WORLD BANK TECHNICAL PAPER NO. 41 3 VT7P4 13 Work in progress for public discussion U0a%Q rL.s, \ q Toward a Financially Sustainable Irrigation System Les sonis .tio tiw State of I irto,',a, Austra-lifa, 1984-1994 .4~~~~~~~~~ I ~ ~~~I 4' _,,~~~~~~~~~~1 -1hn'; ;i -- -- -wv _ law A.- A a .io4 _. | X | _ - '' r' t __ - f~~~~~~~(,jjy I,. 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Forster Duncan M. Malcolm The World Bank Washington, D.C. Copyright e 1999 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing January 1999 Technical Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. 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ISSN: 0253-7494 John Langford is executive director, Water Services Association of Australia. Christine L. Forster is a director of the Land and Water Resources Research and Development Corporation in Melbourne, Australia. Duncan M. Malcolm is deputy chairman of Natural Resource Systems, Victoria, Australia. The book is sponsored by John Briscoe, senior water advisor of the World Bank. Library of Congress Cataloging-in-Publication Data Langford, John, 1944- Toward a financially sustainable irrigation system: lessons from the State of Victoria, Australia, 1984-1994 / John Langford, Christine Forster, Duncan Malcolm. p. cm. -(World Bank technical paper; 413) Includes bibliographical references and index. ISBN 0-8213-4286-X 1. Irrigation-Australia-Victoria. 2. Water resources development-Australia-Victoria. I. Forster, Christine, 1939- II. Malcolm, Duncan, 1946- . III. Title. IV. Series: World Bank technical paper; no. 413. HD1741.A82V539 1998 333.91'3'09945-dc2l 98-32236 CIP Contents FOREWORD ............................................... ix ABSTRACT ............................................... x ACKNOWLEDGMENTS ............................................... x EXECUTIVE SUMI4ARY ............................................... I THE A UTHORS ............................................... 3 CHAPTER 1. INTRODUCTION ............................................... 4 CHAPTER 2. IRRIGATIONIN VICTORIA IN 1984: STARTING POINTFOR THE JOURNEY ............................................... 6 Challenges Presented by the Inheritance .........................................................9 Low Profitability of Irrigated Agriculture ......................... ................................9 Ageing Irrigation Infrastructure ......................................................... 0 Confused Accountabilities and Lack of Defined Financial Targets .................1................. 11 Financially Unviable Water Businesses ......................1.................................. 1 Strong Organisational Culture ........................................................ 11 Environmental Degradation ........................................................ 12 Negative Community Perceptions of Irrigation ........................................................ 12 CHAPTER 3: SIGNPOSTS ALONG THE WAY ............................................... 14 Introduction ............................................................................................... 14 Political Economy of Reform, Government Policy, Governance and Strategic Planning: Timetable of Key Events ................ 14 Public Bodies Review Committee: 1980 - 1983 ...................................................... 16 Rural Water Commission: 1984 - 1992 ...................................................... 16 Financial Management Strategy: 1985/86 - 1988/89 ...................................................... 16 Business Plan: 1990/91 - 1994/95 ...................................................... 17 "Rate Protest": 1991 ...................................................... 17 Future Management Review: 1991 ...................................................... 17 Rural Water Corporation: 1992-1994 ...................................................... 17 Autonomous Regional Rural Water Authorities Formed 1994 ........................................ 18 Profitability of Irrigation: Timetable of Key Events ...................................................... 19 The Irrigation Management Study ...................................................... 20 Temporary Trading of Water Entitlements .......................... ............................ 20 Water Auctions ...................................................... 20 Continuous Accounting for Murray River Resources ..................................................... 20 Permanent Trading in Water Entitlements ........................ .............................. 21 The Water Management System ...................................................... 21 The Irrigation Authority as a Commercial Business: Timetable of Key Events ............ ........... 21 tit Commercial Accounting Practices ................................................................... 21 Application of Information Technology ................................................................... 21 New Revenue: Hydroelectricity .......................... ......................................... 22 Investing in Staff Training to Enhance Skills .................................................................. 22 Restructuring of Employment Conditions: Removing Demarcations ............ .................. 23 Environmental Sustainability: Timetable of Key Events ........................................ ................. 23 Salinity Mitigation ................................................................... 23 Formation of the Murray Darling Basin Commission .............................. ....................... 24 Salinity and Drainage Strategy ................................................................... 24 CHAPTER 4: POLITICAL ECONOMY OF REFORA, GOVERNMENT POLICY, GOVERNANCE AND STRATEGIC PLANNING .................................................. 25 Political Economy of Reform ...................................................................... 25 Role of Government ................................................................... 27 Industry Structures and Accountability ................................. .................................. 28 Separation of the Poacher and Gamekeeper ................................................................... 29 Urban Water Supply ................................................................... 29 Water Resources Management and Other Government Services .............. ....................... 29 Regionalisation ................................................................... 30 Devolvement of Authority to the Community ................................................................ 32 Governance ................................................................... 32 State Rivers and Water Supply Commission - 1905 to 1984 ................. ......................... 32 Rural Water Commission - 1984 to 1992 ................................................................... 32 Rural Water Corporation - 1992 to 1994 ................................................................... 34 Development of a Pricing Policy for Irrigation Water ................................................... ......... 37 Opportunity Cost of Capital ................................................................... 37 Capital Consumption ................................................................... 37 Current Cost Depreciation as a Measure of Capital Consumption ......... .......................... 37 Definition of Cost Recovery ................................................ 38 Twenty Year Phasing in Period ................................................ 39 A Controversial Outcome ................................................ 39 The Move to Renewal Accounting for Calculating Water Prices ....................... ............. 40 Financial Targets and Strategic Planning ................................................ 41 Financial Management Strategy - 1985/86 to 1988/89 ................................................ 41 Rural Water Commission's 1990/91 Business Plan ....................................... ......... 42 Future Management Review ................................................ 44 iv CHAPTER 5: PROFITABILITY OF IRRIGATION ................................................ 47 Introduction ................................................................ 47 Reform of Water Allocation ................................................................ 48 Water as an Economic Good ................................................................ 48 Temporary Transfers of Water Entitlements ............................................................... 49 Water Allocation Anomalies ............................................................... 49 Permanent Transfers of Water Entitlements ............................................................... 50 Water Auctions ............................................................... 50 Bulk Water Allocations: The River Murray Waters Agreement ................. ..................... 51 The Water Management System: A more Commercial Approach to Irrigation Deliveries ....... 52 The Traditional Operating System ......................... ...................................... 54 Central Communication and Planning .................................. ............................. 54 The Water Management System ..................... .......................................... 56 Development of New Water Delivery Services ................................................................ 56 Infrastructure Renewal: An Opportunity to Create a better Irrigation System ........... ............. 57 Pricing and Tariff Reform ............................................................... 59 Research ............................................................... 60 Stimulation of Policy Development on Restructuring Irrigated Agriculture ............ ............... 61 Vote of Confidence by the Food Processing Industry ............................................................. 61 CHAPTER 6: THE IRRIGATION AUTHORITY AS A COMMERCIAL BUSINESS 63 The Financial Performance Required of a Commercial Irrigation Authority ............ ............... 63 Introduction of Commercial Accounting ......................... .................................... 64 Reform of Accounting Systems .............................................................. 64 Identification of All Costs .............................................................. 65 Profit and Cost Centres ............................................................. 66 Allocation of Overheads ............................................................. 66 Reduction of Operating Costs: Improvement of Productivity ........................... ..................... 66 Meeting the Targets .............................................................. 66 Strategies to Improve Productivity and Reduce Costs .................................................... 66 Restructuring the Organisation . ............................................................. 67 Redesign of Work ............................................................. 69 Streamlining Administration ............................................................. 69 Redesign of Water Distribution ............................................................. 70 Creating a Multi-skilled Workforce: The Training and Development Strategy ......... ....... 70 Restructuring Industrial Awards .............................................................. 71 Broadening the Revenue Base ..................... .......................................................................... 73 Outcomes ................................... 74 CHAPTER 7. ENVIRONMENTAL SUSTAINABILITY .77 Introduction .77 V Integrated Catchment Management: The Murray Darling Basin Commission ............ ............ 78 Salinity and Drainage Strategy ..................................................... 78 Natural Resource Management Strategy ..................................................... 78 Riverine Forests ..................................................... 79 Native Fish ..................................................... 79 Algal Management ..................................................... 79 Water Audit ..................................................... 79 The Victorian Salinity Program ..................................................... 79 Sunraysia Plan ..................... 80 Nyah to the Border Plan .................... . . . . . . . . . 80 Tragowel Plains Plan .................. 80 Shepparton Plan .................. 80 Barr Creek .................. 80 Girgarre Evaporation Basin .................. 81 Environmental Management as Core Business ............................... 81 Aquatic Weeds ........... 81 Lake Mokoan ....................................................................................................,,..........,81 Improved Irrigation Management ...................... 81 Environmental Audit . 82 Resource Management ................ 82 Water Resource Assessment: Surface Water ............................... ....................... 82 Water Resource Assessment: Groundwater ...................................................... 82 Floodplain and Waterway Management ..................... .................................. 83 Research ...............................83 Outcomes ..... 83 CHAPTER 8. INSIGHTS FOR FUTURE TRAVELLERS ....................................... 84 Improve the Profitability of Irrigated Agriculture ........................................................... 84 Use Renewal Annuities to Provide for Renewal of Ageing Irrigation Infrastructure ......... ...... 85 Establish Clearly Defined Financial Goals with Government ....................................... ........... 86 Remove the Burdens of the Past ........................................................... 86 Define the Core Business of the Irrigation Authority ........................................................... 87 Appoint Expertise - based Boards to Manage the Irrigation Business ................. ................... 87 Introduce Credible Commercial Accounting Systems ........................................................... 88 Strive to improve the Efficiency of the Irrigation Authority ................................................... 88 Use Technology to Fundamentally Change and Improve the Business ................ ................... 89 Communicate and Treat all Staff Fairly .................... ........................................ 89 Consult with the Irrigators ............................................................ 90 Support Community Leadership in Planning for Environmental Sustainability ........... ............ 90 See External Inquiries as an Opportunity ..................... ...................................... 91 GLOSSARY .................................................... 92 BIBLIOGRAPHY .................................................... 95 vi List of Figures and Tables CHAPTER 1. INTRODUCTION Figures Figure 1.1 Variability of Annual Precipitabon .......................................................... 4 CHAPTER 2. IRRIGATION IN VICTORIA IN 1984: STARTING POINT FOR THE JOURNEY Figures Figure 2.1 Distribution of Soldier Settlement Allotments and Closer Settlement Estates 1927 ................... ..............7 Figure 2.2 Land Use Profile in the Irrigation Districts - 1906 to 1942 ...................................... ....................8 Figure 2.3 Victorian Water Storages - Cumulative Capacity 1860 to 1985 ........................................................... 8 Figure 2.4 Victorian Water Use ...........................................................8 Figure 2.5 Current Replacement Cost of Assets ..........................................................8 Figure 2.6 Victorian Irrigation and Rural Water Supply Systems .......................... .................................9 Figure 2.7 Gross Value of Production in dollarsIML .......................................................... 10 Figure 2.8 Changed Flow Regime in Goulburn-Broken-Campaspe Rivers .......................................................... 12 Figure 2.9 Growth in Diversions .......................................................... 12 Figure 2.10 Shepparton Area - Rise in Water Table Levels over 11 Years .......................................................... 13 Tables Table 2.1 The Rural Empire of the State Rivers and Water Supply Commission, 1906 to 1935 .................. .............7 Table 2.2 Value of Irrigated Production, 1988/89 ($M) .......................................................... 10 CHAPTER 3. SIGNPOSTS ALONG THE WAY Figures Figure 3.1 Financial Targets and Strategies .......................................................... 14 Figure 3.2 Organisational Change .......................................................... 15 Figure 3.3 Timetable of Reform of Water Allocations .......................................................... 19 Figure 3.4 Water Distribution Reform .......................................................... 19 Figure 3.5 Staff Employment Conditions, Career Structures and Training .......................................................... 22 CHAPTER 4. POLITICAL ECONOMYOFREFORM:v GOVERNMENTPOLICY AND STRATEGIC PLANNING Figures Figure 4.1 Rural Water Commission - Regions and Regional Centres ........................................................ .. 31 Figure 4.2 Rural Water Corporation - Regions and Regional Centres ......................................................... . 31 Figure 4.3 Rural Water Corporation - Organisational Structure ........................ .................................. 34 Figure 4.4 Performance Contract between Region and the Corporation - 1993/94 .................................. ........... 36 Figure 4.5 Goulburn Murray Irrigation District, Water Prices - 1959/60 to 1994/95 ................................................ . 38 Figure 4.6 Goulburn Murray Water, 100 year replacement profile for all services . .................................................. 40 Figure 4.7 Rural Water Commission Business in Outline - 1990/91 Business Plan ............................................... . 43 Figure 4.8 Five Year Targets .......................................................... 44 Figure 4.9 Rural Water Corporation - Staff Numbers - June 1986 to June 1996 ..................................................... 46 Tables Table 4.1 Corporatisation Principles .......................................................... 28 Table 4.2 Rural Water Corporation Debt and Superannuation Liabilities .......................................................... 46 vii CHAPTER 5. PROFITABILITYOFIRRIGATION Figures Figure 5.1 Temporary Water Entitlement Transfers (GL/year) ..................................................................... 49 Figure 5.2 Cumulative Permanent Water Entitlement Transfers (GL) ..................................................................... 50 Figure 5.3 River Murray Water Accounts ...................................................................... 53 Figure 5.4 Water Ordering and Delivery Systems ..................................................................... 55 Figure 5.5 Introduction of Water on Order in the Red Cliffs irrigation District ........................................................... 57 Figure 5.6 Murray Valley Irrigation District - Orders in December 1989 ........................................... 57 Figure 5.7 Sunraysia Tariff Change - Red Cliffs Irrigation District ..................................................................... 59 Figure 5.8 Winemaking Production 1991/92 ..................................................................... 62 Tables Table 5.1 Sample Asset Rationalisation Projects ..................................................................... 58 Table 5.2 Australian Horticultural Farms ..................................................................... 61 Table 5.3 Processed Food Exports from Irrigation in the Goulburn Valley ............................................................... 61 CHAPTER 6. THEIRRIGATIONAUTHORITYASA COMMERCALLBUSINESS Figures Figure 6.1 Rural Water Corporation - Change Plan 1992 - 1994 ..................................................................... 67 Figure 6.2 Rural Water Corporation - Business Cost Shortfall ..................................................................... 73 Tables Table 6.1 Rural Water Corporation - Comparison of Financial Position 1984185 and 1993194 ............................. 64 Table 6.2 Future Management Review Implementation Timetable ..................................................................... 69 Table 6.3 Rural Water Corporation - Achievements in 1992 ..................................................................... 75 Table 6.4 Rural Water Corporation - Achievements in 1993 ..................................................................... 75 Table 6.5 Rural Water Corporation - Achievements in 1994 ..................................................................... 76 CHAPTER 7. ENVIRONMENTAL SUSTAINABILITY Figures Figure 7.1 Groundwater Licence Authorisations ...................................................................... 82 viii Foreword Water resource management policies world- All of this changed fundamentally in the late wide are at a cross-roads. On the one hand, in recent 1980s and in the 1990s. Now there was a national years a remarkable consensus on the principles of consensus on the need to reform the Australian reform have emerged. These principles have been economy to become more competitive in a most simply stated in "Dublin Statement" of the globalizing world, and, more specifically, an International Conference on Water and the understanding of the importance of liberalizing Environment in 1991, when 100 countries agreed factor markets in agriculture as part ofthis process. that: In the state of Victoria a further impetus for reform * wae hulemnaeoisial;was the crisis in the state's finances in the early wanater ent shouldbemanad holistticall t 1990s. The result was remarkable. Suddenly the * management should be "at the lowest "three steps forward, two steps backward" paradigm appropriate level", and involve all changed, and there was rapid and decisive progress stakeholders, and in the way in which water (and irrigation, as the e water should be treated as an economic as major water user in the state) was changed forever. well as a social good. To outsiders, this process was "implementing the On the other hand, it has turned out to be far Dublin principles" - now water was managed from simple to translate the Dublin principles into holistically, management became as much a reality on the ground. Water management practices responsibility of the farmers as it was of the state in every country of the world are deeply embedded and there was an intense search for more in a particular natural, historical and political economically-appropriate ways of managing the context, and reform does not come easily. resource. Accordingly, the challenge ofthe day is now to learn To the interested outsider, there is one further from the experiences of successful reform efforts, striking element in the Australian experience. The and to translate these lessons into strategies in water reform process has had remarkable leadership different settings. from a cadre of "thinker-practitioners" who have It is in this context that the Australian constantly sought the holy grail of theoretical experience in recent decades has come to the soundness and technical and political practicality. attention of the water world. For there is arguably This document describes the particular no other country which has so thoroughly reformed experience of water reform in the state of Victoria, the way in which this scarce resource is managed. which has been a leader throughout the period in What is particularly fascinating to the outsider, is the water reform process in Australia. The document the dialectic of reform in Australia. Starting in the is a compelling "insiders' view" by three 1970s, a professional consensus began to emerge professionals who played central roles in the process. on how important it was to manage water better in the Australian context. And in the next twenty years The Victorian experience, like all others, is a lot was done in technical terms, and some progress embedded in a particular natural, cultural, historical made on the institutional side (perhaps more and political reality. But the generic lessons on the strikingly in the multi-state Murray-Darling Basin technical and political reform processes, and the links Commission). But there was also a sense that this between these, are of profound relevance to those was a "water professionals' debate", which had not engaged in the water reform process throughout the yet caught the attention of the body politic, and in world. which reform was incremental at best. John Briscoe Senior Water Adviser The World Bank ix Abstract The decade from 1984 to 1994 was a period By June 1994 the shortfall of revenue over of major reform in the Victorian irrigation industry, costs had been reduced to $13.3 million, within sight The State Rivers and Water Supply Commission, of the ultimate objective. Reduction in operating the authority responsible for irrigation since 1905 costs accounted for 62% of the improvement. The was abolished in 1984. Regulatory and policy decade saw many other reforms: market reforms to functions were separated and a more commercial introduce transferability of water entitlements, water Rural Water Commission established to operate the auctions for new allocations, new technology, staff irrigation system. Over the decade successive training and removal of demarcations to create a strategic plans were developed to reduce the shortfall smaller, multi-skilled and productive workforce. of revenue over business costs, from $66.9 million Community leadership in the development of salinity in 1984 to zero over twenty years. Business costs mitigation plans was another important reform. were defined as: operations, maintenance, The Victorian experience of reform is administration, and finance charges plus a renewal embedded in a particular natural, cultural, historical annuity. To succeed, the burdens of past debt and and political reality. But the generic lessons from unfunded staff superannuation had to be forgiven, the technical and political reform processes, and the which was achieved on 1 July 1992 after links between these, are of profound relevance to transforming the Commission into the Rural Water those engaged in the water reform process Corporation as a government business enterprise. throughout the world. Acknowledgments The Authors would like to thank Geoff Carburn who provided expertise in preparing the diagrams and computer layouts, Christine McCallum who edited the text, and Judy Lunn who assisted with typing. The support of Geoff Spencer and John Briscoe of the World Bank is also very much appreciated. x Executive Summary The decade from 1984 to 1994 was a period In order to achieve the long term target of of major reform in the Victorian irrigation industry. financial self sufficiency a series of financial and The State Rivers and Water Supply Commission, business plans were developed. The Financial the authority responsible for irrigation since 1905, Management Strategy covered the four years from was abolished in 1984 following an inquiry by the 1985/86 to 1988/89. Recurrent expenditure was held Public Bodies Review Committee of the Victorian constant in nominal dollar terms in a period of 7% Parliament. Policy and regulatory functions were to 8% inflation. In the end a 30% reduction in transferred to the newly created Department of Water recurrent expenditure was achieved. Even with these Resources, and a more commercial Rural Water large reductions in recurrent costs, real increases in Commission established to operate the irrigation water prices of 2% annually were required over the systems. twenty years to achieve self sufficiency. Use of history of irrigation in Victoria provided inflation forecasts that underestimated the actual ,t he inflation resulted in under achievement ofthe pricing the new oiganisation with particular challenges. The tag.Relpisinrsdby09anulyor objectives of closer settlement in rural Australia had target. Real prices . nreased by 0.9% annually over a great influence on the development of irrigation. the four years. Unfortunately the lack of financial discipline inherent A Business Plan covering the five years from in these policies left a legacy of irrigation enterprises 1990/91 envisaged further efficiency improvements, of low profitability, small farms, financially unviable increases in asset maintenance and renewal, and real irrigation authorities, ageing irrigation price increases of 2.8% annually. The price increases infrastructure, a large public debt, and environmental were now based on the actual inflation in the degradation through salinity and water logging. Any preceding year. reform of irrigation would have to overcome this In 1991 prices for agricultural cormmodities inheritance. fell and the increases in water prices became the Agreeing on clear financial targets with the focus for the irrigator's concerns. A "Rate Protest" Victorian Government, and attention to strategic was organised to withhold some $30 nillion of water planning were the first steps in setting a new course rates. The Government decided that an inquiry into to overcome the burdens of the past. Ultimately the water pricing and the efficiency of the Rural Water target of reducing the shortfall of revenue against Commission was the best way to resolve the impasse, business costs from $66.9 million in 1984 to zero and established the Future Management Review. over twenty years was agreed with the Government. After extensive consultation the Review supported Business costs were defined as the total of operating, the target of financial self sufficiency, and made maintenance, administration, any finance charges, recommendations to create the Rural Water and a renewal annuity to fund replacement of the Corporation out ofthe Commission as a government agemg irrigation infrastructure. The Rural Water business enterprise outside the Victorian Public Commission now had a clear target to use as the Service. The Corporation would have much greater basis for strategic planning. The target was to be flexibility to achieve large gains in operating achieved by a combination of cost reductions and efficiency. The Review concluded that despite these increases in water prices, with emphasis on the cost large potential gains in efficiency real price increases reductions. of 2.1% annually were still required. Use of a renewal annuity as a measure of The Future Management Review supported capital consumption instead of current cost theappointmentofexpertisebasedboardstomanage depreciation was a major step forward. A more the irrigation systems. A wider range of skills, constructive debate with the irrigation community including commercial skills, was introduced to the on the risk, level of service and cost trade offs has irrigation authority. In fact the Act that transformed created better relationships and opportunities to the Rural Water Commission into the Rural Water progressively deliver more cost effective services. I Corporation in July 1992 specified the range of skills The Rural Water Commission and its to be considered by the Minister when appointing successor Corporation became leaders in staff board directors. The skills ofthe new board directors training with the objective of supporting the played a vital role in the ongoing reform process. introduction of new technology and other initiatives to improve service and efficiency. The Commission the shortfilofrexpeted efficiency gainess were s m ad achieved the status of a private provider of courses the shortfall of revenue agabyst business costs was so that its training was recognised nationally. The reduced to $13.3 million by June 1994, within sight career structures and employment conditions were of the ultimate target that had now been brought reformed resulting in one industrial award for the forward to the year 2001. Some 62 % of the staff with four levels to create a more efficient multi- improvement in financial performance came from skilled workforce that was rewarded for the efficiency gains, and 22% from price increases to acquisition and use of skills. These initiatives made the irrigators. The remaining improvement came a significant contribution to the reduction in cost from broadening the revenue base including described above. hydroelectric power generation. For an irrigation authority to make such an improvement in financial The Victorian Govenment, after an inquiry performance, and to come within sight of long term into salinity adopted the concept of community financial viability is a major achievement. leadership in the development of salinity mitigation plans. The technical experts in the irrigation During the implementation of the financial authonity became advisers to the community groups. plans the Rural Water Commission and its successor a seritesao panswere doped c th havepth were active in other reform areas. Steps were taken potential to progressively halt the spread of salinity. to create a market for water in order to stimulate improvement in the profitability of irrigation. New, The strategy implemented in Victoria over this more profitable irrigation enterprises would be able decade brought about significant improvements in to gain access to water, and the opportunity cost of irrigation. Furthermore the experience gave those water would be exposed for the first time. Temporary involved important insights into the conception and transferability of water entitlements was introduced implementation of a complex reform program. If in 1987 and permanent trading started in 1991. In the reforms can be repeated in other parts of the 1988 the Rural Water Commission organised what world, significant economic and environmental is believed to be the first auction of water benefits will flow through the global economy. This entitlements in Australia. By 1994 a market for water monograph is not a prescription to treat the maladies was emerging. that have beset irrigation over the centuries, but rather a map with signposts to indicate the way for New technology was introduced to improve those facing similar challenges and who must make the efficiency of irrigation deliveries so that more the same journey. responsive and new services could be provided to irrigators to take advantage of the opportunities offered by water trading. Central comnmunication and planning of water deliveries was successfully implemented, and a water management system using surveillance control and data acquisition technology was conceived and introduced. The water management system had the potential to fundamentally change the way the irrigation systems were operated to produce a more customer focussed, commercial approach. 2 The Authors In reading this journey of reform it is CHRISTINE FORSTER important to understand the perspective of the Christine Forster is a microbiologist by authors. All three authors were part of senior training and has been involved in the water industry management ofthe Rural Water Commission, either for over thirty years. Her career started with water at board or senior executive level. They were directly quality activities in the Northern Territory of involved in implementing many of the reforms, and Australia, moving to water resources policy in the their descriptions of the journey of reform are no Federal Government, including the incorporation of doubt coloured by their experiences in implementing water quality and environmental objectives into a difficult and at times unpopular reform program water resources management. She took part in the for the benefit of the Victorian irrigation industry. Lake Pedder Inquiry in 1973, Australia's first public John Langford was Director of Operations inquiry on an environmental issue and a harbinger from May 1987 to January 1989 and then chief of strength of the environmental movement. executive of the Rural Water Commission After a short term as Director of the (Corporation) from February 1989 to November Australian Heritage Commission, she returned to 1994. Christine Forster was the inaugural rural Victoria and became involved in local chairperson of the Rural Water Commission from government and conmmunity development. As a July 1984 November 1990. Duncan Malcolm was partner in the family wool producing enterprise, she the deputy chairperson from July 1984, becoming has first hand experience of the changes in rural Chairperson on 1 December 1990 until December Australia. Christine is currently a Director of the 1995 when the Rural Water Corporation ceased to Land and Water Resources Research and exist. Some biographical notes follow. Development Corporation and a member of the NVictorian Catelment Management Council. She is JOHN LANGFORD actively involved in regional development and rural John Langford is an agricultural engineer with adjustment to achieve sustainable outcomes for a PhD in hydraulics, with 30 years experience in agricultural enterprises. the water industry. His early career with the Melboume and Metropolitan Board of Works started DUNCAN MALCOLM, JP in forest hydrology research identifying the effects Duncan Malcolm owns a farm in Victoria's of bushfires and logging on reducing streamflow Macalister Irrigation District and has extensive yields in wet eucalypt forests. He then prepared a practical experience in dairying and horticulture. He water supply strategy for Melbourne introducing was inaugural Deputy Chairperson of the Rural demand management and reform of water pricing. Water Conmriission of Victoria and subsequently After managing the Distribution Systems Chairperson of that organisation and its successor Department he was seconded to the then Ministry body, the Rural Water Corporation. His involvement of Water Resources to prepare a State Water Plan. with the irrigation sector extends over 20 years and He initiated the debate on water markets and includes his current membership of the National transferable water entitlements. Returning to the Board ofthe Irrigation Association of Australia and Board of Works he managed the water supply system the Australian Irrigation Council. and implemented the first round of pricing reform A former Commissioner with East Gippsland introducing user pays pricing to Melbourne. In 1987 Shire, Duncan is also currently Chairman of the he moved to the Rural Water Commission as Gippslan is alst renal Coastal oard, Director of Operations becoming chief executive in Gippsland Lakes and Coast Regional Coastal Board, 1989. He was a Commissioner of the Murray Chairman of the East Gippsland Catchment Darling Basin Commission for four years and is Management Authority and Deputy Chairman of board chairman of two Cooperative Research Natural Resource Systems, a State Government Centres on Catchment Hydrology and Freshwater organisation specialising in geospatial information Ecology. He is currently Executive Director of the and technology. Water Services Association of Australia. 