River System Management

(International Relations and Governance Brief 3)

River System Management:

A comparative analysis of cross-border freshwater allocation models,

drawing on Australia and Switzerland as major case studies.

Adrian Gepp

November 8 2004 Contents

Section A: Introductory Sections page

A.1 General Introduction

A.2 Introduction to Freshwater and River Systems

A.2.1 Overview of freshwater, its importance and management issues

A.2.2 Overview of the importance of river systems and their management

A.3 Introduction to Main Case Studies

A.3.1 Overview of Australian Case Study page

A.3.1.a Overview of Murray-Darling River System A.3.1.b Water and River Management in Australia: with particular reference to the MD River System

A.3.2 Introduction to the European Case Study page

2 A.3.2.a Overview of the Danube and Rhine River Systems, noting the significance of the Swiss Alps A.3.2.b Overview of the unique views and attitudes towards freshwater in Switzerland

A.3.3 Brief Comparison of Main Case Studies page

Section B: Introduction to Cross-border River Systems page

B.1 Cross-border river systems and their management issues

B.2 Theory applicable to cross-border river systems

Section C: Different Approaches to Cross-Border River Freshwater Allocation page

C.1 Market Model

C.1.1 Outline of the Market Model

C.1.2 Theoretical Advantages of the Model

C.1.3 Problems and Oversights with the Model

C.1.4 Freshwater Valuation in the Model

C.1.5 Water Trading in Australia

C.1.6 Influence of the Privatisation Trend

C.2 Customary Laws and Agreements Model page

C.2.2 Advantages of the Model

C.2.3 Disadvantages of the Model

C.2.4 The Model in Australia

4 C.2.5 The Model in Switzerland

C.2.6 Stewardship Agreements: importance of encouraging self-management

C.3 Hybrid Models

C.3.1 Brief Overview of the Environmental Economics Model

C.3.2 Brief Overview of the Market Based Incentives

Section D: Conclusions page

D.1 General Freshwater and River System Management

D.2 Models of Cross-Border River Freshwater Allocation

D.2.1 The Market Model and its Hybrid Variations

5 D.2.2 Customary Laws and Agreements Model

D.2.3 Stewardship

D.3 An Alternative Hybrid Solution

References and Bibliography page

6 Section A

A.1 General Introduction

Managing river systems that flow across borders is complex and multifaceted. The issue encompasses theoretical and practical debates that, in some form, have been present since the beginning of mankind, as they reflect human attitudes and values. Diverse social factors influence people’s water use decisions such as government policies and especially personal value systems. Therefore, to change water use behaviour personal values must be influenced, which is inherently difficult as in all change processes. This change process has added complexity when applied to groups of people such as communities, states, and nations. The reason for this is that group values are significantly harder to change than individuals’ values1. Therefore getting people, especially groups of people with different ideas and views, to cooperate and work together efficiently is challenging.

Since water is an essential requirement for the survival of all living organisms, nations, states, communities and individuals have had the entire human history to develop beliefs, values and norms that govern the way they interact with, and manage, both water and river systems. A common historical belief has been that natural resources were present to be exploited and were resilient to any damage (the fundamental of market based economics); furthermore, that there is a “right to access and use water”. However, as major impacts from human development are identified, environmental awareness is increasing from the realisation that our natural resources can be damaged. Despite this increase in environmental awareness, it is relatively new and is only slowly changing entrenched cultural attitudes.

With increased awareness it has become apparent that rivers must have an integrated management system to avoid individual sections being managed with completely different goals. However, historically it has been easier for people to manage the river as separate and disjoint segments at the expense of the river system as a whole. The reason for this is that the decision-making groups along rivers have established their own different value systems and interests. Thus, in regard to the issue of water and rivers, it is noticeable that a large hurdle exists between the current state, and effective and efficient integrated river-wide management. This has been acknowledged by the UN through the Agenda 21, resolution, in chapter 18, which refers to the need of an “integrated approach” when dealing with freshwater issues2.

The vast majority of medium to large river systems pass through state or national borders. Furthermore, what is often overlooked is that as the nature of rivers is to transport water from one location to another, it means that every river system passes through some type of border, even if it is a small village or local community boundary. Therefore, a major difficulty with river management is that all groups of people, regardless of their size and culture, will have slightly different value systems regarding river-water due to differences in water access, demand, and dependence on the river’s resources3. Obviously, there are greater similarities between local communities than between different nations. Therefore,

1 Amy Kenworthy-Uren and Michael Gundlach, “Organisational Behaviour” (Gold Coast: Bond University School of Business, 2004), p213. 2 United Nations, Department of Economic and Social Affairs, Division of Sustainable Development, “Agenda 21” (2003), chapter 18, paragraph 18.39 [Accessed October 2004 via Internet at http://www.un.org/esa/sustdev/documents/agenda21/english/agenda21chapter18.htm].

7 the issue of cross-border river management, from small community rivers to large international river systems, is extremely complicated. Consequently, finding the most efficient, effective and equitable management model to guide the future management of these rivers is beneficial from an economic and environmental point of view.

