Dry thoughts on wet stuff

Roger Partridge
The National Business Review
24 March, 2017

Water, water, everywhere – or so it has seemed. In the past few weeks we have had a deluge of controversies over water. 

These include shortages in Auckland despite record rainfalls, Nick Smith’s watered-down fresh water standards and complaints about foreigners bottling our water for no fee. Not to mention the magical thinking that has seen the Whanganui River declared a living entity.

But it is hardly surprising we have worries over water. We manage water rights in a very peculiar way. Most of the resources we consume – the food we eat, the clothes we wear and the petrol we put in our cars -– we pay for.

The price we pay both governs how much we consume and is an incentive against waste. And if someone places a greater value on something we own than we do, we can gain from a mutually beneficial exchange.

With water, it is different. Or at least it is for anyone not on a town water supply. Under the Resource Management Act 1991 anyone can apply for a water permit. And permits are granted on a first-come, first-served basis.


Front of the queue

Whether you’re a farmer wanting water from a stream, a theme-park with a hydroslide, or a bottler wanting spring water from an artesian bore, if you’re at the front of the permit queue, you’re away laughing. 

The cost of applying for the permit is the only price you pay.

The problems with this permit-based approach are easy to see. 

While no one would likely quibble with rural users taking spring water for household use, it is hardly surprising the public is concerned about foreign-owned business-users not having to pay. No one likes the idea of someone getting something for free.

And what of overuse and wastage? It is not rocket-science that in the absence of a price there is little incentive to be frugal. This may be fine on the West Coast where water is not scarce but in Central Otago or Hawke’s Bay it is a formula for disaster.

The first-come first-served approach has other flaws. It means water is not necessarily allocated to its most productive – or efficient – end-use. If those at the front of the queue secure all the available water for activities that yield marginal returns but shut out more productive activities, the community is the loser.


Tragedy of the commons

This approach to water rights has many of the characteristics environmental economists call the tragedy of the commons. This occurs where individuals using a shared resource, acting according to their own self-interest, behave contrary to the common good by overusing a resource through their collective actions.

Fisheries are a classic example of the concept. The depletion and destruction of fish stocks through over-use is a global tragedy.

Of course, it was New Zealand that led the way in responding to the fisheries crises. In 1983, the world’s first quota management system (QMS) for commercial fishing was introduced. With individual transferrable fishing quota, the system has not only conserved the commercial fisheries, but provided a mechanism to ensure New Zealand achieves the maximum benefit from them. And it has provided a blueprint that others have followed.

The QMS is not just good for fisheries. It provides the perfect model for other shared resources such as water. Not surprisingly, it has been widely adopted internationally to manage the allocation and use of scarce water supplies.

From Australia to Chile, and from California to South Africa, tradeable water rights have helped countries around the world manage, and make the most of, their precious Adam’s ale.


Plenty of advice

One might ask why we have not followed. There have certainly been calls to do so. From the Business Roundtable in the mid-1990s, to the Iwi Leaders Group report from Sapere Research in 2015, successive governments have not been short of advice on what they should do.

Of course, the devil is in the detail. And the shadow of the Treaty of Waitangi stands over any move to a property rights-based water trading scheme. But that is no reason not to act.

The Sealord settlement that accompanied the introduction of the QMS for fisheries has been an enduring success – despite the lack of popular support at the time for significant allocation of fishing rights to Iwi.

In any case, as Nobel prize-winning economist Ronald Coase demonstrated, the initial allocation of property rights is not as important as adequately defining the rights and enabling them to be traded. That is the key to economic efficiency. And, in turn, it is the key to public welfare.

In its most recent report, the Land and Water Forum says changing the freshwater management system is “difficult but extremely important for our cultural, economic and environmental future.” It is right. And when we are blessed with so much water, it would be a tragedy if we didn’t make it pay.

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