What price water? The argument for and against making commercial users pay

by Mike White / 15 September, 2017
Photography by Mike White.

Getty images.

Labour's proposal that commercial users should pay for water has become a hot topic in the run-up to this year's election, with allegations of misleading claims and scaremongering. North & South investigated the issue in 2015 and found surprising support for the idea.

It’s there in the Bible, in the book of Revelation, almost the last word written: “And let him that is athirst come. And whosoever will, let him take the water of life freely.”

Ever since we arrived in New Zealand, we’ve done exactly that: come and taken water freely. Like air, it’s always been seen as limitless, rivers and lakes and streams providing life and livelihoods, and it’s been our god-given right to take as much as we wanted.

But things have changed. Droughts have descended more often and more fiercely. Dairy farms have displaced drylands, stubbled paddocks greened with giant irrigators. Our population has continued to grow. Climate change and higher temperatures have become our undeniable future. More immediately, a severe El Niño weather pattern is set to clutch the country this summer, further strangling rainfall along the east coast.

And suddenly it’s clear that in many parts of New Zealand, water has become scarce. That there’s barely enough to go round. That some people are taking huge amounts and not paying a cent for it.

That can’t be right, can it? That can’t be fair? Surely it’s time people started paying for the “water of life”.

Peter Robinson with a photograph of grandson Harper with his first salmon.

Peter Robinson reckons so. He grew up in North Canterbury, caught his first salmon at 11 at the mouth of the Waimakariri and has caught one every season in the 50 years since. His daughter hooked her first fish here when she was four. Just recently, his seven-year-old grandson landed his first one, in the same spot.

But it’s getting harder. The rivers are drying up for longer and over a much greater area. The landscape he’s known all his life is changing.

“Particularly in that crucial time over summer and everybody’s after that water. The fishermen want the water, the farmers want that water, but the water’s just disappeared.

“I went up that road at Burnside yesterday and I thought, ‘That can’t be the river – it’s bone dry.’ I’ve never seen it like that before – I thought I was lost.”

Even where water remains, smaller flows lead to higher temperatures, increased algae and fish dying.

“I used to go out fishing when I got depressed,” says Robinson, “but that’s bloody depressing now too, seeing what’s happening to the rivers. I don’t want my grandson telling stories in the not-too-distant future about how he caught a salmon, and people saying, ‘There used to be salmon in the rivers?’ Because I can honestly see that coming.”

The situation in Canterbury is particularly serious for a number of reasons. About 70 per cent of New Zealand’s irrigated land is here. Water in many areas has been over-allocated for years – more has been allowed to be taken than is available. The past decade has seen dramatic changes from dryland farming, where little irrigation was used, to dairying, where it takes around 1000 litres of water to produce a single litre of milk.

The east coast suffers regular droughts – in North Canterbury they’re still in the grip of last year’s, while facing even worse this summer. Many rivers you used to swim in are now toxic trickles.

As this has become apparent, limits have been set on how much water can be taken from rivers and aquifers. Yet despite this, numerous big irrigation schemes that will further suck from Canterbury’s stretched waterways are being proposed, potentially even doubling the 500,000ha that’s already irrigated across the province.

Environmental consultant and former Fish & Game adviser Scott Pearson says when Canterbury’s farmers turn on their irrigators in spring, the rivers start running dry in a matter of days. “It’s so blatantly obvious it’s just not funny.”

Come April, when the taps are turned off, the rivers bounce back – theoretically.

In May this year, Pearson stood in the Cust riverbed and it was still dead dry. Fish & Game “salvaged” the river in October, saving fish as the river level fell. Seven months later, it was still just bare stones and dry banks. Twenty kilometres downstream, it was the same story – a section that’s normally dry only from December to February still didn’t have a drop in it, nearly three months on.

Farmers argue these Canterbury rivers always go dry in summer. The problem is, says Pearson, they’re going dry earlier, for many more months, and over longer stretches of the river – even after relatively wet winters.

He understands the importance of irrigation for the economy, but says the system of allocating water just isn’t working. “The effects on the river are clear. We have a serious issue with this resource that’s getting more and more scarce.”

Parliamentary Commissioner for the Environment Jan Wright says the logic of putting a price on water is very obvious.