This paper focuses on the complexities of cross border river system management and different management models that can be applied. A brief introduction is given to freshwater and river systems, their management and the main issues involved, to provide a basis for analysis and to highlight the importance of the topic. As a source of real-world data, this paper will draw from two different regions of the world that are unique regarding their water and river systems, namely Australia and Switzerland. The focus in Australia will be on Australia’s longest and only major river system, the Murray-Darling, which has well documented management, flow and quality problems that involve 5 (QLD, NSW, ACT, VIC, and SA) of Australia’s 8 states and territories. As a comparative example, the Rhine and Danube river systems, which traverse numerous countries in Europe, will be discussed in particular reference to the water abundant nation of Switzerland, because the Swiss Alps are a major water source of both of these river systems.

The theoretical issues involved are extremely important, and a purely data-driven analysis is not sufficient to derive accurate and useful conclusions. The theories that are relevant to cross-border river management, along with case study data and analysis, are applied to the two main practical model solutions currently being adopted, which are the market model and the customary laws and agreements model. In order to reach overall and case study conclusions, these two models are then compared and contrasted, and two new hybrid alternatives, known as environmental economics and market based incentives, are analysed.

A.2 Introduction to Freshwater and River Systems

A.2.1 Overview of freshwater, its importance and management issues

Without water, the human race, and all other living organisms on this planet, would cease to exist. Many powerful statements have been made about the simple molecule that comprises two hydrogen atoms and one oxygen atom; for example, water is the most vital substance to the human race4, water is a natural wonder5, and the main purpose of water is to sustain life6. Whether or not the gravity of these statements is excessive, it is a fact that all life on our planet depends upon water7. The importance of water is further illustrated by it being the first substance that space exploratory agencies look for on other planets, as an indicator of past, current and future life.

3 Konrad Repgen, "The Hydro-politics of The Mekong River Basin: Regional Cooperation and Environmental Security" in Non-Traditional Security Issues in Southeast Asia, ed. T.H. Tan and J.D. Kenneth Boutin, p471 (Singapore: Select Publishing, 2001). 4 Water Policy International Ltd, “The Water Page: Water Basics” (2000/1) [Accessed October 2004 via Internet at http://www.thewaterpage.com/waterbasics.htm]. 5 Kozlov (chairman of the Russian Ecological Society). In: “Water: Source of Life on Earth” International Affairs: A Russian Journal of World Politics, Diplomacy & International Relations, vol 49 (issue 6), p164. 6 Jane Matty, “A Universal Resource” Rocks & Minerals (May/June 2004), vol 79 (issue 3), p154. 7 United Nations, “Agenda 21” (2003), chapter 18, paragraph 18.2 [Accessed via Internet].

8 Freshwater8 is the type of water that is a necessity to the survival of the human race. People can survive a month without food, but only five to seven days without freshwater9. This is only one of the many important uses of freshwater, which include: . Assisting digestion and absorption of food . Sustaining ecosystems . Contributing to tourism and recreational activities . Being an integral part of many industrial and agricultural processes . Cleaning for sanitary and hygienic purposes . Providing a means of transport (along rivers) . Generating electric power: hydropower is the cheapest source of electricity today10 The way that freshwater dominates human life is shown by the historical and current population distribution; the world population distribution is dominated by the availability of freshwater11. Furthermore, the distribution of agricultural and industrial areas is also highly dependent on sources of freshwater.

Freshwater is scarce as well as being vital. Although about three quarters of the Earth’s surface is covered by water, only about three percent12 of this water is freshwater that is suitable for drinking (ie. potable water), and less than two thirds of the freshwater is accessible ground or surface water in a drinkable state (not frozen)13. On the other hand, this also highlights that our solid water (ice) in glaciers and ice caps is extremely important as water reserves. The diagram below is from a water study in 2001 and is an illustration of water on Earth that highlights the importance of freshwater as a resource.

Earth’s Water Resources

Graph not available due to digital copyright issues (the source is available through the EBSCO database)

The major statistics shown in this graph where: -Only 3% of the Earth’s water is freshwater, and -2.1% is frozen freshwater

Source: Jane Matty, “A Universal Resource” in Rocks & Minerals (May/June 2004), p154

8 This paper defines freshwater as water that contains less than 1,000 milligrams per litre of dissolved solids. This is the most common definition of freshwater found in encyclopaedias, atlases and dictionaries. It is also the definition found in the following article: Ben Hanley and Joe Buchdahl, “Sustainable Development Information Pack: KS4 & A” (Manchester: Manchester Metropolitan University, 2002), p91. 9 Water Policy International Ltd, “The Water Page: Water Basics” (2000/1) [Accessed via Internet]. 10 Hans Loser, Manager of Elektrizitatswerk St.Moritz (Hydropower plant in the Swiss Alps) [Personal Interview, August 2004] 11 Charles Fenner, “A Geography of South Australian and the Northern Territory” (Sydney: Whitcombe and Thombs, 1958), p73. 12 Different studies claim slightly different figures, averaging about 2.5 to 3%: UNESCO, “The makings of a water crisis” UNESCO Sources (Nov 1996), Issue 84, p12Estimates freshwater is 2.5% of total waterSandra Postel, “Dividing the Waters” MIT's Technology Review (Apr 1997), vol 100 (issue 3), p54.Estimates freshwater to be approximately 2.5% of total waterJane Matty, “A Universal Resource” Rocks & Minerals, p154.Estimates freshwater is 3% of total water 13 All three sources from footnote 9 agree with this figure.

