Foreign Investors are Becoming Players in Australia’s Water Market

September 8, 2010

Well-defined water rights, increasing demand and projections of scarcity are attracting investment funds from abroad.

Foreign investors have bought hundreds of millions of dollars worth of permanent water rights in Australia, according to a series of reports published this week by the Sydney Morning Herald.

Purchasing water rights represents a shift in investment strategy for water funds, which to this point have focused primarily on water utilities, water infrastructure and water-related technologies. Though formal water rights trading exists in Chile, the western United States, South Africa and China, no country matches the size of Australia’s market, worth AU$30 billion.

Australia’s water rights system has two tiers: entitlements and allocations. Entitlements are a permanent right to a share of the total water available. Allocations are a right to a specific, seasonal volume of water granted to an entitlement holder; they are for temporary use when traded.

Investment funds see big earnings from leasing annual allocations to farmers and cities. Since they hold entitlement, these allocations can be sold every year. Ten years ago one million liters traded for AU$2 in Australia. Last year at the peak of the market, the same volume sold for AU$1,300 to $2,400, the Herald reports.

But profits from sales can be volatile, while nearly AU$3 billion in rights was traded in 2009, but prices have dropped 40 percent in some cases due to more rain and changes in the government’s purchasing system this year.

The federal government has been the biggest player in the market, pledging to spend AU$3 billion to buy back water rights to restore rivers in the Murray-Darling Basin. Some farmers allege that the government’s buying flurry last year caused prices to spike and then fall when trading has been lighter in 2010.

The argument for water markets is that tradable rights apportion water to its highest valued use, creating a more efficient economy. According to Australia’s National Water Commission, water trading increased economic productivity in the country by $220 million between 2008 and 2009.

Critics counter that without better regulations, such as limitations on holdings, water rights can become consolidated in the hands of a few.

“We don’t have a problem with investment, or indeed, speculation in the water market,” said Andrew Gregson of the New South Wales Irrigators Council to the Herald. “We are concerned about market dominance. It’s a recently developed, relatively fragile market.”

Small farmers are worried about the strings that might come attached to water allocations purchased from a foreign owner.

Gregson told the Herald that a foreign rights holder could “buy a truckload of water and decide: ‘I’m going to lease it to somebody, but as part of that lease I’m going to tell them what to grow, when to grow it, who to sell it to and at what price’. We’re opening the door to potentially becoming the old feudal system of peasant farmers—on an enormous commercial scale, obviously.”

Those fears recall the recent trend of parched Persian Gulf countries and state-owned sovereign wealth funds buying farmland abroad – what some have called a land grab.

Both farmland acquisitions and water rights purchases are in their infancy, but are projected to grow. The Herald mentions Richard Lourey, the head of the Causeway Water Fund, trawling global financial capitals for AU$100 million to invest in Murray-Darling water.

Another investor Graham Dooley, the chair of Summit Water Holdings, would not say how much the company will invest in Australia, but he did tell the Herald that the thinking is long-term: “We have no upper limit [for acquisition]. We have a buy and hold strategy. We are in the build phase.”

Source: Sydney Morning Herald: Water Rights, Sydney Morning Herald: Liquid Gold, Sydney Morning Herald: Farmers

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