In basic economic theory, when a resource gets scarce, the price goes up. Only, with water, there’s never been a price. Everyone from farmers to hydroelectricity companies to townies washing their cars has essentially got water for free.

But it’s one thing to use it in your house for taking a shower, and another if it’s a fundamental part of your business from which you profit.

Under the current system, devised when everyone imagined water was inexhaustible, big users such as farmers have applied for consents to take water from aquifers or rivers, and usually been granted this right for up to 35 years. They may pay for the consent, they may pay for getting the water to their property – but the water itself has been free.

This water makes them money in two ways: it means their land can be more productive by growing more or different crops, and having a water right also increases the value of their land considerably. So when farmers come to sell their land, given we don’t have a capital gains tax, they’ve essentially turned a public resource, which they’ve taken for free, into pure profit. These consents for water have been granted on a “first-come-first-served” basis, with new businesses now unable to get water in many areas like Canterbury because it’s already been divided up.

Because nobody is paying for water, there’s less incentive to use it efficiently. And there’s no way of gauging if water is being used for the greatest benefit – would 1000 litres provide more value by producing one litre of milk, or irrigating crops or fruit trees, or even increasing the flow so tourism companies, such as rafters or fishing guides, can use the river? Fish & Game chief executive Bryce Johnson says New Zealanders are finally realising water is limited and being exploited by a few.

“These guys get it for nothing. They say they pay for it but all they pay for is the delivery cost. It’s like paying for the truck that brings the fertiliser but getting the fertiliser for nothing. It’s an absolute premium resource for them that they take from the public for free, pocket the profit from it, and all the public get back is a shitload of pollution.”

Parliamentary Commissioner for the Environment Jan Wright says the logic of putting a price on water seems very obvious, and though she’s talked about it for nearly a decade, politicians and the public have skirted round it.

“This is the classic thing that happens with many, many issues – they get away on us and then we’re trying to fix them up once they’ve got away. And this is clearly one of these,” she says.

“It’s a basic principle that if something’s an input into production – in the same way as fertiliser or iron or what-
ever you’re using in agriculture or manufacturing – and it’s scarce and other people want some too, why wouldn’t you pay for it, because you’re profiting directly from it.”

Intriguingly, on this issue there’s strong agreement across the political spectrum, from environmental groups to arch-conservatives, that big water users should pay for this basic raw material, just as they do for electricity or fuel. Some of this revenue could then be used to clean up our rivers and lakes.

Right-wing political commentator Matthew Hooton says as competition for water increases, there are two ways to allocate it. The first is to persist with the first-come-first-served system, which he likens to queuing for food in the Soviet Union. The second is to put a price on it, allow it to be traded, and allow it to be auctioned to whoever will pay the most for it.

“In the Soviet Union, only the people at the end of the queue didn’t get bread and everyone else got it cheap or free. So the existing users of water are automatically at the front of the queue and they currently pay nothing and they’re happy and they certainly don’t want that situation to change.”

But more people have now joined the queue and are missing out, he says. “And I don’t see any other resources or commodities in our economy or society where anyone argues queuing is the best way. The Communist Party of New Zealand doesn’t advocate queuing any longer.”

But despite the broad range of people calling for commercial users to pay for their water, no government has been bold enough to confront it.

Partly this is because they sense there’ll be an instinctive public reaction that it’s bad to pay for water. Partly it’s because if you put a price on it, you immediately raise issues of ownership – and if you do that you have to address the possibility of iwi wanting a share of the country’s freshwater.

And partly it’s because the current government has a strong rural and business base – and asking farmers and companies to pay for water would be utter anathema.

“It’s power politics – that the farmers have too much political power – that’s all it comes down to,” says Hooton. “They want free water, they don’t want to pay. And if I was a farmer, it’s exactly what I would argue. But you wouldn’t make that case for fertiliser, would you? There’s no other input they don’t pay for except the sun.”

The government’s cowardice in not charging for water was reminiscent of National’s reluctance to remove farming subsidies in the 70s, despite the clear logic of doing so, Hooton says.

“The fact that something is obviously economically sub-optimal and non-sustainable doesn’t mean that a
business-as-usual National government, whether led by Muldoon or Key, is going to change it. It’s sad we’re even having debates like this, 31 years after we embarked on rational economics.”

