Feature Article: Experimental estimates of the value of water resource stocks, Australia


INTRODUCTION

The ABS produces a range of information on environmental assets, including estimates of the value of environmental assets contained within the national balance sheet of the Australian System of National Accounts (ASNA). This feature article presents experimental estimates of the value of water resource stocks in Australia. It describes the conceptual underpinnings of these estimates and the sources and methods used in their compilation.

The scope of these experimental estimates extends to all water resources within Australian water catchments with active water management plans that are also subject to tradeable water rights, specifically those water rights called water access entitlements.

Estimates of the value of water resource stocks, such as those contained in this feature article have the potential to perform a number of roles, including:

• To measure the contribution of water resources to the wealth of the nation;
• To assist in explaining and predicting changes in land values and land use — especially land used for irrigated agricultural production;
• Provide a basis for developing ongoing measures of efficiency of water use i.e. to determine whether, over time, these resources are being used more (or less) productively;
• Derive a real economic rate of return on water assets for public (and private) budget planning and project management purposes; and
• Establish a broad basis for potential financial gains from adopting water efficiency measures.

The valuation of water resources is an important element in the sustainable management of this resource and in improving the understanding of the role of water resources within the economy
In compiling these experimental estimates the ABS has relied heavily upon data and cooperation from the former National Water Commission (NWC).


THE CONCEPTUAL FRAMEWORK: SNA AND THE SEEA

Two key international statistical standards have particular relevance to the valuation of water resource stocks. The 2008 edition of the System of National Accounts (2008 SNA) is the over-arching statistical standard guiding the compilation of economic statistics throughout the world. The 2008 SNA recommends including the value of water resources within the balance sheet of the nation. Typically these values are a component of the broader value of land, that is, part of the market value of a parcel of land relates to the value of water resources associated with this land.

The System of Environmental-Economic Accounting (SEEA 2012), like the 2008 SNA, is an international statistical standard. SEEA 2012 supports the compilation of environmental economic accounts that report on interactions between the economy and the environment, and that report on stocks and changes in stocks of environmental assets. The central framework of SEEA 2012 is consistent with the 2008 SNA on the valuation of those natural resources falling within the 2008 SNA asset boundary.

SEEA 2012 (paragraph 5.494) suggests that one approach to the valuation of water resources is to consider the value of water access entitlements which, in some countries, are traded in distinct markets.

The experimental estimates contained in this feature article are therefore consistent with the 2008 SNA and SEEA 2012.


SCOPE OF ‘WATER RESOURCES'

An important decision point relates to the scope of water resources to be included in the Australian estimates. The question arises because some catchments report active trade in water access entitlements while other catchments do not have an active water management plan and therefore have no water access entitlements. Other catchments, despite having tradeable water access entitlements, may experience little or no trading activity in these instruments.

In this context, it seems clear that water rights cannot be used to attach a value to water resources unless these resources are subject to tradeable water rights. That is, in principle, it is difficult to view an unsaleable entity as an economic asset. Therefore, water resources located in catchments without an active management plan (i.e. where water access entitlements do not exist) fall outside the scope of the estimates reported in this feature article.

Where tradeable water rights exist within a water catchment but the market yields no sales (or minimal sales) in the current accounting period, the ABS has nevertheless taken the view that these resources are in scope since they have an economic owner, have value and are tradeable. The issue is a measurement problem, that is, a lack of confidence in the prices arising from the existence of ‘thin’ trading. The solution used has been to generate estimates for all water resources subject to tradeable water access entitlements.

The experimental estimates of water resource values are expressed in current prices only. They reflect all factors potentially impacting on the market value of water, including water quality. Any attempt to generate volume estimates of the value of water resources would need to consider temporal and spatial variation in water quality.