9 Due to the importance and scarcity of freshwater, the human race is dependant on its effective management and use. This is made challenging because human usage and demand for freshwater, predominantly from rivers and lakes, has steadily increased over the centuries14. The demand for freshwater is also increasing for uses other than human consumption. This increase in demand is being driven by the current intensification of industry, agriculture (particularly irrigated crops), freshwater-involved recreational activities and urban growth (mainly lawns and gardens, but also showers, washing machines etc): it is estimated that crop irrigation accounts for 90 percent of the use of freshwater worldwide15. Moreover, poor management and inefficient use of freshwater bears a high cost16. For example, an average sized bath holds between 150 and 200 litres of water, and one dripping tap can waste more than that in a day (approximately 240 litres) 17. Considering the increasing demand, the humanly uncontrollable supply (apart from costly desalination of saltwater), and the costs of errors in the use and management of freshwater, it should be obvious that the earth’s freshwater should be managed with extreme care and caution.

Freshwater is a shared natural resource that often does not fall where it is needed most. Therefore, there are river and pipeline freshwater systems all over the world that aid the division and distribution of this resource. The dilemma that society faces is how to coordinate shared access to these river and pipeline freshwater systems. There are many ways to coordinate this; however, none of them have been proven, in theory or practise, to be the best alternative. Thus, the decision making process regarding the shared use of freshwater is still problematic. The core issues are whether it should be shared equitably between all current human users, or the use should be driven by a specific factor, such as market and money forces, the best interest of the current environment, or the best interest of the future generations. There are many issues that flow from these critical questions; the major concern is how to value freshwater. It is an essential natural resource, which has multi-faceted usefulness, which is more valuable than the additive value of its individual uses.

Thus far, the people of the world as a whole have not performed well in managing freshwater. Recent estimates by the World Resources Institute, in collaboration with the University of New Hampshire, state that “2.3 billion people live in river basins under water stress”18. Currently, according to the UN report titled ‘Comprehensive Assessment of the Freshwater Resources of the World’, approximately a third of the world's population (more than 2 billion people) suffer from what the report describes as ‘moderate to high’ stress arising from their water supply19. Furthermore, “the latest UN report on freshwater supplies estimates that two-thirds of the world population will be affected by ‘severe water stress’ by 2025”20. Although forecasts like these have a speculative component to them, they do highlight that freshwater shortage is a real global problem. The gravity of the freshwater problem, and the general under appreciation of this important resource, has been outlined in the introductory sections of Chapter 18,

14 Water Policy International Ltd, “The Water Page: Water Basics” (2000/1) [Accessed via Internet]. 15 Clair Hutchings, “Down to the last drop” Geographical (Aug 1997), vol 69 (issue 8), p23. 16 BELIAKOV, A. (chairman of the State Duma Committee on Natural Resources and Nature Management). In: “Water: Source of Life on Earth” International Affairs: A Russian Journal of World Politics, Diplomacy & International Relations, vol 49 (issue 6), p158. 17 Water Policy International Ltd, “The Water Page: Water Basics” (2000/1) [Accessed via Internet]. 18 Nels Johnson, Carmen Revenga and Jaime Echeverria, “Managing water for people and nature” Science (Nov 2001), volume 292 (issue 5519), p1071. 19 United Nations. “Water: Is there hope?” UN Chronicle (1997), volume 34 (issue 2), p24. [accessed via EBSCO database]. 20 Hutchings, C. “Down to the last drop” Geographical, p23.

10 entitled ‘protection of the quality and supply of freshwater resources’, in the United Nations Agenda 21 resolution21. The President of Tajikistan, in a UN address, stated that the responsibility for preserving freshwater for future generations needs to be divided between all nations22. This is true; however, in addition to preserving water for the future, it is also necessary to divide the responsibility for managing the current generation’s demand and distribution of freshwater between all nations. Freshwater is so important that efficient and effective approaches to the distribution and management of it (whether they are novel or modified pre-existing processes) need to become an inalienable part of every nation's transition to sustainable development.

It is also important to note that freshwater quantity issues, including flow, supply, demand, and distribution, are not the only freshwater concerns. The issue of water quality is also extremely important. However, studies on freshwater quality, rather than quantity, are far more prevalent23 and most people agree on the desired levels of water quality, because the current and required quality can be more accurately measured scientifically than water flows. Thus, the concern about quality has been identified as finding a method to improve it, which is a difficult task. This paper will not focus on this issue (eg. river pollution and high salinity), but will concentrate on managing the quantity issues of cross-border river systems, which will be a huge step forward in improving the natural health of the water contained in them.

