Most water resources in the world are at or near their sustainable limit. Water management has taken over from engineering as the vital factor if water is to continue to be provided in sufficient quantities and at a reasonable cost for domestic, industrial and agricultural use. The imposition of limits on the exploitation of the water resource allows current users to convert their rights as users into freehold property unless governments take action. Rent is then charged on these water rights and water becomes more expensive for all consumers (Zetland 2011; Chatterton 2000; 1996).
The cost of water
The two major components of the price of water are the distribution costs and the access costs. For domestic water distribution costs are the most important element but access costs are of growing important in countries with physical water shortages. For irrigation water access costs have already become a major factor in the price of water on many river systems (Zetland 2011).
Distribution costs for water are simple to understand. They are the cost of the network of storages, canals and pipes that bring water to consumers. In the case of domestic consumers and particularly those with private suppliers the full costs of the distribution network are passed on to the users. With irrigation water the full cost are passed on with private schemes but government schemes often subsidise the price by not charging for most of the capital costs (Chatterton 2000).
Access costs are a relatively new phenomena. The water resource has been open for thousands of years. Like natural forests, rangelands and sea fisheries, water has been a community resource that has been open. There have been no access costs because there has not been a limit on the use of the water. There has been no reason to pay for access as the water resource has been open to all comers. For example, in South Australia until 1965 one could irrigate land along the river Murray by paying a small, almost nominal licence fee, throwing a suction pipe into the river and pumping as much water as one wanted.The major difference between the water resource and other natural resources is that human intervention (the hydraulic mission) has expanded the availability of water. In spite of increased populations and irrigation development, the water resource has remained open because of the vast community investment in storage and other means of enhancing the supply of water. The era of the hydraulic mission is coming to an end. Many regions do not have any more water to exploit through further expensive engineering. The Nile in Egypt and the Murray Darling in Australia are two example of rivers that have reached their limit of exploitation or even in terms of sustainable supply exceeded it. Many other water resources are nearing their sustainable limit (Chatterton 2000; Zetland 2011).
Closure of the water resource
Access costs are a by-product of closure. The water resource is the abundance of nature. It is free. As long as it is open to anyone it is not possible to charge for access to the resource. Once it is closed, access it only possible when an existing users retires. Free resources or the abundance of nature are described by economists as providing resource rent. Resource rent is a bonanza. It is something for nothing in economic terms as it is provided free by nature (Zetland 2011).
Resource rent commonly disappears through a combination of high costs and over-exploitation. Aquifers provide a good example of high costs and over-exploitation. The uncontrolled digging of wells leads to an arms race for greater depth. Wells are more costly and pumping more expensive. More wells mean a lower yield from each one. If the aquifer is near the coast it can lead to the invasion of sea water. It is a classic example of individual gain leading to collective loss. Other water resources in rivers and lakes have avoided the problem of over-exploitation and dissipation of the resource rent through high costs by expanding the resource. At least that is the case for the water users. It can be argued that it is the community that has borne the cost through engineering works to increase the supply. The community bears the cost and the farmers reap the profit. Many regions reached the absolute limit of the water resource and it cannot be enhanced by further engineering. They face the choice of limiting access or leaving the resource as open access. If exploitation continues unchecked the supply of water will become more unreliable and the resource rent will be completely negated by the high cost structure (Chatterton 2000; 2001).
Limits on water use
While the concept of limits on water use is relatively new for the major engineered river systems, it has been practised for hundreds if not thousands of years among the smaller irrigation and domestic water supply systems. These cooperative systems for desert oases and other small systems where human use has reached the physical limit of the water resource are regularly reported in academic journals as strange primitive concepts that are interesting but should not be treated as serious models for major river systems in the modern world (Chatterton 1996; 2000; 2001).
Resource rent in a closed water resource
With an open access water resource, the users (farmers and others) enjoy the benefit of the resource rent or the abundance of nature while they use the water. By definition they cannot sell these access rights to the water with its resource rent to the next generation as the next generation can gain access independently for little or no charge. Once the resource is closed to new entrants the whole ownership structure changes.This dramatic change in ownership structure is disguised by the closure process itself. In most cases there is an extensive debate and closure is gradually imposed over a number of years. Those wishing to leave the resource are greater in number than those wishing to enter and access costs are insignificant. Over the years a balance is restored and new entrants pay increasing access costs (Chatterton 2000; 1996).
The private property model of ownership
In most cases of closure, the access rights have been seamlessly converted into freehold property. The right to use water from a community resource has become ownership of a specific amount of water within that community resource. The user has become a property owner who can now sell that community water in perpetuity to another owner. The only reason this water has a access value over an above the distribution charges is that there is still some resource rent available to the user. The new user cannot gain that resource rent without first buying out an existing owner. The access right has become a water right that can be sold for a price that represents the future resource rent.
This dramatic change in ownership from community to private has largely gone unnoticed because in practical terms the changeover has made little short term difference. Potential water users anticipate closure long before the water bureaucracies and therefore gain access while the resource is still open. When the resource is closed there are more sellers than buyers. The new property rights have no value and the change goes unnoticed. Over time the excess of sellers is dissipated and the water rights gain substantial values. This model allows the current users and current beneficiaries of the resource rent to capture the future resource rent also. Private property rights for a single generation have acquired priority over community investment and fairness (Chatterton 2001).