3 Chapter 1. Introduction Significant reform took place in the Victorian We acknowledge that irrigation in Australia irrigation industry in the decade 1984 to 1994. This and in Victoria in particular has not been managed reform has positioned irrigated agriculture to take on a sustainable basis over the past century. advantage of emerging international markets while Salinisation, water logging and degradation of rivers maintaining and enhancing the natural resource base through depletion of flows and their use as drains on which irrigation depends. have been the legacy of most irrigation schemes since The authors of this monograph were active the early days. Irrigation also has a poor record of participants in this reform and want to place on financial and economic management. record their account of the reform process so that it In order to understand the context of the might provide useful information for those reform, we describe the inheritance of the Rural governnents and irrigation authorities in Australia Water Commission in 1984, the starting point for and overseas who want to undertake a similar the journey of reform. journey of reform. Irrigation authorities are organisations that We start with the premise that irrigation is supply water to irrigation farms. They may also important to the future of human beings on this carry out other activities such as surface and planet. Increasingly, we are relying on irrigation to subsurface drainage. While these authorities may provide our fruit and vegetables, dairy products and raise part of their revenue from water sales and wine. In Australia, irrigation offers us a way to drainage rates, they are usually not viewed as manage the extreme climate variability and frequent commercial businesses, and are highly dependent droughts and floods resulting from the El Nino on government subsidies to fund their operations. Southern Oscillation (ENSO) climate phenomenon. Such subsidies continue to distort decision making Figure 1 .1 shows the high variability of Australian for the irrigation industry, and divert attention from rainfall relative to the rest of the world. For the same the hard decisions necessary for irrigation to have a mean annual precipitation Australia has greater sustainable future. variability of precipitation than the rest ofthe world. While significant achievements were made Irrigation is therefore particularly important to the before 1984, we have concentrated our discussion future of Australia.bfr 94ehaecnetae took partsio on the decade from 1984 to 1994 since we tookpart Figure 1.1 Variability of Annual Precipitation in the reforms of this period and bear responsibility for the consequences. Much of the time we were operating outside our personal comfort zones, 0.6 however our belief that the reforms were in the long *-\Australia Add term interest ofthe irrigation industry kept us going. WorlW Arid The overall strategy was to improve the profitability of irrigation, improve the efficiency of 0.4 \\the irrigation authority and improve the sustainability of irrigation with respect to its resource * base, the waters and soils of Victoria. Improved 0.2 Ausralia profitability of irrigation generates an inproved cash W ord flow for irrigators to invest in improved management of soil and water resources. The ability to pay higher water prices also generates more revenue for the LX . irrigation authority to invest in renewing irrigation 100 1000 infrastructure and improving services. Mean Annual Precipitation (mm) 4 The discipline of the irrigators funding the The strategy implemented in Victoria over renewal of the irrigation infrastructure will ensure this decade brought about significant improvements that the next generation of infrastructure meets the in irrigation. If the reforms can be repeated in other needs of the industry in more cost effective ways. parts of the world, significant economic and Increases in water prices also stimulate enviromnental benefits will flow through the global necesgof the industry, the economy. This monograph is not a prescription to n s resructi n g treat the maladies that have beset irrigation over the nthrodutabio ofne tcnlgye and impurov Them centuries, but rather a map with signposts to indicate of te prfitbiliy ofirrgate agrculure.The the way for those facing similar challenges and who painful consequences of this restructuring for many mus make the same journey. individual irrigation farmers should not be underestimated and appropriate assistance to them Irrigation in Victoria has enjoyed a through rural adjustment schemes is vital. development phase, survived a maturation phase and We have quantified the achievements over the is now undergoing a renaissance - a rebirth - as a decade - an 80% reduction in.the shortfal of revenue vibrant industry which is contributing to the to total business cost, from $66.9 million per annum economic well-being of the State while moving to $13.3 million per annum. Some 80% of this towards the sustainable management ofthe resource improvement in financial performance came from base. efficiency gains and a broader revenue base, and only 20 % from increased water prices to irrigators. The irrigators were therefore protected as far as practicable from the individually difficult consequences of economic reform. 5 Chapter 2. Irrigation in Victoria in 1984: Starting Point for the Journey The history of irrigation in Victoria is characterised by episodes ofdroughts, financial crises and consequent inquiries, including Royal Commissions. Following a drought in the 1870 s andfinancial collapse of the private irrigation schemes, the first Royal Commission involving irrigation was established in 1884. The Royal Commission was chaired by Alfred Deakin, the then Victorian Minister for Water Supply, who later became Prime Minister of Australia. The 1884 Royal Commission on Water Dr Elwood Mead, the second Chairman of Supply led to the Irrigation Act of 1886. The Act the State Rivers and Water Supply Commission took established the Crown's ownership of "the use and up office in 1907, returning to the United States in control ofthe flow" in Victoria's rivers and streams 1915 to take a leading role in the Bureau of setting the basis for water allocation in the state, Reclamation. Mead introduced policies promoting and ultimately the nation. The State of Victoria was closer settlement in Victorian irrigation. He believed now responsible for allocating water rights to that intensive irrigation was the most effective way irrigators, industry and cities. The Act also retained of developing irrigation, making the most from the local control of works by irrigation trusts, but large investment in water distribution systems, and provided for the Victorian Water Supply Department providing livelihoods for a large number of irrigators to thoroughly check all their proposals; an early sign on small holdings. of the tension between local autonomy and central Mead developed the system of water rights control. Important construction projects such as allocating water to each irrigated land holding in dams would be funded by the State as "National the form of a depth of water per unit area, with the Works". The notion of separate headworks and allocated depth declining as the size of the holding distribution systems was well developed even in these increased. The smaller holdings were designed for early days. intensive horticulture that required more intensive The drought and economic recession of the irrigation, and the large holdings were expected to 1890's placed severe financial stress on the private irrigate part of their holding to support the overall irrigation trusts: some 30 irrigation trusts were in farming enterprise. The water rights were designed existence in 1899 with financial advances in excess to promote closer settlement in defined irrigation of one million pounds (the currency ofthe day). The districts. The water rights were enshrined in statute, ReliefAct of 1899 in fact wrote off75% ofthe trusts' and legally tied the water to the particular allotments debt liabilities. Debt write-offs have a long history of land so that the rights could not be transferred or in Victorian irrigation businesses as will be seen traded. In addition no capital charges were made when the decade from 1984 to 1994 is reviewed. when allocating new water rights. Water was regarded as a social rather than an economic good. The politicians ofTthe day also concludedothat "... .divided control did not work well in practice", The water rights wer to be paid for whether and imposed a higher level ofcentral control. Stuart the water was used or not. The water right was Murray, who was the Secretary to Deakin's 1884 designed to provide a sufficient and reliable cash Royal Commission, drafted a new Water Bill in 1904 flow to fund the irrigation authority. This initiative at the direction of the Honourable George overcame one of the deficiencies of the earlier Swinbume, the Minister for Water Supply of the irrigation trusts which raised revenue from water time. The resultant Water Act of 1905 removed local sales and were left in financial difficulties trying to control from the irrigation trusts and centralised meet fixed costs in wet years when the demand for management under the newly created State Rivers irrigation water was low. and Water Supply Commission. 6 The question of how to define sufficient Table 2.1 shows the substantial growth in revenue or full cost recovery was also considered. irrigation between 1906 and 1935 underthe guidance The concept of full cost recovery for water pricing of the State Rivers and Water Supply Commission. included capital consumption in the form of Figure 2.1 shows the closer settement schemes in depreciation was introduced stimulating vigorous 1927, including the irrigation schemes. The large protests by the irrigators against Mead and his number of schemes depicted on the map emphasises policies. In the end the revenue for water rights was the social objective of the time to settle as many insufficient to cover depreciation sowing the seeds people in rural Victoria as possible. for what was to come. Table 2.1 The Rural Empire of the State Rivers & Water Supply Commission, 1906 to 1935 Inventory 1906/07 1934/35 Capacity of storages 577 000 ML 2 353 674 ML Length of channels 6 144 km 19 796 km Area, irrigated districts 351 077 ha 812 233 ha Population, irrigated districts 12 700 80 000 Area, waterworks districts 3 553 671 ha 5 329 899 ha Population, waterworks districts 292 000 473 000 Area, drainage & flood protection districts 20 235 ha 59 256 ha Population, drainage & flood protection n.a 3 300 districts Towns supplied, No. 111 232 Population supplied 261 000 405 500 Figure 2.1 Distribution of Soldier Settlement Allotments and Closer Settlement Estates [ _ _,>,, ~~~~~~~~~~~~~~~~~~Natural Rainfall ; Numbe\ irigation Allotrrents j _r 7v0Wtropolitan Nblbourne 40~~ - 1 40 80 80 10 7 The financial stress of developing large scale Figure 2.3 - Victorian Water Storages - Cumulative soldier settlement schemes, a series of droughts, a Capacity 1860 to 1985 severe financial depression in the early 1930s 16 Thorrson resulted in a Royal Commission into the finances of irrigation and the State Rivers and Water Supply , 'tmthX Commission in 1932. The 193 Os were characterised _12. by a shift to more extensive pasture based irrigation 10J enterprises with lower capital investment O Eildon enbrgat requirements but lower profitability. Figure 2.2 -CairnCurran illustrates the move to more extensive pasture based G 6 Rocklands enterprises that started in the 1930s. 4 . Figure 2.2 Land Use Profile in the Irrigation 20, Wodd War Districts - 1906 to 1942 250- 15I1 0 8w 1M 191 1920 190 1 It401 10'10'1it0 1s5a 25~~~~~~A Figure 2.4 Victorian Water Use 200 60 0~~~~~~~~~~~~-0 I1B6 1910 1920 1930 1940 Stock& OtherAuthorities Melb.Water Tobal var use Is mabn5ly5 millicn nwgalibw# pat w,wum A decision for the State of Victoria to take The total current replacement costs of the full responsibility for funding headworks was a infrastructure assets in the irrigation systems was significant outcome ofthe 1932 Royal Commission. $4.5 billion (as at 30 June 1994). The importance This decision contributed significantly to the boom of the investment in water transport infrastructure: in headworks that followed the end of the Second channels, drains and pipelines can be seen in Figure World War. Figure 2.3 shows the dramatic increase 2.5. The debt of over $400 million accumulated in storage capacity constructed after the War. during the construction era was a substantial burden The 1980s witnessed the end of the major on State finances. construction boom of the post Second World War Figure 2.5 Current Replacement Cost of Assets era. Blue Rock Dam, opened in November 1984, as at 30 June 1994 was the last major new dam constructed by the State Rivers and Water Supply Commission. Figure 2.6 shows the irrigation systems constructed throughout Victoria bythe Commission and the irrigation trusts. Channel Victoria's water use of some 5 million ML was (Dms weirSucs,res dominated by irrigation that accounted for about 4 ElevTanks and SDams wletc) million ML or 80% of total supplies as shown in Pumps Tiled Drain and Treatre Figure 2.4. Buildings and EquiPmetand Pipelines Dais (Total $4.5 Billion) 8 Figure 2.6 Victorian Irrigation and Rural Water Supply Systems WATER STORAGES 1 Toolondo Reservoir 16 Lake Nagambie iMidura 2 Rocklands Reservoir 17 Lake Mokoan ei w -" ed Cliffs 3 Wartook Reservoir 18 Lake Muiwala I _ Irrigation Areas 4 Lake Lonsdale 19 Lake NillahcoDtie l I-Robirrvale 5 Lake Fyans 20 Lake Eildon 6 Lake Belifield 21 Lake Buffalo -> - 7 - Wrmmera Wallee 7 Laanecoorie Reservoir 22 Lake Dartmouth Stock and Domestic System a Tullaroop Reservoir 23 Lake Hume 9 Cairn Curran Reservoir 24 Lake GlenMaggie 10 Lake Eppalock 25 Cowarr Weir 1 1 Lauriston Reservoi4r 26 Lake WillIam Hoveal$ 12 Walmsbury Reservoir 27 Pykes Creek Reservoir 13 Rosslynne Reservoir 14amliton . . >ohuna 14 Welton Reservoir * Wan*garatta 6Berrata \ s Gtlema el our _ eNesfiet Theinvestmen inirrigationgenrarat att Al CNndra P B iriainBbllarat numi 1988/me Bairnsdale 89amcioetsofi vueo rodu etio Werribee fo LDancenong Kiat f rriae ieeigad.--.Koo wee rulture ad therV n Whrrniamboal enterprisee. 'N, ~ ~ ~ ~~~~~ ,.~~4 L The investment inrrfigation generated atotal CHALLENGES PRESENTED BY value of irrigated production from Victorian THE INHERITANCE irrigation of some $1.18 billion per annum in 1988/ 89. The components of this value of production is shown in Table 2.2. Some 60% of the produce fromn Low Profitability of Irrigated irrigated areas came from trees, vines, vegetables Agilte and othier horticultural enterprises, sic irgainha evlpe rm oia n While the Commission was a highly effective closer settlement policies there had been little organisation by the standards of the day the incentive to apply commercial discipline in the organisation found the transition from construction allocation of water. The water was allocated free of water supply systems to management of "a of capital charges. As a result, large volumes of commercial irrigation supply business" extremely water were allocated to relatively low value uses difficult. These difficulties came to a head during with consequent low profitability. ln Voctoria trees, the 1980 to 1983 inquiry into rural water supplies vines, vegetables and ofter horticulture generated by Public Bodies Review Committee of the some 60% ofthe value of production but used only Parliament of Victoria, Neilson Associates (1981). 15%s of thewater. The 85%oof water usedonpastures An understanding of the inheritance of the generated 40% ofthe total value of production from new generation of irrigation managers is important irrigated agriculture. in understanding their responses to the challenges. 9 Table 2.2 Value of Irrigated Production, 1988189 ($M) Trees Vegetables Cereals Livestock Oilseeds Total Vines and Other Rice Pastures Cotton Horticulture Sugar New South 332 185 212 285 390 1 404 Wales Victoria 375 333 2 468 4 1 182 Queensland 181 382 25 54 467 1 109 South 286 157 <1 53 <1 496 Australia Western 62 121 <1 20 <1 203 Australia Tasmania 31 109 39 179 Northern <1 7 <1 <1 7 Territory Aust. <1 <1 Capital Territory Australia 1 267 1 294 239 919 861 4 580 source: Austraiian Bureau ot btatistics ana inaustry boaies. Figure 2.7 shows the gross value of irrigated sensitive subject. The irrigators and their political production in terms of dollars per unit of water used. leaders had used water prices as a lever to influence The value of production per ML in Victoria was governments and increase government subsidies and considerably lower than for Queensland, California the debate was being diverted from the core issue of or Israel reflecting the relatively low value of crops low profitability to the detriment of the future of grown with irrigation in Victoria. This relatively low irrigation. Overcoming the inheritance of a irrigation value of production could be seen as an opporunity enterprises with low profitability and the irrigators obsession with water prices provides substantial Figure 2.7 Gross Value of Production in dollarsIML challenges. NC w wSouthme ; Ageing iTngation Infrastructure (earsniWand The original irrigation infrastructure was ageing with half the channel systems built before C;iforni USA 1930. The need for capital expenditure on _____ ___ H replacement works was increasing and water pricing o M 4O 0 6DD 86 lowc 1200 policies were not making adequate provision for Dollarsl /L renewal of this ageing irrigation infrastructure. since there is considerable scope for increasing Replacement of the infrastructure, however, gives profitability and improving return on the massive the irrigation community the opportunity to think public investment in irrigation systems. again. The closer settlement policies of earlier times The commercial discipline of the irrigators left another legacy: a large number of relatively smaU paying for replacement of the infrastructure should farms within the 'Government' irrigation districts. ensure that only essential infrastructure is replaced, Some 72% of Australia's horticultural farms are and to a standard appropriate to meet the irrigators smaller than 15 ha with an annual cash income less needs. Managing the inheritance of a massive, ageing than $8,600. The low profitability and questionable asset base with an inadequate revenue stream and viability of a significant number of Victorian declining government subsidies provided another irrigation farms has made irrigation water prices a substantial challenge. 10 Confused Accountabilities and Lack of Community values of the time stressed the Defined Financial Targets need to "stop water running to waste in the sea", and to construct as many dams as possible as a The State Rivers and Water Supply protection against the inevitable droughts. A strong Commission had accumulated a wide range of case could be made that the lack of commercial functions over nearly eighty years including policy, discipline in the original decisions to invest in regulatory and commercial functions. The irrigation infrastructure led to over investment, and Commission was in danger of becoming both that too many irrigation schemes supplying water poacher and gamekeeper. Governments as owners for low value enterprises were built. of the irrigation authority, while quick to criticise poor financial performance, had not set clear The legacy of these investments was an financial objectives and performance targets, and unsustainable debt of some $400 million. Staff had not been prepared to take hard political superannuationschemeshad also accumulated large decisions. The Comnnission could not take all the unfunded liabilities compoundingthe debtproblem. responsibility for its financial condition. Persuading While it is interesting to consider what might have governments to set well defined financial targets was been, the crucial challenge facing irrigation a significant challenge. managers is how to get the best return from that large community investment. Financially Unviable Water Businesses Strong Organisational Culture The organisational culture if the State Rivers Since Government had provided the capital and Water Supply Commission (SR&WSC) was funds for investment in the dams, channels and strong, with a drive for excellence and focus on drains, the irrigation community had little exposure engineering and construction. In its prime the State to the implications of capital investment for both Rivers and Water Supply Commission was one of level of service and cost. There was a temptation to the best publicly owned construction authorities in demand higher standards than were commercially Australia. Their project management skills on major viable. Water prices were discussed in relation to dams were second to none. The organisation gained operating costs, and both the opportunity cost of much strength from the interesting, intellectually capital and depreciation were considered by the challenging work of managing water resources, and irrigation community to be 'free' distorting the obvious value of the work to the wider investment priorities. Irrigation businesses were community. considered as providers of a public service, not Refocussing the inheritance of such a strong commercial businesses that needed to be financially organisation on the new tasks that lay ahead provided viable, even though the lack of commercial discipline a substantial challenge. The organisation had to was harming the long term interests of irrigation. make a difficult transition from a highly skilled Revenue from water rates and charges did construction authority focussed on building dams, not even cover the operating costs let alone, channels and drains to a more financially skilled depreciation or return on capital investrnent. In 1984/ commercial organisation focussed on providing 85 revenue only covered 74% of direct operating water services to the irrigators in an environmentally expenditure. Decisions to invest capital were not sustainable way. considered in relation to the revenue the investmnent would generate. Supply of irrigation water was not seen as a commercial enterprise and Government provided the capital for "free". 11 Environmental Degradation High water tables are a crucial challenge The environmental consequences of salinity, facing Victorian irrigation. Figure 2.10 shows the The evlromenta conequeces o sallty, rapid rise in water tables underlying the irrigation high water tables and the effects of river regulation ares an conequen incresin the araof on Riverine forests, algal blooms and water quality ariclual landeafectedsb ig te abes. wereemeging Fiure .8 howsthechaned low agricultural land affected by high water tables. were emergmig. Gureu2. showe ang flow Overcoming the inheritance of environmental regimes in the Goulburn, Broken and Carnpaspe dgaaint raeassanbeftr o Rivers that supply the irrigation areas of Northern degradation to create a sustainable future for Victoria. The substantial changes in flow regimes irrigation provides the greatest challenge of all if were having adverse environmental consequences irrigation is to have a future. including algal blooms. However, on the positive side ofthe ledger, the tight central discipline applied Negative Community Perceptions of to water allocation by the State Rivers and Water iTrigation Supply Comnission illustrated in Figure 2.9. has C served future generations well. The growth in water Community attitudes to irrigation were diversions has not ballooned out of control. changing from the earlier view of "making the deserts bloom" to the "Northern Myth" of Davidson (1965). Figure 2.8 Changed Flow Regime in Goulburn- The construction of the Ord River Scheme, an Broken-Campaspe Rivers obvious economic failure, was a turning point in c_700 the increasingly negative community attitude to 70C irrigation. Community concern about the O 600___ _ environmental degradation emerging as a result of 500 SOC 500 _ _long periods of irrigation was reinforcing these o 400 negative perceptions. The political debate on c 300 _ _ _ irrigation was becoming increasingly negative and 200 becoming a significant influence on the political X12 100 I _ _ | _ _economy of irrigation. JAN FEB MAR APR MAY JNUL AGSEP OTNODE Source: Miurray Darling Basin Commission Figure 2.9 Growth in Diversions 12000 t2-1 OMttOa a 000 0O 8000 N .2 6000 c: 4000 w Vdd 1920 1930 1940 1950 1960 1970 1980 1990 Sour.: Mulrry Daring Bash Corsiss' 12 Figure 2.10 Shepparton Area - Rise in Water Table Levels over 11 Years SHEPPARTON REGION Strathme _ ~~AUGUST 1982 ''''..,,'!;'',i _ ,> 4 ~~~~~~~~~Nathalia s0 _0 Scale i~00,000 ca 9 1,< ~~~~~~~~~~~~~~~~~~~~1 Elmore * aa/ i: ReserVoy9 \..W LEGeND r 5 t: - .io ~Watertable below suRface Rushwortl` ,54 0- lm Scale 1:500,000 Murchison S !|1 -2m o 10 20 30km SHEPPARTON REGION t ' 1' WATERTABLE CONTOURS ,-; - .-'," < _ ~~AUGUST 1993 | P\ .:j . ! Elmor jJl JEN H V [t r | ) t_9rta~~~~~~~~ble below s urfa ce Scale 1:500,000 g5Murchison 1- >2rn o0 10 20 30 13 Chapter 3: Signposts along the Way INTRODUCTION POLITICAL ECONOMY OF The history ofthe Victorian irrigation industry REFORM, GOVERNMENT inthe decade from 1984 to 1994 is a complex series POLICY, GOVERNANCE AND of inter-woven events. The major areas of reform STRATEGIC PLANNING: are discussed in turn following the reforms through TIMETABLE OF KEY EVENTS the sequence of major events.. There were many important milestones in each major reform, Figure 3.1 sets outthe timing oftransitionof sometimes separated by the passage of several years, the State Rivers and Water Supply Commission into and interningled with many other important but the Rural Water Commission through the "Rate unrelated events. A better understanding of each Protest", and the Future Management Review to the reform would come from a concentrated description Rural Water Corporation. The sequence of the three of all the important events in that reform. in one major strategic plans: the Financial Management place Strategy; the 1990/91 Business Plan; and the Future The journey of reform is therefore described Management Review targets are also shown. in term of the key areas of government policy, Figure 3.2 illustrates the transition of the irrigation, commercial and environmental challenges functions of the State Rivers and Water Supply selected to be useful for the reader contemplating Commission into the Department of Water similar reforms. In order to assist the reader Resources and the Rural Water Commission to understand the inter relationships between the many separate policy, regulatory and operational activities. simultaneous reforms the events are set out in The further transition through the Rural Water chronological order as signposts along the way. Corporation into 4 autonomous regional authorities is also illustrated. Figure 3.1 Financial Targets and Strategies Business Cost Shortfall $66.9M I ,, 1984 +-Rural Water Commission created 1985 4- Financial Management Strategy 1986 endorsed Operating Costs held fixed in nominal dollar terms for 1987 four years. 1988 Financial Management Strategy completed Operating costs reduced by 30% 1990 4 1990/91 to 1994/95 Rural Water Commission Business Plan endorsed 1991 +-'Rate Protest' +'Future Management Review $33.4M 1992 4-Rural Water Corporation created and Future Management Review targets 1993 endorsed 1994 4-Autonomous organisations created out of Rural Water Corporation $1 3.3M 1995 4-Rural Water Corporation ceases to exist 14 1905to1984 1984 1992 1994 State Rivers & Water Rural Water Rural Water Autonomous Supply Commission Commission Corporation Regional Authorities Operations o 9 Regions 5 Regions a Goulbum Goulbum- Goulbum- m Murray NE Murray Murray Loddon Sunraysia Regions Mun-ay Sun ~~~~~~~~Murry SuTraysia 9 Regions Wjmimer-a autononous Sunraysia Viunvera consolidated into 5 Mallee organisations I Mallee Gippsland includingMall Gippsla7nd SotemFeadvAoks halee ein Operational out e Southem Southen 5 R consolidated Actihities Coiban * Transferred to Coliban ilainto 4 specialist Urban Regional Water Water * Transferred to Authority Management Holding Company Headwvorks * Transferred to Construction Holding Company Sinclair Knight Merz Internal business HydroTechnology Water Ecoscience Technical Services untbrHy,,iroken pE)lEnmmna consultancies and puivatised Corporate Office Snowy Mountains (Holding Conpany) Engineering Corp Water 0 Water Management Managenment to DCNR Finance & =t> HeadworHeadeiarks transferred Administration Holding Companyin to Regional Authorities fbrmfled * Holding Company Administrationdibne _ _ di~~~csbanded Gov.emmrent Departmnent of Water combined Department of DCNR (Now Dept. of Policy Water Resources Conservation and E= > |Natural Resources and Resources Natural Resources Enstronnment) Public Bodies Review Committee: Government agreed to take responsibility 1980 - 1983 for some $330 million of the debt incurred March 1980 in constructing the irrigation infrastructure. In return the Commission Public Bodies Review Committee (PBRC) agreed to cut operating expenditure by an all party committee of the Victorian about 30% holding expenditure constant in Parliament given the charter of reviewing nominal $ terms for 4 years. The the rural water industry. The committee Commission was left with responsibility includes leading members of the Labor for $68 million of the total debt. Party. * September 1985 * April 1982 Rural Water Commission clarified the Election of the Cain Labor Government in concept of financial self sufficiency for Victoria with Ministers who have gained irrigation authorities implicit in the experience in reform of the rural water Financial Management Strategy and set a industry from the PBRC target of 20 years to achieve the goal. * July 1983 After allowing for the cost reductions, an increase in water prices of 2% real per Victorian Government introduces current annum over the 20 year period was cost accounting to government business required. enterprises and the Rural Water Commission. . July 1987 Minister confirms the decision to Rural Water Commission: 1984 - 1992 regionalise the Rural Water Commission 0 May 1984 into 9 defined regions with devolvement of M-y 1984 authority from head office in Melbourne to Central Management Restructuring Act, the regional centres. 1984 passed by the Victorian Parliament as August 1988 the first step in reforming industry structures. The Act created two new Rural Water Commission approves the organisations on 1 July 1984: the new regional management structure and Department of Water Resources; and the restructuring the organisation starts in Rural Water Commission of Victoria out earnest. of the State Rivers and Water Supply * June 1989 Commission, which was abolished on 30 June 1984. Successful completion of the Financial Management Strategy with cost reductions of some 30%. The pricing reform however Financial Management Strategy: 19851 is less successful with real price increases 86 - 1988/89 averaging 0.9% per annum since July July 1985 1984. Victorian Government approves the Financial Management Strategy of the Rural Water Commission. The 16 Business Plan: 1990/91 - 1994/95 * July 1991 * January 1990 Government funding of the Rural Water Advisory Board Conference for Commission moves to a one-line net consultation between the irrigators and the appropriation. The one line appropriation Rural Water Commission on the 1990/91 covers the gap between revenue and costs. Business Plan targets and future pricing. The Commission therefore gains control of its revenue for the first time. * July 1990 August 1991 Implementation of the Rural Water Augur 1991 Commission's 1990/91 Business Plan Arthur Andersen reports to the Minister covering the next 5 years starts with recommending the use of renewal approval of the Victorian Government. annuities as a measure of capital Real price increases of 2.8% per annum consumption for water pricing, in place of are required. High inflation rates resulted current cost depreciation. The consultants in a nominal price increase of 11% for were appointed by the Minister in an 1990/91. At the time commodity prices attempt to defuse the "Rate Protest". were satisfactory. * December 1990 Future Management Review: 1991 Regionalisation approved by the Rural * September 1991 Water Commission in 1988 completed. Future Management Review Committee appointed to review water pricing and the "Rate Protest": 1991 future of the Rural Water Commission. 3 March 1991 * January 1992 Most commodity prices for irrigated Future Management Review reports to agriculture collapse causing widespread Government after extensive consultation concern in the rural communitiesp confirming the principle of financial self April 1991 sufficiency and recommending 2.1% real * April 1991 water prices to 2001, earlier than Protest march of irrigators in Kerang envisaged in the Business Plan. The Ma 1991 reduction was made possible by costs savings by creating the Rural Water Victorian Farmers Federation promote a Corporation as a government business "Rate Protest" encouraging irrigators to enterprise outside the Victorian Public refuse payment of their water bills: some Service. $30 million in payments withheld to put pressure on the Corporation and the Rural Water Corporation: 1992-1994 Government. * May 1991 * June 1992 Rural Water Corporation Act, 1992 passed Head Office of the Rural Water by the Victoria Parliament creating the Corporation in Melbourne blockaded by Rural Water Corporation including 5 some 400 irrigators subsidiary Regional Management Boards 17 from the 1st of July 1992. Further Autonomous Regional Rural Water devolvement of authority is proposed. Authorities Formed 1994 * July 1992 * July 1994 Renewal annuities used to set water prices Regional Management Boards become for the first time. government business enterprises in their * September 1992 own right completing the devolvement of Regional Management Boards meet for the authority first time. * October 1992 Kennett Coalition elected as the Government of Victoria. * October 1992 New Government agrees to accept liability for the debt of $102.4 million of the Rural Water Commission (the original $68 million plus debt accumulated since 1984) plus the liability for staff superannuation to 30 June 1992. Provision of $12 million for restructuring the Rural Water Corporation generated from sale of the Corporation's staff housing. In return the Corporation will receive no further Government subsidy and must fund all activities including future staff superannuation costs from revenue. D October 1993 Kennett Government announces major reforms of the Victorian water industry including creating the 5 Regional Management Boards as autonomous organisations and phasing out the Rural Water Corporation. 18 PROFITABILITY OF IRRIGATION: TIMETABLE OF KEY EVENTS Figure 3.3 sets out the timetable of reforms water auctions to permanent trading and continuous of water allocation from the introduction of water accounting for bulk allocations of Murray temporary trading in water entitlements, through River resources. Figure 3.3 Timetable of Reform of Water Allocations 1984 AC PIL Consultants Report on Transferabiltyof ater Entitements 1985 1986 1987 4. TemporaryTrading in VViter Entitlements start 1988 %-e V\berAlocation Anomolies Committee Reports 4- First Water Aiction of new Water Entitements 1989 4New ter Act passed proViding for Permanent Transfers - M.JrrayDauling Basin Commission adopts capadtyshading and 1990 cortinuous accountingforVaterAllocations 1991 4 Permanent Trading in Water Entitements start 1992 1993 1994 1995 Figure 3.4 provides the time sequence of communication and planning to development of the major milestones in the reform of water distribution Water Management System. practices from the introduction of central Figure 3A Water Distribution Reform _1984 1985 1- Jan'85 Channel Systems Project initiated to de\elop Central Communication &Planning Sept'90- Information TechnologySrategy 1990 ¢ completed initiating de,elopment ofthe 1991 Water Management System (WMS) 1992 Pg '92 - Central Communicafion and Planning 1993 implemented in all inigation disticts 1994 . Sept 94 - Waterline - lnteracdiew oice response 1995 system goes live (first stage of WV\) 19 The Irrigation Management Study * July 1987 * August 1984 National Irrigation Research Fund (NIRF) ACIL Consultants report to the new initiated. The research is intended to Department of Water Resources improve water management. recommending the introduction of * August 1987 transferable water entitlements initially by Temporary trading in water entitlements leasing entitlements between irrigators. tart These reforms would involve breaking the stars. legal bond between irrigated land and * January 1988 water to allow the two property rights to Water Allocation Anomalies Committee be traded separately. hearings finalised report anticipated in * Januar 1985 September 1988. Resolution of the Channel Systems Projec initanomalies is required to clean the slate Channruel Systems Projetnicationatd tbefore the new Water Act is passed and introdue cental comunicaton andpermanent trading in water entitlements planning of irrigation water deliveries. The becmes possible. new operating system has the potential to improve the flexibility of operation facilitating trading and new water delivery Water Auctions services such as high capacity meter * May 1988 wheels. The new operating system First water auction of new water prepared the way for introduction of more entitlements in Australia organised by the sophisticated information technology. Rural Water Commnission. September 1986 Ma 1989 Minister for Water Resources releases Water Act, 1989 passed by the Victorian report of the Irrigation Management Parliament opening the way for permanent Study. The report addresses water trading of water entitlements between availability, methods of allocation of the irrigators. Permanent trades between limited volumes of additional water for irrigation and other sectors, such as urban, irrigation, security of supply, water requires direct Government involvement. pricing, transferability of water entitlements, standards of service and on farm management. The report draws on Continuous Accounting for Murray the earlier study by ACIL. River Resources * December 1989 Temporary Trading of Water Murray Darling Basin Commission adopts Entitlements continuous accounting for bulk allocations * May 1987 of Murray River resources between New Amendment to the Water Act, 1958 passed South Wales and Victoria. to allow temporary trading in water * September 1990 entitlements in the 1987/88 irrigation Rural Water Commission's Information season. 