A.2.2 Overview of the importance of river systems and their management

Freshwater in river systems possesses qualities of both a renewable resource such as solar power, and a non-renewable resource such as oil. Water is similar to a renewable resource such as solar energy, as the rain will fall again like the sun will shine again. However, water is only a renewable, or sustainable, resource provided that the usage rate is slower than the natural rate of replacement24. This appears simple; however, the natural rate of replacement varies, even within a small area. Therefore, the usage in each individual area should remain below the natural rate of replacement of that area. The ramification of this is that we are not able to use excessive amounts of water from one catchment area and minimal from another so that only overall usage is acceptable, which is a hard constraint on river management. In the event that a river system was completely drained, there are significant environmental and social impacts. For example, a river system needs a base level25 of water (as a minimum flow requirement) to ensure the health of dependant aquatic flora and fauna, as well as ensuring that new rainfall will be collected and not soak into the soil, rendering it unavailable for drinking. Therefore, for management purposes, freshwater should be treated more like a non-renewable resource, because we can not afford to be without fresh water for any period of time. The adage of this is that actions must be taken before the problem occurs, as total depletion of freshwater would be disastrous for this planet and the human race. This should be considered when making the

21 United Nations, “Agenda 21” (2003), chapter 18 [Accessed via Internet]. 22 Emomali Rakhmonov (President of the Republic of Tajikistan). In: “Water: Source of Life on Earth” International Affairs: A Russian Journal of World Politics, Diplomacy & International Relations, vol 49 (issue 6), p156. 23 An example of this is the huge number of reports that involve water quality produced by the United Nations Economic Commission for Europe [access to all report via Internet at http://www.unece.org/env/epr/studies/] 24 The natural rate of replacement is equivalent to the sum of the amount of rainfall and the amount of snow converted to ice (obviously negligible or zero in countries such as Australia with low snow) 25 Note that this base-level required for waterways is not easily defined and is a topic with many different views

11 decision of whether to act now or later. Thus, we arrive at a major conundrum in river management: if we get it wrong then the costs will be huge in the future, but how probable is it that we are wrong; that is, what is the probability weighted cost? This is the basis of a many of theoretical arguments, including the precautionary principle, which will be discussed in more detail in section A.4.2.

Freshwater (rain) falls in different amounts in different locations, and river systems are the main collectors for its redistribution. As freshwater often does not fall where it is needed most, the management of river systems is a way of controlling the distribution of freshwater. Thus, the people who manage river systems have a huge impact on the amount of freshwater received by others in different sites. In general, management is highly complex and challenging26, and consequently has attracted a lot of attention over the last few years from governments, academia and industry. However, most of the outcomes and recommendations that have arisen from this interest are only partially applicable to the management of ambient goods (eg. freshwater) that constantly move. The complexity in river management stems from the difficulty in establishing ownership, responsibility and obligation to a shared or common resource that travels through land27 without regard for its borders28.

There is little wonder why the word ‘rival’ is derived from the Latin word ‘rivalis’, which means people who live on opposite banks of the river: throughout history even extremely cordial neighbouring nations have found it difficult to achieve an acceptable solution to managing their river systems29. However, as yet, the use of military force regarding freshwater access has been minimal; furthermore, most researchers in the freshwater area agree that wars over freshwater issues are unlikely. The two most stated reasons for this view are that freshwater conflicts will only exacerbate pre-existing political tensions, or the costs of using force will outweigh the potential gains from victory.30 This has been the case for the well- known Mekong River Basin, where the presence of the Mekong River Commission is thought to make armed conflict unlikely31.

In general terms, there are two classifications of riparian land, upstream and downstream. In this context, riparian land refers to land that is located on and around32 the banks of a river. These classifications create two groups of riparian landowners with completely different views. Upstream riparian landowners, who are close to the source of a river’s water, seem to have an abundant supply of water with a drought as their only potential problem. Moreover, the upstream riparian landowners feel that they have an unrestricted right to use “their” river water. On the other hand, downstream riparian landowners notice a fluctuating river flow, which is highly dependant on upstream user patterns, not just the natural supply. The downstream riparian landowners believe that they have a fundamental right to access some of the water that enters the river at the source. That is, downstream riparian landowners believe in the integrity of the river upstream, insisting that others do no affect the river’s water flow33. However, it is ironic that downstream riparian landowners fight with upstream riparian

26 Ricky Griffin, “Management” (Boston, USA: Houghton Mifflin Company, 1999), p8. 27 The term “land” used here refers to the legal meaning of real property with established ownership 28 Dellapenna and Joseph “Custom-built solutions for international disputes” UNESCO Courier (Feb 1999), vol 52 (issue 2), p34. 29 Dellapenna and Joseph (Ibid), p33. 30 Konrad Repgen, "The Hydro-politics of The Mekong River Basin: Regional Cooperation and Environmental Security" in Non-Traditional Security Issues in Southeast Asia, p470. 31 Konrad Repgen, (Ibid), p477. 32 For the purpose of this paper, the word ‘around’ used here will be defined very broadly to include communities, towns and cities in the area that directly use the water from that section of the river 33 Dellapenna and Joseph (Ibid), p36.

12 landowners for the fundamental right to part of the river water, but ignore those rights of riparian landowners further downstream. Nevertheless, the difference in the way upstream and downstream users of water in a river system view the river is a large hurdle for all river management groups, such as communities, industries, and governments.