Environmental consultant Scott Pearson in the dry bed of the Ashley River near Rangiora.

In the same way it was a Labour government that removed farming subsidies, Labour has for many years called for commercial water users to pay for the water they take. So have the Greens.

But the current government has consistently shied from it, though it has asked the Land and Water Forum to look at how to get the best value from water. This group, which includes a range of interested parties, from iwi to environmental groups to farming organisations and business giants like Fonterra, is likely to address the issue in a report before the end of the year.

Environment Minister Nick Smith accepts we need a more sophisticated way of allocating water than the present first-in-first-served system, and have to find where it will provide maximum economic benefit.

“But we’re not looking to price the core natural resource.”

Smith argues New Zealand actually has plenty of water and questions of charging for it relate only to a few regions, a few times a year, when it’s in short supply. “And any attempt to price the water will also bring a very divisive and ugly argument with iwi over who actually owns it in the first place.”

Hence, the government has maintained the mantra that nobody owns water in New Zealand – that at best you can have a consent allowing you to use water.

But in a small office in the west of Christchurch, this fiction is laid bare. Tony Davoren runs HydroTrader – a company that helps people buy and sell water. What essentially happens is that someone who has a consent to take a certain amount of water – either groundwater from an aquifer or from a river – and isn’t using it can sell that surplus portion of water to someone else who needs it. Most of this goes to farmers wanting to irrigate, but Davoren has helped sell water to yam-washing and truck-washing businesses.

These deals have been going on for at least 20 years, but were usually done over a handshake in the pub. However, with limits now being placed on how much water can be taken, and greater demand for it, it’s natural a market has  sprung up.

“It’s not explicit in the plans that you shall have to pay for that water but you’re not going to give it away to somebody else and not get some recompense for it,” says Davoren.

So in 2007, people started asking how much water was worth. To figure this out, they looked at the amount they could increase the yield from their land if they had water (the rule of thumb is you can at least double production if you irrigate), how much water they needed, and came up with a value per cubic metre (1000 litres). Davoren says that figure has ranged from 50 cents to $1.60 but is now about 80 cents.

Farmers generally need about 3500–4000 cubic metres per hectare. So for a 10ha block, you need to buy at least 35,000 cubic metres. At the current market rate, that’s around $30,000.

All this is logical and seemingly a straightforward transaction. But essentially what’s happened is that a farmer has been granted a consent to use a public resource – a consent that means no other member of the public can use that water – and has then sold the water they’ve got for free to someone else, for a considerable profit.

Davoren stresses that while demand for water and HydroTrader’s services are increasing, the amounts being sold and bought are small in the overall picture of water being used for irrigation in Canterbury, with only around 4-5 million cubic metres a year being traded.

But even that amount of water at 80 cents a cubic metre means more than $2 million has changed hands so far this year in deals brokered by HydroTrader.

So while the government and others may insist nobody owns the water, some people are certainly profiting handsomely by selling water they don’t own and have been allowed to use for free. It’s a situation Jan Wright admits New Zealanders should be concerned about and she questions why the government doesn’t receive any revenue from such sales.

Davoren says to increase production anywhere on New Zealand’s east coast, you have to irrigate. If you haven’t got a consent or can’t store water on your farm, or you buy a neighbouring block without water rights, then your only option is to buy water.

“People are saying, ‘This water is so valuable to me that I’m prepared to pay for it to grow something.’”

So if that’s the case, shouldn’t there be a price on water from the start – when someone is granted a consent in the first place?

“Look, I don’t have an issue with people paying for water,” says Davoren. “But it has to be global. If a farmer or irrigator has to pay for water, then so does the person in the city. I don’t think you can be discriminating about this.”

The issue here, however, is the person in the city isn’t profiting from the water they use. Farmers use their water to produce more goods that they can sell, and increase the value of their land. (Davoren says land agents estimate irrigated land is worth about 1.6 times more than non-irrigated land in Canterbury, but can be twice as much.)

Moreover, about half of New Zealanders arguably do pay for the amount of water they use, through water meters at their houses. Authorities claim they’re not paying for the water itself, but merely for the cost of the infrastructure and supplying the water to them, or dealing with wastewater.