20 Technology Strategy approved initiating in selected irrigation districts. Waterline is the development of the Water the first component of the Water Management System to build on central Management System to be commissioned. communications and planning and take Irrigation water delivery in Victoria is at advantage of modem technology to the dawn of a new era. improve water delivery services and operating efficiency. THE IRRIGATION AUTHORITY AS A COMMERCIAL BUSINESS: Penranent Tradig m Water TIMETABLE OF KEY EVENTS Entitlements Figure 3.5 illustrates the reform of staff * September 1991 employment conditions, removal of demarcations Regulatory Impact Statement for and implementation of staff training programs. The introduction of permanent transferability dramatic improvement in flexibility created by of water entitlements. Permanent trading moving the Rural Water Corporation out of the in water entitlements between irrigators Victorian Public Service to create a govermnent starts later in the year for the 1990/91 business enterprise can be clearly seen. irrigation season. v .June 1992 Commercial Accounting Practices * July 1984 Central communication and planning for management of water deliveries Commercial General Ledger, accrual operational in most irrigation districts. The accounting and other accounting reforms new system now accepted by irrigators and introduced to the Rural Water Commission the Rural Water Commission's staff. . December 1988 Category Review of Rural Water The Water Management System Commission's water distribution staff - August 1992 completed leading to more flexible use of staff, lower costs and better career SCADA system installed at Pyramid Hill stafcturcs. as another step towards the Water structures. Management System. Application of Information Technology * September 1992 Snebr19 * September 1990 National Program for Irrigation Research starts replacing NtR Rural Water Commission Information starts replacing NIRF Technology Strategy approved. The • October 1992 strategy was designed to improve Trial of new irrigation planning and management information systems and scheduling system as another step to the water management through the Water Management System. development of the Water Management * September 1994 System to take advantage of SCADA - technology. Waterline, the interactive voice response system for water ordering is commissioned 21 New Revenue: Hydroelectricity Investing in Staff Training to Enhance * April 1991 Skills Contract to install 2.5 MW hydroelectric * July 1992 generator at Blue Rock signed with Rural Water Corporation gains Kvaerner Boving. accreditation as a private provider of * July 1991 training to build skills of staff to create a New Customer Infrmsmaller more highly skilled organisation. New Customer Information and Billing System introduced, encompassing 74,000 * July 1992 customers with over 60 different services, A new generation of commercial supporting tariff reform and water trading accounting systems introduced supported * July1991 by the appointment of experienced financial controllers to the regions and all Funds for enhanced resignation packages business units. become available for the first time allowing acceleration of the reduction in staff numbers and costs. Figure 3.5 Staff Employment Conditions, Career Structures and Training 1984 1985 1988 1987 1988 Dec '88 Category Review remoNed demarcations from Rural Water Commrission Water Distribution workforce 1989 1990 1991 July '92 Rural Water Corporation formed outside Victorian Public Senrice giving greater flexibility July '92 Rural Water Corporation gains private provider status for delivery of staff training. RWC created as a Govem-rent Business rnterprise. 1992 / Nov'92 Single Award created for RWC staff.- w / better career structures, remoxed dernarcations, greater productivty, new career structure suited to introduction of ~/technology. 4 Dec'92 Enhanced Resignation Packages introduced 1993 4 Aug '93 First Certificates in Water Resource Management 1994 issued 1995 22 Restructuring of Employment . August 1993 Conditions: Removing Demarcations First Certificates of Water Resources * November 1992 Management awarded under Rural Water Single industrial award with 2 respondent Corporation's accredited training program. trade unions created for the Rural Water * November 1993 Corporation's staff with potential for Agreement reached with SEC to increase better career structures for staff and revenue from hydroelectric power station reduced costs for the Rural Water at Eildon backdated to 1990 when the Corporation. Incentives given for staff to original agreement was cancelled gain and utilise new skills through Rural Water Corporation's accredited training * July 1994 programs. Reforms made possible by Rural Water Corporation reduced shortfall creation of the Rural Water Corporation as in revenue over business costs by 80% to a government business enterprise. $13.3 Million and passes the baton to the * December 1992 newly independent Regional authorities Enhanced resignation packages funded from proceeds of the sale of Rural Water Corporation houses accelerates the ENVIRONMENTAL restructuring and the reduction of staff SUSTAINABILITY: TIMETABLE OF numbers. KEY EVENTS * January 1993 Non metropolitan urban authorities Salinity Mitigation charged for bulk water supplied from * September 1985 Rural Water Corporation systems. Water had previously been supplied free. Consultants report on the Barr Creek salinity mitigation plan e March 1993 * December 1986 Commercial Development Project starts with the objective of taking business Mineral Reserves Basin salinity mitigation planning and a commercial approach into scheme abandoned and impetus for every work unit in the RWC community leadership in natural resource * July 1993 management grows. * May 1988 Quarterly billing introduced using new Man 1988 customer information and billing system to Victorian Government announces "Salt improve Rural Water Corporation's cash Action" a $50 million initiative to mitigate flow and reduce finance charges. salinity. * July 1993 Rural Water Corporation's business and commercial divisions set up as commercial consultancies providing services to the regions. 23 Formation of the Murray Darling Basin . July 1991 Commission Land and Water Resources Research and * January 1988 Development Corporation commences Murray Darling Basin Commission comes operations. into existence on 1 January 1988. * July 1992 * April 1989 Cooperative Research Centre for The draft Natural Resources Management Catchment Hydrology starts work with the Strategy presented to Murray Darling Rural Water Corporation as a partner. Ministerial Council with a preliminary * June 1993 budget of $45 mnillion. Murray Darling draft Algal Management Strategy released for public comment. Salinity and Drainage Strategy . July 1993 * April 1989 Cooperative Research Centre for Murray Darling Salinity and Drainage Freshwater Ecology starts work with the Strategy approved by the Murray Darling support of the Rural water Corporation. Ministerial Council * August 1993 * May 1990 Completion by the Rural Water Victorian Government approves 4 major Corporation of Victoria's Groundwater salinity management plans covering Management Strategy after extensive Shepparton irrigation, Goulburn Broken consultation. dryland, Campaspe West, and the August 1984 Tragowell Plains. * December 1990 Rural Water Corporation completes its first environmental audit. Woolpunda Salt Interception Scheme, the * September 1994 first major new work of the Salinity and Drainage Strategy opened. Fish lift at Yarrawonga Weir - January 1991 Commissioned. Algal bloom extends for 1000 km along the Darling River. May 1991 Murray Darling draft Fish Management Plan released for public comment. 24 CHAPTER 4: Political Economy of Reform, Government Policy, Governance and Strategic Planning POLITICAL ECONOMY OF In the United Kingdom and New Zealand, REFORM Margaret Thatcher and David Lange respectively initiated fundamental economic restructuring. The journey to a financially sustainable Although these leaders came from different political irrigation system started in the early 1980's at a time persuasions the principles of economic rationalism when changes to the political economy of Australia underpinning their reforms were similar. Industry were becoming evident. structures were reformed to separate regulatory from Gilobalisation of national economies was commercial functions so that commercialisation and starting to have a significant impact on the structure privatisation of government business enterprises of the Australian society, felt most strongly in the could start. labour market and rural and regional areas. When Governments were concerned about the the newly elected Federal Labor Government increasing expenditures required to renew ageing deregulated the banking industry and floated the infrastructure, and the implications of these currency in 1984 Australia was exposed to the expenditures for service prices. Proceeds of asset increasing global forces of competition. sales from privatisation would be available to reduce The manufacturing industry had been debt, and the private sector with its greater protected by a system of tariffs, and many commercial focus should be capable of improving agricultural industries were supported by subsidies the efficiency of the enterprises including water that remained from the days when closer settlement supply. The private sector could also wear the odium of rural areas was the policy of successive of price increases. governments. Australia, as a nation heavily In 1980's Australia a political convergence dependent on commodity trading, could not hide was taking place, providing a window of from the forces of global competition. Progressive opportunity. The traditional socialist Australian reduction of tariffs and subsidies commenced Labor Party was moving further to the centre and exposing the low level of profitability of many adopting much of the agenda of economic irrigation enterprises. rationalism. Most of the economic reforms set in Victoria was not isolated from these winds of train in Australia were initiated in an era when Labor change. The high level of debt built up during a Governments were in power both at the period of major infrastructure construction after the commonwealth level and in many of the states. Second World War was not sustainable. Borrowing Successive Coalition govesements have accelerated had been used to delay marking hard decisions about the implementation ofthese economic reforms, based the future structure of the Victorian economy. on the philosophies of economic rationalism. Reduction ofthe high levels of debt became a policy Australia is a federation of sovereign states imperative. Highly subsidised public utilities such with the powers of the Commonwealth Government as transport and water were therefore an early target constrained by the Constitution. While this structure of government attempts to improve financial ofgovernment has many strengths, it is rare for most management and gain the approval of the governments, Commonwealth and state, to share a international money market which now determined similar political philosophy. Concerted action on the rate of interest paid on growing levels of debt. issues that require cooperation across state borders 25 can be difficult to achieve. During the second half down the highly centralised management systems. of the decade of the 1980's political convergence Regionalisation of activities was a policy of many took place in Australia and, like some astrological governments in the 1980's. The community was also convergences, it portended well for certain actions. demanding greater involvement in decision making, The most notable of these actions has direct either through effective consultation or direct implications for the irrigation industry. Formation participation. ofthe Murray Darling Basin Commission (MDBC) Development of the Landcare Movement took to replace the River Murray Commission created place during the late 1980's. Rural Australia has an organisation with wide responsibilities for always had a strong ethic of social cooperation, managing the catchment ofthe Murray and Darling especially in emergency situations and in response Rivers containing most of Australia's irrigation to crises brought about by the highly variable industries. Formation of the MDBC has profound climate. A sense of responsibility has been stimulated implications for water allocation across the three at the grass roots of rural communities by formation states involved including the irrigation schemes of the Landcare Movement. Landcare facilitates managed by the Rural Water Commission of groups of land holders to come together and work Victoria. Holistic water management was now cooperatively to address environmental issues. The possible. advisory system in the Victorian irrigation industry The drivers for reform in the water industry has a long history reflecting the need to work together werenotconfinedto economicissues alone. During and take decisions at the community level. the 1980's community concern about the Development of the irrigation advisory system environmental consequences of constructing dams provided a model for natural resources management and diverting large volumes of water were in Victoria. increasing. The issue of dam construction came to Reform in the irrigation business in Victoria a head with the blockade of a dam site on the took place in the context of these economic, Franklin River in Tasmania by the green movement environmental and social trends. In some cases in 1983. One legacy of that blockade is that Victoria led the reforms occurring throughout the construction of new dams in Australia for whatever Australian water industry. purpose is a highly contentious issue. The Cain Labor Governent came to power Concerns about the effects of irrigation on in 1982 with a strategy for reform ofthe rural water waterlogging and salinity were also increasing. It industry developed by the Public Bodies Review is ironic that efforts to raise community concern Committee, an all party Parliamentary Conmnittee about environmental issues such as salinity to established with bipartisan support by the previous strengthen the political will to invest government Liberal Government. In developing this strategy the funds in reversing the degradation also served to Public Bodies Review Committee thoroughly create negative perceptions of irrigation in the wider examnined many aspects of the rural water industry, community. These attitudes reinforced the negative published extensively and consulted widely, Neilson perceptions created by the demonstrable economic (1983). The strategy received strong support from failure of the Ord River irrigation scheme in Labor members of the Committee who went on to northern Australia, Davidson (1960). The irrigation hold significant posts in the Cain Labor Government. industry in Australia was on notice to improve both David White and Steve Crabb held the Water its economic and enviromnental performance if it Resources portfolio and Rob Jolly was Treasurer. was to have a sustainable future. The need for reform was now evident to those The tension between central authority and in power in Victoria, and the political will to take local autonomy was also part of the political difficult decisions was strengthened. Labor landscape of Australia in the 1980's. There was governments have an inherent advantage in considerable pressure to devolve authority to the reforming rural activities in that rural communities lowest appropriate level of management and break are not part of the Labor party's political 26 constituency, and the odium of difficult decisions ROLE OF GOVERNMENT has less effect on the Party's support. The role of goverment in irrigation had Establishment of the Council of Australian increased in complexity reflecting the incompatibility Governments (COAG), a forum consisting of the of many of the earlier social imperatives underlying Prime Minister of Australia and the heads of all state irrigation development with the emerging economic and territory governments provided continuing agenda. The winds ofpolitical change and the greater impetus for water reform. COAG's Water Reform focus on economic reality gave an opportunity to Agenda, which was launched in February 1994, reconsider the role of government in irrigation. It provided strong incentives for continuing the was a role in which a number of functions emerged momentum of reform built up in the previous decade. including industry restructuring; governance; pricing The Water Reform Agenda requires pricing and the setting of financial targets. Each of these reform, achievement of full cost recovery for delivery functions will be discussed in detail in the following of irrigation water and reinforces the concept that sections of this chapter. water is an economic good, principally through Industry restructuring is a function of promoting reform of water allocation and creation governments. Reform of industry structures is of water markets. Successful achievement of the required to separate policy, regulatory, resource reform milestones will result in the states benefiting management and operational functions to develop a from substantial payments from the Commonwealth more commercial and financially competent industry. Government. The experience of reform in the irrigation industry in Victoria was influential in Appointment of skilled boards to manage shaping the COAG Water Reform Agenda. government business enterprises is one way for governments to ensure sound governance of Australia was not alone in facing up to the government business enterprises, and the need for reforming irrigation. The Dublin Statement implementation of a complex reform agenda. of the pre-UNCED Conference on Water and the Transparent reporting of financial performance is Environment, World Meteorological Organisation another way for governments to promote competent (1992) articulated three principles that demonstrate management. remarkable similarity with the Australian experience. The principles for effective water In the absence of an idependent economic management embodied in the Dublin Statement are: or price regulator in Victoria at the time, approval of rural water pricing remained a function of * the "ecological principle", requiring holistic government. The government was heavily involved management of water; in developing the water pricing policies of the * the "institutional principle", requiring that irrigation industry and took its share of the political management be participatory, with odium as a consequence. responsibility at "the lowest appropriate Setting clear financial targets for the level" management of government business enterprises * the "instrument principle", requiring that such as irrigation authorities is another vital function water be managed as an economic resource. of government. Such targets are essential for the The experience of reforming the Victorian good management of government businesses. How irrigation industry highlights the importance ofthese can management succeed if their goals are poorly principles. defined? A good summary of the role of governments in the reform of government business enterprises is reflected in the principles for corporatisation set out in Table 4.1 27 Table 4.1 Corporatisation Principles also accountable for policy and regulation of water * Prov iding utilities with clea r co mm ercial allocation. In other words the irrigation authority goals free of conflicting objectives; was both the poacher and the gamekeeper. * Abolishing or transferring utilities' regulatory Reform of the iffigation industry required roles (this is a function of governments or properly constituted authorities); clarification and rationalisation of the functions of * Paying utilities the commercial price for any the State Rivers andWater Supply Commission, the comm unity service obligations undertaken; urban water authorities and of the government and . Vesting management responsibilities in a its departments. The Ministerial Statement that commercial board accountable to Parliament through the Minister introduced the 1984 Bill to restructure central * Establishing and monitoring targets and management of the Victorian water industry providing reward/penalty mechanisms; described creation of the Department of Water * Establishing a 'dividend' com ponent of net Resources as the central policy unit, and the Rural earnings; Water Commission as the operational arm of the * Requiring utilities to pay tax and a fee for rural water industry. The Bill defined two major any Government Services (for example, loan o . " guarantees); objectves - "the delivery of sigificantly improved . Removing policy and regulatory constraints services to consumers and the implementation ofkey not applying to industry generally; public administration reforms through the * Adopting uniform commercial accounting introduction of modem financial and resource practices which are transparent; and management practices." The Bill provided for an * Reducing significantly the scope for "integrated corporate approach" and established a Ministerial intervention. Board of Management for the Rural Water INDUSTRY STRUCTURES AND Commission including representatives of the major rural water users and board members selected for ACCOUNTABILITY their specific skills. The discussion of industry restructuring starts The Rural Water Commission was charged with the end of the State Rivers and Water Supply by the Government of the day to become more Commission in June 1984 with the formation of the commercial in its approach to the delivery of services Rural Water Commission. Restructuring gathered to its customers, to improve financial management pace in July 1992 with the transformation of the and accountability, and to establish strategic Rural Water Commission into the Rural Water planning within the framework of wise resource Corporation. Restructuring focussed on the role of allocation. the rural water authority in industry regulation, Clear accountability is vital to effective urban water supply, and water resources Clear accountab il o the management. Regionalisation of service delivery management, however clear accountability of the was another important aspect of industry structure. RuaWteComsincldotbetbihd The commuit wenpre also demanding a treaterve until the scope ofthe irrigation business was properly The commumity were also demanding a greater voice in natural resources management that had to be defined. The functions that were not essential to the accommodated. irrigation business had to be identified and separated. The subsidies and cross subsidies had also to be The new Government of Victoria inherited an identified, and if not removed completely, at least irrigation authority with a wide range of functions recognised. Unravelling the confusing financial from developing government policy, regulation of relationships and confused accountabilities was an one sort or another, resource management and essential component of the reforms. operating both urban and rural water supply businesses. These functions often resulted in conflict The State Rivers and Water Supply of interest. For example, the State Rivers and Water Commission had accumulated a mixture of internal Supply Commission, the body that represented the and exteral accountabilities across a range of public interests of irrigation, the largest water user, was sector functons: 28 * construction and management of urban water boards. While the supervisory function infrastructure which harnessed the major part was transferred to the then Department of Water of the available water resources in Victoria; Resources in 1984, some direct management of * bulk supplier to non-metropolitan urban water urban water supplies continued. authorities and supervision of their activities Urban and irrigation water businesses are on behalf of the Govemrnent; very different and the urban businesses within the * retailing water to major urban areas such as Rural Water Commission were a distraction. the Mornington and Bellarine Peninsulas, and Eventually all the urban water supply businesses Bendigo; were separated leaving the Rural Water Corporation * managing large gravity and piped government and its successors as purely irrigation and rural water irrigation districts and regulated supply to supply business with clearer objectives and fewer private diverters and smaller schemes such opportunities for cross subsidy. as the First Mildura Irrigation Trust; Separation of the larger, more profitable * policy adviser to the Government; urban water businesses inflicted some financial * regulator on behalf of Government including stress on the Rural Water Commission, leaving the environmental regulation on behalf of the Commission with overhead costs that were not easy Environmental Protection Authority; to reduce, especially when public sector staffing * providing technical services throughout the policies did not allow for redeployment or water industry; and redundancies. The heavily subsidised small rural * assessing and monitoring water quality and town supplies remained with the Rural Water quantity. Commission. Often the lack of financial viability of the small town supplies was the reason that they were left for the Commission to manage. No other Separation of the Poacher and urban water board wanted them! Gamekeeper In order to clarify accountability, the Water Resources Management and Government transferred some of the Commission's Other Government Services policy and regulation functions as well as its responsibility for some urban water supplies to the During an 80 year period the State Rivers newly formed Department of Water Resources. The and Water Supply Commission accumulated a range water quality regulation functions delegated to the of functions relating to management of water as a State Rivers and Water Supply Commission by the natural resource, including water resource Environment Protection Authority were returned. assessment, floodplain and river management. The This allowed the Rural Water Commission to reason for accumulating these functions was often concentrate on rural water supply and resources that the State Rivers had the necessary skills and management. The ultimate objective ofthe structural the staff members were motivated to increase the reforms was to create an efficient commercial range of their activities. Over the passage of the irrigation authority working within a policy and years the Government lost contact with these regulatory framework established by the new activities and was often unaware of the services it Department of Water Resources. was getting! Collection of water resource and Urban Water Supply environmental data, ground water studies and involvement in the salinity program were more The State Rivers and Water Supply directly in the interests of the Rural Water Commission also directly mnanaged a number of Comsinadtsctme. urban water supplies including the Mornington Peninsula and Bendigo, and supervised some 450 29 A Commercial Orientation Task Force, Rural Government. After extensive and exhaustive Water Commission (1987), was established in 1987 consultation with the rural communities by the Rural to review all the Commission's activities to separate Water Commission a regional structure of nine them into activities that were part of the irrigation regions together with the regional centres was business and thus funded from the Commission's announced. This regional structure is shown in revenue. Natural resource management activities, Figure 4.1. on the other hand, are more appropriately funded The communities i some of the districts that by Government. had missed out on selection for a regional centre The ultimate objective was to convert the reacted strongly and organised political protests. natural resource management activities into a The Pyramid Hill community composed a song contract with the Government to ensure that all lampooning the Rural Water Commission, and the services were regularly scrutinised and subject to entire community of Murtoa inthe Wirmera walked competitive tendering. The discipline of reviewing 30 km to Horsham, the newly designated regional each activity would also eliminate activities that were centre, to publicise their case. In the end the being subsidised by inappropriate classification as decisions held. a govermnent service instead of part ofthe irrigation The initial regionalisation commenced by the business. Rural Water Commission in 1986 was completed Independent observers such as the Director by December 1990. The recommendations of the General of Water Resources commented that the Future Management Review made in January 1992 process was highly disciplined. The Board of took regionalisation of rural water management to Management of the Rural Water Commission was the next stage. confident that all subsidies resulting from In its submission to the Review the Rural misclassification of activities had been eliminated. Water Commission recommended that its nine The process certainly led to a more streamlmed and regions be reduced to five based on rural water efficient Commission. The future of the water systems. Maliee Region was divided into a stock resource activities previously carried out by the and domestic supply component and an irrigation Commission then became highly dependent on the component. The stock and domestic component was skill of the natural resource departments in combined with Wimmera to form the Wimmera establishing and managing contracts. Mallee Region based on the stock and domestic water supply system. The remainder of Mallee was Regionalisation combined with Loddon Torrumbarry, Goulburn and The Cain Labor Government had a strong Murray-North East Regions to form the Goulburn commitment to regionalisation of service delivery. Region covering the whole of the Goulbum Murray Regionalisation has the advantage of devolving Irrigation District. The larger regions would have responsibility closer to the work-face with the greater chance of becoming financially viable in their potential to improve the effectiveness of decision own right if they were ultimately separated. The making. While arguments can be developed that Future Management review took up this proposal centralised structures are more cost effective the for five regions. decision to regionalise was made on philosophical The Victorian Government accepted the grounds. The Rural Water Commission had the job recommendations ofthe Future Management Review of implementing regionalisation and making in their entirety and established the Rural Water productivity savings, and commenced a major Corporation with the five regions shown in Figure regional restructuring program in September 1986. 4.2. The new regional structure further clarified The selection of regional centres and the accountabilities by separating the regions according reduction in functions and staff in the district centres to the type of rural water business, and facilitated were highly controversial issues in rural Victoria. It holistic water management of catchments and water was also an issue that caused difficulty for the supply systems. 30 Figure 4.1 Rural Water Commission - Regions and Regional Centres Red Cliffs SUNRAYSIA \ Swan Hil LODDON TORRUMBARRY MALLEE Kera Fgr Hom4Rralaate C r - R and Re Al C WIMMERA \ ren igo v < GOULBURN % NORTH EAST^)/3 SOUTHERN ArmadaleX ; GIPPSLANJ X ~~~~~~~~~~ @ ~~~~~~~~Maf f r ; Figure 4.2 Rural Water Corporation - Regions and Regional Centres eRdCliffs WIMMERA MALLEE GOLUNMRA X ~~~SUHR Armadale GIPPLAN 31 Devolvement of Authority to the GOVERNANCE Community Governance, by which is meant the manner The government encouraged delegation of of governing, was critical to the success of intended authority to the community level. The first effect of reforms. The governing body must have clearly this policy was reflected in the Victorian Salinity defined powers, responsibility and accountability in Program that developed from the Parliamentary order to achieve its objectives. It must be able to Inquiry on Salinity of 1982-1984. Community control those elements of its budget which affect its groups were established to lead the development of financial performance. The most appropriate form salinity management plans for specific water of governance emerges from experience, review and systems. The technical specialists of the government refinement. In the decade from 1984 to 1994, which agencies includingthe Rural Water Commission, and is the focus oftthis discussion, there were three major subsequently the Rural Water Corporation provided forms of governance each giving way to the next as technical advice to these community groups. The the state government reform process proceeded. technical specialists had led previous planning programs and the role reversal took time for both State Rivers and Water Supply the community and technical specialists to adjust to. The policy of devolving authority also involved Commission - 1905 to 1984 the irrigators through development of the advisory The State Rivers and Water Supply committees of the irrigation districts described in Commission was governed by Chairman and two Chapter 5. Commissioners appointed by the Government. Customer focus was enhanced by the Rural Commissioners were usually appointed from inside Water Commission through strengthening the the organisation and more often than not were advisory system of irrigators and other rural water professional engineers reflecting the priorities of the users. Local advisory committees were based on construction era. irrigation areas and in the case of domestic and stock water supply, on communities of interest. Rural Water Commission - 1984 to Membership was drawn from customers with the 1992 by-laws of the Advisory Committees allowing for appointment of members with specialist skills. On the st of July 1984, the body responsible Representatives of these local Advisory Committees for governance of rural water changed from an formed Regional Advisory Councils covering whole expert commission ofthree to a representative Board water systems. A state wide forum was convened of Management consisting of 8 members. biennially to consider state wide issues. A state wide Representation of irrigators and other rural water Groundwater Advisory Committee was established user groups on the Board of Management was one in 1991 and developed a Groundwater Strategy to way to ensure that the industry's needs and interests improve management and protect the quality of were promoted. Delivery of improved services to groundwater in Victoria. customers was one of the main objectives for Advisory committees and councils were the establishing the Rural Water Commission. forum for the discussion of options for pricing The Board consisted of two representatives policies and asset maintenance and replacement. of irrigator interests and one representative of Improved methods for water distribution were also domestic and stock water users. These canvassed. The establishment of advisory system representatives were selected by the Minister from was the first step towards customer management of a panel of names proposed by Rural Water the irrigation systems. Commission's Regional Advisory Councils. Two other Board members were selected by the Minister 32 on the basis of skills and experience in the fields of Act, 1989 which provided for establishment of bulk waterway management, and business. The staff of water entitlements, including environmental theCommissionelectedanotherBoardMember. The entitlements, and transferability of water Director-General of Water Resources (head of the entitlements. The Rural Water Commission was also Department of Water Resources) was an ex-officio an active participant in the affairs of the Murray member of the Board. The General Manager (chief Darling Basin Commission including development executive) ofthe Rural Water Commission who was of the Salinity and Drainage Strategy. appointed by the Minister, completed the Board of While the restructuring arrangements put in eight members. place on 1 July 1984 went a long way towards Board membership was designed to achieve improving accountability, the dual reporting a balance between internal management and external arrangements of the General Manager to both the skills while keeping in close touch with development Minister of the day and the Board of Management, of water policy. The new Board of Management created the potential for significant conflict between developed a vision for irrigated agriculture to make the long term goals of the Board and the shorter a significant contribution to the wealth of the State term political imperatives of the Minister. Success and nation by improving profitability while depended on a good working relationship between addressing the problems of financial and ecological the Board and the General Manager and a sustainability. Goals for customer service, considerable amount of trust and goodwill was productivity, and commercial viability were invested to make this arrangement work. The key established by the Board of Management. players became masters of compromise, exploiting Clearly defined and numerically expressed every window of opportunity. goals were essential to the reform process. The Board The representative based Board disciplined of Management took the initiative and negotiated itselfto work more as a corporate skills based board. specific performance targets with the government There were, however, constraints in respect of the to ensure that accountabilities were clearly defined. range of skills available to the Board. Ex-officio The Board of Management was convinced Board membership for the Director General ofWater thlatlong-term sustainabiity ofthe irrigationindustry ~Resources also made it difficult for the Board to in Vgctoria would depend on the irrigation authority operate as an independent authority to achieve its becomingVfinancially self-sufficient. Itisaw thatthe primary objective - a financial and ecological becoingfinacialy slf-uffiien. Itsawthatthe sustainable irzigation industry. The staff member on financial discipline of relying on revenue to fund tainae signion intry The st er At operations and investment in infrastructure renewal the Board faced significant conflicts of interest. At would lead to the development of more appropriate times the interests of the organisation and its services and cost effective irrigation systems. The customers conflicted with the interests of the staff, financial goal was to close the gap between revenue particularly when large reductions in workforce and expenditure in twenty years, including making numbers were required. adequate provision for renewal of the irrigation Rampant inflation and adverse terms of trade infrastructure. This was to be achieved by made the Board's pricing regime very unpalatable combination of price increases, and cost reduction, to the rural sector resulting in a "Rate Protest" by with emphasis on cost reduction. the irrigators and the subsequent Future Ecological sustainability was addressed Management Review of the Rural Water through providing considerable technical resources Commission. The Board of Management embraced to the Victorian Government's Salinity Program and this review and submitted its recommendations improved water allocation policies. The Rural Water which were largely incorporated into the next phase Commission played a major role in supporting the of restructuring - the establishment of the Rural Department of Water Resources in drafting the Water Water Corporation. 