USE OF TRADEABLE WATER RIGHTS TO VALUE AUSTRALIA’S WATER RESOURCE STOCKS

The widespread use of tradeable water rights in Australia provides the opportunity and mechanism to develop estimates of the market value of Australia’s water resource stocks. Appendix 1 provides details on the operation of Australia's system of water rights, however the instrument of most importance in this valuation exercise is the water access entitlement defined as a “perpetual or ongoing entitlement to exclusive access to a share of water from a specified consumptive pool as defined in the relevant water plan.” (Council of Australian Governments, National Water Initiative, 2004)

The water access entitlement is a right to access a share (i.e. quota) of water from a water catchment that is subject to a formal management plan. This type of entitlement is valid in perpetuity. The water access entitlement is typically tradeable on open markets, separately from the land it adjoins. Thus, the market value of the tradeable water access entitlement represents the value of the use of the water resource. The price paid for a water access entitlement will reflect buyer expectations of the benefits from holding and using the resource.

The National Water Report was published by the former NWC and contained estimates for each state and territory of the total amount of water subject to water access entitlements. It also reported information on the sale of water access entitlements, in particular: the amount paid for these instruments; and the volume of water changing hands.

Given the conceptual match between the value of the water access entitlement and the value of the underlying water resource, it is possible to calculate the value of water resources for each of Australia’s states and territories. It is equal to the total value of water access entitlements and is calculated as:

Value WAE = Price WAE * WAE on Issue
Where:
Value WAE = total market value of traded water access entitlements in the current period
Price WAE = Weighted average price per mega litre of water in the current period
WAE on Issue = Water access entitlements on issue in catchments at 30 June (mega litres)

The key assumption underpinning this methodology is that the market prices achieved for trading in water access entitlements are representative of all water in the catchment. Assuming this, it becomes possible to calculate the market value of all water access entitlements for each catchment.

Additional data water trade information supplied by the NWC allowed ABS calculations to be performed at the water catchment level which delivers a better match of prices paid to water volumes traded.


EXPERIMENTAL ESTIMATES

Table 1 below shows the value of Australia’s water resource stocks, by state and territory for the period 2007-08 to 2012-13. The total includes water owned by all institutional units, including the Australian government entity with ownership and management responsibility for Australia’s environmental water stocks and flows i.e. the Commonwealth Environmental Water Holder (CEWH).

TABLE 1 EXPERIMENTAL ESTIMATES OF WATER RESOURCE STOCKS, BY STATE AND TERRITORY, CURRENT PRICES

	2007-08	2008-09	2009-10	2010-11	2011-12	2012-13
	$m	$m	$m	$m	$m	$m
NSW	14,532	14,877	15,995	14,403	15,813	15,944
VIC	6,741	7,610	9,936	10,635	10,300	9,297
QLD	5,447	6,107	7,997	7,598	9,425	11,085
SA	2,923	2,924	2,794	2,845	3,130	2,968
WA	3,444	3,613	3,872	3,914	3,714	4,340
TAS (a)	-	-	2,380	2,460	2,530	2,544
NT	160	265	372	464	439	436
ACT	-	113	110	110	108	107
Australia	33,247	35,509	43,456	42,429	45,459	46,721
(a) NWC data are unavailable for Tasmania in respect of 2007-08 and 2008-09 and for the ACT in respect of 2007-08.

In table 2, estimates of the value of water resources are juxtaposed against other elements of Australia’s capital base as they appear in the ASNA national balance sheet. Throughout the period 2007-08 to 2012-13, the value of Australia’s water resource stocks remains consistently at around one per cent of the value of the natural capital base.

