Private sector involvement in irrigation agriculture

Privatization and corporatization of water have been endorsed as part of an alternative approach to water resources planning and management in some irrigated regions of Australia. Experience in New Zealand and South Australia illustrates the importance of involvement of the irrigation community in facilitating the policy implementation process. Results of a survey of irrigators in the Lachlan Valley of New South Wales suggest that a significant gap exists between the proponents of a policy of privatized self-management and irrigators and others likely to be affected by the change. Wide-ranging consultation with irrigation interests will be critical to avoid confrontation and ensure that this innovation is accepted as a workable alternative to government control.

John Pigram is Associate Professor of Geography and Planning and Executive Director of the Centre for Water Policv Research at the University of New En& land, Armidale, NSW 2351, Australia. Helen Mulligan is Policy Analyst with the Sydney Water Board, Sydney, Australia.

Research for this study was carried out in the Centre for Water Policy Research with support from the Australian Water Re- search Advisory Council and the New South Wales Department of Water Re- sources.

‘D. Kinnersley, Troubled Water: Rivers, Politics and Pohfion, Hilary Shipman, London, 1988.

Private sector involvement in irrigation agriculture

An Australian perspective

John J. Pigram and Helen K. Mulligan

Privatization of water is being actively canvassed in Australia as a desirable policy option to improve the efficiency and effectiveness of water resources management.

Until recently considerable doubt existed about the feasibility of privatizing water. The special nature of water and the need to ensure security of supply and equity in access to the resource seemed to suggest that water was best left in public hands. Even the UK under the Thatcher government was described as ‘stumbling into privatization’ of water.’

Despite some initial hesitancy, privatization and corporatization are now seen as an appropriate response to the array of concerns facing irrigation agriculture in Australia. Problems of asset decline and the need to devise more cost-effective approaches to the financing of investment and the servicing of debt are becoming critical. Community aspirations for water systems are not always matched by the ability of the public sector to satisfy them. The conflict between what irrigators expect and what governments are willing and able to provide has stimulated the search for alternative approaches to meeting water demands by involving the private sector.

Privatization is a generic term encompassing a series of measures for private sector involvement in the water industry. These range from full private ownership, through franchising, contracting and other deregula- tory procedures to the application of commercial pricing and market- oriented modes of operation. Under active consideration also by some irrigation authorities in Australia are proposals for complementary public and private investment in joint water supply ventures.

Forms of privatization of water infrastructure and corporatization of water services operate in several industrial countries in the West, notably France, North America, the UK and New Zealand. Questions arise as to the extent to which overseas experience is applicable to the water industry in Australia. The UK and French approaches are primarily urban-orientated and appear to be of only partial relevance to

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Privute sector involwment in irriguiion ugriculturc~

the irrigation sector. Moreover, reservations have been expressed concerning the benefits and costs of privatization, its operational feasibility and its environmental and equity implications.

Irrigation in Australia

Irrigation agriculture is the largest user of water in Australia, accounting for some 74% of total annual consumption.2 The notion that irrigation is an essential prerequisite for viable agriculture is still widely held, and irrigation projects are seen by many politicians and constituents as desirable and beneficial public works.

Government involvement in irrigation in Australia is well established. All major schemes before Federation were initiated by governments on a state-by-state basis, and generally on a combined Commonwealth- state basis this century. However, the use of water for irrigation has come under critical scrutiny in recent years. Economists, in particular, have argued that irrigation is of doubtful profitability and that capital and resources would be better invested in alternative forms of production.

Such criticism, together with concern over the reliability of water supplies and the cost-effectiveness of developing new water resources, and also uncertainties over markets for irrigated products, have brought into question any further investment of public funds in the expansion of irrigation. At the same time, interest has been expressed by irrigators in proposals for the transfer of established public irrigation schemes to the private sector. Whereas these proposals generally fall short of outright ownership, they do reflect a desire on the part of water users for greater control and autonomy. The increased support for self-management of irrigation schemes has been strengthened by significant rises in water charges and perceived inefficiencies in operation, maintenance and management by public authorities.