33 Rural Water Corporation - 1992 to Five Regional Management Boards were 1994 established as subsidiaries of the Rural Water Corporation. The Future Management Review The Rural Water Corporation was established reduced the nine regions of the Rural Water on 1 July 1992, based on the recommendations of Comnnission to five in the Corporation The regions the Future Management Review. Figure 4.3 were not separate legal entities although this was summarises the organisational structure of the Rural foreshadowed in their establishment. Each region Water Corporation. now had its own Regional Management Board The new skills-based Corporation Board was including two members of the Corporate Board, or appointed by the Minister, through the Governor- senior management. . Bi-monthly meetings of the in-Council on the recommendation of a selection Chairs and Deputy Chairs with the Corporation panel, chaired by Stuart McDonald, the chairman Board served as a high level forum for solving some ofthe Future Management Review. The new Board of the transition problems This overall structure was equipped with considerably enhanced financial provided effective leadership to the regions in their management skills, while continuity was maintained ultimate transition to independence. by the appointment of three former members of the The crucial factor in the success of these Rural Water Commission Board of Management, Boards was that the members were appointed on including the Managing Director. the basis of expertise structured to ensure that each The Corporation Board supported by two Regional Board had access to the full range of skills Audit Committees, the internal auditor and the required. Members of the Regional Management Corporate Office, in effect formed a holding Boards, apart from the Corporate appointments, company providing strategic direction and corporate were selected by a similar process to that used for discipline, to five regional subsidiaries, to maintain the Corporation Board. Customer involvement in a careful balance between central authority and the selection process for all the Regional regional autonomy. The establishment of a strong Management Boards was accounted for by Financial Audit Committee by the Board, together significant representation on the selection panels by with augmentation of the internal audit function by nominees of the Victorian Farmers Federation. private contractors, was essential to expedite the The five regions worked within performance establishment of accounting policies and secure the contracts negotiated with the Corporation Board. integrity of the financial systems in the transition. The performance contracts set financial targets to aigure 4.3 Rural Water Corporation - Organisational Structure . udi Sub-Committee Corporation Board --d -b- -o-n- - -i - Financial & EDP| | nagerrnent & II Environment Business Divisions § Business| | j Wdro- | bNterSy ste Corporate Office iServicesl TechnooCorporate Development Corporate 4nance REGI1)NS 34 achieve the Rural Water Corporation's overall goal The Future Management Review also of financial self sufficiency within 20 years. The recommended further strengthening ofthe Advisory principal target was the required regional reduction Committee structure with the formation of Customer in the shortfall of revenue against business costs. Groups with a major role in deternining levels of Figure 4.4 (on the next page) sets out a typical service, maintenance and replacements of assets in performance contract between the Corporation each irrigation or water user group area. Board and a Regional Management Board. Independent management of local systems by these Regional Management Boards managed their groups was foreshadowed once they were financially own affairs, preparing budgets within borrowing self-sufficient. The Regional Management Boards limits set by the Corporation, in turn fixed by global were responsible for establishing the Customer borrowing constraints set by the Government. groups. Regional Business Plans (including Asset During the Future Management Review some Management Plans) were developed and expressedtheviewthatthereshouldbeanimmediate incorporated into the Rural Water Corporation move to full autonomy of the regions. In the end a Business Plan. Regional Management Boards were commercially based and expert Corporation Board free to determine their own pricing policies within supported by a small corporate office proved highly the overall guideline of becoming financially self- effective in accelerating the movement to financial sufficient by 2001. Tariff structures were also self sufficiency, and managing the transition to revised on a regional basis. autonomous regional authorities. Headworks (Water Systems Division in A change ofgovernment occurred in late 1992 Figure 4.3) were separated out from other Corporate and new state wide policies for water reform were Office activities, costed accordingly, with established. These involved, amongst other things, appropriate charge-out rates and bulk water prices early separation ofthe regions into independent rural to the regional subsidiaries. The Regions delivered water authorities and the privatisation of business retail water services and operated the headworks units such as Hydrotechnology. Implementation of under contract to the Corporation's Water Systems these reforms stepped up the pace of pricing reform Division which in turn was contracted to the so that regions could be financially sustainable in Corporation Board to deliver wholesale water their own right. A decision was made to disband services. the Rural Water Corporation and the Corporation's The two service divisions of Business regionsbecameindependentRural WaterAuthorities Services and Hydrotechnology were established in on 1 July 1994. the form of stand alone business and technical The Corporation sold the individual consultancies reliant on revenue from customers to businesses within Hydrotechnology, maximising the survive. Both these consultancies also operated sale of assets to retire debt; disbanded the Corporate within a contract with the Corporation Board, Office and those business units not commercially supervised by Board subcommittees. These sub- viable, and devolved the remaining policy functions committees addressed the issues of restructuring and to the Department of Conservation and Natural financial management of the business units so that Resources. The Corporation Board undertook this business dealings between divisions and the regional task with the objective of maintaining the momentum subsidiaries were transparent with all costs attributed for reform in the industry while preserving essential to the unit in which they occurred. A purchaser- technical and management skills. The Rural Water provider relationship was established between the Corporation ceased to exist on 27 December 1995. business units and the regions. 35 Figure 4.4 Performance Contract between Region and the Corporation - 1993194 The items contained herein are specifically agreed to by the parties within the context of this document. Region Corporation * Continue to develop the Regions as an * Continue to implement the McDonald Review. effective operating entity, in accordance with this Performance Contract. * Operate the water system in accordance with * Provide strategic advice and assistance to the the Operational Plan. region. * Establish new consultation and customer * Achieve productivity gains for the Corporate group structures. Office and Service Companies in line with McDonald Review targets. * Establish prices that assist in achieving * Enter into contracts with the Government in financial self-sufficiency in a period shorter relation to services Government requirements. than defined by the McDonald Review. * Ensure all beneficiaries of the region's * Expand the customer base to incorporate all services contribute to the region's revenue identifiable beneficiaries within the water base. systems by June 1994. * Develop strategies to address the issue of * Maximise returns on periodic cash surpluses. WHO standards compliance for urban systems. * Deliver any Government funded programs. * Ensure the Water Resources Business function is delivered in the most effective manner. * Maintain the system's assets in accordance * Provide the region with an overdraft facility. with asset management plan. * Deliver the regional components of the * Negotiate mutually beneficial financial and contract with the Water Resources Business. policy arrangements with Government. * Meet financial obligations to the Corporation to ensure the shortfall to cover financial costs is no greater than $1.4 million. * Develop a strategy to reduce dependence on overdraft. * Initiate programs for delivery efficiency improvement. * Continue to productivity improvement program. Chairperson, Region Chairperson, Corporation 36 DEVELOPMENT OF A PRICING the current written down replacement value of the POLICY FOR IRRIGATION assets. Such a level of price increase was politically WATER untenable and inequitable. The current generation of irrigators had paid a higher cost for their farms Water pricing policy was one of the first reflecting the low, highly subsidised price of water. subjects to occupy the Board of Management of the Government wisely decided to regard the opportunity Rural Water Commission on its formation in July cost ofthe original capital as a sunk cost, and not to 1984. Previous state governments had not specified seek to recover the opportunity cost of the original clear financial objectives for the irrigation authority. capital expenditure. The opportunity cost of new Construction of irrigation infrastructure in a cost investments in irrigation was another matter. effective manner was the unwritten performance target. Capital Consumption Increasing the level of cost recovery, Allowance for capital consumption in the stimulating the development of more profitable definition of cost recovery presented another policy irrigation enterprises and reducing the emerging dilemma. The government was concerned about financial burden on the government of financing the meeting the high cost of renewing ageing irrigation renewal of ageing irrigation infrastructure were the infrastructure. Including a measure of capital new policy objectives of the Cain Labor consumptioninthedefinitionofcostrecoverywould Government. Changing the notion that water was influence future behaviour, an important an economic and not solely a social good would also consideration when formulating economic policy. If require pricing reform so that irrigators receive more the irrigators funded renewal of the infrastructure appropriate economic signals about the value of they would have strong incentives to ensure that only water. essential infrastructure was renewed, and to an Development of pricing policy involved appropriate standard to meet their needs. What considerable interaction betweenthe government, the measure of capital consumption should be used in irrigation authority and the irrigation community, determining water prices? although, in the absence of an independent pricing Traditionally depreciation based on historical regulator, the government had the ultimate costs had been used as a measure of capital responsibility for pricing policy. The Rural Water consumption. The long lived assets of the water Commission and the Victorian Government had to industry and the ravages of inflation over time left develop an appropriate pricing policy defining the inadequate financial provision to fund renewal works level of cost recovery to be achieved for irrigation when required. A more appropriate measure of water. capital consumption was required. Opportunity Cost of Capital Current Cost Depreciation as a Definition of full cost recovery raises some Measure of Capital Consumption complex questions. Should an allowance be made The Cain Labor Government introduced for the opportunity cost of capital used to construct the existing irrigation infrastructure? At the current cost accountmg to all government business beinn of th dead une dicsso the enterprises as a matter of policy. Current cost beginninetg Of the decade under discussion the depreciation therefore becamne the required measure government was meeting all the interest payments o aia osmto o rcn upss hl on a debt of some $400 million incurred in constructing the existng hinfiastructure An analysis current cost accounting and current cost depreciation contrucing tevexsting infrastrutue ta have some significant advantages, particularly in OI pricing levels o 18 dnsrated tha water performance comparisons, and making adequate four tic es to generate a 4% real rate of return on provision for asset renewal, the policy had some substantial disadvantages. 37 Current cost depreciation was calculated and administration costs plus the current cost from estimates of current replacement cost, assuming depreciation of the irrigation infrastructure by the that the service potential of every major year 2004/05. Water prices would have to reflect infrastructure asset would be replaced using modem this goal having regard to the potential to make design and construction techniques. The current productivity savings and reduce the costs of replacement cost was then depreciated in a straight renewing the infrastructure. Use of current cost line over the estimated life of each asset or class of depreciation did not give the irrigators a clear assets. In broad terms historical depreciation for the incentive to reduce renewal costs. assets held by the Rural Water Commission was $16 When this goal was achieved the Rural Water million per annum while the equivalent current cost Commission would have sufficient cash flow to depreciation was $50 million per annum. manage the irrigation business into the future without A major advantage of current cost accounting further government subsidy. The policy was based was that it required a rigorous review of all assets on the assumption that the interest on the original and the development of a comprehensive asset debt would continue to be met by the Government. register including the replacement cost and In the end a small positive rate of return would be nominated life of each asset or class of asset. required to meet interest costs on new debt incurred Development of a comprehensive asset register after the original debt write-off. imposed substantial disciplines on the Rural Water Until this policy change, pricing decisions had Commission. been made from year to year on an ad hoc basis. If The major disadvantage of current cost commodity prices were high and farming profits depreciation, which in the end proved fatal to good then price increases were large, on the other implementation of current cost accounting as the hand if commodity prices were depressed water basis for setting water prices, was the difficulty in prices were often frozen. Large fluctuations in price explaining the policy to the irrigation community. increases occurred as illustrated in Figure 4.5 The large price increases necessitated by current cost showing water prices, both in nominal and real terms accounting required clear explanations. The policy (in 1994/95 dollars), from 1959/60 to 1994/95 for debate was easily sidetracked. Why assign a life of the Goulbum Murray Irrigation District, the largest 200 years to Eildon Dam, the principal structure in irrigation system in Victoria. the irrigation system? Wouldn't the electrical and mechanical components require replacement first and the embankment last much longer? Calculation Figure 4.5 Goulbum Murray Irrigation District, of current cost depreciation of a drain creates another Water Prices - 1959160 to 1994195 policy dilemma. A drain is a hole in the ground. If the drain is properly maintained, that is cleaned out 20 regularly wouldn't the drain last indefinitely? These 18 u . questions are very difficult to answer, particularly 16Future Management Re4evv K to a highly sceptical audience. Application of current 14 cost accounting was also correctly seen to generate a) large cash surpluses in the early stages of 0 imDplementation. 1 implementatin. c8 Charge adjusted to 1994/5 values Definition of Cost Recovery 46 Actual Chare perM Despite these difficulties the financial target 2 for the irrigation authority could now be defined. 1 61 i i970/19751W 6 1I'/1 i985186 i99V 1 The Rural Water Commission was given the goal of achieving a 0% real rate of return on assets within 20 years: that is meet the operations, maintenance 38 The price of irrigation water in Victoria had of openness adopted by the Rural Water Commission been held low in the belief that low water prices has led to a much greater understanding of the would assist the irrigation industry. Water prices, financial realities of the irrigation authority within in real terms had remained constant at approximately the irrigation conmmunity. $1 O/ML from the early 1960's to the late 1970's. In the late 1970's and early 1980's the State Rivers A Controversial Outcome and Water Supply Commission started to increase water prices substantially, partly in response to Inflation levels used to calculate the annual stimulation from the Public Bodies Review price increases were based on forecasts of inflation Committee, and also reflecting the underlying prepared by the Victorian Treasury. Inevitably concern that ageing infrastructure would erode the forecasts of inflation prepared by governments are long term economic viability of irrigation. Water underestimates ofthe actual inflation. Governments prices had reached approximately $14/ML by 1984/ want to avoid forecasts of high inflation becoming 85 (in 1994/95 $) when the Rural Water self fulfilling prophesies by building high inflation Commission succeeded the State Rivers and Water estimates into budgets. The underestimates in Supply Commission. inflation resulted in the Rural Water Commission Adoption of the 0% real rate of return would under-achieving its pricing targets. The actual real result in almost doubling water prices from 14 $/ price increases achieved over the life ofthe Financial ML to about 25 $/ML. The latter target could be Management Strategy to 1988/89 was 0.9% per reduced by greater efficiency gains and reducing the annum compared to the target of 2%. cost of renewing infrastructure. Given the capital During the development of the 1990/91 intensive nature ofthe irrigation authority's business, Business Plan the need for remedial action was the potential for reducing the target is limited unless identified to speed up achievement of pricing a large amount ofthe irrigation infrastructure is not reforms. In future, pricing calculations would be renewed. The govermnent and the Rural Water based on the actual inflation in the previous financial Commission had to face the odium of doubling water year and not forecasts. Coincidentally the decision prices. The next policy question was over what was taken just as the level of inflation started to period would this price increase be phased in? fall. The required price increase was now 2.8% real per annum. The more accurate estimates of current cost depreciation and productivity improvement Twenty Year Phasing in Period embodied in the 1990/91 Business Plan, together Long term predicability of water prices was with the under achievement of the original target an important policy goal developed by the Rural resulted in a high target for real price increases. Water Commnission and accepted by the government. Providing the irrigation community time to adjust With inflation running at 8%, the nominal Providing the i.figation community time to adjust price increase in the first year after the change in to rising water prices by improving water use method of p*ce calculation was 11%. Declining efficiency and profitability would reduce the impact inflation helped over-achieve the annual target as of price increases. The Rural Water Commission llustrated by the step in real prices in 1990/91 shown therefore decided to phase in the required price in Figure 4.5. The 11% increase in water prices was increases over 20 years from 1984/5 to 2004/5. The taken at a time when commodity prices were high. annual price increase required was calculated as 2% Unfortunately shortly after the decision had been real per annum over the twenty years, havmg regard to~~~~~~~~~~ prjce fiinyipoeet n ot Implemented the pnces of most rural commodities to projected efficiency improvements and cost crashed leading to unrest in the irrigation community reductions. The wisdom of announcing such a long and the "Rate Protest" during which the irrigators term pricing policy can be questioned. Some would refused to pay their outstanding water rates and argue that the same result could be achieved by charges. The unrest stimulated a series of reviews stealth, putting up water prices when commodity icluding a review of current cost depreciation, and prices were high and holding them in periods of the Future Management Review of 1991/92. recession. But there can be little doubt that the policy 39 The Move to Renewal Accounting for distribution staff were used to rate the majority of Calculating Water Prices assets in the channel and drainage system during field inspections. A risk rating was also be assigned Current cost depreciation was the first policy to each structure based on the consequences of element to feel the heat of review. Initially the failure. If the structure could be reinstated quickly Minister, Steve Crabb, requested the Auditor and only affected a small number of customers, then General to review the concept of current cost a low risk rating was assigned. On the other hand, depreciation. Understandably the Auditor-General if the structure was large, would take a long time to refused, stating that he could not comment on reinstate and affected a large number of customers, government policy. The accounting firm, Arthur then a high rating was assigned. Anderson, was then commissioned to review current cost accounting and other policy options to account Finally the cost of replacing each structure for capital consumption. or class of structure was estimated, based on using the best available technology, and the cash flow Arthur Anderson recommended a shift to necessary to fund replacement of the infrastructure renewal accounting. Renewal accounting requires prepared. The cash flow was presented in the form estimation of the timing and cost of replacing of an annuity to smooth out annual variations in essential infrastructure having regard to risk of asset replacement costs. The first renewal annuity failure and the hazard should failure occur. The cash was based on a 100 year period. The replacement flow required to fund the required renewal of profile of irrigation infrastructure in the Goulbum infrastructure over an extended period is built up Murray Region over 100 years is illustrated in Figure from a study of all the infrastructure assets in turn. 4.6. Subsequently the annuity period has been An annuity is calculated to smooth out fluctuations reduced to 20 years which brings the risk of in cash flow over the annuity period. Capital substantial increases in the annuity as large consumption is then defined in terms of the renewal replacement items move into the 20 year period. annuity. The renewal annuity unlike current cost depreciation has the advantage that it can influence future behaviour with the potential to create a more Figure 4.6 Goulbum Murray Water, 100 year cost effective irrigation system. The renewal annuity Replacement Profile for all Services. has the potential to facilitate a more positive debate with the irrigators over renewal costs and pricing. 40 Renewal accounting requires building up 30 substantial knowledge on all the assets including - their condition, the risk to service and the hazard to .° 20 life and limb. From the formation of the Rural Water El9 Commission on the 1 July 1984 a substantial, and 10 ongoing effort was put into developing and improving asset registers and supporting information o The~~ step getting a complete I~~~~~ eli 16 21 2631 3641 46 515661 66 71 76 818691 66 systems. The inportant step was getting a complete .hre 6 5 year blocks commnc3ig on yer ar tw9 picture of the long term cost of replacing the Totaexpenditueovewnext2Oyears$26dZ4m, 100pears $1.88.2m infrastructure. The initial estimate would likely be on the high side and subsequent reviews and The first estimate of the 100 year renewal revisions would reduce the estimates of renewal annuity for the Rural Water Commission was $38 costs. million per annum compared to $50 million per A six level condition rating system was annum for current cost depreciation. The difference introduced with Condition 1. referring to a new asset, partly resulted from the fact that "holes in the and Condition 6. referring to an asset that had failed ground" in the form of channels or drains do not or was on the point of failure. Experienced water need replacing, only the bed and banks do. 40 Replacement of a channel therefore can cost less renewal accounting as a policy initiative, and has than construction of the equivalent new channel. contributed to the more constructive relationship The concept of renewal accounting was between the irrigation authorities and the irrigators. introduced following Future Management Review and ultimately adopted by the Government as the FINANCIAL TARGETS AND basis for calculating future irrigation water prices. STRATEGIC PLANNING The price increase recommended by the Future Management Review was 2.1% real per annum over Three Strategic Plans were formulated for the the periodto 2001 comparedtothe 2.8% ofthe Rural period 1984 to 1994. The first four years from 1985/ Water Commission's Business Plan. In fact the 86 to 1988/89 were guided by the Financial Future Management Review brought forward the Management Strategy (FMS), the second time target date for financial self-sufficiency from 2004/ segment was covered by the 1990/91 Business Plan 2005 to 2001. which was superseded by the Strategic Plan drafted Acceleration of productivity improvement, by the Future Management Review which reported and adoption of renewal accounting helped reduce in January 1992. This Review established the Rural the real price increases required to achieve financial Water Corporation. All three plans had common viability. The stark reality of the financial position goals - to reduce the business cost shortfall to zero, of the Rural Water Commission could not be a strong customer focus and local management of avoided, however, and there was acceptance that business operations. The business cost shortfall was large price increases would still be necessary despite defined as the difference between revenue and the substantial gains in operating efficiency. total of operation costs, maintenance costs, administration costs, any finance charges and the Water supply and irrigation is a capital renewal annuity. The Future Management Review intensive industry and the cost of replacing ageing strongly endorsed the Rural Water Commission's infrastructure dominates the calculation of prices. 1990/91 Business Plan and accepted the goal of The continued sharp increase in real water prices financial self sufficiency for irrigation. following the freeze during the "Rate Protest" is evident in Figure 4.5. Real water prices had increased to $18/ML by 1994/95 and the target for Financial Management Strategy - financial viability was within sight, coming down 1985/86 to 1988/89 with improved efficiency, and more cost effective The Financial Management Strategy was the asset renewal to the range of $22 to $23/ML. first strategic plan endorsed by the Board of Funding the renewal of essential Management of the Rural Water Commission and infrastructure was now the focus of the pricing the Government. The Strategy was negotiated with debate. Renewal accounting for pricing irrigation the Department of Management and Budget (the water has a vital advantage in that it is forward Government's treasury department) by the looking and promotes a much more positive debate Commission's General Manager, and the Director on pricing with the irrigation community. The debate of Finance and his staff. It was essentially a "top- now shifted to what needed replacing to keep the down" exercise with little involvement across the irrigation system working to provide the level of organisation. It was a blunt tool and recognised as service required by the irrigators. Importantly the such. debate could focus on smarter ways of replacing The basic elements of the Financial the service capacity of the infrastructure and trading Management Strategy were: off level of service against water prices. The shift in focus of the debate from water * the Commission agreed to restrict recurrent prices to what needs to be done to keep the irrigation expenditure for four years from 1985/86 to system working is testament to the success of the nominal expenditure for 1984/85. Regardless of inflation, the annual 41 Appropriation Act would show constant practices was constrained by the Rural Water operating expenditure for the organisation for Commission remaining in the inner budget, with the next four years. Only Government operating funds appropriated by the Victorian initiatives approved by Cabinet on a project Parliament and revenue disappearing into the by project basis would cross this threshold. Government's Consolidated Fund. A series of With inflation running at 7% to 8% at the internal and external reviews and activity value time, the real reduction in operating analyses wereusedto help formulatethebudgetfrom expenditure was projected to be about 30%; year to year to meet the diminishing financial * in return the Government agreed to forgive resources available. The first two years of the historical debt of some $400 million, and any Financial Management Strategy were relatively interest on that which might have accrued; painless but by the third year rising inflation and * the Financial Management Strategy did not diminishing scope for across the board cost include pricing policy, except to note that reductions caused significant tensions in the revenue needed to be increased. organisation. Forgiveness ofhistorical debt was an essential The outcome was that the Rural Water part ofthe pricing strategy ultimately agreed between Commission achieved the targets of the Financial the Rural Water Commission and the Government. Management Strategy. Operating costs were reduced If the Commission accepted responsibility for the by 30% over the four years to 1988/89. debt of the past 80 years it would sink the organisation financially before it started. This debt Rural Water Commission's 1990/91 had been incurred for projects that were often carried out to meet social objectives, such as soldier Busness Plan settlement and closer settlement, rather than to The next significant strategic planning generate a viable irrigation business. Forgiving the activity was the formulation of the 1990/91 Business debt recognised this reality and gave the irrigation Plan. The goal of this five year plan was financial industry a clean start to become a viable business self-sufficiency within 15 years given that five years enterprise. had elapsed since the twenty year target was set. Figure 4.7 sets out the business of the Rural Water thathnc onlyd direbtlyn that was cied frateRdws Commission in 1989/90 in terms of revenue sources. that incurred directly in the name of the State Rivers TeBsns lnbito h xeineo and Water Supply Commission. This amounted to i he Financil Mnagement egy $68 million that had been borrowed in the early tmplementlng the Fsiancaal Management Strategy 1980s. Allocation of the $68 million across the to develop more sophisticated strategies for reducing Commissions irrigation systems caused much costs and ensuaing the financial and environmental debate as the original monies bore no relationship with particular projects. Inclusion ofthis $68 million The Business Plan was based on the following in the financial package caused a major diversion in strategies: the debate and was ultimately forgiven by the further productivity gains and continuing real government in the financial package that followed price increase to achieve financial self the Future Management Review, sufficiency in 15 years; The accounting practices of the Rural Water . the provision of those services which Commission were systematically overhauled to customers want and for which they are provide management information necessary to prepared to pay; implement the Financial Management Strategy. . increased expenditure on maintenance and Accrual accounting, together with current cost replacement of assets to ensure ability to accounting provided the tools necessary to indicate provide services in the future; future capital requirements to maintain the irrigation infrastructure. Further reform of accounting 42 Figure 4.7 Rural Water Commission Business in Outline - 1990191 Business Plan l ~~Manager of Water Systems l Waterrvices (84%) u p (% Maem enrvicest(16%) Water Resources {-fW-a-te r-Su-p pi y -(7-2 Management: (5%) Surface and gDrainage i Salinity & a gron repl Groundwater Flood Protection (3%) Assessments reteei w r ses ad mtock (1w0%) Water Quality _ l ~~~~~~~~~~~~~~Services equitabrole ctshring,y faore-aptlexediueonrplcn/astsoe Figure 4.8 (o the nextpage)seoRiver Diversion (3%) r r Other Recoverables: Groundwater Placing a7tgtren o Murray Darling Basin Extracthon ( 1 %) Commission (5%) integration Catch-menr: Others (3%) H Burk Supplies (4rl) Managem ent (2%) andalfco gfom ther sourRiver Management t H Envirnment(1°h) l Floodplain Ma nagem ent NOTE: Figures in brackets represent rounded |State Wjater| percentagesoftcuent businessrerenue. Total$95m. E ab oratoryg(2%) - greater investment in salinity and ground replacement of infrastructure was important issue water control measures, in accordance with considered in developing the business plan. The agreed salinity management plans, and State Rivers and Water Supply Conmmission worked protection of the resource through total in an environent where capital was provided by systems managementb and goveenment and the finance charges were disguised greater efficiency in water use and more within the Consolidated Fund. Such a system equitable cost sharing. favoured capital expenditure on replacing assets over Figure 4.8 (on the next page) sets out the 5 recurrent expenditure on maintenance. This situation year financial targets of the 1990/91 Business Plan. was exacerbated by the Financial Management In sunimary the Plan involved: Strategy placing a tight rein on recuffent expenditure boosting revenue by $20 million,over the 5 icluding maintenance. Maintenance expenditures Th balatnc evne betee maneac$nd fo21.0ilint2. million over the sam years, with half coming from the irrigators reueineatmsdngthforyrsfte an afcmn rmote ore uha Strategy. While some decrease could have resulted hydroelectricity; ~~~from productivity improvements the conclusion was reached that increasing expenditure on asset * reducing costs by $11 nmillion; naintenance was required. • increasing maintenance by $5.1 niillion, and capita expenitureon renwal o The Business Plan of 1990/91 included an infapitaluepenitue by$ ilon;rnwlo allowance for real increases in expenditure on asset infrastucture y $9.5 illion;maintenance. Expressed in 1989/90 values, annual * ensuring debt servicing costs were kept below maintenance was targeted to increase froni $14.7 25 % of revenue; and million in 1989190 to $19.8 million in 1994195, the * reducing government subsidies by $16 capital expenditures on replacement of the million. distribution infrastructure were targeted to increase The balance between maintenance and from $14.6 million to $21.7 million over the same period. The equivalent expenditures on replacement 43 Figure 4.8 Five Year Targets Water Services $ million (1989190 values) TARGETS Ainual Change 89/90 94,95 by94/95 $M $M $M Increases in Revenue District Rates and Charges 68.0 78.0 10 OtherServices 11.0 21.0 10 Decreases in Costs Additional Productivity Gains 0 7.0 7.0 auarterlyBilling 0 4.0 4.0 Increases in Asset Investment Total lVbintenance 14.7 19.8 5.1 Distribution stem Replacement 14.6 21.7 7.1 Headworks Replacemern, Safety 5.6 8.0 2.4 Productity Capital 1.0 3.0 2.0 Reduction in Debt Servicing Costs 24% 20%* 4% (as a percentage of Revenue) Reduction in Government Funding Recurrent Costs 14.0 0 14.0 Capital Costs 13.0 11.0 2.0 * Longer term maxdmum is 25% of headworks including dam safety were an increase Future Management Review from $5.6 Million to $8.0 million. The total increase The implementation of the 1990/91 Business in annual maintenance and replacement of irrgation Plan coincided with a period of high inflation, high infrastructure over the five years of the 1990/91 intere. rates and the deepening of a rural recession. Business Plan was $14.6 million representing an Nominal rice increases were high and a "Rate increase of 42% in 5 years. Even with these large g incteathe urent replae entes ofl$4.7 on a reduction in water prices. The inigators, led by the Victorian Farmers Federation, withheld payment The average life of infrastructure assets was of some $30 million of water rates. therefore assumed to be 100 years. T'hese planned increases in expenditure were The Victorian Premier of the day decided to a direct reflection of the Board of Management's diffuse the protest by promising a review ofthe future concern to keep the ageing infrastructure in good management of rural water in Victoria and the principles of the Rural Water Commission's working order and catch up on deferred maintenance Business Plan. The Future Management Review was of earlier years. therefore established with terms of reference drafted Achievement of these targets would reduce by the Rural Water Commission and agreed by the the annual subsidy by Government to $11 million Government and the Victorian Farmers Federation, for capital works. Significant progress towards but the protests continued including a lockout of the financial self sufficiency was the goal. These targets Rural Water Commission's head office in Melbourne were met for the first two years of the plan. by some 400 irrigators. 