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Could a central system improve the transparency of water markets?

As calls for a more transparent water trading market grow louder, governments and industry are looking at ways to make the system more equitable and efficient.

On the surface, water trading is simple: water access rights holders sell their water entitlements or allocations to those who want to buy them. But throw in a complex mix of increasing demand for water, decreasing supply, large-scale water investors, and a new range of water market products, and it can become difficult to know who owns what, and what water is available.

In addition, each state has its own processes and rules for allocating water, and the price of water varies from catchment to catchment.

The complexities of water trading are particularly pronounced in the Murray-Darling Basin (MDB), where irrigators and other groups are advocating for a single water trading market to replace the current multiple trading platforms.

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To address these challenges, the Australian Competition and Consumer Commission (ACCC) is currently conducting an enquiry into the MDB water market.

Federal Water Minister David Littleproud said the enquiry is a response to the concerns of farmers within the MDB, including complaints about non-farming investors driving up the price of water.

“Farmers told me they had concerns around changes in water use, trade between valleys and the effect speculators have on the water market,” Littleproud said.

“It’s important to make sure the market is operating as intended; our regional communities depend on it. We need a transparent market in which farmers have timely access to accurate information.”

Victoria assessing options

Meanwhile in Victoria, Water Minister Lisa Neville announced in May that the government would look at the options and benefits of a completely transparent water trading system. 

While it wouldn’t bring down water prices, Neville said a central system could give water users more confidence in the market. 

The government has now released an options paper on the subject, and is calling for input from the Victorian irrigation community on the best approach.

“We need to balance greater transparency with an appropriate level of protection for irrigators’ commercial privacy, which is why we have come up with a range of proposals for the community to consider,” Neville said.

“Delivering a more transparent water market will ensure our precious resources are shared fairly and efficiently, and I hope to see other jurisdictions following Victoria’s lead.”

One of the options put forward by the government is ‘full market transparency’, which the paper describes as “making all information in the Victorian Water Register free, publicly available and easy to find and access”. 

Another option is to publish information about the biggest buyers and sellers – those with the potential to manipulate the market. 

Finally, the government has also posited improving the existing Broker and My Water portals, or creating a central water trading platform.

This central system would offer a clearer picture of the market by providing real-time price and allocation information. In comparison, currently the same parcel of water can be listed with multiple brokers, which means it’s hard to know how much water is actually for sale.

Prices can also vary from broker to broker and can be different from the price published on the Victorian Water Register, which is a few days behind the market.

Chain of possibility

Access to accurate information is critical to the success of the water market; sellers are unlikely to trade water unless they know they’re getting a fair price, while buyers need a way to find available water.

Blockchain technology is one option for creating a single point of reference for this information. This is essentially a distributed ledger system where records are shared across a network of computers.

Consultancy firm Arup has been working with the New South Wales Government to investigate the potential uses of blockchain in water trading. This project came about after Arup senior hydrologist Jason Carr attended a blockchain hackathon.

"I realised there were all kinds of benefits that come out of blockchain that could be applied to water trading where there were perceived failings of the current system,” Carr said.

“Exploring a system that could be more tamper-proof and transparent – these were things blockchain could bring to the table that we wanted to explore.”

Transparency is the obvious benefit of blockchain; the records are easy to look up and difficult to forge. But it can also help make record keeping more consistent and streamlined.

“Blockchain gives you the opportunity to think about what can be automated within the system,” Carr said.

“It also allows for the use of smart contracts, where contracts are set up between key stakeholders.”

For example, if a certain person needs to sign off on whether there’s enough water in the catchment to complete a trade, they can add a digital signature to the approval using blockchain.

Community consultation needed

But using blockchain for water trading also comes with risks. These include how long it would take to implement, getting the right people to the table, and potential security, privacy and intellectual property risks.

“There are a lot of unknowns,” Carr said. 

“There are no systems set up like this anywhere, to my knowledge.”

While blockchain is often referred to as a ‘trustless system’, Carr said it would require a lot of trust to build a water market on it.

“It’s a trustless system in that anybody can make trades and you don’t need to know who you’re trading with – you know that the system is set up [to ensure] the allocation of water is actually there,” Carr said.

To build this trust, change – if it comes at all – will need to be slow and involve all stakeholders including irrigators, government, water brokers and the wider community.

“We can’t develop technology in isolation,” Carr said.

“It’s not an industry we can just automate away, because there is a trust that has been built with the community.

“Our research is just saying, ‘This is what we’ve been using for decades, what would it look like if we were to move to blockchain or a distributed ledger system?’.”