“Public submission to charge rules issues paper for ...



“Public submission to charge rules issues paper for irrigation infrastructure operators by Tom Martin, Vice Chairman, South Australian Murray Irrigators on 15/7/2008.”

SAMI’s responses in this document address matters raised in the “Issues Paper – May 2008”

1 – Introduction

The sixth paragraph refers to “full cost recovery water charges being applied consistently across all the basin – will facilitate the efficient functioning of water markets, by removing distortions to trade ………………”

The statement would achieve its aims and intent if:

• The Federal government had proper control of the MDBA as planned not as is now is apparent that the states still dictate on all issues.

• All tributaries within the MDB were under a single Federal management that could manage the system as an entity for the fair benefit of all its dependents including the environment.

2.1 – What is the purpose of water charge rules?

The second paragraph “………water charges must contribute to the economically efficient and sustainable use of water resources and water infrastructure assets, and facilitate the efficient functioning of water markets”.

Frequent comments by politicians (both federal and state), water policy administrators and irrigators lauded the success of the water market in delivering these aims – up until the $50 M federal water buy back this year.

It will not matter how much distortion water charges are making – they will not be discernable whilst the weight of federal funds is sloshing in the market without transparency or a plan.

Further if the two points stated in section 1 are not applied, consistent water charging is difficult to apply to water of different values and various levels of security.

We understand and accept that water charges will vary according to the infrastructure etc required. A market can easily understand these differences too.

But if they are applied to the same product (a ML of water) that also has variables designed by various states entities for unrelated purposes - the contribution to economic efficiency will be nil!

Economic signals of real value cannot be generated from a base that is continually interfered with by state governments.

2.4 What can water charge rules for charges payable to operators cover?

We are aware of submissions by others responding on behalf of CIT and RIT.

A number of other trusts operate in SA under completely separate structures that are more corporate in nature:

• The shareholders own their land

• A trust owns and manages the water, infrastructure and manages the land

• Shareholders elect a board of directors to manage these assets.

The governance responsibilities of these directors are the same as the director of any corporation in Australia:

• Accordingly the charging arrangements are - to ensure the business remains profitable, its assets are maintained and its liabilities are met.

• Water charge rules have no application in these structures.

2.5 Governance and price setting arrangements

Paragraph 6 – acknowledges the diversity of operators. The monopoly questions do not apply in structures where the shareholdings in the water and infrastructure trusts are in the same proportion as the shares in the land company. In this situation the duty of the directors to maximize profits and distribute them evenly mean that the operator is compelled to be efficient and fair to all.

Paragraph 9 – correctly identifies the “nexus” between operator and customer and concludes that this may actually be efficient, “even though no regulator is present”.

These structures are efficient in our experience and they do have very powerful and sufficient regulator – the Corporations Act.

3.1 Economically efficient and sustainable use of resources and infrastructure

Efficient operators are now being invited to expand by operators who cannot offer their customers the levels of management, service and charges they currently levy their customers.

We see the potential for expert operators to continue to develop their business into packages that may be attractive to an even wider range of customers. That is a market where service providers compete as in all other areas of business.

The success of such business’s will always rest on the skills they can apply to the management of the resource and its required infrastructure.

3.3 Efficient functioning of water markets

Paragraph 1 – totally agree. Just as the water market was proving this point and at a time when irrigators needed an efficient market like no previous time in our history – it was completely disrupted by the government entering the market.

Paragraph 2 – this was all happening until the feds entered the scene! We contend that the protection sought by some operators under limited trading volumes (Cap in our view refers to a “state, total volume of allocation” so for clarity we will use LTV) is a defense mechanism required to protect their business from a Buyback regime that has no plan and is not transparent in its practice.

While this is understandable – it is having a limiting effect on:

• opportunities for customers to exit

• structural renewal for industries

• volumes of water for lease or permanent sale

• longer term options for operators to successfully steer their corporations into the future

Paragraph 3 – Again this is a bit rich coming from a government that promised a federally administered Water Act – that in fact now has 5 governments in the brew and the states continuing to resist fair and sensible oversight. JUST PLAIN THUGGERY ON THEIR PART – the MDB deserves and needs fair management for its communities and the environment.

Talking about consistency of regulation and pricing across jurisdictions is nonsense – it should be one jurisdiction!

Paragraph 4 – Where consumers manage their land individually, then the water ownership must be devolved from the corporations that manage their water and infrastructure.

The irrigator in this sense is the decision maker driving the business and must have full control of all the inputs to make the best decisions for the business and those inputs.

4.1 Methodological Issues

Just as investment funds have comparative charts and indices – operators should report to standards that can be compared with other operators.

These comparisons will guide:

• operators as to how their business is performing

• irrigators in where water can be delivered at least cost

• regulators on which operators are making adequate provisions for capital upgrades

4.2 Service standards and obligations

Independent reviews and benchmarking of operators is somewhat meaningless if there remains variability in the security of the water resource between jurisdictions.

Operators who are able to deliver a larger percentage of the resource will clearly be at an advantage. A discount could be allowed for an operator so affected – but that would introduce an intangible and lower the value of any comparison.

Question 3

Exit grants have failed in horticultural areas generally because the rules for broad acre funding have not transited successfully into capital intensive perennially horticulture.

Operators seeking the protection of LTV’s should be protected instead by medium term funding to allow land that currently has nil (or no buyers currently) value to be consolidated over time and sold to new investors in say 5 years time.

Land that has roads, power, water, services and a supporting community will be redeveloped ahead on virgin land in the future because of lower capital costs.

Question 6 Asset valuation

a) Operators should plan a renewals annuity very early in the life of an asset possibly assisted by some debt financing of the renewed infrastructure.

b) Assets should be valued on a per Ha basis. The total infrastructure serves one purpose to deliver water to land. The market value of that land is determined by what the combination of land and water can yield. This would introduce another form of bench marking – comparing the land values across operators but within crops. Variations between market value and the calculated value of equivalent land plus infrastructure would also need comparative analysis.

c) Our view is that assets should be depreciated in the accounts according to ATO schedules but in the assets register according to the life for each well maintained item.

3. Termination fees

Paragraph 4 – is very good. Renewals annuities eliminate the need for termination fees.

Paragraph 6 – Operators will need support through a transition phase in most instances.

Question 15 (g)

Operators are only able to assess a particular customer’s credit risk by the customer’s history of payments for water delivery charges.

To secure their risk operators should have access to a customer’s water. If operators are not able to recover debts then rising expenses are shared among remaining customers.

Adding the liability of others to remaining customers at a time of stress will produce a knock on effect – that should not be allowed!

3. Transitional arrangements

Changes in charging regimes for water delivery expenses need to be implemented with sensitivity to the structural changes in the irrigation industry that are currently happening\need to happen.

Operators that have assets stranded need time to see the new picture of what assets will be required. Ignoring or rushing this point will produce poor results.

Operators should be able to access government support to assist them through this period.

Question 31

A review of the new water charge rules should be conducted after the federal water buy back is completed.

SUMMARY

Many of our answers refer to inadequacies in the current performance of the MDBA – which we acknowledge is outside the parameters of the ACCC’s enquiry into Water Charge Rules.

It is early days in the life of the MDBA and we hope many of the anomalies will be addressed – but our experience to date is that the states still rule.

We do not retract from these comments. Further we wish to state that the application of new Water Charge Rules on a system that has so many basic and old flaws will fail to deliver the economic efficiency and signals so desired by us all!

The increasing price of energy will produce a new era of opportunity for irrigators and it is important that the decreased volumes of water that will be available are able to used in these opportunities to the greatest benefit for our communities and the environment!

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download