44 The laws relating to secondary boycotts left * stipulating that subsidiary businesses be set the Federation highly vulnerable to legal action. up to provide specialist technical, training and Having been reminded of its legal situation the business services to the regions; Federation agreed to support abandomnent of the . identifying the shortfall in revenue to "Rate Protest" and allow the Future Management be made up by: Review to proceed under the original terms of substantial cost savings through reference. Whatever the rights and wrongs of the restructuring, "Rate Protest" the outcome was good in that an reducturmg, inquiry with a high degree of credibility was reduction in costs by converting debt established and the financial realities communicated to equity, to the irrigators for the long term benefit of irrigation * revenue from new sources, in Victoria. * increased charges to existing customers The Steering Committee for the Future and, Management Review (FMR) was chaired by Stuart * declining Government subsidy over an McDonald, Chairman of the Rural Finance adjustment period. Corporation and an irrigator himself. The Steering The Future Management Review report noted Committee included representatives ofthe Victorian that it is in the best interests of the Victorian Farmers Federation, Rural Water Commission, community that users of Victorian rural water union and business interests. The Review was systems pay the economic costs of operating, supported by consultants Gutteridge, Haskin and maintaining, administering and renewing these Davey, assisted by ACIL Australia and Ernst and systems, while ensuring that these activities are Young. undertaken at least cost and conforming to best The report of the Future Management Review practice. The Review endorsed the principle of endorsed the principles ofthe 1990/91 Business Plan financial self sufficiency that was the foundation of and made recommendations in respect of the the Rural Water Commission's business plan. structure of the Rural Water Commission: The efficiency savings made possible by - creating the Rural Water Corporation as a removing the organisation from the inner budget statutory authority outside the inner budget sector allowed reduction of the real annual price sector; increase from 2.8% to 2.1%. However the capital * removing the employees of this new costs of renewing the infrastructure dominated the Corporation from under the provisions of the pricing equation. The Future Management Review Public Service Act; endorsed the concept of using renewal accounting instead of current cost depreciation to calculate * redirecting head office functions to emphasis capital consumption for pricing purposes. water production and asset management; The Government implemented the * reducing the nine regions of the Rural Water recommendations ofthe Review and the Rural Water Commission into five regions (Coliban was Corporation together with its five regional Boards to become an independent urban water was established in 1992. The Future Management authority) establishing expertise based Review recommended phasing out capital subsidies Regional Management Boards as subsidiaries over the period to 2001 although the financial burden of the Rural Water Corporation; of the debt held by the Rural Water Commission * requiring that from 1993, each Regional was also recognised. The debt was made up of the Management Board assume responsibility for $68 million left with the Commission at its inception running its own business; plus the debt required to fund replacement of * stipulating that anew, small central authority essential infrastructure. The debt amounted to some (in effect a holding company) be formed to $102.4 million in 1992. set specific policies, coordinate the State wide system and drive the change process; 45 Continuing capital subsidies gave the Table4.2 RuralWaterCorporation- Debtand irrigation community confusing signals about the Superannuation Liabilities future of government subsidies, even if they were being phased out. Fortuitously the present value of Govemment's Package: the subsidies and the finance charges on the Debt forgiveness of $1 02.4m remaining debt were effectively the same. The debt balanced by no more subsidies to was therefore written off and the capital subsidies Corporation. withdrawn in a cost neutral trade-off to give the * 1991/92 Debt Servicing of $16m Rural Water Corporation and the irrigation Subsidy of $20.8m community much clearer financial accountabilities. * Superannuation: Negotiations were held with the Government Government accepts Liability of to forgive the remaining debt of $102.4 million in $269m to 1 July 1992 return for removal ofthe remaining capital subsidies. RWC accepts liability from 1 July The Government also accepted responsibility for the 1992 onwards unfunded staff superannuation costs of $269 million * Government funding $12m for to 1 July 1992 in retur for the Corporation accepting implementing recommendations of liability from 1 July 1992. In addition the McDonald Review from sale of RWC Government agreed to purchase the Corporation's houses to GEHA housing stock for $12 million to fund the restructuring costs including redundancy packages. The arrangements of the financial package are summarised in Table 4.2. Figure 4.9 Rural Water Corporation - Staff N^umbers - June 1986 to June 1998 The Rural Water Corporation now had to be dependent on revenue raised from its customers for 2200 long term financial viability, and finance charges were now a small component ofthe pricing equation. At last the financial accountabilities and 2000 performance targets were clear and the Corporation had sufficient resources to accelerate the 180 restructuring. FMR Target The Rural Water Corporation made &60 substantial progress in achieving the targets set by Actual the Future Management Review. Figure 4.9 shows Fure MwmaentPeview(FMP4SyearT the reduction in staffnumbers relative to the targets, 140098619S87 1SB 1S9 1SS 1912 1993 1994 1995 1996 and the substantial benefits of removing the Rural Water Commission from the strictures of the public service. The Rural Water Corporation achieved the 5 year targets in only two years. 46 CHAPTER 5: Profitability of Irrigation irrigators drive operation of the system. INTRODUCTION Development of a water management system can improve system operation, provide more flexibility The profitability of irrigated agriculture must in water trading, and create new water delivery be improved to break the cycle of drought, economic services for more profitable irrigation enterprises. recession, inability ofthe irrigation authority to fund Implementation of such technology also provides essential maintenance, financial hardship in the the opportunity to create an organisation focussed irrigation community, and the inevitable public on customer service. inquiry. In the past governments have responded to . . . . . t these crises by restructuring institutions and The discipline that irrigator's meet the full thescrasing subsides touctheuiringaintutocomuni ind cost of renewing irrigation infrastructure is vital to oneafrmo another. Exeiriien c ownith if ensure commercial disciplines are applied to future all the subsidies do is keep the price of water low investments in replacing ageing irrigation and the issue of profitability is not addressed then infrastructure. Renewal of infrastructure provides andthe next e eo rofisabisiy is nonl admtersof tie. another important opportunity. Instead of replacing tmrvng pcroofiabiit of a mactur e sthe the infrastructure as it exists, careful analysis ofthe key to a better future for irrigation, system will reveal opportunities to create better, more cost effective irrigation systems. Most of the The tools available to an irrigation authority investment in irrigation systems is in the network of to improve profitability of irrigated agriculture are small channels and drains close to the irrigation limited, however the irrigation authorities and farms. A high degree of involvement by the irrigation governments can exert significant influence. community in decisions to renew infrastructure is Changing the irrigation community's view of water required if this opportunity is to be realised. from a social to an economic good is a useful first Reform of tariffs is also necessary to support step. pricing reforms to ensure that as far as practical the Reform of water allocation policies to create irrigators receive valid economic signals from their markets for water and trading encourages the re- use of irrigation and drainage services and can make allocation of water to more profitable irrigation decisions accordingly. Research to develop more enterprises, and gives the irrigators valuable efficient irrigation technology, better water knowledge of the opportunity cost of water. The management systems, and better ways of replacing opportunity cost is reflected in the prices paid at ageing infrastructure is also important to support auction for new water entitlements or the prices the overall reform program. irrigators are willing to pay to purchase existing . . entitlements from their neighbours. Knowledge of Egarlier social polices of closer settlement left the opportunity cost will influence decisions on water a legacy to be overcome. The policy Issues arising and improes proitab ilityr from the large number of small, unprofitable management and improves profitability.'irrigation properties and the large volumes of Operation of the complex irrigation channel irrigation water used on enterprises with low systems in Victoria in 1984 was inflexible and highly profitability can not be ignored. Rural adjustment reactive. Once water was released from the policies must be developed to provide opportunities headworks, the job of the operators was to do the for improving the profitability of irrigators with long best they could to meet the requirements of the term prospects. The policies should also assist those irrigators using all the water flowing down to them who do not have a long term future in irrigation to and in the last resort outfall the excess water orders leave the industry with dignity with sufficient back to the river systems. Operation ofthe irrigation resources to re-establish their lives in a new venture. systems was driven from the headworks down. A major shift in thinking was required away Modem technology for surveillance, control from subsidising water prices to improving the and data acquisition systems (SCADA) provide the profitability of irrigated agriculture. Improving the opportunity to turn the operation of the irrigation profitability of irrigated agriculture generates more system on its head so that the demands of the 47 cash for meeting the higher water prices necessary allocation systems to allow water to be moved from to meet the costs of maintaining and renewing the unsuitable and degraded land to situations that had irrigation systems adequately, and to ensure a sustainable future under irrigation. The majority sufficient funds are available to invest in salinity, of irrigators, however, were opposed to trading in drainage and essential environmental management water at this early stage. The irrigators feared that activities. the major cities would buy the water entitlements to the detriment of irrigation. Victoria's irrigators had REFORM OF WATER been sensitised to the issue by a proposal from the Melbourne water supply authorities in 1960 to divert ALLOCATION water from the irrigation areas to supply Melbourne. The experiences of the Owens Valley in California Water as an Economic Good in a similar situation did not give the irrigators much comfort. Promotion of the concept of water as an The economists correctly argued that if economic good, by measures such as creation of a Te was owectly would In market and trading in water allocations has the trading in water was allowed, the buyers would, in potential to substantially improve the profitability general, be developing more profitable irrigation of irigatd agiculure. or mny poplethis enterprises, and the sellers would be operators of of irrigated agriculture. For many people this less profitable enterprises. Water trading would requires a paradigm shift. therefore progressively improve the profitability of The system of water rights introduced by irrigation. The owners of less profitable enterprises Elwood Mead in the early days of the Twentieth would also gain access to capital either for Century was based on the principle of government restructuring their farming enterprise or for leaving ownership of the "right to the use and control the the industry with some dignity. Only a small flow" of water in waterways. This principle had been proportion of water needs to traded to expose the developed by Alfred Deakin and enshrined in the opportunity cost with implications for the whole Irrigation Act, 1884. The volume of water right irrigation community. allocated to individual irrigators was based on a The Department of Water Resources initiated complex formula relating the unit depth ( ML/ha ) to the particular area of land to whlch the water tintrodcin ofirasferable waterlrigts was allocated. Well defined water allocations had VictorIa m 1983 by commissloning consultants been , owe b yprivate iniiul.ic h ACIL Australia Pty Ltd to evaluate the costs and brrigiowne Act, 1884pA reshte lookviduats thinciplee benefits oftransferable water entitlements. The final Irrigation Act, 1884. A fresh look at the principle reotACLusalaPytd194ws of locking land and water together, a century later, published the following year. revealed an opportunity. If the legal bond between land and water could be broken a system of trading The consultants concluded that transferable in the existing property rights in water could be water entitlements provided an opportunity for established. improvement in the economic efficiency with which When large irrigation schemes were being water is allocated between farms. The number of constructed and with new water allocations transactions was likely to be initially low and build continuously becoming available, the issue of water up over time allowing adjustments in policy as trading did not arise. However, as the construction experience in the emerging water market developed. of new irrigation schemes effectively stopped in the A water market involving trading in about 5% of the total allocation was expected to develop. While 1970s, the demand for new water allocations had to p be met in other ways and the issue of water trading the volume traded was expected to be low, the effects emerged. in creating an opportunity cost for water were expected to be much greater. Increasing salinisation of land also provided Introducton oftransferability would reinforce an incentive for development of more flexible water trends to more intensive irrigation already evident 48 in the more flexible allocation of sales water (the Figure 5.1 Temporary Water Entitlement annual allocation of water available in excess of Transfers (GUyear) water rights). The irrigation districts with the greatest proportion of salinised land were expected to provide the sellers of water entitlements, in .ID particular the Kerang and Tragowel Plains. The 2% I - buyers were expected to come from the dairy _ z/.4 industry in the Goulburn Valley, and the viticulture 150 oTAL industry of Sunraysia. Minimum constraints on S10W. transfers were recommended. Constraints caused by *0- . _ _ _ .*. limited capacity of irrigation channels, together with 0 salinity and drainage constraints were also 1984 198 1986 1987 1988 1989 1990 1991 1992 1993 recommended. Leasing or trading in temporary water entitlements was recommended as a first step in diversion permits along the river valleys of New preparing the irrigation community for more wide South Wales suffered fewer capacity constraints, and ranging reform. started earlier than transfers within the highly integrated channel systems of northern Victoria. Temporary Transfers of Water Entitlements Water Allocation Anomalies Introduction oftemporary transfers or leasing Given that water allocations were based on of water rights between irrigators was recommended formulae enshrined in legislation that was being as a first step before allowing permanent transfers continually amended, and that the allocations had or sale of water entitlements. Leasing could be been managed with no formal system of appeal, a approved with minimal changes to the existing backlog of disputes over anomalies in water legislation, permanent transfers required legislative allocation had accumulated. The water legislation change. After extensive consultation, and some had to be rewritten to remove the formulae and define obstruction from the Department of Water the allocations as at a set date. The backlog of Resources, the Rural Water Commission introduced disputes and the clarification of policies regarding a system of temporary transferable water rights to these water allocation anomalies had to be resolved the Goulburn Murray Irrigation District at the start before trading in water could be introduced. Failure of the irrigation season of 1987/88. to address the anomalies would have undermined The new systemn was a significant step in the support for water trading from within the irrigation development of irrigation in Victoria, removing the community. traditional nexus between water right and land. The A Water Allocation Anomalies Committee system allowed leasing of water rights, diversion was established and public hearings completed by licences, and sales entitlements between established January 1988. A total of 365 applications were irrigation farms within the same river or supply received by the Committee, of which 257 proceeded system subject to certain conditions. These to a hearing. The final report of the Committee conditions were designed to safeguard the rights of contained internal inconsistencies rejecting most of the other irrigators on the same supply system and the individual applications but in the final stages avoid drainage and salinity problems. the Committee changed its view supporting general In 1987/88 a total of 242 applications were principles that would allow most of the applications approved involving 16,345 ML. Figure 5.1 shows to succeed. The Board of Management of the Rural the growth in temporary transfers of water Water Commission was left to adjudicate! entitlements for Victoria, New South Wales, After extensive deliberation by the Board of Queensland and South Australia. Water trading of Management, and subsequent intervention of the 49 Victorian ombudsman, effectively all the anomalies reform in water allocation, and the potential were resolved without recourse to the courts. The improvement in the profitability of irrigation, are relatively small number of anomalies and the immense. disciplined management of water allocation was a credit to the State Rivers and Water Supply Water Auctions Commission the body responsible for the majority of water allocation in Victoria. The slate was now Introduction of permanent transfers of water clear for legislative change and permanent trading entitlements necessitated introduction of capital in water. charges for all new water entitlements. Such capital charges are necessary to avoid the recipients of new Pennanent Transfers of Water ~entitlements making unearned capital gains by selling Permanent Transfers of Water water entitlements that they had received free of Entitlements charge. Setting the charge opened an important A Water Bill, completely revising the Water policy debate. The principle of allowing the market Act, 1958, was introduced to the Victorian to set the capital charge was adopted. The options Parliament in 1989. The Bill did not contain for setting the charge were thus reduced to a choice provisions to facilitate pernanent transfers of water between tenders or auctions. Initially the Rural Water entitlements. The left wing of the Victorian Labor Commission favoured tendering largely because of Party, the party in government in Victoria at the time, the extensive experience the Commission had gained opposed the trading in water as a natural resource. through its construction activities. After The members of the left wing faction believed water consultation, the irrigation community favoured should stay in public ownership despite the fact that auctions. The farming community has a great deal private ownership of water rights, attached to land, of experience of auctions. Auctions are more open, had been in place for nearly 100 years. In the end an and prices are set in public. opposition amendment in the Upper House of the There were new unallocated water Victorian Parliament, with the tacit support of the entitlements arising from construction of Dartmouth Government and the Rural Water Commission, Dam on the Mitta Mitta River in northern Victoria. opened the door for permanent transfers. The Rural Water Commission recommended to the After some more political skirmishing the Minister that these new entitlements be auctioned. necessary regulations were passed and permanent In what is believed to be the first water auction in transfers or sale of water entitlements started in the Australia, on 4 May 1988, the Rural Water 1991/92 irrigation season. Figure 5.2 shows the Commission auctioned in Bridgewater 2,000 ML cumulative growth in permanent transfers. While of entitlements to divert water from the Loddon the initial volumes of permanent transfers are small, River. The 2,000 ML were sold to existing and the potential long term significance of this policy potential diverters at an average price of $239 ML. Prices ranged from $175 per ML for lots of 200 Figure 5.2 Cumulative PermanentWater ML up to $775 per ML for small lots less than 10 Entitlement Transfers (GL) ML. 100 ao 90 . TOTAL The system of water auctions was based on a S 80 system used for auctioning gold. Pre-registration was i 70 required to participate in the auction. Applicants had N60 NSW to provide evidence that they were bona fide _ / / irrigators and that they owned irrigable land that 4 30 / could be supplied from the Loddon River. The E/,. SA maximum application for water also had to be 10 / Victona specified. The unit depth of water was checked to 0 390 _1019 QLD ensure that the volume applied for was reasonable 1984 1985 1988 1987 1988 1989 1990 1991 1992 1993 e Source: Murray Daring Basin Conission given the area of land and the irrigation enterprise 50 involved. A decision had been taken to prevent and breathless to declare: "fancy getting paid for speculation by building up large volumes of water that, I have not had so much fun in years!" Obviously on small areas of land. Speculation in the first an excellent choice of auctioneer saved the day. auction had the potential to undermine community Subsequently the Rural Water Commission confidence in the auction process. (and the sUiccessor Corporation) organised five more The water was auctioned in a series of steps, successful auctions of water entitlements on the for example steps in volume of 5 ML, 10 ML and Goulburn, Broken, King, Thomson and Murray 20 ML could be used. The auction would start with Rivers. Successful completion of these water the auctioneer calling for bids on the basis of $/ML auctions represented another important milestone in for minimum allocations of 5 ML. The successful the reform of water allocation policy in Victoria. bidder could take an allocation at the bid price up to The auctions clearly established the opportunity cost the maximum volume specified in the pre- of water in the minds of the irrigation community in registration. All other participants in the auction a highly public forum. could then take allocations up to their pre-registered maximum volume at the bid price. Bulk Water Allocations: The River Given the small volumes involved, the unit Murray Waters Agreement water prices in the first stage of the auction were invariably high and those seeking large volumes of The River Murray Waters Agreement water held back in the hope of achieving lower unit specifying the bulk allocations of water between prices . The auctioneer would then start the second Victoria, New South Wales and Victoria was another stage by calling for bids for a minimum allocation important area of reform for Victoria's irrigation of 10 ML. Again the successful bidder would gain systems. Clark (1982), describes the lengthy debate access to the pre-registered maximum requirement and controversy involved in developing the original at the bid price. If the total volume sought by the River Murray Waters Agreement signed in 1914. other participants at the bid price was less than the Significantly the Agreement was signed during a remaining volume available, then all the applications drought which had served to concentrate the minds could be approved. If on the other hand the total of the politicians! volume of water sought was greater than the The Agreement established a formula for remaining volume the auction would start again and sharing the waters ofthe Murray River. The formula the price would rise. A good sense of timing was was simple in concept. South Australia, the required by those seeking large volumes of water: downstream state was to receive a guaranteed some did well and some got their fingers burnt by minimum flow. The waters upstream of Albury were underestimating the demand. to be shared equally between New South Wales and The first water auction nearly turned into a Victoria, and the down stream tributaries belonged riot. The irrigators realised at the last minute that to the state in which they originated. there was a very large demand for water and that The Agreement was successful in reducing many applicants were likely to miss out. The local the controversies of the time involving bulk water water users group tried to boycott the auction and allocations between the three states. The water also tried to distract the auctioneer by chanting in sharing agreement was, however, based on an annual time to his call for bids. Fortunately the auctioneer accounting period. There were no large storage was a large man with an even larger voice and he reservoirs in the water supply systems at that time overcame the tumult. The boycotting group walked and the lack of accounting for carry over volumes out in protest except for their secretary who sneaked was not an issue. back and bought some water, which did not do his standing in the local community much good when The imtegrity of the.Agreement was eroded his colleagues discovered what he had done. After over time as major storage reservoirs were the auction the auctioneer emerged hot, sweating constructed at Hume, Menindee, Lake Victoria and 5 1 Dartmouth. The annual accounting period enshrined irrigation water later in the season. The option gave in the original Agreement excluded carry overs of the rice grower security to plant a given acreage of unused water allocations from year to year. New rice knowing with certainty at an early stage the South Wales with a significant rice industry could volume of water that would be available during the operate on low security of supply. Victorian growing season. If the New South Wales water irrigation, on the other hand, was dominated by supply system could not meet the demand then the permanent plantings of fruit trees, vines and pasture option on Victorian water would be taken up and requiring a higher security of supply. the full bulk water price paid to the Rural Water In wet years New South Wales could take Corporation for delivery to the off take of the New advantage of the large volumes of water available South Wales Irrigation System. The first option for to grow rice. Victoria could not make full use of its an interstate trade was set up and paid for in the half share in wet years without compromising its irrigation season of 1992/93. security standards and being unable to meet the The introduction of capacity-sharing is requirements of permanent plantings in subsequent another good example of innovation in water dry years. At the end ofthe annual water accounting allocation policy providing irrigators with period the unused Victorian allocation was shared opportunities to manage their security of supply and equally between New South Wales and Victoria. improve their profitability. Effectively this meant that Victoria was losing part of its water allocation. THE WATER MANAGEMENT After much controversy and debate the SYSTEM: A MORE COMMERCIAL concept of continuous accounting, or capacity sharing was introduced through no small measure APPROACH TO IRRIGATION to the efforts of David Dole, The Rural Water DELIVERIES Commission's Director of Technical Services, and a Deputy Commissioner of the Murray Darling In 1985 the first step was taken to Basin Commission. Figure 5.3 depicts the River fundamentally change the approach to managing the Murray Water Accounts showing the system of irrigation systems. A project team was set up by the Murray Water AccuntshwiRural Water Commission to initiate the "Channel flows, storage volumes, transmission losses being Systems Project" with the objective of reducing the divided into two equal shares. Even with only two shares the water accounting system becomes hihy costs of delivering water services and of building a complex. The water previously lost byeomhighly base with new technology to allow more shown as a credit balance to Vlctoria in the water sophisticated water services and tariffarrangements. accounts. The Project developed the concept of Central accounts. Communication and Planning (CCP). The new system of continuous accounting introduced the opportunity of interstate water trading Development of modern information and widening of the water market. If Victoria did technology for surveillance, control and data not sell part of its allocation it would spill into New acquisition systems (SCADA) provides the South Wales's notional half storage for no cost to opportunity to make fundamental improvements to New South Wales. On the other hand if Victoria the management of water deliveries in an irnrgation sold too much of its allocation it would compromise system. The opportunities are paricularly important the security standards for its existing irrigator in an irrigation system using open channels as the customers. delivery system. Open channels are inflexible in operation and slow in responding to changing As a trial, an interstate trade in water was demands for water. organised between the Rural Water Corporation and . .w rice growers in New South Wales. A system of Polc initiatives sc as water digtariff options was devised. The rice growers could take reform and the development of new water delivery out an option in August for the delivery of Victorian services could not deliver their full potential without 52 MENINDEE LAKESc +~~~~~~~~~Fo PL [ hl Loso t hong in *msoft N5W#A-V 271!.5 q<'VIC NSW + bVp t DesM4n)13 LAKE VICTORIA ,nw .M _ ^ 0 >: . ~~~~~~~~~~ s T < ri b~~~~. Tarf bw V Wwo Mole&Wbos ~~~~~~~~~~~~~o . - t S. I T s - e o +_^t ^* tmrl - e.0 ,,W 10 Wgw Id W bi.i :,.V;,,=d: ,__ng i~~ , Ali W~~~ ~~~~~~~~ i 1l"W7r4.i4 W*~~~~~~~~~~~~~~~~~~~~~~~~~~ . 32§!C51 Eb ,. NSWG S I TTLVCNW* || i- D49% venue:tariff. Customers could now benefit from being able ,, 3- W Fixed Access Fee to control their annual water charges by deciding 2- charged on basis on the number of dams they needed to fill. In O-- EWia_ tderrr it implementing the tariff, the Rural Water Comnission 100% %venue gained greater knowledge of the number and location based on trxed chargefor Water of dams, developing a sophisticated computer Rght &tilernent database to improve future planning and service delivery. The new tariff provides more flexibility for customers, while helping to conserve scarce Under the old tariff irrigators were assigned water resources. a water right of 9 ML/ha which they paid whether 1991 was a vintage year for tariff reform. A they used the water or not. On average 82% of new tariff was also introduced in the Coliban urban irrigators used less than this water right. The water supply district covering the City of Bendigo. irrigators who used less water and imposed smaller The old tariff was based on property rates (in effect pumping costs paid the same as those who used more a property tax) and "free" allowances for water water and imposed higher costs. There was also little based on these property rates. The tariff provided financial incentive to invest in more efficient little incentive to use water efficiently and did not irrigation technology. The tariff structure was share costs equitably. Over a period of years the reformed by reducing the fixed charge (an access minimum rate had been progressively increased and charge) to cover 4 ML/ha on the basis that this level the property rate reduced until some 70% of of fixed charge would generate about half the customers were paying the minimum. The effect on revenue. All water delivered was also subject to a revenue of eliminating the property rate had now volumetric charge making atwo part tariffto provide been reduced to the point where introduction of a irrigators with clear economic signals. fixed access charge based on the size of the water 59 meter could be introduced. A volumetric charge for One of the most strategic outputs of NIRF all water consumed was introduced at the same time was a comprehensive strategic plan prepared by to give a classic two part tariff for urban water Wood and Banks (1991). Priorities related to the supply. sustainable use of irrigation allocations and off-site There was also a fire service charge for impacts. The strategy not only identified research commercial and industrial premises with fire service priorities but also presented a funding strategy. One connections, reflecting the costs of the larger water of the major barriers to developing a national mains needed to support these fire services. The approach was that there was no national focus for undesirable cross subsidies from the commercial to the irrigation industry. Research focussed on the domestic sector were thereby eliminated. This commodity production such as wheat wool or meat urban tariff system was at the forefront of urban and not on industry inputs such as irrigation water. tariffs and ahead of its time. Establishment of the Land and Water The full program oftariff reform also included Resources Research and Development Corporation tariffs for: (LWRRDC) provided a research focus for management of natural resources such as water. A * surface and sub surface drainage in irrigation National Program for Irrigation Research was districts; established with $500,000 from LWRRDC matched * ground water supplies; and by $200,000 from each of the Rural Water * Otway Rural and Urban Districts ( for both Corporation, New South Wales and Queensland urban, bulk supplies and stock and domestic). irrigation authorities. A program management The extensive program of tariff reform committee was established with strong reinforces the importance placed on these reforms representation from the irrigation community to by the Rural Water CCommission and its successors. ensure that the research was focussed on practical by the Rural Water Commission and its successors. outcomes, and more importantly, was supported by the irrigation community. RESEARCH The National Program for Irrigation Research The irrigation related research effort in based its priorities on the NIRF Strategy, developing Australia was largely funded by government new priorities for the second phase of the program research organisations and was focussed on through consultation with the irrigation community. agronomic and agricultural aspects. The water The theme of the second phase was water use management side of irrigation was relatively efficiency and major projects were commissioned neglected. If irrgation was to have a sustainable to benchmark irrigation practices across Australia future the search for more profitable irrigation would for different irrigation enterprises. have to be supported by a research effort designed to improve irrigation water management and to develop more cost effective ways of renewing the service capacity of aging irrigation infrastructure. The Rural Water Commission, through its then Chairperson played a leading role in establishing the National Irrigation Research Fund (NIRF) in 1987. NIRF was a modest fund of $300,000 per annum, formed by the partnership of the Australian Water Research Advisory Council and irrigation agencies in Queensland, New South Wales and Victoria. NIRF funded small strategically located projects with the aim of demonstrating to local irrigation communities, the value of research. 