TABLE 2 EXPERIMENTAL ESTIMATES OF WATER RESOURCE STOCKS, AND SELECTED ELEMENTS OF AUSTRALIA’S CAPITAL BASE, CURRENT PRICES

			2007-08	2008-09	2009-10	2010-11	2011-12	2012-13
			$b	$b	$b	$b	$b	$b
Produced capital			3,851	4,058	4,242	4,462	4,702	4,986
Net financial assets with rest of the world			-655	-687	-747	-766	-830	-828
Spectrum			8	8	9	9	10	13
Natural capital			3,743	3,935	4,562	4,568	4,602	4,961
	Land		3,285	3,192	3,857	3,817	3,672	3,849
		Of which: water	33	36	43	42	45	47
	Water resources (a)		0	0	1	2	2	2
	Mineral and energy assets		446	732	693	737	916	1099
	Timber		12	11	11	12	12	11
Net worth			6,947	7,314	8,066	8,273	8,484	9,132
Source: all estimates except water are from ABS ASNA (cat. no. 5204.0).
(a) ‘Water resources’ refers to those water resources unattached to land, see section entitled Commonwealth Environmental Water Holder and Sectoral Estimates.

COMMENTARY ON THE ESTIMATES

Since no national statistical agency has yet published estimates of the value of its country’s water resource stocks, the analysis and commentary on the experimental numbers cannot be compared to national data produced elsewhere. Comparisons may be made with work undertaken within the research community and with data that are otherwise related to the value of water resource stocks.

As with any asset, the price of water governed by water access entitlements can be expected to change over time. A range of factors may explain these price movements, including; changing profitability of those productive activities using the water, perceived long term changes in water availability; growth in water access entitlements on issue; changing interest rates; the entry of the Commonwealth government into the water market; and continued improvements in the operation of Australia’s maturing water markets. The price of water access entitlements should not be affected by normal year-to-year variability in rainfall since the entitlement relates to permanent use of water resources.

A more active and open market in water access entitlements should deliver more representative pricing. In this context ‘representative’ means that the price achieved for water access entitlements sold during the accounting period is indicative of the value of the remaining entitlements not sold. Generally, a ‘thicker’ market can be assumed to deliver more representative prices. Table 3 shows the percentage of water access entitlements traded in each state and territory for selected years.

Water markets in Australia are well-developed by international standards but remain relatively young markets, especially for states located away from the Murray-Darling Basin. The brief time series shown in Table 3 reveals the impact of the Commonwealth Environmental Water Holder (CEWH) (footnote 1) on trading volumes earlier in the time series (especially in 2008-09 and 2009-10) and the very recent emergence of entitlement trading in Western Australia and Tasmania. Across the whole of Australia, the water market appears to be maturing and settling; with around four percent of water access entitlements now traded each year. This proportion is marginally less than the proportion of existing dwellings traded each year in Australia and prices observed in respect of these dwelling trades are considered sufficiently representative to underpin capital stock estimates in the ASNA.

TABLE 3 PERCENTAGE OF WATER ACCESS ENTITLEMENTS TRADED IN SELECTED YEARS, BY STATE AND TERRITORY

	2007-08	2009-10	2011-12	2012-13
NSW	7.3	13.3	5.8	5.1
Victoria	11.8	11.9	5.7	3.4
Queensland	3.3	3.8	2.2	3.8
SA	22.4	8.7	5.3	3.8
WA	0.5	0.5	0.5	3.2
Tasmania	0.2	0.2	3.1	2.1
NT	-	-	-	-
ACT	-	-	-	-
Australia	6.9	8.9	4.4	4.1
- Nil or rounded to zero (including null cells).

VALUATION AT THE STATE AND TERRITORY LEVEL

In Australia, water management is a state and territory responsibility and the design and operation of water rights and water trading varies somewhat between states and territories. In using water rights to value the water resource, better data results are expected if trading in water access entitlements is relatively unrestricted, for example, if these rights can be sold separately from land and can be sold to any buyer, including buyers who do not hold land. Data improves further if inter-catchment trading takes place, as occurs in the Murray-Darling Basin. There is also more confidence in the representativeness of market prices when a significant portion of these rights is sold every year. Most of the larger states of Australia operate under conditions that solidly support the use of water rights to value the water resource, and this is especially so where the water resources of the Murray-Darling Basin are concerned. For New South Wales, Victoria, South Australia and, to a large extent Queensland, the design and operation of water rights and water trading gives rise to information that is conducive to the generation of monetary values for water resources.