Such a situation is conducive to change, and initiatives have recently been taken in several Australian states to promote a more commercial orientation and greater involvement of the private sector in irrigation.

Despite the dominant role played by governments in irrigation, private irrigation schemes have a long history in Australia. This is particularly so in the Murray Valley of Victoria and South Australia, where irrigation was pioneered by two Canadians, the Chaffey brothers, more than 100 years ago. There is also considerable private sector involvement in the New South Wales irrigation sector. Examples include private diversion and distribution of water, either individually or by joint authorities, and several private cooperative irrigation schemes. Scope exists for extension of private sector involvement by way of contracting of specific services for irrigation such as channel maintc- nance, self-management by irrigators of publicly owned schemes, and eventually complete privatization of assets.

The objectives of research undertaken at the Centrc for Water Policy Research at the University of New England focus on the opportunities and constraints for private sector involvement in the irrigation industry in the state of New South Wales, the safeguards necessary and the administrative procedures and mechanisms required to facilitate effec-

2J. Pigram, Issues in the Management of tive implementation of privatization proposals.

Australia’s Water Resources, Longman Recent experience in New Zealand and South Australia appears to be

Cheshire, Melbourne, 1986. instructive for comparable irrigation situations in New South Wales.

LAND USE POLICY April 1991

Private sector involvement in irrigation ugriculture

New Zealand experience

In 1988 the government of New Zealand announced its intention to transfer Crown interests in community irrigation schemes to irrigators. This disposal of assets was motivated by a desire to regain a proportion of past expenditure on the schemes and to promote more efficient pricing of irrigation services and water resources by granting irrigators financial and management independence from government.3

The process of divesting the government of responsibility for the operation and maintenance of community irrigation schemes began in 1987 with a review of existing schemes. 4 That review canvassed alterna-

tive forms of ownership for the various components of an irrigation scheme as follows:

l Crown retaining ownership;

l state-owned enterprise; l private enterprise;

l ownership by local authority;

l ownership by irrigators.

The appropriateness of these different types of ownership was then assessed by criteria relevant to the government and to irrigators. The criteria, as determined with reference to government policy and the attitudes expressed by irrigators, related to:

l achievement of government policy (ie self-funding of irrigation schemes with full irrigator responsibility);

l difficulties and costs of shifting to new ownership;

l ongoing viability of schemes under new ownership;

l acceptability to irrigators;

l efficiency of new ownership structure (ie effectiveness in scheme operation and delivery of service).

The review recommended that in most cases it would be practicable to transfer ownership of community irrigation schemes to local irrigator groups. Moreover, this was found to be the first choice of irrigators in a large number of schemes in New Zealand. The next preferred option

3W. Moore and M. Arthur-Worsop, ‘Priva- was ownership by a local authority.

tising water: an analysis of initiatives to sell The review concluded that in certain hazardous circumstances Crown

community irrigation schemes and to cre- ate water markets’, paper presented to the

ownership should continue.’ In a few other cases the government might

annual conference of the New Zealand need to decide between the alternatives of scheme closure and providing

Branch of the Australian Agricultural Eco- additional financial assistance.

nomics Society, 1989. 4W. Lewthwaite and G. Martin, ‘Review of

The outcome of this review was an announcement that, where

existing community irrigation schemes in practicable, irrigators would receive first offer for ownership of the

New Zealand with a view to the future’, Crown’s share of community irrigation schemes. To assist irrigators a report prepared for Ministry of Works and Development, Wellington, 1987.

report was commissioned on possible corporate structures and the

5J. Park, ‘Irrigation - legislation and poli- appropriate legal entity for ownership and operation of the schemes.’

cy’, in Proceedinqs of Conference on Wa- The alternatives were evaluated against a range of criteria and the t&and Society, New Zealand Institution of Professional Engineers, University of Ota-

report recommended that the two realistic options for ownership were a

go, Dunedin, New Zealand, 1988. limited liability company or a cooperative company. The report also

‘Touche Ross. ‘Coroorate structure for dealt with a number of related issues concerning corporate structure, private ownership of ‘community irrigation schemes in New Zealand’, report to the

such as ownership and control; voting rights; management structure;

Ministry of Agriculture and Fisheries, Wel- taxation; risk and liability; and contractual obligations. The report

lington, 1988. concluded with recommendations on ownership and management

LAND USE POLICY April 1991 135

Private sector involvement in irrigution agriculture

arrangements specific to individual schemes, and the critical steps to be taken in the process involved in the transfer of schemes.