60 STIMULATION OF POLICY VOTE OF CONFIDENCE BY THE DEVELOPMENT ON FOOD PROCESSING INDUSTRY RESTRUCTURING IRRIGATED The large investments made by the food AGRICULTURE processing industries in enterprises dependent on The legacy of closer settlement policies for irrigation such as wine making and dairy foods, is a strong vote of confidence in the long term future of onacgatlon,eang restructurincannote ig ed irrigation in Victoria. Table 5.3 shows export Table 5.2 shows that in 1989/90 some 72% of earnings and investments by food processing Astrablea 5 horticulturalifarms8were0smallerthan15f companies in the Goulburn Valley. Processed food, Australian horticultural farms were smaller than 15 much of it reliant on irrigation, makes up a large ha and had cash incomes that would not sustain the part of Victoria's total exports. Figure 5.8 (over the farm enterprise in the long term. One of the page) shows the rapid growth in Victorian frustrations of the Rural Water Commission was winemaking production in 1991/92 most of which the inability to stimulate major policy reforms ocredaint irrdgation ae of ursi and designed to assist the restructuring of irrigated occangedwin he i mpre of iabint agriculture leading to a more profitable, export oirrigatwa aiclturefmut ontinue bae p therei oriented horticultural industry. Despite the great of irrgated agricultare must cotinue because terein oriened hrticlturl inustry Desite he geat Iies the key to a sustainable fulture for irrigation. progress in reform of irrigation, integration of rural restructuring policies with reform of the irrigation industry is an important subject that will have to be left for future irrigation managers. Table 5.3 Processed Food Exports from Irrigation Table 5.2 Australian Horticultural Farms in the Goulburn Valley Impact of Farm Size on Cash Income Ranking Corrpany Earnings Farm Area Proportion Cash Income ($ rn (ha) of Farms (%) ($/year) 40 Bonlac 267 43 Murray-Goulburn Cooperative 260 <10 50 6,700 71 Nestles 141 10-15 22 8,600 135 Unilever Australia 50.9 15-20 12 18,800 137 SPC 50.3 20-25 7 29,900 157 Ardmona 39 25-30 3 28,600 163 Tatura Milk Industries 36.2 30-40 5 38,200 >40 2 184,200 Source: ABARE Farm Suivey 1989)90 Company Infrastructure Investments - current I proposed Company S m Murray-Goulburn Cooperative 40 Nestles Foods, Tongala 5.6 Tatura Milk, Tatura 28.3 Kraft Foods, Strathmerton 82 Henry Jones, IXL, Kyabram 3 Unilever, Tatura 28 Plumrose, Echuca 56.2 SPC, Shepparton 8.1 Ardmona Fruits, Mooroopna 21 Unifoods, Tatura 26 Bonlac Foods, Goulburn Valley 58.1 HW Greenham &Sons, Tongala 3.5 Source: Shepparton News, June 1993 (Industry Ranking by Pinnacle International) 61 Figure 5.8 Winemaking Production 1991/92 Australian Winemaking Production Victorian Winemaking Production 1991/92 1991192 an increase of 32.7% over 1990/91 QLD, W.A, Tas South Australia Swan Hill Sunraysia Total 564,054 tonnes Total 104,398 tonnes Source: ABS ViticultureAustralia 1991-92 62 CHAPTER 6: The Irrigation Authority as a Commercial Business THE FINANCIAL PERFORMANCE funding capital investments and paying the finance REQUIRED OF A COMMERCIAL charges on debt is an important discipline. IRRIGATION AUTHORITY Managing the water delivery and drainage The long term viability of the irrigation operations of the Rural Water Commission as a authority as a commercial business is vital to the commercial business would ensure that the necessary future of irrigation. Managing an irrigation business commercial disciplines are applied in generating requires long term investment in infrastructure assets sufficient revenue, getting the costs down, managing and the long term care of natural resources. Failure cash flows, assets, debt and making sound capital to pay sufficient attention to either of these investments. In addition pricing water to meet the investments will result in the decline of irrigation costs of delivering the service would stimulate more through poor services, water logging and salinity, efficient and profitable water use. or financial failure through building up While governments find investment in new unsustainable debt. An organisation that does not infrastructure projects politically attractive, control its revenue and is not subject to the discipline replacement of decaying irrigation channels which of raising revenue to fund its activities will not make up the major proportion of irrigation survive. Such an organisation will be subject to the infrastructure is not a vote-winner in urban whims of governments and bureaucrats and cannot electorates. The inevitable result of inadequate manage a long term business such as irrigation. funding is deferral of maintenance and renewal The Rural Water Commission, like many which eventually impacts on the standard of service irrigation authorities, was run as a public service to the irrigation community. The prospect of department. The Commission was set up as a irrigation schemes deteriorating to the point where spending department and there was no connection large injections of capital funds are required to between revenue and expenditure. The ensure services continue is very real. Irrigation Commission's revenue disappeared into the communities would then be faced with the difficult Consolidated Fund ofthe Victorian Government, and choice of raising the money themselves or face the operating expenditure was appropriated annually by abandonment of the irrigation scheme. the Parliament as part of the annual budget of the Preparation of a profit and loss statements Government. There was no discipline on the and a balance sheet was the first step in setting up Commission to rely on revenue to fund operations. the Rural Water Commission as a commercial This financial system provided the Commission little irrigation business. Unfortunately this was not as incentive to reduce costs or increase revenue. simple as it sounds. The financial and accounting Capital funds for investment in irrigation systems of the Commission were intertwined with infrastructure were provided by governments with those of the wider Victorian Public Service little or no regard to the direct income derived from disguising many hidden subsidies. Reforming the the investment or any notion that such income should financial and accounting systems to clarify the be used to meet the finance charges on the debt. financial position of the Commission for all Such policies led to a substantial over investment in stakeholders was therefore a priority task. irrigation infrastructure and high levels of debt. The Table 6.1 (over the page) shows the finances finance charges were lost in the overall cost of oftheRuralWaterCommissioninl984/85. Annual funding Victoria's debt. The irrigators regarded operating revenue in 1993/94 $ was $75.5 million capital funds as "free" distorting investment analyses covering only 74% of the annual operating costs of to favour capital intensive investments that might $101.9 million. The annual funding requirements not be the most cost effective solution. The irrigators for replacing the irrigation infrastructure is now 63 Table 6.1 Rural Water Corporation - Comparison 5. invest in research, and development to of Financial Position 1984185 and 1993/94 improve cost effectiveness both in operations and renewal of infrastructure; and finally Water services in S millions 6. progressively increase water prices to achieve financial self sufficiency for the irrigation 1984/85 1993/94 authority. o perating Revenue 75.5 96.7 All these strategic efforts needed the support Business Cost of commercial accounting systems to prevent them Operating expenditure 101.9 69.3 coming to nought. Finance Charges * 2.5 1.7 Renewals Annuity 38.0 38.0 Dividend 0 1.0 INTRODUCTION OF Total 142.4 110.0 COMMERCIAL ACCOUNTING Business Cost Shortfall $66.9m $13.3m Reform of Accounting Systems Ns percentage of Revenue 88.6% 13.8% The accounting systems of the State Rivers Finance charges standardised to service debt and Water Supply Commission were set up for the accumulated by corporation after 1 July 1992 role of a spending department within the Victorian Public Service, not a commercial business, and were known to be of the order of $38 million based on a based on the principles of cash accounting. Accrual renewal annuity. The shortfall in revenue over accounting and a commercial general ledger were business costs was $66.9 million. The Conumission implemented in 1984/85, to support the concept of was clearly not viable as a commercial business. profit and cost centres. The general ledger, with Productivity imnprovements alone could not bridge upgrades served the Conmmission well for ten years. a shortfall of this magnitude. The lack of credibility of the Rural Water The overall strategy for developing the Commission's accounting systems in the eyes of the Commission as a commercial business can be irrigators, and the continuing changes as the hidden summarised as: subsidies were progressively exposed was a major cause of the "Rate Protest" described in Chapter 4. 1. clarify Government responsibility for The rapid progress made in improving the historical debt and unfunded liabilities for financial systems after formation ofthe Rural Water staff superannuation; Corporation and the appointment of professionally 2. define the irrigation business and provide qualified accountants as financial controllers in the support to the business with high quality Regions raises the issue of whether these expert staff commercial accounting and financial should have been appointed earlier given the information systems; improvement in credibility they achieved. Looking 3. negotiate with government in setting back it is doubtful whether the Commnission would challenging targets for productivity have been able to recruit such high quality staff while improvement; invest in staff training to create the financial systems were in such a primitive state, a smaller, more highly skilled organisation and the Commission was still forced to use the focussed on providing services to irrigators; financial and employment system of the Victorian 4. define the financial resources required to Public Service. renew the aging irrigation infrastructure; Suffice to say that the movement of the Rural 5. broaden the revenue base, and sell non Water Commission out of the Victorian Public essential assets; 64 Service to form the Rural Water Corporation as The Rural Water Commission's customers government business enterprise and the gained considerable benefit from the wholesale water consequential improvements in financial business of the Murray Darling Basin Commission management have delivered major benefit to the but Victoria's share of the costs were met directly irrigation industry. The Rural Water Corporation by the Victorian Government. The Victoria's quarter had the advantage of direct access to the revenue share of the annual operations, maintenance, gained from water rates and sales. administration and asset renewal costs of some $3.6 million was allocated to the Rural Water Identification of All Costs Commission's customers and the Victorian Government reimbursed annually from the The accounting systems of the Victorian Commission's revenue. Public Service did not identify and allocate many of Finance charges on the Rural Water the costs legitimately associated with running an Financerdraft" on the Rur Waten irrigation business. Employer contributions for staff Commission's "overdraft" was the other hidden superannuation schemes amounted to some $13 subsidy. The Commission's major costs such as million per annum based on a payroll of $60 million wages and salaries were distributed uniformly and the then standard public service employer throughoutthe financialyear in contrast torevenue contribution rate of 21.5% of salary. Exposure of from rates, charges and water sales that came in the this high cost stimulated a change in the lastquarterofthefinancialyear. Thefinancecharges superannuation schemes for new staff and on the "overdraft" over the first three quarters of negotiation of a more realistic employer contribution the financial year were hidden in the Government's rate of 12%. Workcover or workers compensation Consolidated Fund. The net finance charge over insurance was another expenditure met directly by the financial year was the order of $4 million the Government and not recorded in the Rural Water depending on prevailing interest rates. Commission's accounts. Allocation of these costs Movement of its funding to a one line net directly to profit centres gave managers both the appropriation required the Rural Water Commission rewards and penalties of managing staff numbers to manage its loan portfolio and meet the finance and occupational health and safety in their charges onthe overdraft from revenue. Forthe first workplace. time the Commission had a strong incentive to Insurance of irrigation infrastructure such as manage its cash flow. A Customer Information and major darns was another cost not directly allocated Billing System was developed and, after consultation to the irrigation authority. Both public liability with the Commission's customers, periodic billing insurance and insurance of the structures for repair was introduced progressively to give a more uniform ofdamage and loss of service are a major cost which revenue stream over the financial year. Finance was being met by Government in the form of a charges on the "overdraft" were reduced subsidy. The annual insurance premium for the Rural substantially as a result. Water Corporation was the order of $800,000 (in The rigorous process of identifying the full the days of the Rural Water Commission the costs of running the Commission's water business insurance premium was paid by the Victorian and exposing all the hidden subsidies did not earn Government as a hidden subsidy). A major incident the Commission many friends in the irrigation at the hydroelectric power station at Dartmouth community. The progressive exposure of the Reservoir highlighted the benefits of such insurance subsidies instead of a once-off exposure of the full with liability for costs being limited to the deductible financial position, and the lack of credibility of the of $5 million under the policy. Potential costs were Commission's accounting systems did not help considerably greater. relationships with the irrigators," not another set of figures worse than the last lot!" 65 The Board of the Commission held firmly to management about the services they were getting the view that it was in the best long term interests of for the cost of head office overheads. the irrigators that the Commission be financially self In 1991 the accounting firm Arthur Anderson sufficient and not have to rely on shrinking was commissioned to carry out a review of overhead government subsidies to renew and modernise the iriato sytms.h .rs ofadcieo. h allocation. After a rigorous analysis as many irrigation systems.was Ther riskeofal declineofth overheads as practicable were allocated on a causal basis in an attempt to link the overhead directly to a service. The discussion of overheads could then Profit and Cost Centres proceed on a more constructive basis even though The activities ofthe Rural Water Commission the end result in terms of cost allocation was much were separated into cost and profit centres at an early the same. stage ofthe reform process. Cost centres were called "Responsibility Areas" and profit centres were called REDUCTION OF OPERATING "Financial Entities". The profit centres or Financial COSTS IMPROVEMENT OF Entities provided profit and loss statements and balance sheets and were intended to be the PRODUCTIVITY fundamental management unit of the Commission. The early attempts did not include all the costs but Meeting the Targets a start had to be made. Establishment of profit centres made the possibility of separation of the Achievement of financial targets was an Commission into individual profit centres more essential part of the Rural Water Commission's likely, particularly once the internal cross subsidies business planning. were exposed. The benefits of establishing profit The Financial management Strategy set a centres far outweighed the risks and the journey was target of holding recurrent or operating expenditure commenced. constant in $ terms for 4 years during a period of In the early years of the Rural Water 7% to 8% annual inflation. Recurrent expenditure Commission and the Financial Management Strategy included Government Services as well as operating there was an inevitable focus on cost reduction. As expenditure on the irrigation and drainage systems. a consequence the Responsibility Areas became the The 1990/91 Business Plan set a target of fundamental financial unit used in managing the reducing annual operating costs by $7 million over irrigation business. It was only after the the 5 year period of the Plan in 1989/90 dollars. establishment of the Rural Water Corporation in Total operations, maintenance and administration 1992 that the full benefits of increasing revenue and costs at the time were some $85 million. selling redundant assets became available to the managers of financial entities. Until that time The Future Management Review in effect mangemntnaturally concentrated on costs. doubled the 1990/91 Business Plan target for management naturally concentrated on costs. reduction of operating costs to $14 million over the 5 year planning period in equivalent terms. These targets for cost reduction and Definition of profit centres required the proper productivity improvement were all achieved. allocation of overheads presented another vexed question. Regional and head office overheads had to be allocated to all profit centres. After much Strategies to Improve Productivit and analysis the simple method of allocating overheads Reduce Costs in proportion to recurrent expenditure was chosen. The task ofthe Rural Water Commission, and Many questions were asked both by the Rural Water later the Rural Water Corporation was to develop Commission's customers and by regional strategies to deliver the required efficiency 66 Figure 6.1 Rural Water Corporation - CHANGE PLAN 1992 -1994 AwardRe sfummarise Reorga 6a.on d tng entr a Sfmng Inforumbtion =_ of -_ rhnaoSy DeTelop and t sm head o fie in Meloun cmponment S:sll WDe n Technology Forn-atbrn Busine ts setb Strategy wMicro Restrct gtrget ands 199/4 Organistaaordrtrc ,'' and introductionofbusinesspla gtthe wk A r n*a,.l sthe Businesd Review Boa. ..... -onsof. Mange nslBus. 'onlracUng i%': i' .' ,. ,'.'-head,o}fic Officest pente RJbestructuring o , S -rvce Unitswas adopted. Theterpt wanase thePtaskwastodelive the producty -, savingss Plannni Syster wraiting/a re nls rent. The R Wt groups in.head ore.mnt While thers Commisiov n did haettan opportunisty to im e ntdcharge thefulcs,aneattepty wasmadeito productivity 1 . gate reduction of tses and Cognstoloma r sturine regionsandheadoffiepresentedanoth Suppinrgonaistio an dvlpetof Tefrtaemtaidbcusthrcmend Polnssuits, strucure enviage stfleesfanndxesfh 04sureme gets Oe ytherFnnilsaaeet taey 2 redesig~Traniofwokgr/ icoesrutuin imprvemets o beter. stabishmnt o the The StauteRivers tandgetsereSpl Commissionll into finnciloramewor wyinthouto govemmnew tehaslogy, the 9regionsal strutue Rual reesgndtoeier Com misio d scribed toehraiig awith buiessructuring, and alwdcnoiain o aaeet stingrofdunactial targsiets. Strategiesatoh impove ad Ainsrationand stechncalr wsuapportovdb thergoa th uranitrCoprtio'hnePao 1992l Boredcd sinficangmntliy ugs18. The reinlcnrscaleret The stategis canbe divded ito tw majo head office sill prelbuentddfiuteoee.I compon i th rgnsain rents taddesigin orgaissueiofnhal strucetures forncep I orgaisatinalormacrorestruturin rervions and t headsffc adpreeted. anTher chalncep ewa includingiseionalisationalseanddbevlpenmae bae ofnh fi statepfaledin beaus purhaer preommeded thakwsupotedb deintroutn ofnwtchooythe productivity saigeainhpbtarets theregions anegotiabe andor witaff triigawr etrcuig n h regional structure. h ua aerusi head redie.sWignedtdeir them.rieunt i Cmintronducion ofv busnes oplantninaty the wornpov Ao chregeithnful csts,uantatemp was appovdeb the tetswatodlvrteproductivity savingt reductionofte2dircsof oshi servicesnd thel regionsand thdet bsupport 67 the services to be provided by head office. In the had slowed. With the effective completion of the first instance costs such as employer contributions first round of regionalisation the Regional to superannuation were excluded from service unit Coordination Branch was closed down. To date costs, however costs such as corporate overhead the substantial staff reductions bad been achieved were included. The structure imposed a discipline by natural attrition and not replacing staff who on both the purchaser to define the service required resigned or retired. Inability to offer redundancy and the provider to deliver the service at a packages to encourage staff to leave was emerging predetermined price. as a major difficulty. It was not until the 1991/92 Regionalisation proceeded following approval financial year that the Commission gained access of the structure in August 1988. It took about 12 to funds as part of a wider program to streamline months to complete each layer of the organisation the Victoria Public Service. By this time the working from the top down. The work had to be economic difficulties of Victoria were becoming redesigned, positions described in detail and the obvious and the Government had no option but to complex and time consuming procedures of the start reducing the public service. Victorian Public Service followed to the letter, Although the funds gained by the Commission including processing appeals from unsuccessful were relatively modest, the value ofinvesting in staff candidates. A Labor Government was in power in reduction became obvious. Management also gained Victoria and the trade unions wielded considerable useful experience in applying redundancy and early influence. Management had to be careful how far retirement packages. One fundamental principle that and how fast restructuring proceeded. was rigorously applied throughout was that Given that the organisation had been static management deterniined who received an offer. Too for a long period it is not surprising that extensive often in such programs all staff are made an offer consultation with staff was required to overcome and the more competent ones who have better uncertainties. However the approach paid off in prospects of alternative employment take up the that the confidence gained by staff that they would offers with alacrity. The organisation rapidly loses be fairly treated even if decisions went against them, skill at a time when highly skilled staff are vital to allowed future restructuring to proceed more rapidly. the ongoing performance of the organisation. Management also gained in experience and The other fundamental principle applied was developed skill in restructuring the workforce. that any redundancy package offered had to result The Government had promised a series of in a permanent reduction in staff either directly or eight new regional offices. Southern Region was by restructure ofthe work unit. The rate of reduction located with head office at 590 Orrong Road in head office costs was accelerated by doubling the ArmadaleinMelboude. Fortunatelythe conceptual productivity targets for corporate overheads design proceeded slowly and the original cost compared to the regions. If the regions faced a 3% estimates of some $9 million left a lot to be desired real reduction in recurrent budgets the corporate and costs escalated substantially. Reasonably areas of head office faced a 6% real reduction. comfortable~~~~~~~ teprr comdto a plication of a doubled productivit target over comfortable temporary accommodation was phe er eutdi susata geutosi tf organised including the leasing of buildings in three years resulted in substantial reductions in staff Horsham and Swan Hill. Later it proved a great numbers at head office. advantage not to have invested much needed capital The service units were progressively upgraded in regional office buildings that would shortly be to business units with full accounting of all costs as redundant. though the business unit was a commercial Following successful establishmnt of the consulting company relying on income from Folwn*ucsfletbiheto h customers to survive. The Designs Branch and the regions the focus on restructuring returned to head Stomer torvive. The esign Banchdate office. After some major surgery to the Finance StaterWate borato were ey cadidates for and Administration Division in the early days of the converslon tobusiness units sincetheyhad developed Financial Management Strategy the pace of change stronger client provider relationships. Ultimately 68 Table 6.2 Future Management Review Implementaton Timetable Phase One - completion by June 1993 * Commission to be taken outside public service as a statutory authority in the "off-budgef' sector, * Emphasise production management and planning in the head office structure; * Reconfigure the present nine regions into five, with each region focused on particular types of customers within largely discrete water systems Phase Two - completion in 1995/96 * Each region to have a Management Board running discrete businesses, setting prices & levels of service; * A new small central group be formed to set specific policies and performance contracts, co-ordinate state-wide aspects of water systems and drive the change process; * Semi-independent service companies to provide specialist technical and business services to the rest of the authority on a commercial basis. these business units were sold. Most of Redesign of Work Hcydrotechnology was purchased by Sinclair Knight Redesign of basic work practices was Merz, with the major structures group being necessary to achieve more cost effective operations. purchased by the Snowy Mountains Engineering The Commission decided on the approach of Corporation. The State Water Laboratory was reforming its own work practices rather than merged with Melboume Water's laboratory to form wholesale contracting out of activities to introduce WVater Ecoscience which was ultimately sold to Au han*Water Te chnlgs purchasers wr potentially better work practices of contractors. In Australian Water Technologies. The purchasers were tecs firgto hr a o opttv .. . . . > . . . ~~~the case of irrigation there was not a competitive impressed by the good preparation of the business market for many operational services in the rural units for a future in the commercial world. co .munities of the irrigation districts. The Future Management Review reduced the The redesign ofwork can be subdivided into number of regions to five and opened up the potential The generlgn strean be aub stmto of further consolidation of administration and three general categories: streamulining administration; technical support functions. Direct involvement of redesign of water distrbution activities; and award regional and middle management in preparation of restructuring to combine the operations (water distribution) and maintenance workforces into one, the Rural Water Commission's submission to the smaller multi-skilled workforce. Future Management Review helped gain the commitment of middle management to the major changes that were to follow. The Future Streamlining Administration Management Review team organised extensive The streamlining of administration was built consultation with all stakeholders, particularly the into almost all activities of the Commission and it is rural communities. This extensive consultation went difficult to identify highlights. The early reductions a long way to gaining acceptance and subsequent in the Finance and Administration Division and in rapid implementation of the findings. Table 6.2 gives the regions following the consolidation ofthe districts a timetable for the implementation of the Review into regions are notable. The "Activity Value recommendations. Analysis" conducted by consultants Price 69 Waterhouse Urwick reviewed all administration The introduction of new technology required activity and was of major benefit. Implementation a strong training program to ensure that staff were of the Customer information and Billing System well equipped to use the new technology and as a reduced the amount of manual work in processing result have a positive attitude to the new work water rates and sales. When the Rural Water practices. The Training and Development Strategy Corporation was formed there was a substantial was essential to successful introduction of Central reduction in administrative work required to satisfy Communication and Planning and the Water Victorian Public Service conditions, particularly in Management System. Staff needed support to make managing the workforce. There can be no doubt best use of new technology. that the Rural Water Corporation as a government The Strategy had a strong emphasis on business enterprise had greater freedom of action competency based "on the job" training and and lower costs. assessment. The first line supervisors had a major In streamlining administration there proved role in determining the training needs of their to be no substitute for the hard grind of continual workers, in delivering the "on the job" components reviewing activities and attention to detail in ofthe training program, andin the competency based implementing improvements. Constant vigilance assessment. Specialised consultants provided advice was also required to prevent new initiatives from on training needs, development of curricula, imposing significant administrative work. competency standards and assessment procedures. The assessment of prior learning gained from the Redesign of Water Distribution extensive work experience of the existing workforce was a major issue. One objective of the training The redesign of water distribution activities strategy was to build into the Commission's had the dual objectives of improving services and supervisors the skills on identification of training reducing costs. The initiatives are described earlier needs, curriculum development, competency in Chapter 5. standards and assessment, and recognition of prior learning. Creating a Multi-skilled Workforce: The Rural Water Commission had a well The Training and Development established staff training facility at Tatura, the Strategy regional centre of the Goulbum Murray Region, which was used to deliver the specialised training The Staff Training and Development Strategy courses for the water distribution and maintenance was introduced to facilitate creation of a smaller activities. The Tatura facility was also used to multi-skilled workforce. The Commission's training deliver occupational health and safety courses. The programs were designed to be externally accredited more general training courses such as the use of so that the qualifications would be recognised computers, supervision, and financial management throughout Australia. This would impose the were delivered through the established Technical and discipline on the Commission ofproviding a fulfilling Further Education Colleges (TAFE) located in the work enviromnent and good career structures to hold regional centres of rural Victoria. In addition to competent and well trained staff. Staff displaced by reducing the cost of delivering training programs, the restructuring would have a better chance of the use of TAFE Colleges had the advantage of gaining alternative employment, which improved the giving the Commission's workforce the opportunity workforce's attitude to restructuring andthe redesign of mixing with people from a wider range of of work. The development of externally accredited backgrounds and occupations, broadening their training programs also gave the Commission's outlook. workforce strong signals that management regarded Development of the Commission's training training as an investment not a cost. Dvlpeto h omsinstann program was supported by a grant from the Commonwealth Government through the 70 Department of Education Employment and Training Restructuring Industrial Awards (DEET). The Commission's competency standards Although training and development was an were developed with the ultimate objective of using essential first step in creating a smaller, flexible, them as national competency standards for the wider multi skilled workforce the goal could not be rural water industry'. achieved without restructuring the industial awards A Certificate, an Advanced Certificate and which prevented using certain categories of workers an Associate Diploma in Water Resources on other than specialised functions. Management were developed in a carefully While the Commission remained within the structured program with core training modules m Victorian Public Service there were severe universal skills of supervision, financial . . management, and computers supported by elective retiiosnwhtcudbahev.Te managramet rlatd comsputeific supted distributionv Victorian Public Service Board was continually programs related to specific water distribution or looking at the implications of the Commission's maintenance activities. The Associate Diploma was industrial restructuring for the wider Public Service designed as a stepping stone to tertiary courses of and was extremely cautious ifthere was a possibility professional standard such as engineering degrees. of a "flow on" of new working conditions to the A worker could join the Commission with no more wider workmg consequence the than a basic secondary education and work through wertworkforceo as a cosequecebte onl the Commission's programs and beyond to ga restructuring of awards that was possble was tetir qulfcain an th opotniyo confined to the unique components of the tertiary qualifications and the opportunity of Commission's workforce, specifically the water appointment to positions at the highest level of distribution workforce. management. The opportunity to progress from the base of the organisation to the pinnacle is an The Rural Water Commission inherited a important principle in motivating a workforce, water distribution workforce with at least 30 particularly those with ability, energy and ambition different categories of worker from water bailiff, who are so vital in developing a competent reservoir keeper, diversion inspector, urban organisation. turncock, etc. Each category of worker usually had no more than three career levels. The workforce extemal acommdisstion asuccPritee ided in gAig was therefore fragmented into a large number of external accreditation as a Private Provider of TAFE dfeetctgre ahwt eaieyrsrce Courses in July 1992, the only water authority in Australia, and one of a handU of govemment career opportunities. Combination of all these Australia, and one of a handful of government difrncaeoesfwrkrntoewtr business enterpises to achieve the goal of private distribt category would allo the tr provider status. The first Certificates of Water Resources Management were awarded in August programs to create a multi-skilled workforce with 1993. A total of 360 staff were enrolled by December better career opportunities in the one, larger category 1993 with 6 candidates successfully completing the of water distribution worker. Management would Certificate, and one candidate completing the also have greater flexibility in the assignment of Advanced Certificate in Water Resources highly skilled workers. Management. The Asia Pacific Co-operation Forum After much effort a "Category Review" in send a study mission to Australia seeking the best conjunction with the Public Service Board produced examples of on the job training programs. The one category of water distribution worker from the mission chose the Rural Water Commission as one previous 30 different categories. The door was also of the better organisations to visit to gain from the opened to reviewing the expensive overtime and experience of implementing a complex training stand-by arrangements that are vital to running a program. 