The operation of water access entitlements and water trading in Western Australia and Tasmania provides some concern around the consequent quality of estimates of the value of water resources. In Western Australia, water access entitlements are not separated from the land to the degree observed in other states and territories. This type of restriction results in thinner trades and questions concerning the representativeness of observed water trade prices.

The institutional situation in Tasmania is also not currently ideal for supporting valuation of water resource stocks. While trading of water access entitlements takes place in Tasmania, there is currently no legal requirement for entities involved in water trading to report prices to the Tasmanian Department of Primary Industries, Parks, Water and the Environment (DPIPWE) and the department has no mechanism to collect these data. The DPIPWE has stated an intention to facilitate further development of water trading as a key action item under the Water Development Plan for Tasmania.

For Western Australia, Tasmania, the Northern Territory and the Australian Capital Territory, the average price used in valuing water resource stocks is the average price observed across the remaining four states. This methodology is not ideal since there is a significant risk of the NSW/Victoria/Queensland/South Australia water price being unrepresentative of the other states and territories. In this respect, possibly the greater risk is that the combined NSW/Victoria/Queensland/South Australia price will overstate the correct value for Western Australia and Tasmania. The ready access to water trading across especially NSW, Victoria and South Australia; the entry of the Commonwealth Environmental Water Holder (CEWH) into the Murray-Darling Basin water market; and the existence of large, interconnected water areas in NSW/Victoria/South Australia might reasonably be expected to deliver a greater number of potential buyers and therefore higher average water prices. This can be tested to some degree through an analysis of data contained in the ABS publications: Gross Value of Irrigated Agriculture (GVIAP) data (cat. no. 4610.0.55.008) and Water Use on Australian Farms (cat. no. 4618.0).

ABS cat. no. 4610.0.55.008 contains state-based estimates of gross agricultural product arising from irrigated production, which can be compared with corresponding volumes of irrigation water applied, available from ABS cat. no. 4618.0. Table 4 records, for each state, GVIAP per ML of irrigated water used in agricultural production in 2012-13. Note that data for Northern Territory and the Australian Capital Territory yield results that are considered somewhat improbable when expressed as dollars of GVIAP per ML of water applied to crops and are therefore excluded from the table.


TABLE 4 GVIAP ($) PER ML OF IRRIGATED WATER USED IN AGRICULTURAL PRODUCTION, BY STATE 2012-13

	2012-13
	GVIAP ($) per ML
NSW	685
Vic.	1,514
Qld	1,389
SA	2,011
WA	3,307
Tas.	2,464
Australia	1,214

The data clearly suggest that in 2012-13 each ML of irrigated water leads to a greater value of agricultural product in Western Australia and Tasmania than for either of NSW, Victoria, Queensland or South Australia. That is, a ML of irrigated water is relatively more valuable as an input to agriculture in the states of Western Australia and Tasmania. Other things being equal, the more valuable is the output of irrigated agricultural production, the more the producer is willing to pay for the input of irrigated water. Therefore, the use of an average water price across NSW/Victoria/Queensland/South Australia as a proxy for water prices in Western Australia and Tasmania should not overstate prices in Western Australia and Tasmania.

The above analysis is indicative only, since water resources are used for purposes other than agriculture-related irrigation and GVIAP is not equivalent to the cost of water –– higher value end-use of water does not necessarily lead to a higher price for water inputs.

Nevertheless, in the absence of better pricing information for Western Australia and Tasmania, the average water price observed across NSW/Victoria/Queensland/South Australia is considered to be a conservative and justifiable proxy for water prices in the remaining states and territories.

