Stranded irrigation assets

Staff working paper

This paper by Heather Roper, Chris Sayers and Andrew Smith was released on 28 June 2006. The paper presents the results of research on the options to address the perceived adverse financial consequences of stranded irrigations assets.

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Key points
Contents

Despite significant concern, it is not certain that proposals under the National Water Initiative (NWI) to relax restrictions on permanent water trading will necessarily result in widespread stranded (under-utilised) irrigation assets.

Prior to the NWI, sales did not always reach restriction levels, suggesting that there are other factors influencing the volume of permanent trade;

two such factors could be the differential tax treatment of temporary, leased and permanent water trades and the option value of holding entitlements in the presence of uncertainty about the level and volatility of future prices.

Stranded assets do not necessarily represent an impediment to the efficient use of infrastructure, the allocation of entitlements, or the use of water.

Current proposals to manage the adverse financial impact of stranded assets - such as the ongoing payment of annual access fees, 'tagging' and 'exit' fees - will reduce the economic gains potentially available from entitlement trading.

A more efficient approach would be the introduction of full cost recovery infrastructure pricing. This would involve:

abandoning charges for renewals annuities predicated on the full replacement of existing assets;
revaluing under utilised assets 'appropriately' to reflect their current economic value in use;
charging to recover costs fully, as already agreed by governments (having regard for the demand for services); and
the introduction of cost differentiated charges for individual irrigators within irrigation areas.

Action along these lines could be expected to:

encourage rationalisation of stranded assets where the provision of infrastructure services can no longer be justified;
ensure that the financial consequences of stranded assets on remaining entitlement holders are minimised; and
remove current distortions to temporary and permanent water trading caused by large variations in the level of cost recovery across irrigation areas.

Where assets are under utilised or stranded and remaining irrigators are unable to afford the increase arising from entitlement trading, charges should be set at levels that allow irrigators to continue using the assets, as long as they are sufficient to cover the costs that would be avoided by withdrawing the service.

Preliminaries
Contents, Preface, Acknowledgments, Abbreviations, Overview

1 Introduction
1.1 Stranded irrigation assets
1.2 Scope of the study
1.3 Conduct of the study

2 Industry arrangements and reforms
2.1 Industry structure
2.2 Governance
2.3 Water supply reliability and technology
2.4 The 1994 reforms
2.5 The National Water Initiative
2.6 Responses to the National Water Initiative

3 Stranded assets and trade
3.1 Stranded assets
3.2 Historical response to stranded assets
3.3 Trade in the southern Murray–Darling Basin
3.4 Strategies to address stranded assets
Attachment 3A Data tables

4 Pricing
4.1 Pricing of water, entitlements and infrastructure services
4.2 Infrastructure price comparisons
4.3 Pricing issues
4.4 Cost recovery comparisons
4.5 Consequences of increasing charges
4.6 Transition to higher cost recovery
4.7 Net outward trade and price adjustment

5 Fees on exit
5.1 Options for fees on outward trade
5.2 Economic impact
5.3 Financial effects
5.4 Tax implications
5.5 Community effects
5.6 Legal issues
5.7 Implementing fees on exit
5.8 Setting fees

References