The implications of private water rights
The most obvious effect of the change from access rights to property rights is the substantial increase in the cost of water. In the past the water cost was simply the distribution cost. Once the water access has been converted into a freehold property, the water user has to pay interest on the value of the water. The cost of production for irrigators and other users increases. Farmers and other users could protest at this increase in their input costs but for many decades the owner of the water and the user will be the same person. The accounting systems used on farms will not deduct the potential interest on the capital value of the water from their farming profits. Over time however the two will become separated. The original owners of the water will sell their water rights, capitalise the resource rent and walk away with their windfall profits. The new owners will be saddled with a increased requirement for capital to purchase the right to use water. This additional capital cost will appear in their books and become a significant additional cost of production.
However, the small amount of rent farmers receive will be a burden on the next generation of poor farmers. The rent does not come from any investment in the water system of storage and distribution as does the distribution cost. It comes from pure (environmental) luck. The capitalised value of the future resource rent accrues to the generation of users who were lucky enough to use the water when it ran out (Chatterton 2001).
The water market
Markets are the holy grail of neo-liberal economics. They are considered the perfect mechanism for achieving efficiency. The bed rock of markets is property rights and once these were established for water it is inevitable that markets were proposed for the buying and selling of water rights. Water markets are not like other markets where price influences supply and demand. The supply of water is already determined by the water management authority and allocated in the form of water rights. Except during droughts it is a fixed amount. With the growing demand for food it is unlikely that the demand for water will fall below the supply level with water rights being abandoned. The water market is not a true market between suppliers (the management authority) and consumers (irrigators and others) but between existing owners of water rights and buyers who wish to access cheap water. Irrigators and other owners could challenge the concept of cheap water but unless the water costs less in distribution costs than the potential resource rent the owners of water rights would be unable to sell their water rights at a premium. In Australia where the water market has been in place for several decades many water rights have been purchased by hedge, pension and private equity funds. They see water rights as another asset class to diversify their portfolios. The ownership of the water rights by these funds highlights the fact that water ownership has become completely divorced from water use. These new owners are professional rentiers and unlike most other investments in their portfolio they do not represent any real tangible investment. Not one cent of the money paid for a water rights has been invested in water supply or storage (Chatterton 2001).
It is possible to reform the water market so it genuinely reflects supply and demand. The water authority could auction the water to water users. They could auction supply contracts for differing period with a short term contract of a year or less reflecting the current supply. This system would introduce high levels of economic efficiency but would confiscate users' traditional rights of access. It would in many ways copy the system of land use in southern Italy a century ago. Large landowners leased their land to poor farmers on an annual basis. The allocation of fields was made and those who were not provided with land returned to their village to starve for another year while those who did have a field or two lived in constant fear of losing it at the next allocation. It was an economically efficient system of competition but with enormous social consequences. This model gives most of the resource rent back to the community. The historical rights of users are confiscated as they have to bid in an open market for the right to use water. Economic efficiency is increased and the community may obtain a return on its investment (Chatterton 2000; 2001).
Cooperative ownership model
One method of recognising access rights to water without large increases in costs for farmers is to use a cooperative model. Instead of the present generation of water users walking away with the future resource rent, the capital value of future rent is parked in a cooperative for use, but not ownership, by the water users. A cooperative structure would ensure access by water users to the resource while they remain as a user – in fact this should be written into the cooperative constitution - but not access to the the future resource rent. Cooperatives build their capital through borrowing and retained profits. The assets are then used for the benefit of the members in the form of better prices for their products, cheaper banking and many other services. The assets do not generate profits on shares but are used by the members and any profits are re-invested. Cooperatives have their problems with the transfer of generations particularly in Anglo-Saxon countries such as Britain and Australia but the model does offer some advantages. When members retire new members have the advantage of access to cheap capital. Unfortunately in recent decades cooperatives have been privatised on a massive scale. Members have been dazzled by a fist full of money to sell their long term interests for a short term capital gain. Cooperative ownership of the water resource would require greater barriers to privatisation than currently provided by law. This model is a compromise. Users rights of continuity are recognised. Their access to current resource rent continues. The users do not have the right to capitalise the future resource rent. The capital value of the future resource rent is held in trust by the cooperative for the benefit of each generation of water users (Chatterton 2001; 2000).
Chatterton B & L (1996) Closing a water resource; some policy considerations. Ed. Howsam P. and Carter R. C. 1996 Water policy; allocation and management in practice, London; E & FN Spoin pp 355-361
Chatterton B & L (2000) Access costs and distribution costs - AC and DC - for water. Published on
Chatterton B & L (2001) The Australian water market experiment, Water International.
March 2001 Vol 26 No 1.
Chatterton B & L (2005) WIER, WISER and WINER WATER FAO database.
What is wrong with water markets?: Brian Chatterton: Amazon.com: Kindle Store
Zetland, D. (2011). End of abundance. Aguanomics