While the proposed experimental estimates of water resource values are considered defensible, they could be expected to improve further over time with the continued expansion and maturing of Australian water markets; continuing unbundling of water rights from land in more and more catchments; improved data collection; and with improved understanding of the data.


COMMONWEALTH ENVIRONMENTAL WATER HOLDER AND SECTORAL ESTIMATES

The Commonwealth government of Australia owns water resources (‘environmental water’) for the express purpose of protecting or restoring environmental assets in the Murray-Darling Basin and in other areas where this environmental water is held. The Commonwealth government describes how it attempts to meet this purpose in the Framework for determining Commonwealth environmental watering actions. The Water Act 2007 establishes the Commonwealth Environmental Water Holder (CEWH) as the manager of the Commonwealth’s environmental water holdings.

With the advent of the CEWH, the assumption that the value of water resources is necessarily a component of the reported value of land is clearly no longer true. The value of water resources owned by the CEWH is in addition to the value of ‘water associated with land’. The 2008 SNA contains a data item ‘water resources’ which is an appropriate place to capture such an item:

“…water and other natural resources are included in the balance sheet to the extent that they have been recognized as having economic value that is not included in the value of the associated land.” (Paragraph 13.51.)

Thus, in the balance sheet, part of water resources is reported as a component of the value of land and the remainder is reported as a separate line item ‘water resources’.

The ASNA publishes balance sheets both at the national level and also in respect of institutional sectors. If estimates of water resources are to be included in the ASNA then sectoral estimates of water resources values are required. Water owned by the CEWH is assigned to the general government sector, while the remainder of Australia’s water resources is (at present) owned by non-financial corporations.

As for other institutional units, the value of water held by the CEWH is generated by multiplying the holdings of water entitlements (ML) by the average price ($/ML) observed in market trading during the period. The CEWH produces an annual report which provides details of its water entitlement holdings at the end of the financial year. The Australian Commonwealth Department of the Environment (DoE) reports observed market price information for water access entitlements in the Murray-Darling Basin. These holdings of water access entitlements and the prices achieved for trading in these entitlements are available for individual catchments.

In some cases, the DoE reports do not report observed prices for certain catchments. Typically this occurs for small catchments where limited trading has taken place and in these instances proxy prices have been used based on a number of considerations, including: price results achieved for this catchment in surrounding years; and results achieved for neighbouring catchments and for similar classes of water entitlement (‘high security’, ‘general security’, ‘groundwater’ etc.).


FUTURE PLANS

The experimental estimates contained in this feature article are a potential inclusion in future editions of the ABS Australian Environmental-Economic Accounts and/or ASNA. The ABS is undertaking further assessment of the quality of these estimates and their capacity to inform users’ decisions before deciding on how these data might be published in future.

The ABS welcomes user feedback on the estimates contained in this article.


REFERENCES

Australian Bureau of Statistics (2015) Australian System of National Accounts, 2014-15, ABS cat. no. 5204.0, ABS, Canberra.
–– (2014) Gross Value of Irrigated Agricultural Production, 2012-13, ABS cat. no. 4610.0.55.008, ABS, Canberra.
–– (2014) Water Use on Australian Farms, 2012-13, ABS cat. no. 4618.0, ABS, Canberra.

Australian Government Commonwealth Environmental Water Office (2013) Framework for determining Commonwealth environmental watering use. http://www.environment.gov.au/system/files/resources/7f9e9c2f-79cd-400e-a6ca-cdcf3cdb7012/files/cewh-framework.pdf Accessed online 18 July 2012.

Comisari, P. Feng, L. and Freeman, B. (2011) Valuation of Water Resources and Water Infrastructure Assets. Paper presented to the 17th meeting of the London Group on Environmental–Economic Accounting. Stockholm, Sweden. 12–15 September 2011.

Department of the Environment, Water, Heritage and the Arts (2010) Annual report of the Commonwealth Environmental Water Holder 2009-10. http://www.environment.gov.au/system/files/resources/c041306b-2b7e-4f79-9024-2340920c5d45/files/cewh.pdf Accessed online 18 July 2012.