The Lower Waitaki Scheme in the South Island of New Zealand was the first scheme the government agreed to sell. Agreement in principle has also been reached with a further 11 of the remaining 46 schemes.’ The irrigators intend to operate the Lower Waitaki Scheme as a cooperative delivering water at least cost, rather than as a business maximizing net returns to shareholders (irrigators).

A number of concerns were raised relevant to the transfer process in regard to asset valuation, irrigator equity and the effects of the transfer on economic efficiency. Although the price negotiated was below the estimated market value and commercial value of the scheme, accept- ance was recommended in the absence of alternative offers. This was done to remove without delay the C rcrwn’s ongoing liability for the scheme’s operation and to act as a sigiial of t!te government’s determina- tion to dispose of the remaining schemes.

The New Zealand experience details the process required to facilitate the transfer of irrigation schemes to the private sector, and illustrates the compromises which may be necessary between economic and political considerations. However, despite the complex procedures developed to model the financial aspects of schemes and to determine the valuation of assets and liabilities, there seems to have been relatively little consideration or comparison of the economic performance of the schemes under public or private ownership.

The importance of consultation with the irrigation community is also well demonstrated in the New Zealand case, as is the need for complementary water management measures to maximize benefits from self-management. Transferability of water entitlements and the application of capacity sharing or priority sharing for the allocation of water, for example, would contribute to the efficiency of self-managed schemes.

South Australia

Plans for self-management of government irrigation areas are well advanced in the Lower Murray and Riverland regions of South Austra- lia. However, some questions relating to legislation remain to be resolved.

Further upstream, in the irrigation areas of the Riverland region, consultants have recommended self-management as a viable option and have prepared business management plans for each of the eight areas involved. These range from 60 irrigators to over 500 in the Renmark Irrigation Trust.

The replacement value of the assets (pipelines, pumping stations and regulating structures) in this region is estimated at between A$150 million and A$180 million. The debt on these assets is approx- imately A$50 million, but this is to be taken over by the state. Although significant rehabilitation has already taken place, much remains to be done. Some 60% of the channel systems in the Rivet-land region had been replaced with pipelines, and new automatic pumping stations were built prior to 1984 when the rehabilitation programme was suspended. It is considered essential for rehabilitation to be completed if these irrigation areas are to remain viable.

7Moore and Arthur-Worsop, op tit, Ref 3. The estimated cost of these works is around A$35 million. As an

136 LAND USE POLICY April 1991

Privurr sector involvemenl in irrigation agricdiure

incentive for irrigators to accept self-management and the transfer of assets, it is proposed that the asset purchase price be set relatively low (A$7 million) and that this be treated as the growers’ contribution to completion of rehabilitation. The remainder of the cost (A$28 million) is expected to be split between the federal state governments. If these conditions are not acceptable it is likely that the costs will be arbitrarily divided, with the irrigators’ contribution rising considera-

ably. The experience with negotiating self-management in South Australia

has relevance for moves to ‘privatize’ irrigation in New South Wales. Despite the apparent generosity of the proposed arrangements, these should serve to convince irrigators to agree to the proposals and also facilitate early completion of infrastructure rehabilitation. The business plans prepared (in consultation with area irrigation advisory boards) provide for complete budget control by irrigators to achieve a zero rate of return, ie to cover costs of operation only.

It is of interest to note that the Engineering and Water Supply

Department of South Australia has also prepared an overall business plan for the region. This will permit comparison of costs and advantages and disadvantages of self-management against the reductions in operat- ing, maintenance and administrative costs considered achievable under planned restructuring within the department.

