major environmental, social and economic plan is at risk of failing, and has lost the trust of the people it most intimately affects. The ACCC report adds jigsaw pieces to that picture.

The federal government set up the ACCC inquiry in August last year, as an election commitment. The impetus was farmer concerns about water speculation and hoarding by investors – but those issues remain a sleeper.

Brett Proud, the chair of the Riverland Winegrape Growers Association, said he expected a forensic investigation of alleged hoarding and speculation – and thinks the ACCC report is “shallow” on these matters, although its recommendations for better regulation are welcome.

Water brokers are subject to consumer law but largely unscrutinised and not licensed or otherwise regulated. There are frequent allegations of kickbacks and conflicts of interest. At the time of writing, a rumour is circulating in one rural community of water having been sold to a big investor when local farmers had offered a higher price.

When the inquiry began, there were calls for the market in water to be ended and water rights to once again be tied to land – but the ACCC firmly rejected that approach.

The ACCC has few words of comfort for the communities and industries left behind by water markets, including dairy. The answer, the report says, is not to dismantle or undermine markets, but rather to implement targeted rural policies to address inequality.

Despite the importance of the water markets across so many aspects of national life, the ACCC describes an untidy grab bag of government agencies involved in water management, including the Murray–Darling Basin Authority (MDBA), federal and state water departments, numerous water authorities and many regulators and compliance agencies, including the ACCC itself. Over the top is a ministerial council, including representatives from all basin governments, which has led to a mire of politics stalling reform.

Impenetrable information systems and enormous complexity mean many farmers rely on unregulated brokers and lack the ability to compete with professional traders.

The fault, the ACCC says, is one of governance. In that, says water market specialist Dr Adam Loch, of the Centre for Global Food and Resources at the University of Adelaide, the ACCC has “given itself something of a black eye … They say the governance in this space is poor, but it’s their portfolio.”

The MDBA did its own water trade price report in 2019, which also found “strong evidence” that price reporting was inaccurate and incomplete. But no visible enforcement action was taken. Loch says the MDBA is apparently hobbled by its need to police the states while at the same time depending on their co-operation to run the river system.

Meanwhile, the ACCC has had what Loch describes as “very clear, very robust arrangements under the Corporations Act and Consumer Law to police the market, but until now there has been little visible action”.

The ACCC considers several options for reform. Brokers could be licensed at either federal or state level, or else the existing regulations applying to financial services could be extended to tradeable water rights. Other options included taking regulation of water markets away from the states and giving it to a new market regulator, such as those for the energy and financial services markets. Another option is to create an Australian Stock Exchange-type body as a single clearinghouse for water bids.

There should also be “visible enforcement and compliance action” on things such as price reporting requirements, the ACCC says, and buyers and sellers should be identified on the paperwork using Australian Business Numbers “for taxation purposes”.

More fundamentally, the ACCC has opened up the question of how water is allocated and shared – which goes beyond water trading and to the heart of the Murray–Darling Basin Plan.

The report suggests bringing in continuous water accounting and creating a new market for water storage to allocate the space in dams. This resonates with the long-term view of Mike Young, who suggested a shares system, fixed to an indicator such as rainfall, back when then Water minister Malcolm Turnbull first drove through the Water Act. Young says what the ACCC has floated is “totally consistent” with what he and the then CSIRO water economist, Jim McColl, wanted Turnbull to implement.

Young says the reform process “got stuck”. When the process hit the detail of what was needed for robust, efficient trading, “it all suddenly seemed to be too hard. Many of the rules that should have been put in place are still missing … Worst of all, trust in the system and its leadership has been lost.”

Young says there should have been an equivalent to a Reserve Bank set up for water – independent of political control. Now the need for reform is urgent, he says.

Not surprisingly, Treasurer Josh Frydenberg and current Water Minister Keith Pitt escaped questions on the contents of the ACCC report, given the timing of its release.

When the final report is delivered in November, the call for wholesale reform will present them with an enormous challenge. More inquiries are unlikely to do the trick.

This article is supported by the Judith Neilson Institute for Journalism and Ideas.

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