ACCC Murray-Darling Basin Water Markets interim report

On 30 July 2020 the Australian Competition and Consumer Commission (‘ACCC’) released its interim report on its inquiry into Murray-Darling Basin water markets.  The report recognises the significant benefits that water markets have delivered for water users and the broader economy. It also recommends an ambitious reform agenda designed to improve transparency and market efficiency so that these benefits will continue to flow into the future.  If adopted by state and federal governments these reforms will be overwhelmingly positive for all Kilter Rural Funds.

Since 2008 Kilter Rural has been managing water investments in the sMDB on behalf of investor clients and is proud of the role it has played in the market.

On 30 July 2020, the Australian Competition and Consumer Commission (‘ACCC’)  released its interim report on its inquiry into Murray-Darling Basin water markets.

When Kilter Rural entered the market in 2008 farmers had two options for accessing water for their enterprise: they could deploy their scarce capital to purchase water entitlements, or they could subject themselves to the variability of the markets for water allocation.

The investment approach employed has always focused on the generation of long-term sustainable returns for investors through the development and distribution of water products to a client base of farmers.

Kilter Rural has engaged proactively with the ACCC and contributed two voluntary submissions and provided comprehensive records of trading activities as requested. Kilter Rural will continue to work with the ACCC as they progress to their final report, believing firmly that better market transparency and market operations offer the best scope for improved market confidence by participants.

The report sets out the ACCC’s preliminary views regarding the state of water markets and issues identified from their investigative analysis to date.  It devotes much of its focus to water markets operating in the southern Murray Darling Basin (‘sMDB’). It estimates that the current value of the major classes of entitlement on the issue in the sMDB is in the order of $22.7 billion, with approximately $5 billion held by the Australian Government for environmental purposes. The combined trade in water rights, which includes trading in both water entitlement (permanent water) water allocation (temporary water), averages about $1.5 billion per year.

The ACCC is seeking further feedback from stakeholders as they continue their inquiry and formal recommendations will be provided in the final report, due by 30 November 2020.

The background

Over the past twelve years, 2008 Kilter Rural has been at the forefront of water product development guided by our own experience in managing diverse irrigated farming enterprises in northern Victoria. Over this period, Kilter Rural supplied farmers in all regions of the sMDB and all major irrigated industries with many hundreds of water products.  Key among these products are water entitlement leases. These leases are a valuable new source of capital for farmers, enabling them to grow their businesses while providing them with secure access to water.  Kilter Rural has also provided farmers with a range of risk management products that remove or reduce risks associated with the price or availability of water allocation.

In combination, these products significantly enhance the range of options available to farmers to access their water requirements. They are also entirely consistent with the objectives of the Water Act 2007 (Cth), which include “to enable the appropriate mix of water products to develop based on water access entitlements which can be traded either in whole or in part, and either temporarily or permanently, or through lease arrangements or other trading options that may evolve over time.”


Key findings

  • The report provides clear recognition of the “substantial benefits” water markets have brought to water users but has identified opportunities to improve governance, regulation and operational frameworks.
  • The water market has helped facilitate an increase in agricultural production by an average of 2.3% p.a. in real terms since 2010-11 despite the tough and volatile conditions that have prevailed during this period.
  • The report acknowledges that the benefits derived from water markets are not universal or shared equally between participants or regions. Regions in which resident industries can compete more vigorously for access to water experience economic growth while areas that are less able to compete experience contraction. Water scarcity exacerbates these differences. Governments face challenges in addressing these issues, without negating the benefits that water markets generate.
  • The ACCC is not supportive of dismantling existing water markets and the reforms that underpin them, such as the ‘unbundling’ of water from land titles.
  • The complexities in administering water markets have exceeded the current arrangements. The system is built for water management, but not for efficient trading. Reform is needed to achieve more transparent and efficient trading outcomes.
  • Across the three sMDB states (Vic, NSW & SA), existing governance frameworks are complex and need to contend with different legal jurisdictions. As a result, regulatory oversight can be overly complex, fragmented and overlap, leading to operational inconsistency and inefficiency.
  • There are market information gaps that limit market transparency and potentially fairness, particularly when there is a significant variance in water market literacy between participants. Sophisticated traders may find opportunities to exploit market flaws.
  • The report identifies the lack of regulation of water brokers and commercial trading platforms as a particular problem. This lack of obligations on brokers can harm market participants and damage confidence in the market.
  • Trading rules have not evolved to better manage the dynamic supply, demand and hydrological factors at work in the market.

