The Australian Competition and Consumer Commission (‘ACCC’) has recently released its interim report into the Murray-Darling Basin’s water market. Intermediaries and other participants should consider the medium to long term implications of the structural reforms identified by the ACCC.
The Murray-Darling Basin Inquiry (“Inquiry”) was established to respond to concerns raised by water market participants over the transparency of the existing water market as well as to examine potential reforms to how the water market operates in the Murray-Darling Basin states.
While finding a number of deficiencies in the underlying mechanisms and regulation of the Murray-Darling water markets, the ACCC expressed support for the ongoing ability to trade in water rights separately from the land, closing the gate on proposals to revert back to water being tied to real property.
Tradeable Water Entitlements
Water entitlements in the Murray-Darling Basin are capable of being sold, leased, transferred and traded separate to any interest in land within the Basin. The ability to trade water entitlements has allowed those who need it most – irrigators, farmers and others who rely on water throughout the year – to purchase additional water, sell excess water entitlement, and use water entitlements to raise capital.
“a mostly unregulated environment”
The Interim Report notes that the ability to trade water rights has benefited the agriculture industry and led to the creation of an entire sub-industry focused on facilitating the transfer of water. Despite this, it has been this rapid increase in the trade and transfer of water interests that has resulted in a market that the ACCC has found “many water users do not trust”.
Supervision and Oversight
Focusing on the water market intermediaries who facilitate water trading, the ACCC highlighted the significant imbalance in the information available to established investors, brokers, water exchanges and irrigators compared to local farmers and new water market participants.
This is coupled with a “lack of rules and trading oversight” causing a market that the ACCC believes is vulnerable to manipulation - but may not be in breach of any federal or state law.
In its Interim Report, the ACCC focused on the consequences of this imbalance, suggesting that a deficit of specific regulation, professional standards, or oversight, leads to inevitable conflicts of interest between intermediaries and market participants.
It is suggested that increasing transparency in the market, reversing the information asymmetry, simplifying the water trading process across the Basin, and potentially inserting a single Murray-Darling Basin regulator will eliminate the risk of manipulative or unconscionable conduct.
The competition regulator is ambitious in its recommendations for the sector, looking to large scale water market reforms while not varying the current ability to trade water entitlements or lock certain market participants out of the Basin.
The ACCC’s focus appears to be on the market intermediaries who facilitate the transfer of water rights and is considering licensing and authorisation models comparable to those in the financial services sector. It appears that additional regulation and licensing for market participants will be inevitable to protect against market manipulation and the conflicts of interest that may be allowed to exist.
While this may increase the overall regulatory burden for those intermediaries in the market, it reduces the risks to water users and those with less resources who rely on water for their businesses and livelihood.
If you would like any further information please contact us and a member of our Agribusiness or Corporate team will be able to assist.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.