The much smaller irrigation schemes in the Lower Murray region are of less relevance. An earlier report to the (then) NSW Water Conserva- tion and Irrigation Commission’ concluded that because of the complexity of operation of larger schemes in New South Wales and the need for cooperation between landholders, a privately operated irrigation district of any magnitude would ultimately fail. It was predicted that subsequent neglect of maintenance would require renewed assistance from the government for major rehabilitation works. Clearly, attention to needed asset rehabilitation is advisable prior to, or coincident with, moves to self-management.

A further aspect of relevance from the South Australian experience is the consideration given to community involvement. Consultation with irrigators has long been a feature of the operation of the government irrigation areas in South Australia, and advisory boards function effectively in providing input to the setting of water rates and to budget deliberations. These boards have been consulted extensively in the negotiations towards self-management and the preparation of business plans.

Whereas such involvement should assist the policy implementation process, the matter of voting rights and procedures to approve transfer arrangements remain to be resolved. Something more than a simple majority of irrigators seems desirable for such a major decision; yet something less than unanimity should be appropriate. The feasibility of permitting a discrete area within an irrigation scheme to secede, either to achieve self-management in its own right or to decline to be involved, also needs to be addressed.

‘1. Bolton and S. Flint, ‘Proposal for man- Policy implications for New South Wales

agement of irrigation districts by local landholders’, report to New South Wales Water

This brief overview of experience with private sector involvement in the

Conservation and Irrigation Commission, water industry has drawn attention to a number of matters which Sydney, 1975. require consideration if self-management of irrigation schemes is to

LAND USE POLICY April 1991

Private sector involvement in irrignfion ugrktdture

become a reality in New South Wales. Essentially, the matters relate to the policy implementation process and the administrative procedures, mechanisms and safeguards required to facilitate effective implementation of privatization proposals.

Policy implementation is essentially a sociopolitical process, meshing political and social acceptability with economic and technical feasibility and administrative reality. The forces at work and the conditions which have to be satisfied for the process to generate the desired outcome account in large measure for the slow progress sometimes experienced in the realization of preferred options in public policy in the water industry. Privatized self-management of irrigation schemes is a case in point. It is the context within which such a policy must be implemented which is important. Conflicts and resistance emerge because of the nature and complexity of the policy, the way it is perceived by implementing organizations and target groups, and the environmental conditions - physical, sociocultural, political and economic - which prevail. Whereas some irrigators might perceive self-management as the ideal response to a scheme’s financial and operational concerns, others might regard the proposal as a political ploy by which the public sector can elude its responsibilities to the irrigation industry. Again, for many in the community, privatizati(~n may be seen as too redistributive in its effects, entailing far-reaching disturbance to the prevailing insti- tutions and socioeconomic conditions which currently govern irrigation practices.

For the implementation process to succeed in New South Wales, privatization of water must first be perceived by political interests as a conceptually robust policy, electorally defensible and readily amenable to implementation. Secondly, the various interests involved must be convinced that the net outcome will be positive, or at least benign, in the longer term. Finally, the target groups - in this case the irrigation communities affected - must be receptive to change and see privatization as a constructive response to their priorities.

Put succinctly, a policy of privatization of water must first be argued in conceptual terms and political realities, then considered within a functional context which will facilitate policy implementatit~I1 at an operational level.

Clearly, in the case of self-management of New South Wales irrigation schemes decision makers must remain in touch with community attitudes and be prepared to balance informed public input against professional judgment. ‘Top-down’ planning processes, often typical of water authorities, must be matched by ‘bottom-up’ involvement of the irrigators themselves if confrontation is to be avoided and policy implementation is to succeed. Wide-ranging consultation with irrigation interests, including the workforce servicing the system, is critical to ensure thorough awareness of financial, legal and operational implications of privatized self-management.

The New South Wales government is committed to a policy of self-sufficiency for irrigation and to placing the industry on a commercial footing. However, results of field research in the Lachlan Valley, in the central west of the state, suggest there may be reason to question the extent of grassroots support for self-management of irrigation schemes. Only a minority in the study area was in favour of change and it would appear that the ‘view from the top’ is strongly at odds with the perspective of many irrigators in the Lachlan region.



