Privatise the Murray-Darling River System
Privatise the Murray-Darling River System
This article argues in favour of the privatisation of the Murray-Darling River System by advancing four main arguments in favour of privatisation. They are that private ownership promotes:
- Sustainable use;
- Water being directed towards its highest value use;
- Capital being managed by those who produce the highest value;
- A society of voluntary exchange and mutual service.
But first, an overview of the present situation.
Overview
The present arrangement for managing the Murray Darling River System is one of the most interesting examples of central planning in Australia.
The 1992 Murray-Darling Basin Agreement between the Commonwealth, New South Wales, Victoria, and South Australia established among other things, the Murray-Darling Basin Commission (MDBC). This is a centrally planned river system where ‘the state’ owns and controls the river and determines to whom water is distributed. Rights to water are allocated to the various states in the agreement based on a proportion of ‘the cap’, a limit to the amount of water that is to be diverted from the river system. Water users do not pay for the water they divert from the river system. The financial accounts of the MDBC for the year ended June 2001, show that the only major source of cash is ‘Contributions by governments’ amounting to $61 million. ‘Sale of goods and services’ amounted to $521 thousand, while ‘total revenue’ was $63.4 million1.
That water users are not charged for their water use goes some way to explain the overuse of the river system. Some may suggest that the simple solution is for the MDBC to charge the market rate for water diverted from the river system. But this solution fails to strike at the root of the problem that allows low or no prices to be charged. The root of the problem is state ownership and the only solution is private ownership of the river system itself.
Things have been moving in the right direction, with recognition of the allocative role of free market processes. The MDBC commenced a trial of interstate water trading in 1998 where certain users in the Malee region of SA, VIC, and NSW could sell water they did not need. Other water users could buy this water.
Over 10,000 megalitres (ML) of water has been traded, slightly more than 1% of total entitlements within the pilot zone. The average price of these trades has been between; $1,000 and $1150 per megalitre (ML) valued at $10 million in total2.; As an interesting comparison, Sydney Water charges $925 per megalitre3 (ML).
At these prices and with an annual cap of 10,000 gigalitres (GL) of water, a privatised Murray-Darling River System could generate revenue of $10 billion per year. This is slightly less than half the revenue of Telstra ($23.1 billion4), Coles Myer ($23.8 billion5), or Woolworths ($20.9 billion6). Assuming expenses of $200 million (now $57.1 million2) delivers a profit of $9.8 billion per year. After tax, this would reduce to $6.86 billion. If we were to assume a dividend payout ratio of 60% of after tax profit ($4.116 billion), and dividend growth of 3% per year and a discount rate of 10%, then the capital value of the Murray-Darling River System would be approximately $87 billion. Therefore, a listed ‘Murray-Darling River System Ltd’ would be the largest listed company in Australia.
Now to the main arguments for privatisation.
1. Sustainable Use
State ownership of the river system encourages overuse because no one owns the capital value of the river system. (The capital value being the present value of future benefits.) Politicians do not own the capital value of the river (they cannot sell it and realise the proceeds for themselves) and so they have no interest in preserving it. If they do preserve it, the opposition could then waste the resource when they get into power.
A private owner does own the capital value of his asset (he can sell it and realise the proceeds for himself) and because he is secure in his property rights will look to maximise the capital value. That is, he will aim to conserve the river. If a private owner oversold water from the river, the water would run out and the owner’s income stream would literally dry up.
State ownership leads to overuse whereas private ownership leads to optimal conservation and sustainable use. We can therefore look forward to the enthusiastic embrace of capitalism by the environmental movement.
2. Highest Value Use
Former president of the MDBC, Roy Green stated in a speech, “Market driven pricing and highest value use then promote water use efficiency and improved economic returns, resulting in long-term economic and environmental sustainability for the irrigation industry2.”
In order to calculate the highest value use of resources in a division of labour society, there must exist private property. If the state owns everything, there can be no exchange between property owners, no prices, and a consequent inability to calculate. In a situation with private owners, there can be exchange, prices, and economic calculation.
Economist Ludwig von Mises in ‘Economic Calculation in the Socialist Commonwealth’ wrote, “Calculation … in an economy without exchange, can embrace consumption goods only; it completely fails when it comes to dealing with goods of a higher order [capital goods]. And as soon as one gives up the conception of a freely established monetary price for goods of a higher order, rational production becomes completely impossible. Every step that takes us away from private ownership of the means of production and from the use of money also takes us away from rational economics7.” State ownership of the Murray-Darling River System represents an ocean of chaos in an otherwise rational economy.
3. Capital Being Managed By Those Who Produce The Highest Value
A market place with private owners is the best way to ensure that managers act to maximise the capital value of the assets they control. There are three ways this occurs in the free market place.
Inside the firm there is performance-based compensation, and the market for managers where potential managers monitor the current managers in order to replace them appealing to the performance required. Under state control, performance benchmarks are more difficult to develop because of the inability to use economic calculation. Performance indicators tend to be based on the satisfaction of political interest groups, otherwise known as stakeholders.
Outside the firm there is competition in the product market. There are suppliers of capital such as shareholders and debt holders who can set rules or withdraw their capital. Under state control, politicians set the rules based on satisfying interest groups and can conscript more capital through the taxation system if required. Also, there can be little competition against a firm giving away product at no cost.
Finally there is the market for corporate control where entrepreneurs take over poorly managed firms and install new management in order to make a profit. Entrepreneurs would have great difficulty trying to take over a state ‘enterprise’.
4. A Society Of Voluntary Exchange And Mutual Service
As the financial statements show, farmers are totally dependent on the state for their allocation of water. Apart from the pilot water-trading program, there is no way they can purchase more water from the river system. The state can give and take ‘rights’ to water as it sees fit, a totally one-sided ‘contract’.
Under private ownership, both parties trade as equals, exchanging value for value.
Under the current system, changes in the use of water are forced by the MDBC (an arm of the state). Impact is incurred by whomever the state says will incur it, without regard to the highest value use.
Under private ownership, users themselves would determine the impact of a change in supply through their response to the market price for water. If the price went up, marginal uses would go unsatisfied as some users withdrew from the market. Farmers would develop new methods of production or switch to crops that use less water. A rise in price would also encourage water storage in tanks and dams.
The financial statements also show that water is not the only thing being allocated by the state. The other thing being allocated is the labour services of the ordinary taxpayer. Money earned in exchange for labour (or for the employment of property) is being taken away from their rightful owners to pay for the costs of providing water to farmers.
The privatisation of the Murray-Darling River System would promote the sustainable use of water towards its highest value use; the management of capital by those who produce the highest value; and a society of voluntary exchange and mutual service.
References
1 Murray-Darling Basin Commission (2001) Annual Report 2000-2001, p 106 & 108
2 Green, Roy (2001) Water – the new liquid asset
3 Sydney Water Account for residential property issued May 2001
4 Telstra (2001) Annual Review 2001, p 42
5 Coles Myer (2001) Annual Review 2001, p 22
6 Woolworths (2001) Concise Report 2001, p 45
7 Mises, Ludwig von (1920), Economic Calculation in the Socialist Commonwealth, The Ludwig von Mises Institute, p 19-20
© Danny Haynes