Thailand’s Kong-Chi-Mun project on the Mekong River is a classic example of the upstream and downstream conflict. The project was to divert up to 6,500 million cubic meters a year from the Mekong mainstream, which would reduce the annual runoff in that area by over 1,000 million cubic meters. Even with a project this large, Thailand did not conduct a single study on the downstream impacts of this project. Downstream riparian nations such as Laos and Vietnam were extremely concerned about the potential drop in water flow during dry-seasons, which may have had detrimental effects on river navigation activities34. The Thai deputy foreign minister argued Thailand’s sovereign right to its share of the Mekong stating that “if joining the committee [Mekong Committee] means the loss of our sovereignty, we prefer to go it alone”35. Ironically, this statement shows no consideration for downstream nation’s sovereign rights to use freshwater from the Mekong. In addition, China, a country further upstream and thus not affected by Thailand’s project, aided Thailand politically by attempting to prevent other riparian countries from having the right to veto such a project. These arguments resulted in Thailand and an upstream riparian group having a stand-off against Vietnam and a downstream riparian group: with both parties threatening to leave the committee if their views were not heard. This upstream and downstream stand-off eventually resulted in intervention by the UN Development Programme, which was successful in restoring cooperation between the Mekong riparian nations. Hence, this case shows the reality and strength of the opposing riparian views: the difference between the upstream view of territorial sovereignty and downstream view of river integrity is a major source of conflict between riparian nations.36

A.3 Introduction to main case studies

A.3.1 Overview of Australian Case Study

Australia is a unique country, especially regarding its freshwater situation. Excluding Antarctica, Australia has the lowest natural replacement rate of freshwater (ie. lowest cumulative rainfall) of any continent. Nevertheless, Australia has one of the highest per capita consumption rates of freshwater in the world.37 Based on this very general data, it is not surprising that freshwater is such a prevalent issue to the people and governments within Australia.

A.3.1.a Overview of Murray-Darling River System

An overall view of the Murray-Darling River System

34 The Nation, “Water Plan May Hit Mekong Neighbours” August 2, 1994. 35 The Nation, “Strong Distrust Delays Cooperation in the Mekong,” March 27, 1992. 36 Konrad Repgen (Ibid), p478-479. 37 Melbourne Water, “Australia –The driest Continent” (2004) [Accessed October 2004 via Internet at http://conservewater.melbournewater.com.au/content/conserve/driest.htm]

13 Figure not available due to digital copyright issues (the source is available from the Murray Darling Basin Commission)

Other diagrams of the Murray-Darling River System are available on the web; however, these are of a much lower quality and accuracy

Source: Murray Darling Basin Commission, “Corporate Plan”, 2001, cover page.

The Murray-Darling Basin (hereafter referred to as the MD Basin or MD River System) is Australia’s only large scale river system, and consequently is a major focus of interest for freshwater in Australia. The MD Basin covers an area of 1,058,800 square kilometres, which is approximately one seventh of the area of Australia38. The basin drains from all of the Australian Capital Territory, and parts of 4 states, namely Queensland, New South Wales, Victoria and South Australia39. This means that the river system involves 6 different governments, i.e. the ACT government, the 4 state governments and the commonwealth government. Each of these governments has different levels of interest and concern about various aspects of the MD Basin, because each state/territory has different demands on the water supplied by the river system. In addition, the legislation and administration regarding river systems and freshwater varies considerably across states40.

38 Murray Darling Basin Commission, “Basin Statistics” [Accessed September 2004 via Internet at http://www.mdbc.gov.au/naturalresources/basin_stats/statistics.htm]. 39 The Integrated Natural Resource Management Group for the South Australian Murray Darling Basin, “Integrated Natural Resource Management Plan for the South Australian Murray-Darling Basin” (2004), p19. 40 Mike Young, Darla H MacDonald, Randy Stringer and Henning Bjornlund “Interstate Water Trading: A Two Year Review. (Draft Final Report)” Adelaide, South Australia: CSIRO Land and Water, Policy and

14 The South Australian portion of the MD river system covers an area of about 70, 000 square kilometres41; it is the simplest to plan and manage as it only involves one river, the River Murray, which only flows into SA and out into the sea. Other states all contain multiple river systems, all with their own catchment areas; a summary of the remaining states’ (and territory’s) rivers, which contribute to the water flow in the MD river system, is presented below: . From Victoria, the Mitta Mitta, Kiewa, Ovens, Broken, Goulborn, Loddon and Avoca are the major contributing river systems . From New South Wales, the Murrumbidgee, Lachlan and Darling are the major rivers together with their tributaries42 . From Queensland (outflows into the MD river system but no inflows), the two main tributaries of the MD river system, via the River Darling, are the Macintyre and Dumaresq. . From ACT: all the rivers are tributaries to the MD river system The greatest single dependence upon the water from the River Murray occurs in South Australia, where only two of the major cities have their own water supplies. Adelaide, Port Pirie, Port Augusta, Whyalla and some associated towns are dependent upon water that is piped from the River Murray. The dependence of Adelaide alone is between 40 to 85%43, whereas the other localities that are in drier areas are solely dependent upon the river pipeline apart from local water tanks that are usually for domestic use. The urban and industrial dependence upon this water, from one source, together with the cities/towns and irrigators along the River Murray itself, demonstrates the critical level of interest that South Australia has in its river supply. As the most downstream end user of the water supply there is also a critical concern about its quality.