24 hour 7 day a week water distribution operation. Under the industrial awards of the day there was a demarcation between the operations, and the construction and maintenance workforces of the 71 Rural Water Commission that required that they By November 1992 a new industrial award were managed as two separate workforces without had been written with only 2 responding trade interchange of workers. The operations, and the unions. The award covered more than 95% of the maintenance work were seasonal and out of phase. newly created Rural Water Corporation's workforce The irrigation systems delivered water in summer excluding senior management. The only basis for and were shut down in winter for maintenance. If a demarcation was the skill and qualifications the same workforce could be used for both activities required to carry out specific functions. The award a smaller multi-skilled workforce could do both contained four levels replacing the previous seven operations and maintenance significantly reducing level structure. A flatter more effective costs. organisational structure was now possible. Each The Rural Water Commission started with ofthe four employment levels contained 3 pay points; 12 trade unions and 8 industrial awards governing movement between pay points was only possible by working conditions and remuneration. The acquiring and using new skills as defined by the multiplicity of awards created demarcations within Corporation's accredited training program. the workforce and consequent inefficiencies Workers were now rewarded for acquiring and using Integration of the two workforces would not only skills, replacing the previous system which rewarded result in a smaller multi-skilled workforce, better workers for length of service. Positive forces could career structures would also result in giving workers now create a multiskilled workforce. a positive incentive to support change. The One major factor in creating the industrial construction and maintenance workers did not enjoy climate was a communication strategy using the the same public service conditions as the operational Managing Director in a series of visits to discuss workforce and were a disadvantaged group. If long the restructuring with the workforce in the less serving construction and maintenance workers threatening environment of their workplace. wanted jobs in the operational workforce they had Effective two way communication was vital for the to respond to a newspaper advertisement and Managing Director to understand the views of the compete with external applicants for base level workforce and for the workforce to understand the positions. The higher grade positions were not reasons behind the significant restructuring taking available to construction and maintenance workers place. At least half the workforce had the no matter how long and comprehensive their opportunity to interact directly with the Managing experience. Director over a six month period before the A long term strategy was devised with the negotiations for the new award commenced. Visits objective of removing all artificial demarcations in were followed up by written communications the workforce, that is demarcations not based on answering the important questions raised in the skill requirements. The desired result was one discussions. The questions and responses were industrial award for the entire workforce serviced circulated to the whole workforce. The by one trade union. The first element of the strategy communication strategy was an important factor in was to devise a staff training strategy so that the success of the negotiations to establish the new operational workers could learn construction and award. Despite the complexity and sensitivity of maintenance practices and vice versa. the negotiations no time was lost from industrial activity. Creation of the Rural Water Corporation as a government business enterprise outside the Public The Commercial Development Project (CDP) Service made more fundamental award restructuring was the next step in the strategy to create a customer possible. A major recommendation of the Future focused high performance culture within the Management Review was to move the Rural Water corporation. In essence the project, or CDP as it Commission out of the Public Service to allow became known, was to take the Corporation's vision development of an entirely new industrial award and mission together with the overall Business Plan governing terms and conditions of employment, to develop abusiness plan for each work unit within including overtime and stand-by. 72 Figure 6.2 Rural Water Corporation - Business Cost Shortfall in 1993194 Dollars $66.9m Average an lual Closure Prod ctuvity 1984J85 to 1991192 $33.4m $4.8 m $53.6r; $33.4m -------------- ~ i $33.4m n $11.4m Base Revenue 11, ~~increas" $1 1.8n $22.Oml Revenue S .n $2.m lnitia' \4 less Dividen $8.4m I1.3 1984/85 1991/92 1992/93 1993194 Rural Water Commission->[K Rural Water Corporabon Based on normalised revenue and expenditure particularly average wmter sales the Corporation, taking business planning down to process, while accommodating large real increases work unit level. The level of understanding of in maintenance expenditure, was a major commercial practice and the commitment of the achievement by any standard. workforce was significantly improved by CDP that is set out in schematic form in Figure 6.1. BROADENING THE REVENUE The Corporation's Commercial Development BASE Project stimulated: * development of commercially oriented Until the Rural Water Commission's funding business plans for work units throughout the moved to the one line net appropriation it had no Corporation; financial incentive to identify new sources of revenue. Bulk water supplies were provided free or * synChroniationo tebines annine at nominal prices to the cities and towns along the tom poatin, regiona d i rivers regulated by the Commission's irrigation division planning requirements; headworks, principally on the Goulburn and Murray * development of marketing plans; Rivers. The annual revenue subsidy amnounted to * asset management strategies; some $6 million if a 4% real rate of return on the * transition plans arising from implementation current written down value of the assets was used of Water Industry Structural Review (which to calculate bulk water prices. The regional cities disaggregated the Corporation); and were getting drought security at the expense of the * development of new organisational irrigators. structures. Generation of hydroelectricity was another While it is hard to allocate individual example of revenue foregone. The agreements to productivity improvements to specific initiatives allow generation of hydroelectricity at the there can be no doubt about the substantial overall Commission's dams were written in an earlier era improvement in productivity achieved. Figure 6.2 when proposals for one government authority shows a $33.4 million or 32% reduction in annual charging another commercial rates were not operating cost over the ten years of the reform considered appropriate. In addition the agreement 73 allowing generation of hydro electricity at Eildon, risk or the management cost involved. Future which was written in 1955, contained no allowance irrigation managers would be well advised to divest for inflation, and the real value of payments had themselves of the management of recreation by declined substantially by the 1980s. Fortunately licensing the activity to local government or other the Eildon Agreement contained a clause that suitable management agencies. allowed either party to cancel the Agreement Government authorities often provide providing 12 months notice was given. subsidised services to particular groups in the The Rural Water Commission cancelled the community, in effect as community service agreement and, after lengthy and vigorous obligations. The Commission's services were negotiations, a new agreement on more favourable reviewed and concessional services identified. terms was signed. The agreement at Dartmouth did Subsidised water supplies to churches, scout halls, not contain a cancellation clause and has proved local government in rural towns, etc, were identified. very difficult to renegotiate despite the intervention The subsidies were more generous than those of Ministers. prevailing in the wider urban water industry and a The potential for new hydroelectricity strategy to reduce the subsidies by some $350,000 generators at the Commission's other dams raised was implemented to improve the Commission's some interesting possibilities both interms of revenue revenue. The Commission was unsuccessful at and innovative licencing arrangements and some 5 gaining support from the Government for continued new small hydroelectricity generators were licenced funding ofthese concessions as Community Service and constructed, contributing to the Corporation's Obligations. revenue. Broadening the Rural Water Commission's The Commission owned considerable areas revenue base was one of the most difficult and time of land surrounding reservoirs and other works. consuming tasks. The political barriers created by While much of the land was leased the terms were groups who benefit from highly subsidised services less than equivalent commercial leases. As the should never be underestimated. Politicians like to leases expired the terms were renegotiated on more make good fellows of themselves and are often commercial lines and revenue progressively unwilling to withstand either the political pressure increased. from interest groups, or the pressures from the Treasury to avoid funding such community service Recreational activities, particularly boating obligations through direct subsidies from the state on reservoirs, imposed considerable costs on the budget. Commission without compensating revenue. Houseboats on Eildon Reservoir were the only boating activity which the Commission directly OUTCOMES licensed and had an immediate opportunity to seek To illustrate the growing pace of reform the commercial terms. The real value of licence fees achievements ofthe Rural Water Corporation during for houseboats had declined substantially snce they 1992, 1993 and 1994 are set out in Tables 6.3, 6.4 were first introduced. A five year strategy was and 6.5. introduced to increase the fees to commercial levels. The end result was to increase the annual fee on a Table 6.1 shows the improvement in the typical houseboat from $160 to $1000 over the five financial position of the Rural Water Commission year strategy. and Corporation between 1984/85 and 1993/94. The figures have been adjusted to reflect the reductions Initiatives were taken to raise revenue from in responsibilities of the Rural Water Conmmssion the other boat owners who made considerable use and Corporation during the period. The revenue ofthe Commission's reservoirs, but without success. and costs for both 1984/85 and 1993194 relate to The political influence of the small boat owners the business as it was structured in 1993/94. proved insurmountable. In general the revenue raised from recreational activities was not worth the 74 Table 6.3 Rural Water Corporation - Achievements in 1992 January FMR Report to Government March Government decision to implement FMR findings Northern Mallee pipeline funding approved April Rural Water Corporation legislation drafted ay Torrumbarry Weir failed (Remedial work success fully implemented) June 1992/93 Business Plan, budget and pricing approved (average 4.4%) July RWC established outside public service * Corporation's Board of Directors holds first meeting * Fully funded superannuation arrangements for new employees * Interim award created * Corporation became only water authority in Australia accredited as private TAFE provider kugust Delegation manual approved September Regional Management Boards meet October $100 million debt converted to equity * Past superannuation liability borne by Government - future liability borne by Corporation Vovember * Single award with two respondent unions * New commercial financial systems go live * Financial controllers appointed December * Enhanced resignation packages offered Table 6.4 Rural Water Corporation - Achievements in 1993 January Urban water authorities charged for supply of bulk water February Irrigation research program established March * Commercial Development Project initiated May High level Asia Pacific Economic Co-operation Forum delegation received Water Industry Structural Reform Study initiated Lowest seasonal irrigation water sales on record ($7m shortfall in budgeted revenue) June 7.6% workforce reduction over past six months Annual profit of $14.8 million which is greater than the $14.4m budget despite reduced sales July Business plans completed and Regions decide prices * Business and Technical Services Divisions commence commercial operations Final meeting of Water Industry Structural Reform Steering Comnittee August First certificates of Water Resource Management awarded * Completion of Groundwater Management Strategy Performance contracts signed between regions and Corporation Board September Financial statements completed and audited by due date for the first time October Legislation changed to allow charging for securing bulk water entitlements * Lake Eildon significantly reduced major flooding 18 October * Governmuent announced major reforms to water industry and released a strategy paper 27 October First meeting of Regional Autonomy Task Force November Implementation plan endorsed by Corporation Board * Communication with staff commenced relating to organisational change * Agreement with SEC for Eildon power generation re-negotiated to provide additional revenue from June 1990 75 Table 6.5 Rural Water Corporation - Achievements in 1994 March Auction of River Murray water for irrigation April Corporation Board adoption of proposal for the Preservation of Information and Corporate Memory May Interim Board of Radius Computing met for first time Legislation passed by Parliament to enable the creation of Rural Water Authorities June Torrumbarry Weir commencement ceremony held for construction to commence in September '94 * Ministerial Order creating new Rural Water Authorities * Interim Board of Water Ecoscience (joint laboratory venture with Melbourne Water) met for the first time * Final meeting of Regional Autonomy Task Force * Redcliffs Pipelining Project comprising conversion of 55km channels to pipelines and construction of 2 major pumping stations completed on time, in budget July Regions autonomous from 1 July * RWC succeeded in reducing shortfall of revenue against business costs to $13.3m compared to Business Plan target of $19. lm. * Operating Costs were reduced: Staff numbers decreased by 9.3% without disruption to service September Commencement of interactive voice response system for water delivery orders * Private power station opened at Yarrawonga Weir to generate 9.6 megawatts into the State's power grid * A fish lift constructed at Yarrawonga Weir for upstream fish migration Contract approved for re-construction of Torrumbarry Weir. Overall revenue had increased 28% in real The reduction in operating costs of $33.4 terms and operatig expenditure had been reduced million contributed 62% of the improvement in by 32% despite the large real increases in performance. Increase in water rates and charges to maintenance expenditure. The shortfall of revenue the irrigators contributed $11.8 million or 22%. New against business costs (total of operations, sources of revenue net of a dividend to Government maintenance, administration, a renewal annuity and contributed the remaining 16% of the improvement finance charges) was reduced by 80% or $53.6 in financial performance. The irrigators and other million in real terms. Figure 6.2 traces progress rural water users had been protected from price towards financial self sufficiency from the annual increases as far as practicable shortfill of $66.9 million in 1984/85 to $13.3 million in 1993/94. During the management of the Rural Water Commission the shortfall was reduced on average by $4.8 million per year. In the first year of the Rural Water Corporation the shortfall was reduced by $11.4 million, a clear demonstration to the irrigation commurity of the value of the Future Management Review. Appointment of a highly skilled Board with strong commercial skills, and elimination of the large overheads generated by the Victorian Public Service contributed significantly to the improved performance. 76 CHAPTER 7: Environmental Sustainability INTRODUCTION Commission contributed to the development and Any irrigation authority has a vested interest implementation of the MDBC's catchment-wide in protecting the resource base of soil, land and water strategies including management of salinity and resources. Ecologically sustainable development is water allocation. more than just a catch-cry. It is the substance of the Some environmental activities are part of the business. Degradation ofthe land and water resource core business of an irrigation authority. Potential impacts on delivery of water of appropriate quality adverse environmental impacts can result from and quantity to customers downstream and on the system operation, impact of works and activities viability of irrigation farms. Potential resource such as channel spraying with herbicides, leaking degradation includes salinity and water logging, channels from poor maintenance, cold water releases water pollution through drainage and ecological from reservoirs and rapidly changing water levels damage through over-allocation and regulation of and rates of flow in rivers. Management of aquatic rivers inducing changed flow patterns, with weeds, for example, provides a more cost effective consequences for algal blooms and infestation of solution to maintaining hydraulic capacity of pest species such as carp. If the irrigation practices channels and drains. Reservoir management is of customers are not environmentally sustainable in another. During the reform decade decisions on respect of resource use, then both the irrigators and reservoir management led to degradation of water the irrigation authority are out of business. quality and the formation of toxic blue green algal In Victoria a strategic decision was made early blooms preventing use of the water. This highlighted in the twentieth century to promote closer settlement the importance of environmental auditing and the to settle as many people as practicable in rural development of environmental management plans, Victoria and increase the intensity of irrigation, a important initiatives for a commercial organisation decision that has significant environmental working in the natural environment. implications. Many irrigation districts in Victoria The Rural Water Commission and its were established as the result of closer settlement predecessor had carried out resource management and soldier settlement policies after the two world activities for the state that were not the core business wars. In addition the political imperative of the day of an irrigation authority. These activities were was to establish as many farms as possible for the converted to a Government Services Contract as least cost. Planning and establishment costs were described in Chapter 4. with the RWC as the service minimised and essential activities such as the provider. Surface and groundwater assessment, and provision of drainage and soil surveys frequently floodplain and waterway management were the did not take place. Local politics influenced decisions major activities in this category. on the location of new irrigation schemes, often The Rural Water Commission had a strong against the technical advice ofthe time. The outcome commitment to building the knowledge base and was that many Victorian irrigation districts were supported research principally through the established with inadequate drainage and sometimes Commonwealth's Cooperative Research Centres on soils that were not suitable for irrigation. program, including the Cooperative Research Centre Integrated catchment management, or holistic for Catchment Hydrology and the Cooperative water management is vital in ensuring sustainable Research Centre for Freshwater Ecology. The use of land and water management. Formation of National Irrigation Research Fund was another the Murray Darling Basin Commission was an important initiative supported by the Commission. important step in managing the water and land resources of Victoria, New South Wales and South Australia within the Basin. The Rural Water 77 INTEGRATED CATCHMENT The Mineral Reserves Basin, near Swan Hill MANAGEMENT: THE MURRAY in Victoria was a project designed to intercept saline DARLING BASIN COMMISSION water before it entered the Murray River and DARLING BASIN COMMISSION concentrate it through evaporation. The scheme was Most of the irrigation districts in Victoria lie intended to compensate for increased saline drainage within the Murray Darling Basin. The Murray from the upstream irrigation areas in Victoria. Darling Basin Commission and its Ministerial Construction ofthe project, although well advanced Council were established in 1987 to co-ordinate the was aborted by a class action from Swan Hill management of water quantity and quality in the farmers who opposed disposal of salt from the basin. The Murray Darling Basin Commission upstream irrigators in their district. brought together the agricultural, water and The strength of the Salinity and Drainage environmental management agencies of Victoria, Strategy was that it included the whole catchment. New South Wales, South Australia, and the A salinity audit was carried out and a model Commonwealth into a decision making and program developed of salt loads and concentrations along the implementation organisation with responsibility for main stem of the Murray River. The three states a multi million dollar budget. The Commonwealth and the Commonwealth were to contribute to the Govermnent was involved because of the economic costs of saline interception works to reduce river importance ofthe region andthe crucial role inwater salinity by 80 EC units. Victoria and New South resources policy and funding. Wales could each earn the right to dispose of 15 EC The MDBC's roles in developing and units of salt in drainage water by contributing to the implementing catclment-wide strategies for water interception schemes. Expenditure of $50m would allocation and salinity management were vital. give a net reduction in salinity of 50 EC units in the Development of the Salinity and Drainage Strategy Murray River at Morgan, a reference point in South was a particularly important step forward in Australia. brokering a solution to the impass between the three Salinity mitigation schemes were rated states on managing salinity in the Murray River. according to cost-effectiveness without regard to The Rural Water Commission was their location in the states. Most of the more cost represented on the MDBC by a Commissioner (the effective schemes were located in South Australia, General Manager of the Rural Water Commission), requiring investment of funds from the two upstream and a Deputy Commissioner (Director of Technical states in South Australia. These investments would Services or Director of Operations of the RWC). not have been possible without the MDBC. The The Rural Water Commission was in a position to Rural Water Commission provided considerable influence the development of catchment-wide technical support to the implementation of the strategies and assist in harmonising Victoria's water Strategy, establishing the framework and management with those strategies. performance targets for salinity plans within Victoria. Salinity and Drainage Strategy Natural Resource Management Development of the Salinity and Drainage Strategy Strategy was a key point in addressing the problems of the Basin. It established principles for cost- The Natural Resources Management Strategy sharing between states and regions and introduced was developed as an umbrella strategy addressing the concept of salinity credits which broke the the many complex natural resource degradation gridlock that had developed when downstream issues on an integrated catchment management basis. communities took action to protect their areas from The NRMS had two components: Investigation and the impact of upstream irrigation and drainage Education designed to strengthen the knowledge and activities. skill base; and Integrated Catchment Management based on the development and implementation of 78 catchment plans by community groups. The Strategy Targets were set for phosphorus loads from included all resources, land, water and the riverine the major sub catchments of the Basin to provide environment. the framework for community catchment plans designed to reduce phosphorus. Other actions were Riverine Forests focused on improved flow regimes, heightened community awareness and improved scientific The Barmah Forest is a riverine red gum knowledge. (Eucalyptus camaldulensis) forest on the Murray River upstream of Echuca. The forest has depended on spring flooding through the forest to regenerate Water Audit and maintain its health. Construction of reservoirs The steadily increasing diversions of water and use of the River as a supply channel has for irrigation illustrated in Figure 2.9 raised concerns eliminated all but the high spring floods and the that the water resources of the Basin were being forest is declining. The Murray Darling Basin over allocated, and the sustainability of the current Commission made an annual allocation of 100,000 level of use was questioned. A comprehensive audit ML to the forest as an environmental allocation. of water use in the Murray Darling Basin was The allocation is managed by a trust representing completed in 1995. This audit highlighted the fact the various community interests. Providing specific that diversions had increased since 1988. The Rural environmental allocations and assigning them to Water Commission had a major role in respect of specific organisations with accountability for the this audit in Victoria through modelling future water environmental outcome are important principles that use scenarios. Although new water allocations for should be applied more widely. diversion had been limited in Victoria, one of the impacts of water trading was to activate water rights Native Fish that had been allocated but not been previously used (referred to as sleeper licences). Native fish require unimpeded passage up and A major and controversial outcome of the down the Murray River system to maintain their audit was the capping of future diversions and the normal breeding cycle. Weirs and other regulation introduction of conditions for water trading that structures form an unnatural barrier with adverse would not increase diversions. The discipline on impact on the fish population. As part ofthe MDBC woulot imposedibo The dis an Fish Management Strategy a fish ladder was Water allocation imposed by the State Rivers and constructed at Torrumbarry Weir and a fish lift Water Supply Commrission was to the long term constructed at Yarrawonga Weir in association with benefit of the Victorian irrigation community, which the establishment of a small hydroelectricity scheme will become more evident as the other states have to allowing the passage of fish through a widely cut back allocations. expanded area of the river system. THE VICTORIAN SALINITY Algal Management PROGRAM In 1994, the Murray Darling Basin The Victorian Parliamentary Inquiry on Commission adopted the Algal Management Salinity reported in 1984 identifying the costof rising Strategy, prompted by increasing concern about saline water tables to the State and to individual eutrophication and accelerated by a massive IOOOkm irrigators as a major threat to sustainability of algal bloom in the Darling River in 1992. The goal agriculture, Parliamentary Salinity Committee 1984, of the Strategy was to reduce the frequency and The report reflected the growing comnunity concern intensity of algal blooms, and other water quality as to the impacts of both irrigation and dryland problems associated with nutrient pollution in the salinity on land and water resources. Murray Darling Basin, through a framework of coordinated planning and management actions. 79 The Government recognised the importance Nyah to the Border Plan of this threat to the State's natural resources and Soil and land types were classified as high or the Victorian Salinity Program was established as a low hazard in respect of salinity along the Murray high profile activity by Joan Kirner, then Minister River from Nyah to the South Australian Border. for Conservation, Forests and Lands, with a budget The trading rules developed for Transferable Water of some $20m per annum. The most important Entitlements along this reach of the Murray River aspect of this programn was that it was community only allowed trading from high hazard to low salinty driven. Some eighteen salinity Plans were developed hazard land. Water could not be traded for use on by community groups. high hazard land. A long-term reduction of saline The Government established the Salinity flows to the Murray is expected to result from the Bureau to coordinate the activities of the number of new trading rules. agencies that could contribute to salinity mitigation, principally the Departments of Agriculture, Tragowel Plains Plan Conservation, Forests and Lands and the Rural Water Commission. The Rural Water Commission The Tragowel Plains are an area in northern contributed significantly to the success ofthe Salinity Victoria that has suffered from high water tables Program through provision of technical support to and salinity for a long time. The key element of the the community working groups as they developed Plan was extensive soil surveys which identified their Plans and in the implementation ofthose Plans. A,B,C and D class soils in respect of soil salinity. Cost shanng arrangements between fartners, Armed with this information, irrigators could localgostvaring Staraemverntbentwend fmer, concentrate their water allocation on the better A loclovwer mentt ernent feanthe and B soils and use Transferable Water Entitlements Commonwealth Government were a key feature of to sh. wae.rmslnsdCadDcassis all the Plans. Cost sharing reflected the flow of benefits that were expected to result from implementation of the Plan. Shepparton Plan The following plans and projects were Shepparton is a prosperous irrigation area enhanced by Rural water Commission policy concentrating on horticulture and dairying and is initiatives and technical direction. one of the more upstream irrigation districts in the Goulburn Murray Irrigation District. Rising water Su-raysia Plan tables and inadequate drainage affected productivity in the Shepparton region. Surface and sub-surface One of the key elements of the Sunraysia drainage were required but provision of traditional Salinity Plan was an education program for drainage by the Rural Water Commission required irrigators that emphasised water use efficiency and financial resources that were not available from the the technologies for efficient application of irrigation government or irrigators. Community drainage water and monitoring water use performance. The schemes were devised to allow for sharing of risk of Plan also included grants and other incentives to flooding between irrigators who were given improve water use efficiency but required that responsibility for small drains, and the Rural Water irrigators complete the course to become eligible for Commission that was responsible for major regional purchasing further water allocations through trading. drains. Saline discharge to the Murray River must Water pricing and tariff reform reflecting the true be covered by salinity credits under the MDBC's cost of providing the water also encouraged water Salinity and Drainage Strategy. use efficiency by sending the right price signals. Barr Creek Barr Creek was identified early as a major contributor to salinity levels in the Murray River as 80 it received sub-surface flows from elevated saline Lake Mokoan watertables and drainage flows from irrigation. It Lake Mokoan is a shallow storage adjacent was the largest single point source of salt to the the Broken River in norther Victoria. In the 1982/ Muffay River, discharging some 150,000 tonnes per 83 drought the water level was drawn down and the annum. The Plan was based on reducing flow of reservoir almost emptied, exposing the lake bed. The relatively low salinity drainage water into Barr Creek naturally occurring ribbon weeds were destroyed. so that the existing evaporation basin would have a In addition an intense thunderstorm following lower volume of more saline water to manage, and direc could operate more effectively. Implementation oftlafeth1928drutwsedoian nutrients into the reservoir. In subsequent years the the Plan included incentives to encourage whole- Lake experienced regular algal blooms; it was farm planning, laser levelling and the retention of ecologically degraded and water could not be used. drainage flows on farm through re-use systems. Improving water quality in the lake involved the local community in strategic development and planning. Girgarre Evaporation Basin. A research forum on lake restoration was established Rising watertables were threatening and simulation modelling of the Goulburn-Broken productive irrigation enterprises near Girgarre in the system assisted in planning. The outcomes included Goulbum Murray Irrigation District. The Girgarre new target lake levels between 40% and 70% of Project involved the installation of groundwater capacity, flushing flows, a completed ecological pumps to lower water tables. The highly saline study, revegetation, grazing controls and fencing and groundwater was discharged to a constructed water quality monitoring. evaporation basin. The project was completed in 1987 and has operated successfully since then Improved Irrigation Management ensuring greatly improved productivity of previously degraed lad. Moe imortanly, tis prjectThe Rural Water Commission recognised that degraded land. More importantly, this project development of sustainable irrigation mana ement demonstrated the efficacy of a system that can be deeomn fssaal rgat mngemn applistrted i ther pfficar of the Murry Dharg Bain. b practices at the farm level was a key factor to ensure sustainability of the irrigation authorities business. Irrigation at the farm level must be profitable if the ENVIRONMENTAL irrigator is to generate cash surpluses to invest in MANAGEMENT AS CORE sustainable practices. Chapter 5 outlines the actions BUSINESS taken to encourage best practice in the industry at the farm level. Sending the right price signals, making sure Aquatic Weeds that the price of water reflected the true costs of The use of herbicides to control aquatic weeds resource use was a key driver in establishing water is a highly cost effective way of maintaining the efficient practices on farm. Trading in water hydraulic capacity of channels and drains. entitlements also exposed the opportunity cost of Selection and use of herbicides in an aquatic water, and gave the irrigators more flexibility in the use of water. Flexible operation of delivery systems environment requires a great deal of skill and such as the move in the pumped districts, from care. Exotic weeds such as water hyacinth pose rostered delivery of water, whether the crop needed a threat to the natural ecology. The Rural Water it or not, to water on order, reduced outfalls from Commission developed considerable expertise drainage. Development of "best practice" manuals in the management of aquatic weeds which was for on-farm activities, irrigation scheduling and used both by the Commission and other natural technological innovations provided the irrigator with resource managers. the tools needed to reduce water use and minimise the cost impact of higher water prices. Environmental Audit The models also underpinned the work of the Office In 1994 , the Rural Water Commission of Water Resources in the process of establishing completed a comprehensive environmental audit of Bulk Water entitlements and environmental flows. all its activities, providing its successor bodies, the The State Water Laboratory developed a Rural Water Authorities, with the basis for range of tools to monitor and manage water quality. developing environmental management plans. This These included biological monitoring and the use of audit covered all aspects of the business operation the Adaptive Environmental Assessment Model of the organisation. which has contributed significantly to community understanding of the processes which affect water RESOURCE MANAGEMENT quality in individual catchments. Water Resource Assessment: Water Resource Assessment: Surface Groundwater Water Groundwater is an important future resource Reliable data is required to manage a in Victoria and is the only source of fresh water in resource. The Rural Water Commission was parts of the State. The 1982/83 drought stimulated responsible for the Victorian water resources a significant increase in the Groundwater Licence assessment program, measuring and monitoring the Authorisations as demonstrated in Figure 7.1 The quantity and quality of water resources throughout Rural Water Commission established a Statewide the State for inventory, water management and Groundwater Advisory Committee which developed environmental purposes. a Groundwater Management Strategy. A The Rural Water Commission also developed groundwater database was developed by the Rural computer models of the Victorian water system so Water Commission to provide information on a that the natural carriers and the distribution system statewide basis. The database is an invaluable tool could be operated efficiently, minimising water use. for the management of groundwater, assisting in These models were also used to protect water quality protecting the quantity and quality of the resource. and mitigate the effects of salinity and excess Groundwater pricing was revised for the 6000 nutrients. The models also formed the basis for irrigation bores throughout the State. The new establishing Bulk Water allocations for Victoria, pricing strategy reflected the full cost of managing making provision for environmental entitlements. groundwater. In the Koo-wee-rup and Dalmore districts over-use of groundwater led to the depletion Figure 7.1 Groundwater Licence Authorisabons coo 600 3 60 X - 300 260l 80181 82183 84186 86187 88189 90191 92193 81/82 83184 86186 87188 89180 91192 82 of the resource and the threat of saline intrusion, RESEARCH jeopardising the horticultural enterprises in the region. The Rural Water Commission established Strategies to ensure that irrigation can be the first Groundwater Conservation Area, using environmentally sustainable into the future need to appropriate pricing and metering to match extraction be underpinned by a sound scientific base. The Rural with recharge, thus protecting the resource. All Water Commission took an active role in the groundwater extraction was metered and irrigators establishment and management oftwo Co-operative charged for water used. Research Centres - Freshwater Ecology and Catchment Hydrology. Considerable research effort Increasing urbanisation threatens the quality was applied in respect of the MDBC Natural of groundwater through contamination. One of the Resources Management Strategy, the Salinity most significant sources of this contamination is Program and the National Irrigation Research Fund. from landfills for garbage disposal. The Rural Water Commission provided technical assistance to the Environment Protection Authority in developing OUTCOMES protection policies. Landmark legal action by the Ecological sustainability is essential for the Commission established precedents to protect long-term viability of the irigation business. The groundwater from this source of contamination, health of the natural resources which underpin irrigation must be nurtured. The lessons learned as Floodplain and Waterway Management the reforms ofthe decade from 1984 to 1994 included The Rural Water Commission provided the importance of an integrated catchment-wide technical support to the River Management strategy, including cost sharing arrangements, which Authorities throughout the State. The Commission has been developed in partnership with the relevant also had responsibility for the management of local community. The Salinity Program was an floodplains and waterways for those parts of the example ofthat partnership - the technical expertise State not controlled by other formal arrangements. of the Rural Water Corporation and community Floodplain Management Plans were developed in leadership resulted in strategies which are being consultation with local communities and implemented, thus helping ensuring long term municipalities with the emphasis on non-structural viability of irrigation. means of protection from flood damage i.e. using planning schemes to limit building in flood prone areas. Sensitive application of structural measures were used where these were necessary to protect existing assets. Communities of Wangaratta, Shepparton, Echuca and Werribee all implemented floodplain management plans and have benefited by increased protection. The community of Benalla did not implement its plan and paid a high price in subsequent floods. 