However, this seems convenient semantics, perpetuating the assertion nobody pays for, or therefore owns, water. But if you’re paying a charge per cubic metre of water for showering and doing the dishes and watering the garden, and the more you use the more you pay, it seems difficult to deny that people are indeed paying for the water itself – in the same way that everyone pays for electricity based on how many kilowatt-hours they use.

Matthew Hooton says claiming domestic users aren’t actually paying for the water is like saying when you buy a can of Coke, you’re only paying for the can and the brand and the truck to get it to the shop – not what’s inside the can.

“‘No one owns the water’ and ‘the water belongs to all of us’ are sing-songy lines that have no particular meaning.”

Opuha CEO Tony McCormick at the Opuha Dam, inland from Fairlie.

Tony McCormick stands on the lip of the Opuha Dam, inland from Fairlie, admiring the lick of snow on the surrounding hills. It’ll eventually melt and help fill the storage lake that irrigates 250 properties and 16,000ha downstream. God knows, they can use all the help they can get after last summer. In late February, the lake essentially went dry, dirt bikes and 4WDs replacing the boats that usually roar across its surface. For almost two months, the irrigation scheme had to be shut down – the first time it had happened since the dam was completed in 1998. With an El Niño forecast this summer, McCormick, Opuha’s CEO, doesn’t rule out it may happen again.

The Opuha scheme is the poster child of New Zealand’s irrigation industry. The benefits it’s brought are used as evidence that more irrigation will transform our economy, create jobs and save regional towns. Blips such as what happened this year at Opuha don’t undermine the value of irrigation schemes, McCormick stresses – they just reinforce that we need more water stored behind more dams like Opuha to counter the dry years.

The last thing you need, says Tony Howey, who farms downriver, is to make farmers pay for water.

While more than half of Opuha’s water now feeds dairy farms, Howey has stuck with growing grain, vegetables and berries. Irrigation has meant he’s more than doubled the number of people he employs, and the wages he pays them filter through to South Canterbury’s economy.

Water is as fundamental to New Zealand as oil is to Saudi Arabia, Howey says, because it has allowed farmers to make the most from their land.

“And while the general public might think it’s a bad thing to be intensive, hell, that’s what we’ve built our economy on – intensive agriculture. If we were just running a few sheep, one sheep to the acre, it wouldn’t be a very good-looking economy round here.”

Given the high cost of building new irrigation schemes, and the cost of complying with environmental standards, making farmers pay for water would be a step too far. “If you put a tax on it, these schemes just won’t happen; it’ll just be a stifling of the economy.”

Describing paying for water as a “tax”, with its associated negative connotations, rather than simply a cost to business, is something Irrigation New Zealand frequently does. But to Andrew Curtis, the industry body’s chief executive, that’s exactly what it is. The way he sees it, if farmers irrigate their land they make more money and pay more tax, which benefits all New Zealand.

“If you charge me a tax for the water, that just comes off my profitability and I pay you less income tax. So do we create another tax and create more bureaucracy around the collection of that, or do we just accept we have an income tax for business in New Zealand that basically says, if you make any money, we’ll take 33 per cent of the dollar off you?”

Any increase in land value from irrigation means an increase in rates that also goes to the public purse, he says, and farmers are already paying for water through consents and through the cost of getting the water to their properties.

“Are we going to start saying we’re going to put a charge on air?” Curtis despairs. “This car uses air coming into its combustion system, so there’s now a charge for that? It’s the same principle.”

But it’s not the same – there’s enough air for everybody, but water is scarce in places like Canterbury and has to be rationed.

No, insists Curtis, “we’ve got shitloads of water – we’re not water-limited in any way, shape, or form”.

He argues Canterbury’s alpine rivers have phenomenal amounts of water, and the answer is simply to get it to the dry areas. “It’s about getting smarter with water management. It’s not about, ‘Oh, the end of the world is nigh and it’s all buggered and you’ve got to stop.’”

If irrigation is hobbled or prevented, Curtis says you might as well just stop farming. “Don’t farm anywhere. Kill all those local communities – actually, a lot of the Christchurch community as well. So let’s get real, because we all like flat-screen TVs, we all like to come out and have a coffee and do all those things.”