A.3.1.b Water and River Management in Australia: with particular reference to the MD River System While reservoir levels around Australia are monitored closely, the residual flow44 in a river is less noticed, unless there is not enough water to provide someone with what they want. A clear example of this is the drought of 2002, which affected Adelaide and the Gold Coast in a similar way. The map below, produced by the Bureau of Meteorology, clearly shows that both the Adelaide and the Gold Coast regions were in a period of low rainfall (freshwater) in the first 6-months of 2002.

Economic Research Unit (PERU), 2000, pp34-37. 41 “Integrated Natural Resource Management Plan for the South Australian Murray-Darling Basin” (IBID). 42 In this context, the word ‘tributaries’ is defined as rivers that flow into (contribute) to another river. 43 Darla H McDonald, “The Economics of Water: Taking Full Account of First Use, Reuse, and Return to the Environment” (Adelaide, South Australia: CSIRO Land and Water, Policy and Economic Research Unit (PERU), 2004), p24. 44 In this context, the term ‘residual flow’ refers to the amount of water flow that continues to flow down a river after freshwater consumption/usage processes.

15 Figure not available due to digital copyright issues (refer to first figure in the webpage source)

This figure showed the rainfall deficiency areas in Australia for the 7 month period of 1 December 2001 to 30 June 2002

Source: Bureau of Meteorology, Drought Statement (July 3 2002) [Accessed on October 2004 at http://www.bom.gov.au/announcements/media_releases/climate/drought/20020703.shtml]

Although the majority of the MD River System is not in the rainfall deficiency area, Adelaide and the MD River system in close proximity to Adelaide (red section to the East of Adelaide on the above map) is in a ‘Severe Deficiency’ rainfall state. Similarly, the Gold Coast (immediately below Brisbane on the map above) and the surrounding areas were under ‘Severe Deficiency’ of rainfall during the same period. However, water restrictions on the Gold Coast were invoked before those in Adelaide. The main reason presented is that Adelaide receives its water through a pipeline to the River Murray, and from personal experience people think that this pipeline provides an unlimited supply. This difference between the perception of stationary (reservoirs) and moving water resources (rivers) is something that needs to be addressed.

The historical, or cultural, view of Australians45 towards the use of freshwater from river systems is one of personal ownership with stereotypically upstream attitudes. The past attitude is displayed by the widely expressed viewpoint ‘when water flows onto my land, it is mine and I should be able to use it as I please’. The lack of environmental or shared resource concerns in this phrase is worth noting. An extreme example of this approach is the dam that was constructed on the well publicised Cubbie Station. A dam that contains the same amount of water as in Sydney Harbour was constructed on one of the tributary rivers to the MD River System in Queensland46. Obviously, this has huge positive effects for

45 Referring to the post-English settlement period only 46 Tony Eastley, “Cubbie Station cotton irrigation blamed for Darling River damage” AM on ABC Local Radio, June 24, 2004 [Transcript assessed October 2004 via Internet at

16 the dam’s owners and their cotton crop, with the consequence of considerably less flow for downstream riparian landowners. Moreover, the most downstream state, South Australia, possesses both upstream views, as well as the obvious downstream attitudes. Overall, South Australians have typical downstream views when dealing with upstream interstate suppliers; that is, arguing for the supply of water in their segment of the river system to be kept above a certain level for their own use. However, ironically, within the state, the same problems occur as they adopt upstream attitudes and people do not consider those further downstream. These attitudes are most evident in cities where there is a greater focus from urban users on maintaining or increasing their water supply rather than using it efficiently.

Since the 1960s, all areas of the MD River System, have been subject to a continued expansion of agricultural irrigation47. The extensive clearance of riparian land has created dryland salinity problems; that is, salts rising to the surface and draining into rivers. Dryland salinity problems, particularly within the MD River System, along with prolonged and frequent droughts and large scale projects such as the dam at Cubbie Station, have forced Australians, and their governments, to become more aware of these conditions, and the importance of the MD River System and its management. The National Action Plan for Salinity and Water Quality 1999 (continually being updated), endorsed by Council of Australian Governments (COAG) was formulated to coordinate activities across states to improve the salinity and overall quality of freshwater in Australia, particularly in the MD River System48. Agreements such as this National Action Plan, and general public views, are a positive sign of changing attitudes towards water and rivers in Australia. The existence of COAG, and national policies and plans is a sign that the governments within Australia are realising both the benefits and necessity of working together. The new structure of the Murray- Darling Basin Commission is a practical example that illustrates, at least in theory, that all involved governments are working together to aid this independent commission to improve overall management of the river system. The current structure is shown below:

http://www.abc.net.au/am/content/2004/s1139216.htm] 47 Murray Darling Basin Commission, “Irrigation: An historical overview” [Accessed October 2004 via Internet at http://www.mdbc.gov.au/education/encyclopedia/irrigation/irrigation.htm]. 48 Australian Government: departments of Agriculture, Fisheries and Forestry and the Environment and Heritage, “About the National Action Plan for Salinity and Water Quality” (2004) [Accessed October 2004 via Internet at http://www.napswq.gov.au/about-nap.html].

17 Figure not available to digital copyright issues (the source is available from the Murray Darling Basin Commission)

This figure is only available from the MDBC

Source: Murray Darling Basin Commission, “Corporate Plan”, 2001, p5.