83 Chapter 8. Insights for Future Travellers Many organisations and individuals of ageing irrigation infrastructure is the first step in contributed to the reform program of 1984 to 1994. improving profitability. Irrigators are given the However the role of the Rural Water Commission, correct economic signal of the costs they are and its successor, the Rural Water Corporation was imposing, and can respond accordingly. central to the success of the reforms. Without these The opportunity cost of the original organisations the achievements we describe either investments in irrigation schemes should not be would not have happened or would have taken recovered. The opportunity cost has been capitalised considerably longer. Placing these achievements on into the value of the irrigation farms, and paid by the record provides a benchmark for our successors succeeding generations of irrigators. New irrigation to measure their performance. schemes are another issue altogether. The The experience of a decade of reform in the opportunity costs of investments in new irrigation Victorian irrigation industry also gave those involved schemes in Australia should be recovered at full important insights into the conception and commercial rates. implementation of a complex reform program. Many Given that unprofitable enterprises will not hard lessons were learnt along the way. We hope survive such a pricing regime time should be given future reformers will benefit from the following to allow for readjustment, and governments should insights gained from our journey. concentrate their financial resources on helping those who can not survive to leave the irrigation industry IMPROVE THE PROFITABILITY with dignity and a financial stake to re establish OFIRRIGATE D AG RICULTU RE themselves. Given our time over again more energy OF IRRIGATED AGRICULTURE and effort would be put into stimulating governments Irrigation in Australia has suffered from a to develop more effective adjustment policies for series of crises brought on by severe droughts, irrigated agriculture. The drive for full cost recovery economic recession, or both. The allocation of large pricing and the target of 20 years to achieve it would volumes of water to irrigation enterprises with low remain. profitability is a legacy of historical policies. Rather Significant reform of water prices was that face up to the fundamental issue, the typical achieved over the decade increasing the real water policy response to the inevitable crisis has been to price from some $14/ML to $19/ML (1994/95 $ increase subsidies usually in the form of subsidised values) in the Goulbum Murray Irrigation District, water prices. Water is a relatively srnall proportion stimulating improved efficiency and profitability of ofthe overall costs of irrigated agriculture, and such irrigated agriculture. Reform of water pricing will subsidies are poorly targeted benefiting many who remain controversial but there can be no doubt that do not need assistance. In the end the only way to the discipline of having to rely on revenue from break the cycle is to stimulate imnproved profitability irrigators to fund business costs is stimulating a more of irrigated agriculture so that future irrigators have cost effective, commercial approach by the Victorian the financial resources to survive the pressures of irrigation authorities. periodic drought and economic recession. Significant reform of tariffs to ensure that The first step in improving profitability is to they were cost reflective to support pricing reform accept that for commercial activities such as was also achieved over the decade. Introduction of irrigation, water is an economic not a social good a darn fill charge in the Wimmera Mallee stock and and should be priced accordingly. Establishing water domestic water supply system, and other user pays prices to raise sufficient revenue to cover operations, initiatives such as in the pumped irrigation districts maintenance, administration and provide for renewal of Sunraysia, and in the City of Bendigo were also major achievements. 84 Reform of water allocation policy is another USE REN EWAL AN N U ITI ES TO effective way to stimulate improved profitability, and PROVIDE FOR RENEWAL OF another step in establishing irrigation water as an economic good. Establishment ofa market for water AGElNG IRRIGATION allocations has two main advantages: INFRASTRUCTURE * new, more profitable enterprises can gain Capital consumption of infrastructure is access to water resources, and conversely usually provided for by depreciation, based on either unprofitable enterprises can realise an asset historical or current replacement costs. The dams, to assist them adjust; and weirs, channels, pipelines and drains that make up * the opportunity cost of water is exposed to irrigation infrastructure have long lives. Inflation give irrigators a valid measure of the value over these long lives results in historical cost of water stimulating investment in more depreciation making inadequate provision for efficient irrigation technology. renewing the irrigation systems. On the other hand, Initiatives to develop water markets should use of depreciation based on current replacement be given a high priority in any reform agenda. costs for setting water prices has generated destructive debates with the irrigators, and proved The Rural Water Commission and counter productive. subsequently the Corporation stimulated reforms to create a water market through introduction of The use of renewal annuities has stimulated temporary trading in 1987, and subsequently a much more constructive debate about service permanent trading of water entitlements in 1991. requirements, risk and cost trade offs between the irrigators and the irrigation business. The renewal The first water auctions in Australia to annuities approach encourages debate about future introduce new water allocations to the market were actions, and facilitates development of a more cost also organised by the Rural Water Commission. A effective irrigation system. When irrigators pay for total of six water auctions were successfully renewal of ageing irrigation systems they have a organised by the Rural Water Commission and strong interest in ensuring that: Corporation. Creation of water markets, pricing reform and demonstrated competence of the Rural only the service potential of essential Water Commission and Corporation in managing infrastructure is replaced; irrigation systems were factors in convincing food * irrigation systems are redesigned to deliver processing companies to invest substantial capital services in a more cost effective ways; and sums in Victoria's irrigation areas. In 1993 a total . risk cost trade-offs are made by the irrigators investment in food processing of $360 million was in an open debate. committed to the Goulbum Valley alone. Implementation of renewal annuities requires Where there is economic poverty, a sophisticated asset register, supported by field environmental degradation will follow. Since inspection of all assets, classification of their environmental degradation threatens the entire condition, and evaluation of the costs of renewal. irrigation community it is in the interests of all in Successful implementation of such a reform was a the irrigation industry that profitability is improved. major achievement of both the Rural Water Sufficient funds will then be available for sustainable Commission and Corporation. environmental management of irrigation. 85s ESTABLISH CLEARLY DEFINED REMOVE THE BURDENS OF THE FINANCIAL GOALS WITH PAST GOVERNMENT Victoria's irrigation systems were burdened The Rural Water Commission successfully by historic liabilities for debt incurred in building developed and promoted to the Victorian the irrigation infrastructure. Unfunded employer Goveirnent the policy of financial self sufficiency contributions to superannuation for staff engaged for irrigation authorities. Attainment offinancial self to construct and manage the irrigation systems were sufficiency is a necessary precondition for the another historic liability. These liabilities related to industry to control its destiny. Confused earlier times and seeking their repayment by current accountabilities will result unless clearly defined generations would not be equitable. financial goals and targets are set. Defining a The Rural Water Commission made repeated financial goal to reduce the business cost shortfall representations to the Victorian Government seeking from $66.9 million to zero over twenty years proved relief from these historic liabilities. Progress was effective. achieved during negotiation of the 1985 Financial The policy of self sufficiency was the Management Strategy when all but $68 million of foundation of the Commission's strategic planning the $400 million historic debt incurred in and embodied in the Financial Management Strategy constructing the irrigation systems was taken over and subsequent business plans, all of which were by the Victorian Government. endorsed by the Victorian Government. The The Rural Water Corporation completed the Commission was less successful in promoting the task in 1992 by convincing the Victorian policy to the irrigation community. Following the Government to accept responsibility for the "RateProtest"thepolicywasendorsedbytheFuture remaining debt, and all the unfunded staff Management Review after extensive consultation superannuation liabilities of $269 million incurred and is now more acceptable to the Victorian up to 1 July 1992. In return the Rural Water irrigation community. Corporation accepted responsibility for costs The Rural Water Commission (Corporation) incurred after 1 July 1992 including renewing achieved substantial progress in thejoumey towards irrigation infrastructure, finance charges and fully financial self sufficiency. The shortfall of revenue funding staff superannuation. The slate was now over business costs was reduced by 80% from $66.9 wiped clean and a new start could be made to define million to $13.3 million over theO years from 1984 the financial accountability of the irrigators. to 1994. Some $33.4 million or 62% of this $53.6 Establishment of a financial framework in million improvement in performance came from which any subsidies from government are provided productivity improvements or cost reductions. New in the form of a one line subsidy, and the historical revenue sources contributed another $8.4 million, liabilities are removed so that progress towards while increased water charges to the irrigators financial viability can be clearly demonstrated is an contributed $11.8 million or 22% of the total important lesson. improvement in financial performance. This achievement places the Rural Water Corporation in the forefront of international irrigation businesses, and is the major achievement of the Corporation. 86 DEFINE THE CORE BUSINESS APPOINT EXPERTISE - BASED OF THE IRRIGATION AUTHORITY BOARDS TO MANAGE THE Governments have an important role in IRRIGATION BUSINESS clarifying accountabilities and defining the core Appointment of management boards business of the irrigation authority. Irrigation representing the interests of particular groups, such authorities often accumulate a confusing array of as the irrigation farmers, runs a high risk that the functions to meet govenmment needs of the time, or board directors will play to the gallery instead of to build an empire. All but the activities essential making sure that the irrigation business is financially for running an irrigation business should be stripped viable and running efficiently. Appointment of a away leaving a clearly defined irrigation business. board of directors with expertise covering the wide Regulatory and govemment policy functions should range of skills from financial management of a be transferred to other appropriate organisations. business, through engineering management to There is no substitute for the hard grind of irrigation farming has introduced a new approach going through all the activities of the irrigation to irrigation in Victoria, and is a very important business, examining them in detail, deciding on their lesson for the future of irrigation. status to unravel the tangled web of govemment The Board of the Rural Water Commission accounting systems and subsidies. All activities of included a broader range of skills including the Commission that were not part of the irrigation irrigators, business and natural resource skills. business were either devolved to another organisation Although representative Board members were or set up as a "government services contract" with selected from the farming community the Board Government as purchaser and the Rural Water decided to act as though it was a professional board Corporation as provider. The "Government Services of directors. Decisions were taken in the best interest Contact" was designed for competitive tendering. It of the Commission and its customers. While the is fair to say that the Rural Water Commission found views of the multitude of interest groups were the devolvement of profitable activities such as urban considered, the interests of the Commission and its water supply a difficult issue to confront. Once the assets took priority. decision was made to devolve an activity the Commission managed the devolvement with great The principle of appointing high calibre skill. boards covering a wide range of skills to direct irrigation authorities was ultimately endorsed by the Improved definition of the core business of Future Management Review, and embodied in the an irrigation authority makes a significant legislation creating the Rural Water Corporation. contribution to improving the efficiency of the To its great credit, the principle of appointing skills organisation. based boards was supported by the Victorian Farmers Federation. The Minister, in appointing the boards of the Rural Water Corporation and its regional subsidiaries, was guided by a specification of the range of skills required. The skills introduced onto management boards as a result of adopting this principle have made a great contribution to the Victorian irrigation industry. 87 INTRODUCE CREDIBLE * establishing technical and business COMMERCIAL ACCOUNTING consultancies; SYSTEMS * introduction of new operational systems supported by new technology and staff Discussion of accounting systems in the same training; list as strategic goal of full cost recovery may seem * removing demarcations from the workforce odd, however introduction ofcommercial accounting by restructuring industrial awards, and systems of high quality supported by qualified reducing the number of unions. The financial controllers is vital to the success of reform amalgamation of the operations and in irrigation. construction workforces delivered All players in the game must understand the considerable savings; costs and revenues, and have faith that the numbers * working hard to maintain good presented are valid. Public access to comprehensive communication with staff on the reforms and and accurate financial information is essential to the workplace changes; effective management of what is a monopoly * development of staff who were adaptable and business. who could cope with the substantial changes occurring in their working lives. STRIVE TO IMPROVE THE The commitment of the organisation to EFFICIENCY OF THE investing in staff training and development was a vital factor in helping the staff through the changes IRRIGATION AUTHORITY and in improving efficiency. The Rural Water Transformation of the Rural Water Corporation was one of only a handful of Commission from a budget sector govemment government business enterprises to gain external "spending" department dependent on appropriations accreditation of its on-the-job training programs to from Parliament to fund operations, into the Rural the level of Certificate, Advanced Certificate and Water Corporation, a government business Associate Diploma of Water Resources enterprise reliant on revenue collected from irrigators Management. to fund its business activities was a substantial The reduction of $33.4 million or 33% of the achievement. At last financial and management annual recurrent costs of the core business of the accountability was clearly defined. Rural Water Conmmission (Corporation) over the Allocation of the contribution of individual decade from 1984 to 1994 stands as a major initiatives to improving efficiency is difficult achievement. however there is little doubt that the following were Redesign of work is difficult and all too often also major contributors: is neglected during reform programs. Redesign of * regionalisation of operations to get decision work requires the hard grind of redesigning detailed making closer to the centre of operations; work practices at the grass roots of an organisation. Investing in technology, staff training, industrial toimplematenti ferponsiblty clostructue relations and development of new career structures tordelegate responsibility closer to the that provide staff incentives to perform well is another important lesson. 88 USE TECHNOLOGY TO COMMUNICATE AND TREAT ALL FUNDAMENTALLY CHANGE AND STAFF FAIRLY IMPROVE THE BUSINESS Reform of irrigation business will often result Development and implementation ofsystems in substantial reductions in the numbers of staff. such as Central Communications and Planning and Achieving the necessary reductions in staff without the Water Management System to improve service destroying morale (and thereby productivity) and to irrigators were major achievements of the Rural the skill base of the organisation is very difficult. Water Corporation. The need for, and the nature of change must be communicated quickly and effectively to staff. There If opportunities arise to fundamentally change is nothing that destroys an organisation quicker than the way the services are delivered by using new uncertainty. The chief executive must take the lead information technology they should be pursued with in communicating directly with the staff at all levels. vigour. Traditional operating practices of open channel irrigation systems are highly reactive and A demonstrated record of treating stafffairly do not respond flexibly to changes in irrigator and with dignity will develop trust between staffand demand. Development of a water management management allowing difficult and often harsh system as part of an overall business strategy can changes to be implemented effectively. If staff know deliver substantial benefits. Through modern that effort will be put into helping them find a new surveillance control and data acquisition systems career and that they will be compensated for operators can see the behaviour of the whole redundancy they are more likely to embrace change. irrigation system for the first time and respond more Implementation of fundamental reforms will then quickly and responsively to irrigator demands. New proceed rapidly and effectively. Only one staff water delivery services, and the ability to reduce the member in hundreds need be treated unreasonably constraints of inadequate channel capacity on water for that trust to be destroyed, and the reform process trading present considerable opportunities. set back. The lesson of our experience of introducing The Kennett Government, on coming to power new technology is to take a small first step by in 1992, started implementing radical restructuring introducing a basic, relatively simple form of new of all the utility industries including water. The information technology. Training of staff and objectives were to deliver lasting benefits to the customers can then proceed in parallel with Victorian economy, give commercial customers development of new career and incentive structures greater input to the management of the utilities for staff. Once customers and staff are comfortable through appointment of skills based boards of with the new systems and can see the potential directors, and to sell assets to repay the State's benefits they will start to demand the introduction unsustainable debt. The changes were to be made in of new systems, greatly improving the chances of ways that were difficult to reverse by future succeeding by making fundamental changes from governrnents. Privatisation was the favoured option. the use of more sophisticated technology. The process of reform started with a structural analysis of each utility industry to identify the 89 essential monopoly components and to define ways CONSULT WITH THE competition could be introduced. The electricity IRRIGATORS industry, for example was divided into generation, transmission and distribution so that the individual Some of the reforms such as introduction of generators could be separated to create competition water trading can provide large benefits to irrigators for the production of electricity. The vertically and are an easier issue to consult effectively with integrated electricity utility was broken up into a the irrigation community. Other reforrns such as full large number of organisations most of which have cost recovery pricing are much more difficult. The since been privatised. principle lessons were never to stop trying to consult The water industry was subject to a similar as effectively as possible, and to delegate genuine structural review. The review proposed that the power when that was appropriate such as deciding wholesale water systems be separated from water on the risk, level of service trade offs in determining distribution. A series of regional wholesale water investment in maintenance and renewal. businesses in public ownership trading in bulk water Development of credible financial systems entitlements was thought necessary to create a and information presented by staff with competence competitive market for bulk water. The wholesalers in business management, together with the use of would supply a series of regional distributors of renewal annuities considerably improved the urban water and a series of smaller district based effectiveness ofconsultation, as did the appointment distributors of irrigation water. The ultimate of regional management boards with local credibility. objective was to privatise the water distributors. All service components of the water utilities such as SUPPORT COMMUNITY engineering design and laboratories were to be sold. PPORT IN ITY The Rural Water Corporation faced the LEADERSHIP IN PLANNING FOR ultimate test of dividing itself into five regional water ENVIRONMENTAL authorities based on the Corporation's regional water SUSTAINABILITY systems, devolving the wholesale water systems to The communty faces many hard choices i the five regions, selling the technical consultancies The communty sustanybhard choices an and closing down the corporate office and business achieving environmental sustainability. Salinity and service division. The new restructure represented Cter logging are difficult issues to deal with. the next wave of devolvement of responsibility and Community understanding of the choices facing them theakextiwave of dentralv authofrity.T uespnsiy ad t is vital if far reaching and effective strategies for weakening of central authorin The success of the achieving environmental sustainability are to be model is highly dependent on the competence of the ipeetd salsmn fcthetpann new regional authorities and it is difficult to predict implemented. Establisht ment octhment planning what the outcome will be. Their ultimate test will groups led bycommunity members withthetechnical come when the inevitable crisis occurs whether a experts in an advisory role is improving drought and severe water shortage, a structural understanding and on ground environmental failure or financial stress in the irrigation industry. management. The principle of community leadership should be supported. Managing such a disaggregation is an Substantial steps were taken to improve the extremely challenging task. The professionalism of environmental sustainability of irrigation through the Rural Water Corporation and its staff in the support of community developed salinity implementing the radical structural reforms of the Kennett Government without industrial disputation management plans such as those in the Goulburn ordisruptiontowaterdeliveries stands as ameasure Valley, Tragowell Plains and Sunraysia. The Rural of the quality of the organisation. Water Commission provided technical support to development of the Murray Darling Basin Commission's Salinity and Drainage Strategy. The technical expertise of the Rural Water Corporation played a significant part in the development and implementation of these plans completing another major achievement 90 SEE EXTERNAL INQUIRIES AS AN OPPORTUNITY External inquiries into the effectiveness and efficiency of your organisation can be daunting to say the least. Instinct often leads you to see such external inquiries as a threat: that instinct should be resisted. External inquires, while painful, present a great opportunity to progress reform of irrigation management. The Future Management Review led by a person with a high level of knowledge and competence in irrigation, and with a high level of credibility with the irrigation community, endorsed the strategies and business plan developed by the Rural Water Commission. These strategies, including that of full cost recovery were more acceptable to the irrigation community and resistance to reform lessened. The inquiry into water management by a prominent businessman that set up the national COAG Water Reform Agenda also endorsed the principle of full cost recovery for irrigation water pricing. Two independent inquiries have effectively reinforced the reforms initiated by the Rural Water Commission at a state and national level maximising their chances of full implementation. To succeed in reforming irrigation persistence and a healthy sense of humour are essential qualities! 91 Glossary ACT/STATUTE/BILL CABINET An Act is a legal instrument passed by both A group ofsenior Ministers ofthe Crown who Houses of Parliament at either the Federal are responsible for the government of the nation or Govenmment or the State Government level. A the state. Cabinet is chaired by the Leader of the Bill is a draft Act, introduced to parliarnent for government, the Prime Minister or Premier. debate. A Bill becomes an Act after it has been debated in both Houses of Parliament, amended as COALITION GOVERNMENT necessary, and passed. An Act becomes law after Elected members of Parliament usually have it is promulgated, which might be some time after it allegiance to a political party, although some are is passed. A statute is a formal document which independent. Political parties usually vote as a bloc has been enacted by the legislature. in Parliament. In Australia there are two major parties. Liberal and Labor, several minor parties the APPROPRIATION ACT most numerous being the Democrats and the In the Westminister system of government, National Party. Coalition Government refers to the the monies required by the government for its coalition of Liberal and National Party which recurrent annual expenditure must be approved by combine to form a government. both Houses of Parliament in the form of an annual Appropriation Act. CONSOLIDATED FUND A government wide fund which collects AUDITOR - GENERAL revenue due to the government. Revenues due to An officer of the Crown, responsible to the Fund were often set without regard to the Parliament rather than to Executive Government. expenditure which may be required under the Provides an independent probity check, performance Appropriation Act. measurement and ensures that appropriate accounting methods are used by government COUNCIL OF AUSTRALIAN departments and agencies. GOVERNMENTS (COAG) Formerly known as the Prime Minister/ AUSTRALIAN WATER RESEARCH Premiers' Conference. The Council comprises the ADVISORY COUNCIL Prime Minister of Australia and the Premiers of each This body was established (1984-90) to state. COAG was established with a charter to be provide independent advice to the Federal proactive in the introduction of competition policy Government Minister responsible for natural and microeconomic reform throughout the public resources on matters relating to water research at sector. the national level. It also approved research proposals consistent with an agreed government DEPARTMENT OF WATER RESOURCES, strategy. CONSERVATION AND NATURAL RESOURCES, NATURAL RESOURCES BAILIFF SECTION AND ENVIRONMENT An area within an irrigation district which was Successive government departments which managed by a bailiff who collected water orders administered the Water Act and advised the Minister from irrigators, planned the release of waters for Water Resources during the time ofthis journey. through channels and managed the flow of water FEDERAL POLITICAL STRUCTURES to service orders. Australia is a federation of sovereign states, those states having ceded somne powers to the Federal Government on formation in 1901 and occasionally thereafter. Each state government and the Federal Govermment independently elect an upper and a 92 lower house of parliament, the lower house providing LABOR GOVERNMENT the government of the day. Given that systems of Refers to the State Governments led by election are different and elections take place at Premiers John Cain and Joan Kimer, when the Labor different times, it is quite common to have upper Party held a majority in the lower house of and lower houses controlled by different major Parliament, from 1982 to 1992. Can also refer to parties and certainly common to have a different the Federal Govemment which was in power from political status between states and with the federal 1983 to 1996. govemment. An alignment provides an opportunity for concerted action. LAND AND WATER RESOURCES RESEARCH AND DEVELOPMENT GMID CORPORATION The Goulbum Murray Irrigation District. The A Federal Government statutory authority, largest irrigation district in Victoria, using 80% of established under the Primary Industries and Energy the irrigation water. Research and Development Act. A successor body to the Australian Water Research Advisory Council, GOVERNMENT BUSINESS ENTERPRISE it was established in 1991, to develop, fund and Semi-autonomous govemment agencies, manage land, water and vegetation research and usually established by statute, which generate development at the national level, especially in revenue for provision of services, e.g. gas, water, respect of their relationship to primary industries. electricity, grains handling, railways etc. MDBC SALINITY AND DRAINAGE GOVERNOR-IN-COUNCIL STRATEGY The Govemor is the ultimate Head of State The Murray Darling Basin Commission in Victoria, appointed by the Queen. The Governor developed a number of strategies in relation to heads an Executive Council comprising the Premier, concerted action to address natural resources Treasurer and other nominated Ministers. The management issues. The Salinity and Drainage Council approves statutory appointments, the Strategy was the first such strategy and established promulgation of legislation. principles for cost sharing and resource allocation between states on the issues covered by the strategy. HIEAD WORKS In the case of irrigation, headworks refers to MINISTER the structures which impound and release the water Under the Westminster system of government, for irrigation purposes. responsibility for the administration of Acts of Parliament are allocated to nominated members of INNER BUDGET the party which has gained the majority number of Refers to those government departments and seats in the lower house of parliament at election. agencies whose annual, recurrent expenditure is Each Minister has a portfolio of related acts to determined by the Appropriation Act. administer and is responsible for related matters. A Minister is advised by a Department. Both the State IRRIGATION TRUST and Federal Governments have Ministers responsible An association which was established as a for similar issues, although the degree of cooperative venture by landholders and licenced by responsibility is related to which government has the State Government to divert water for irrigation, the constitutional power. In the case of water resources, they are a State responsibility, with the Federal Government taking part in national coordination through Ministerial Councils. The Federal Covernment has taxing powers which, de facto confers influence over State Governments. 93 MURRAY DARLING BASIN COMMISSION ROYAL COMMISSION The MDBC succeed the River Murray A Royal Commission is the level of public Commission which was established in 1915 to inquiry, commissioned by the Queen on the advice manage the allocation of water from the Murray of the Government of the day. A Royal Commission River system to the three states which contribute to has expanded powers of discovery and is only and draw from the system. Victoria, New South established on matters of serious import to the State. Wales and South Australia, together with the Commonwealth were members. In 1985, MDBC RURAL WATER COMMISSION replaced RMC, the new body encompassed a much This body was established in 1984 by the larger geographic area, including the catchment of Central Management Restructuring Act of Victoria Australia's longest river, the Darling, and broadening as a successor to many of the functions of the State the terms of references to cover natural resources Rivers and Water Supply Commission. management in the region. The State of Queensland became involved and accepted formal membership RURAL WATER CORPORATION later. The successor body to the Rural Water Commnission, this body was established by the Rural NATIONAL IRRIGATION RESEARCH Water Corporation Act in 1992, following the Future FUND Management Review carried out by Stuart NIRF was established in 1987 to provide a McDonald. focus for irrigation related research at the national level. It was funded partly by the Federal STATERIVERSANDWATERSUPPLY Government and partly by State irrigation agencies. COMMISSION It was a small research fund which stimulated the The predecessor body of the Rural Water development of a national Irrigation Research Commission was established in 1905 and had Strategy which was adopted and implemented by responsibility for irrigation and many other water the Land and Water Resources Research and related matters in rural Victoria. Development Corporation. URBAN WATER BOARD PUBLIC SERVICE ACT Boards established to manage particular An Act which governed the terms and urban water supplies, basically retailing water and conditions of employment of public servants, sewerage services to non metropolitan urban employees of government and government agencies. communities. REGIONAL MANAGEMENT BOARD VICTORIAN TREASURY/DEPARTMENT Following the implementation of the Future OF MANAGEMENT AND BUDGET Management Review in 1992 and the establishment Alternative names for the State Government of the Rural Water Corporation, five Regional Department which advises the State treasurer on Management Boards were established to manage economic and financial issues. irrigation and associated enterprises across Victoria under the guidance of the Corporation. Each Board had five members selected by an independent panel and appointed by the Minister. A director or officer of the Rural Water Corporation was also appointed to each Board. 94 Bibliography ACIL Australia Pty Ltd. 1984 Transferability of Water Entitlements, report prepared for the Department of Water Resources, Victoria. Clark, S. D. 1982. The River Murray Waters Agreement: Down the Drain or up the Creek? 1982 C. H. Munro Memorial Oration, delivered at the Hydrology and Water Resources Symposium, held at Melbourne University, 11-13 May 1982. Davidson, B.R. 1965. The Northern Myth: Study of the physical and economic limits to agricultural and pastoral development in tropical Australia. Melbourne University Press Neilson Associates. 1981. Irrigation Management in Victoria, a report commissioned by the Public Bodies Review Committee of the Parliament of Victoria, Victorian Government Printer. Parliamentary Salinity Committee. 1984. Third Report to Parliament. Salt of the Earth: Final Report on the causes, effects and control of land and river salinity in Victoria, October 1984. Rural Water Commission. 1987. Report of the Commercial Orientation Task Force, Internal report. Rural Water Commission. 1990. Information Technology Strategy, Internal Report, September 1990. Rural Water Commission. 1985. Annual Report of the Rural Water Commission for 1984/85. Rural Water Commission. 1986. Annual Report of the Rural Water Commission for 1985/86. Rural Water Commission. 1987. Annual Report of the Rural Water Commission for 1986/87 Rural Water Commission. 1988. Annual Report of the Rural Water Commission for 1987/88 Rural Water Commission. 1989. Annual Report of the Rural Water Commission for 1988/89 Rural Water Commission. 1990. Annual Report of the Rural Water Commission for 1989/90 Rural Water Commission. 1991. Annual Report of the Rural Water Commission for 1990/91 Rural Water Commission. 1992. Annual Report of the Rural Water Commission for 1991/92 Rural Water Corporation. 1993. Annual Report of the Rural Water Corporation for 1992/93 Rural Water Corporation. 1994. Annual Report of the Rural Water Corporation for 1993/94 Victorian Governnent. 1988 Salt Action: Joint Action, a strategy to mitigate salinity in Victoria, Government Printer, October 1984. Wood, S. and Banks, L. 1991. Irrigation Research and Development in Australia: A National Strategy, National Irrigation Research Fund. World Meteorolgical Organisation, 1992, International Conference on Water and the Environmnent (1992) The Dublin Statement, World Meteorological Organisation, Geneva. 95 Distributors of COLOMBIA GERMANY Tel: (52 5) 624-2800 POLAND Fax: (941) 432104 lotaenlace Ld. UNO-Verlag ISRAEL Fax: (525)624-2822 Intematienal Publishing Service E-mail: LHL@sd.Lanna.net W orld Bank Carrera6Nob51-21 PoppelsdoulerAlleehs Yozmot Literature Ltd. E-mail: intotec@rtn.net.mx Ult. 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