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Published: Australian Financial Review

Free marketeers eschew the need for government intervention until such time as their own vital interests are threatened.

Dr. Ken Henry, Secretary of the Treasury, champion of the environment and the market place, has come out with both barrels blazing. He accuses State and Federal governments of having a disgraceful record on the management of water. “Water management on this driest inhabited continent on Earth has been a disgrace.” And who could argue. He noted that water extraction from the Murray/Darling Basin amounted to 93% of the average natural flow to the sea.; ”In three of these (last) 10 years water extraction actually exceeded inflows.”

But this should come as no surprise to Dr. Henry, an advocate of free market solutions for the distribution of water of which water licences form a key element; they are the instrument which makes it possible to extract more than replenishment.

In March 2008, just before the GFC and huge government handouts (typical free market solution to an economic crisis) Henry argued that a well functioning market would bring into play efficiencies governing the distribution and consumption of water.

He claimed that in times of drought water prices should rise, the extent being determined by the severity of the drought but also the ‘price-sensitivity’ of demand and supply. He said, in this utopia of economic modelling, that drought induced increases in price would naturally cause water to flow to those who valued it more highly. This is social engineering, to match that of Pakistan, where the haves get the water and the have nots miss out.

He said increases in price would be a market incentive to build desalination plants, new dams and water recycling plants. Development of the first two ‘solutions’ are not environmentally friendly.

The drought Henry refers to is climate change and a response to water shortages caused by long term climate change will need to be driven by government rather than the market.

Water licences cannot create water; they are an inferior and inefficient method of allocating scarce water resources, “…on this driest inhabited continent on earth.” They are unable to foster and create equitable outcomes; they are as effective in husbanding water resources as a mirage.

Management of water in Australia, while licences remain an integral part of the framework, is an illusion. Water licences should be scrapped as a first step in governments managing water on behalf of the nation.