The importance of this structure is the fact that individual communities’ (through the community advisory committee), and all participating governments views’ flow through to an overall independent commission, which also has a supporting Commission Office to coordinate and facilitate its work. In addition, the Ministerial Council is designed to ensure “effective, efficient and sustainable use of the freshwater, and authorise measures to achieve this”49. The success of this new structure is still somewhat unknown, as no formal documents analysing the implementation of this new structure have been released. However, there have been some positive signs: it seems that the independence of the commission is being maintained, and the commission is receiving more money to improve the health of the river system50. The general manager of the Marina Association of Australia, who has regular dealings with the commission, stated that the commission “has extensive representation from government and the agricultural sectors but has far less from the leisure, boating, tourism and recreation industries that are significant in the Murray-Darling Basin”51. Therefore for the sake of equity, the Commission, Council and Committee, need to correctly

49 Murray Darling Basin Commission, “Corporate Plan”, 2001, p4. 50 Murray Darling Basin Ministerial Council “The Living Murray: A Discussion Paper on Restoring the Health of the River Murray”, (Canberra, Australia, 2002), chapter 6, p25-29.

18 represent all sectors (and all geographical segments in those sectors) relating to the MD River System, especially the non-consumption use sectors. Although governments are beginning to work together and realise the need for cooperation and integrated policies, the problems with the MD River System are still far from being fixed. The danger is that positive short-term results may cause governments to lower the issue’s priority, so that in the long-term there will be less improvement. This is typical of short term budgeting and profit focussing when environmental issues need long term commitment.

A.3.2 Introduction to the European Case Study

A.3.2.a Overview of the Danube and Rhine River Systems, noting the significance of the Swiss Alps Switzerland and particularly its Alps, are extremely important regarding freshwater issues. The Swiss Alps play a key role in providing freshwater to a large number of Europeans through the Danube and Rhine river systems.

Rhine River System

Figure not available due to copyright issues (the original figure is available from the website source)

Adapted from “Rhine River” accessed at http:// www.rollintl.com/roll/rhine.htm

The Rhine, flowing almost 1320km52 in a generally north-westerly direction, begins in the Alps of Switzerland and later forms the boundary between Switzerland and Lichtenstein, then between Switzerland and Austria, Switzerland and Germany, France and Germany, and then flows through Germany and finally through the Netherlands to the North Sea at Rotterdam.

51 Glenn Jones, General Manager of the Marina Association of Australia [Personal Interview, October 2004]. 52 Anton Earle, “The Water Page: The Rhine River” (Water Policy International Ltd, 2000/1) [Accessed October 2004 via Internet at http://www.thewaterpage.com/rhine_main.htm].

19 Danube River System

Figure not available due to copyright issues (the original figure is available from the website source)

Adapted from “The Danube River” accessed at http://www.danube-research.com/Danube.html53

The Danube flows about 2850km54 in a predominantly easterly direction; it is Europe’s second largest river, with a watershed area that spreads over seventeen countries55. The river system originates in the Black Forest Mountains of Austria, near the border to Switzerland. The Danube then flows through Germany, back through Eastern Austria, then through Hungary, and onto Croatia, Romania and into the Black Sea via Bulgaria. The River Inn originates in the Swiss Alps and is mainly supplied by glacial melt. It is therefore a major glacial tributary of the early stages of the Danube (via Vienna in Austria).

About 2400km of the Danube is navigable with an estimated 10,000 ships using it annually56, while the Rhine has been described as the busiest waterway in the world57. The year round large water flow in these two river systems and the extensive riparian development that has and continues to occur, contributes to both rivers’ past and present economic significance as international waterways. Consequently, there has been a long history of international negotiations in an attempt to achieve “equitable” use, predominantly for navigation and trade via the river systems (distinguishing from trade of the water within the river systems). For the Rhine, an agreement was established in 1831 that introduced free navigation rights to the riparian states, but imposed a small tariff on foreign ships (the tariff was abolished in 1868 and all navigation was made free). Similarly, for the Danube efforts to establish international control began approximately 150 years ago in 1856. The declaration of ‘The Peace of Paris’, on March 30,1856 declared that navigation of the river was free to all nations, subject to international control by the European Commission58.

Through reasonably high rainfall, huge river systems, and huge freshwater reserves in the form of glaciers, Switzerland in particular, like many European countries has never faced a significant shortage of freshwater. The country has always had sufficient freshwater to fulfil all of its agricultural, industrial, and human use needs; for example, all the power stations in Switzerland generate electricity by hydropower using freshwater from lakes and rivers59. However, the glaciers within the Swiss Alps, the most significant freshwater reserve for Switzerland and one of the most important for the rest of Europe, are decreasing

53 As per note on the source website: Please note that since February 2003 "Yugoslavia" above should now read "Serbia and Montenegro" 54 Danube Research Commission, “The River Danube” (2004) [Accessed October 2004 via Internet at http://www.danube-research.com/Danube.html]. 55 Dellapenna and Joseph “Custom-built solutions for international disputes” UNESCO Courier, p36. 56 BBC News Online, “Danube opens for shipping”, November 29, 2001. 57 Anton Earle, “The Water Page: The Rhine River” (2004) [Accessed via Internet]. 58 The Encyclopaedia Britannica (1937), “Inland Water Transport”, volume 12, p364. 59 Hans Loser, Manager of Elektrizitatswerk St.Moritz [Personal Interview]