Lachlan Valley field study

As noted above, moves to transfer responsibility for management of irrigation schemes from the public to the private sector have been gathering strength in New South Wales. Moreover, government proposals for privatization of the industry have been strongly endorsed by representative groups such as the Irrigators’ Council and the Ricegrow- ers’ Association.

One of the first schemes considered for self-management was the Jemalong-Wyldes Plains irrigation district in the Lachlan Valley. This is a small, relatively self-contained scheme of some 85 irrigation undertakings primarily involved in fodder crop production. Despite enthusiastic support for self-management from some irrigators in the scheme, others were known to have reservations. To clarify reactions to the prospect of self-management a survey of the proposed policy initiative was conducted from the perspective of those likely to be involved in its implementation - irrigators, water authority field staff and local management.

The principal objectives of the study were to determine the level of awareness of the issues relating to increased private control of the scheme and to assess the degree of support for such a move. It was envisaged also that the survey and associated group discussions would contribute to informing the community affected of possible concerns and constraints relating to self-management.

A questionnaire survey was undertaken of all 85 irrigation interests represented in the scheme, and a number of structured group discussions were conducted to develop the issues raised in greater depth. Consultations were also held with operational field staff and management in the government departments involved. The postal survey covered the physical aspects of the scheme, current management problems and suggested changes, attitudes towards possible private ownership or management, and perceived advantages and disadvantages of private sector involvement in the scheme’s operation. The response rate to the survey was 68.7X, which suggests a high degree of willingness on the part of irrigators to be involved in issues affecting their scheme.

The results of the survey revealed that, overall, the management performance of the state water authority was rated as ‘satisfactory’. Although a number of management problems were noted, the over- whelming majority of respondents indicated that they were confident that any problems could be handled within the current management structure. A significant proportion of respondents (27%) saw no problems at all and no need for any change from state ownership and management.

In general, the notion of ‘privatization’ of the water industry was firmly rejected by the majority of respondents, and private ownership of the Jemalong Scheme (with all the financial responsibilities which that might entail) was supported by only 5.5% of those surveyed. However, private management of the scheme received considerably greater en- dorsement (23%). Greater efficiency, lower costs of operation, lower water charges and a more responsive form of management were seen as the likely benefits.

By contrast, a number of disadvantages were associated with private control, among them the possibility of physical neglect of the scheme



and possible financial collapse. Almost half of respondents were con- cerned that the smaller, less powerful irrigators would be treated inequitably under a private self-management arrangement. Few respondents endorsed the notion of some element of self-service in the management of the scheme and it would seem that the prospects of achieving savings by involving irrigators directly in operation and maintenance are poor. Likewise, little appreciation seems to exist of the magnitude of public funds already invested in the Jemalong Scheme and the likely requirement for even greater sums to rehabilitate the infrastructure.

Of course, a more cynical view might relate the lack of enthusiasm by irrigators for transfer of the assets of the scheme to private ownership to the pressing need for rehabilitation of the water distribution system. If the process of ‘privatization ’ is to proceed beyond self-management, then the present condition and .,d~u: +>f assets and the financial responsibility for their upgrading are likely to become most contentious issues. Even if agreement can be reached (as seems likely in New Zealand and South Australia) on a basis for the assets to be transferred, there remains a riced for clearly defined and enforceable guidelines as to standards of asset maintenance and system performance, legal liability for negligence, and responsibility for environmental protection.

Implicutions of the .study

The success or otherwise of the implementation of a policy of privatization, involving self-management of irrigation systems, hinges upon the extent to which the decision environment reflects a proper balance between professional ‘top-down’ assessments of management and a positive response from the irrigation community affected.