trade processes and market transparency

The report identifies a need to make practical changes to trade processing, to improve the quality and timeliness of core market data. Fundamental to this is the need to develop clear and comprehensive frameworks applying to the record-keeping and data provision requirements governing all entities who process trades, including water brokers, exchanges, irrigation infrastructure operators (IIOs), and Basin State approval authorities. The report also identifies the opportunity that digital technologies offer in streamlining trade services while at the same time as improving information quality and availability and outlines a range of options in this regard.

market architecture

The ACCC is continuing to examine opportunities to improve policies and rules essential to the operation of the market so that they can more efficiently and, in some cases, more fairly manage the underlying physical constraints of the water supply and river system. These changes apply to areas such as inter-valley trade, the allocation of limited delivery capacity and the management of water storage and carryover. The final report will explore a range of potential reform options for the water market architecture concerning these features.

governance and compliance

The ACCC’s preliminary view is that there is a clear need to reduce the impacts of fragmentation that arise as a result of the market activity occurring in multiple jurisdictions. To do this, the ACCC recommends standardising and harmonising governance roles and how governance roles are carried out across entities. Also, it identifies the need to reduce governance gaps and overlaps as well as uncertainty in decision making. This could be achieved by governments delegating specific roles and functions to independent institutions.

The report also observes that there is a need to increase regulatory oversight and enforcement and compliance activity concerning some practices of some market participants. This regulation could be limited to brokers or could cover other market participants, such as investors and irrigation infrastructure operators (IIOs). In the case of water brokers, it is the ACCC’s preliminary view that regulation should be introduced. It is continuing to investigate the adequacy of current provisions in relation to other market participants.

Investors in the water market

Focusing on the role and practices of investors in the water market, Chapter 5 reflects stakeholder and market participant concerns raised in the consultation phase of the inquiry about the ability of investors to manipulate the market to their advantage. It recognises that there are different types of water market investors, ranging from large superannuation funds to retired farmers.  However, for its initial analysis, the ACCC has focused on the market position and trading activities of four large investors (the Investors). As of 30 June 2019, collectively, the Investors held 7% of the high reliability water entitlement on the issue in the sMDB. Kilter Rural is one of the Investors.

The ACCC’s key findings concerning investor participation in the market were that:

  • Investors provide benefits to the water market in three key ways by:
    • Providing new sources of capital to irrigated agriculture
    • Increasing water market liquidity and
    • Providing a range of water market products to help irrigators manage water supply risks.
  • The ACCC focused particularly on the 2018-19 water year for trading activity irregularity in response to some concern about the impact the Investors may have on water prices.
  • Investors broadly pursue a similar buy and hold entitlement strategies that aim to achieve long term capital growth and generate income by supplying water products. A critical historical difference in their approach relates to water allocation purchases. One of the Investors is noted as a substantial purchaser of temporary allocations. In 2018-19 that investor accounted for 87% of total Investor water allocation purchases and 66% of water allocation sales. That investor was not Kilter Rural.
  • The ACCC is continuing to examine the potential market power of the Investors. The preliminary analysis does not provide a sufficient picture of circumstances where opportunities to exercise market power might arise.  The ACCC will undertake a more detailed analysis of the Investors’ trading activity and present its findings in the final report.

Kilter Rural view

We commend Mick Keogh and his team at the ACCC’s on the work they have undertaken to enable the release of this interim report. It provides an extraordinarily detailed and balanced examination of the current state of water markets in the Murray-Darling Basin and, in particular, the sMDB.

A minor criticism is that as an interim report, it lacks a concise summary of findings and recommendations.  At 544 pages, many in the market who have raised concerns as to its operation may find the document impenetrable. Hopefully, this will be addressed in the final report so that the work can be shared with, and consumed by, the broadest possible audience. That said, the size of the report also reflects the scale and complexity of the topic.

In a market as complex as the sMDB periodic adjustment and improvement is vital. We are hopeful that all governments concerned will heed the ACCC’s strong recommendation to use this opportunity to pursue comprehensive reform rather than an incremental approach to problem solving.

A transparent market, where all have access to the same information, supported by consistent trade rules and clear regulation will permit greater confidence in the market and see it evolve for the benefit of water users, the broader economy and the environment.

Kilter Rural welcomes the prospect of the proposed reform. It could potentially see the imposition of additional regulation on our activities in the market. However, there is nothing in the report to suggest that this would in any way impinge upon the water investment approach that Kilter Rural has developed.   On the contrary, we expect that the reforms contemplated will further support the role that investors play in providing much needed capital to support the ongoing development of irrigated agriculture in the Basin.

“In our view, it is the most comprehensive report of this nature that has been completed to date. We look forward to assisting the ACCC further as and when required as they prepare their final report.”

– Euan Friday, Chief Investment Officer

Kilter Rural also looks forward to making a further submission to the ACCC responding to the areas where they have requested feedback.