Curtis talks in torrents, a gush of repeated facts and arguments in favour of free water, unstoppable, unstaunchable.

He attacks “radical greenies” and, somewhat ironically, slaps at “the anti-change lobby”; claims the officially recognised definition of whether a river is swimmable is just an “emotive term”; says there’s “madness going on” in relation to some environmental concerns.

Irrigation provides so many economic and societal benefits, Curtis argues, that there’s no way farmers should pay for the water they use. In fact, the public should be funding more irrigation projects, he says.

But that’s like saying taxpayers should subsidise any business that could create jobs – oh, and by the way, how about they chip in free electricity too.

Morgan Foundation economist Geoff Simmons says our current system of dividing up water is the real madness, and the obvious solution is to establish clear ownership rights, price it, and make farmers and hydroelectricity companies pay for it. “I don’t view it as a tax. I view it as a charge for something you don’t own – the public owns it. To say this would kill jobs or kill communities is just absolute bollocks – it just alters behaviour.”

Paying a fair price would mean users valued it, used it much more efficiently, and it was used for the highest-
value products. Sure, there would be difficulties moving to a system where you auctioned water, rather than had it by historical right for free.

But policy economist Peter Fraser, who specialises in agricultural issues, says there are precedents with other resources that we can draw lessons from, such as how we allocated fisheries quotas or divided the radio spectrum.

He also points to oil and gas companies, which pay licences to explore, and also pay royalties for what they extract.

While acknowledging that requiring farmers to pay for water is a very fair thing, Fraser notes it will be extremely hard for them to accept this while they’re also being asked to help pay for dams that are “so horrifically bloody expensive”. But the reason it’s usually left to farmers to fund the schemes is other investors can see that the numbers actually don’t stack up.

“It’s the 21st century version of Think Big in that it’s big, stupid engineering solutions to solve a problem where there are actually better ways of doing it. We’re effectively producing water-hungry, low-value goods – dairy being the prime one.”

It’s something economic commentator Rod Oram also points out – the government’s push to increase the country’s primary exports isn’t really about increasing value, but increasing volume – pouring more water on to land for more dairy cows. “And that’s all that irrigation is about.”

Oram says rather than encouraging an industry that takes 1000 litres of water to produce a single litre of milk, it would make far greater environmental and economic sense to investigate how to farm better in dry climates where water is scarce – things like grasses that grow deeper roots, how to improve soil quality, and catching water on farms rather than massive dams and lakes and networks of pipes.

Charging for water needs to be looked at now, he says, because crucial decisions are already being made about many catchments, pressure on water is increasing, and climate change will only exacerbate this. “Absolutely it’s complicated. But heck, if we can’t work out complicated systems, then there’s no hope.”

Irrigation in Canterbury. Some estimates say there are another 500,000ha in Canterbury that could be irrigated.

The avowal that nobody owns water and nobody pays for it has never been true – despite what the Bible may have promised and politicians perpetuated. When gold miners flocked to New Zealand in the 1860s and started scouring our hinterland, water was precious – it was the only way to sluice away earth to reveal the gold. So canny businessmen constructed races from high rivers and built storage lakes to hold the water, which they then sold to miners. Visit Central Otago and you can still see the remains of this private enterprise.

Of course, many will argue now is absolutely the wrong time to be raising this issue, to be suggesting farmers should pay for water, given how our crucial dairy industry is besieged by low prices. But when would be a good time? When the milk payout is nearer $8 rather than around $4 as it is now? At that time you’d still be accused of sabotaging the economy’s engine room. And as more farmland slips into foreign ownership, shouldn’t we be considering if a crucial natural resource that’s under increasing pressure should be given to them for free as well, so they can make profit that goes overseas?

So maybe this is exactly the right time to confront the issue – when the value of what we’re using an increasingly scarce resource for is laid bare. When, despite so much of that resource underpinning one industry, so many farmers aren’t making a profit and may go broke.

“And at the same time, we’ve brought ourselves a host of environmental impacts,” notes economist Geoff Simmons. “They’re getting a free input – their most crucial input – and are profiting from that water. And their land values go up when they get a consent to use water – but they’re not even taxed on that. It’s an incredible situation really.”

This was published in the October 2015 issue of North & South.

 

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