European Commission, Food and Agriculture Organization, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations, World Bank (2012) System of Environmental-Economic Accounting: Central Framework. http://unstats.un.org/unsd/envaccounting/seeaRev/SEEA_CF_Final_en.pdf

National Water Commission. National Water Initiative. NWC, Canberra.http://nwc.gov.au/nwi Accessed online 17 July 2012.

National Water Commission (2011) Water markets in Australia: a short history, NWC, Canberra.

National Water Commission (2013) Australian water markets report 2012-13, NWC, Canberra.

United Nations, European Commission, International Monetary Fund, Organisation for Economic Co-operation and Development, World Bank (2008) System of National Accounts 2008.http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf


APPENDIX: OPERATION OF TRADEABLE WATER RIGHTS IN AUSTRALIA

Water rights and the Australian National Water Market

Where tradeable water rights are in widespread use, the successful valuation of water resources will likely involve the use of information pertaining to these rights. An understanding of these instruments is therefore an important backdrop to the discussion of the valuation and recording of water resources within the ASNA and the Australian environmental-economic accounts. In Australia, water access and use is governed by statutory water rights administered by individual state and territory governments. The various water rights operating within the Australia National Water Market are described below.

The Australian National Water Initiative (NWI) defines a water access entitlement as “a perpetual or ongoing entitlement to exclusive access to a share of water from a specified consumptive pool as defined in the relevant water plan”. These water access entitlements are attached to land parcels which adjoin waterways or sit above aquifers and have been gifted to the holders — though volume based charges apply to any water extracted under these entitlements. Water access entitlements are tradeable, though not all are permitted to be traded separately from the land to which they relate.

A water allocation derives directly from the water access entitlement. Each season, the relevant jurisdictional government assesses water availability within a catchment and announces how much (the ‘allocation’) of the water access entitlements can be used given prevailing water availability. These water allocations are usually determined/reflected as a percentage of the total share to which each water access entitlement holder is entitled. An example serves to illustrate the relationship between water access entitlements and allocations.

A farmer may hold an ongoing water access entitlement of 10 Giga litres (GL) p.a. However, this does not mean the farmer necessarily has the right to extract 10 GL p.a., rather, the jurisdictional government may announce that, due to prevailing conditions in the catchment, only 80 per cent of the entitlement may be extracted in the current season. Thus, for the current year the water allocation in this example is 8 GL (i.e. 10 GL access entitlement times the 80 per cent ‘allocation’).

Australian water allocations are typically tradeable separately from land, that is, these allocations can be sold separately from the land to which the allocation was initially attached. Further, in many cases the allocation may be sold to an entity that operates outside of the water catchment from which it is bought. Under some arrangements, the purchasing entity need not even be a land owner.

Irrigators that receive water through a network of irrigation infrastructure operators (IIO) will typically hold a water delivery right against the IIO that allows this receipt of water and such rights may be tradeable within delivery systems. The IIO is an entity that operates water service infrastructure to deliver water where the primary use is for irrigation. In many cases, irrigators in Australia do not hold a statutory water access entitlement. Instead, the IIO holds the statutory water access entitlement (often called a bulk entitlement) collectively on behalf of these member irrigators. Such member irrigators hold a contractual irrigation right that entitles them to receive water from their IIO. These irrigation rights may be transformed into tradeable water access entitlements.

Stock and domestic water rights and Riparian water rights provide limited water rights to their holders — typically, drinking water, domestic use, fishing etc. Neither is tradeable separately from the land to which they attach. Holders of Native Title with respect to water are able to undertake a limited range of non-commercial uses of water. Such rights are tied not only to specific location(s) but also to specific person(s) and cannot be traded.

FOOTNOTES

1.The CEWH is the Australian government body responsible for the management of environmental water owned by the Commonwealth government. <back