New Productivity Commission inquiry into the National Water Initiative

The Productivity Commission has commenced an inquiry into Australia's national water policy to assess the state and territory reforms implementing the 2004 National Water Initiative (NWI). This triennial inquiry is a statutory requirement under the Water Act 2007 (Cth) and the second of its kind following the Commission's first review of the NWI conducted in 2017.

Water policy is a difficult area and the Commission's review is timely in light of recent water management challenges triggered by droughts, bushfires and the COVID-19 pandemic. The findings of the inquiry are likely to see State and Territory Governments implement significant water policy reform which may impact upon water stakeholder interests.

The National Water Initiative

Agreed in 2004 by the Council of Australian Governments (COAG), the NWI is an intergovernmental agreement between the states and territories to implement water reform. The purpose of the NWI is to establish a "nationally-compatible, market, regulatory and planning based system of managing surface and groundwater resources for rural and urban use that optimises economic, social and environmental outcomes". Under the NWI, signatory States and Territory Governments commit to:

• prepare comprehensive water plans;
• achieve sustainable water use in over-allocated or stressed water systems;
• introduce registers of water rights and standards for water accounting;
• expand trade in water rights;
• improve pricing for water storage and delivery; and
• better manage urban water demands.

The present inquiry

The present inquiry will see the Commission assess the progress of the States and Territories in their implementation of their commitments pursuant to the NWI.

The scope of the inquiry is outlined in the terms of reference provided by Treasurer Joshua Frydenberg, and stipulates the Commission is required to:

• assess the progress of jurisdictions towards adopting the principles set out in the NWI;
• consider the outcomes (including benefits and opportunity costs) of reform efforts;
• consider the extent to which the NWI reforms help address emerging challenges faced by governments, water providers and water users, such as climate change or changes in economic circumstances; and
• make recommendations on future reform priorities, and ways in which the NWI could be improved.

In addition to the above, the terms of reference provide that the Commissioner is also to consider specific issues, including the:

• interaction of water policy with other policy areas (eg. climate, energy, agriculture, forestry, land use planning and urban development);
• policy ramifications of emerging climate change impacts on water resources; the provision of reliable water services to regional, rural and remote communities;
• principles to be satisfied for any government investment in major water infrastructure projects; and
• issues previously identified within the Commission's 2017 inquiry.

The Commission's Issues Paper

The key considerations of this inquiry have been identified in an Issues Paper released by the Commission on 26 May 2020. The Issues Paper acknowledges the impact of Australia's recent and ongoing challenges (droughts, bushfires and the COVID-19 pandemic) on our water systems and management regimes, and indicates that it will use the findings of the Commission's 2017 review as a baseline for its assessment of jurisdictional progress implementing the NWI.

To inform its assessment of such progress, the Issues Paper outlines the following key issues to be considered by the Commissioner.

1. Implementation of water entitlements and planning: the Commission will assess whether the states and territories are implementing NWI-compliant water entitlements and plans which, as stated by the Issues Paper, is timely as a number of jurisdictions have established new water planning frameworks in recent years. This line of review will also assess whether the jurisdictions have taken climate change concerns into sufficient account when developing water policies (this follows on from the Commission's determination in 2017 that the NWI provided "little guidance" when re-evaluating the balance between environmental and consumptive use) as well as arrangements for extreme event management (for example, severe droughts), within the water allocation frameworks developed by the jurisdictions.
2. Water markets and trading: the Commission will reassess the water market reforms implemented by the jurisdictions which were identified as issues within its 2017 inquiry, including the quality of water registers, residual barriers to trade and the maintenance of trade reforms. This line of review concerns all water markets and is to be reviewed in distinction to the current ACCC inquiry into the southern Murray-Darling Basin water market.
3. Water accounting and compliance: the inquiry will see the Commission review the effectiveness of governmental water measurement, monitoring and reporting systems in supporting public and investor confidence that water trading, extraction, recovery and management effectively achieve environmental and other public benefit outcomes.
4. Environmental water management: the Commission will determine whether governmental environmental objectives are appropriately defined and assess the performance of arrangements in place to achieve NWI objectives. The integration of environmental water with complementary waterway management activities, works and measures will also be subject to the inquiry as well as arrangements for environmental water managers following earlier recommendations for such management to be at an arm's length from government.
5. Indigenous water use: pursuant to the NWI, water access planning and management regimes must recognise the water needs of Indigenous Australians and governments are to uphold cultural values and assets, and protect water rights under native title arrangements. The Issues Paper states the Commission will further assess progress towards providing water for the economic development of Indigenous communities, recognising that targeted policies may facilitate improved financial security and living standards.
6. Water services: upon reviewing institutional arrangements for water services, the Commission will examine concerns that there is an insufficient separation between the roles of water resource management, standard setting, regulatory enforcement and service provisions. Assessments will also be made as to whether pricing outcomes are NWI-compliant and if there is sufficient government collaboration with small providers for the purposes of reducing costs and improving capability.
7. Investment in new water infrastructure: in 2017, the Commission found that new water infrastructure projects had not met a requirement for transparent benefit-cost analysis prior to receiving government funding and made proposals to ensure government financed infrastructure be viable and sustainable; the present inquiry will assess new infrastructure investments to determine whether governments have implemented such proposals.

Next steps

The Commission is currently receiving public submissions on its Issues Paper. Submissions may be made via the Productivity Commission's National Water Reform website until 21 August 2020. In order to ensure this deadline is met, we suggest stakeholders wishing to lodge a submission allow sufficient time to both draft the response and to collate evidence supporting their views. We note that the Issues Paper has suggested this deadline may be amended in light of the COVID-19 pandemic and recommend stakeholders stay alert for updates extending the present deadline. 

The inquiry is currently slated to be finalised in 2021.