It would appear from the results of the Lachlan Valley study that there is a significant gap between the perspectives of policy formulators at the ‘top’ and the views held by policy takers at the ‘bottom’. A further gap appears to exist between those who claim to represent irrigator interests, ic industry groups and associations, and the irrigators thcm- selves. Yet the New South Wales government appears to be determined to transfer responsibility for irrigation schemes to management boards within each region. The Jemalong-Wyldes Plains irrigation district is no exception. Even before the results of the Lachlan Valley study (which was part-funded by the state government) were known, the appoint- ment was announced of a management expert to recommend the best approach to restructuring existing managetncnt advisory boards to give them greater control over the day-to-day operations of irrigation schemes.

The declared intention is to allow the restructured boards an interim period of 12 months to produce strategic and business plans and to become fully acquainted with the management and budgeting aspects of irrigation water supply and distribution. This initiative has the enthusiastic support of irrigation leaders and industry associations which arc urging rapid implementation of the restructuring proposals. After this preliminary period it is envisaged that a poll of irrigators will be held to ascertain the level of ownership or self-management they wish to assume for the schemes.

Studies undertaken in New Zealand and South Australia of proposals to transfer government-owned irrigation undertakings to the private sector suggest that an affirmative vote of irrigators of between 80% and


Private sector involvement in irrigafion ugriculture

100% would be required for successful cooperative operation. The dimensions of the task of implementation facing the New South Wales government can be seen when it is realized that irrigators in the Lachlan Valley appear to be as much as 75% against private management of the Jemalong-Wyldes Plains irrigation district and 95% against private ownership.

’

If the results of the Lachlan Valley study are valid and reflect state-wide attitudes, it would seem the government is left with two choices. It can leave the management of irrigation schemes within the control of the public water authority and continue to pursue efficiency gains through regional managerial staff. Alternatively, the government can proceed with its policy implementation programme in the face of apparent community opposition, in the belief that eventually those

affected will become convinced that self-management (at least) of irrigation schemes is in their best interests. Even this alternative could be difficult to impose and achieve without much more widespread and effective consultation than has been evident to date.

It has been conceded by consultants to the state government ‘that the successful implementation of the changes proposed will not be an easy task and will require both careful planning and a high degree of commitment and perseverance from all involved’.” With hindsight, this may prove to be an understatement.

Conclusion

An important consideration when assessing the relevance of private sector involvement in water resources planning and management is the motivation for the change. Change for change’s sake is certainly not appropriate, and more than commitment to political ideologies or free-enterprise philosophies is needed to justify the accompanying disruption to established administrative structures and modes of operation. A fundamental question is the extent to which improvements in technical and economic efficiency can be delivered under private or public management. Simply replacing inefficient government-owned monopolies with privately owned monopolies may have little beneficial effect. According to Paterson, efficiency gains ‘can be realised regard- less of where ownership rests’. I’) The evidence is inconclusive, but already some public irrigation undertakings in Australia have been able to achieve significant improvements in the quality and efficiency of their operations.

Irrespective of the mode of management ultimately emerging for irrigation schemes in New South Wales, it is important that the ongoing performance of the institutional frameworks and organizations come under close scrutiny. Systematic testing of irrigation system performance begins with the drawing up of a business plan specifying key management objectives. The involvement of both agency personnel and

‘Gutteridge, Haskins and Davey, ‘Water the irrigation community is essential to ensure that appropriate objec- distribution operations in irrigation areas and districts of New South Wales’, report

tives are set and indicators of performance are correctly specified,

to the NSW Department of Water Re- whether for private or public management of the irrigation system.

sources, 1989. Given rigorous monitoring, the incidence and origin of deficiencies in “‘J. Paterson, ‘The privatisation issue: wa- performance should then be identified and remedial measures im- ter utilities’, in P. Abelson, ed, Privafisa- Con: An Australian Perspective, Australian

plemented.

Professional Publications, Sydney, 1986, Deregulation of economic and financial systems is high on the agenda pp 181-203. of federal and state governments in Australia. An important manifesta-



tion of deregulation is the growing support for private sector involvement in the water industry and the current move towards self- management of irrigation schemes in New South Wales. Successful implementation of such a policy initiative will be a significant test for government commitment to community consultation in river basin planning and management in the state.


Documents

Private sector involvement in irrigation agriculture