20 in surface area and total volume at the fastest rate ever measured. The decline started at the end of the last quasi-ice age in 1850, and since then, on average, Swiss glaciers have lost 40% of their total volume. A major source of the River Inn, the Morteratsch and Pers glacier has also been shown to recede on average 16.4m per year since 1850.60

Overall Glacier Situation in Switzerland

Table not available to digital copyright issues (the German source may be available from the Swiss Government Commission)

The sum of all glacier volumes presented in the table are: 465km2 (1850), 280km2 (mid 1990s), which is a 40% or 185km2 decrease

Specific Case Study (from Bernina Area) –Morteratsch and Pers Glacier

Figure not available due to digital copyright issues (the German source may be available from the Swiss Government Commission)

This figure shows the decrease in size of the Morteratsch and Pers Glacier from 1850 to 1990

60 Swiss Government, “Gletscherlehrpfad Morteratsch” (1993) [Accessed through, and translated by Beat Lusher (from German to English), Forrester for the Swiss Government in Semadan in the Swiss Alps].

21 Figure not available due to digital copyright issues (the German source may be available from the Swiss Government Commission)

This figure shows the predicted (smaller) size of the Morteratsch and Pers Glacier in 2035

Figure not available due to digital copyright issues (the German source may be available from the Swiss Government Commission)

This figure shows the predicted (smaller) size of the Morteratsch and Pers Glacier in 2065

Source for all above data: Swiss Government, “Gletscherlehrpfad Morteratsch” (Ibid)

It can be clearly seen that these circumstances are of extreme importance to freshwater management, including river management, because glaciers are the main source of freshwater in summer: the sun melts the glaciers into potable freshwater. Thus, if glaciers are depleted the supply of freshwater will significantly reduce and dramatically impact on the river flows, as the only remaining freshwater source left in Switzerland will be rainfall.

The predictions pictured above are based upon the premise that the trend between 1850 and 1993 will continue into the future. This view and future predicted, decline in glacier volume is predominantly based upon the continuance of global warming61. Whether the cause of this glacial retreat is global warming, a

61 Christine Rothenbuhler, Research (PhD) student at Academia Engadina (Research Institute in the Swiss Alps), Institute of Tourism and Landscape [Personal Interview, August 2004].

22 simple long-term environmental trend or something entirely different is not a matter that will be discussed in this paper. However, this data was given as an expert scientific prediction to highlight the fact that there is a real possibility that the freshwater reserves in the Swiss Alps may not be permanent. The research suggests that over the next century many of the smaller glaciers will disappear, and large glaciers (such as the Morteratsch and Pers Glacier) will be significantly depleted62. Although official figures were not known, a researcher in glacier studies noted that Switzerland’s freshwater was predominantly (over 50%) supplied by glacial melt, especially in the warmer seasons (over 75%)63. Therefore, due to the reliance on glacial melt as a freshwater source and the current decline in glacial area, there is a real possibility that Switzerland, and subsequently the rest of downstream Europe, could face the situation of freshwater shortages in the near to medium term future. Thus, there is an obvious need for Switzerland and downstream countries to incorporate the possibility of decreasing freshwater volumes into their short and long term management plans.

A.3.2.b Overview of the unique views and attitudes towards freshwater in Switzerland Individuals in society can not own freshwater that occurs on, or flows through, their property; individuals in society can not own freshwater. These statements are absolutely correct under Swiss freshwater policy. Individuals possess a small subset of the rights of ownership, which include the rights to64: 1. Purchase freshwater for personal use on their property. This includes activities such as giving water to visiting friends to drink, but not running a pipeline from your property to the neighbour’s to supply them with water. 2. Use freshwater for ordinary activities that occur on your property. This includes activities such as drinking or supplying cattle with freshwater from a dam on, or river that passes through, your property65. As a hypothetical example, if a landowner obtains permission to dig and search for underground freshwater and succeeds in finding a plentiful source, they only possess the 2nd right above. Thus, they may not sell, gift, or store (beyond enough for ordinary use on their property) any of the water they have found. The residual freshwater (ie. the water remaining after the amount the landowner has used) from the water the landowner discovered is controlled by the community66 in which the landowner resides.

Although communities, states and the country of Switzerland itself have more rights than individuals, they are not able to own freshwater. These bodies have an extended set of rights over those of individuals; the additions are: the right to sell freshwater to those individuals within their control, and to other communities, states and nations67. However, their rights to sell freshwater to other groups is restricted to stationary freshwater. Thus, using the example of river systems, an upstream riparian community is not able to sell the freshwater from a river to downstream riparian communities as they have a natural right to the residual freshwater (ie. the amount of freshwater in the river after the amount that

62 Swiss Government, “Gletscherlehrpfad Morteratsch” (Ibid) 63 Christine Rothenbuhler (Ibid) 64 Patrick Peduetti, Water Manager, Community of Celerina (within the Swiss Alps) [Personal Interview, August 2004]. 65 There are a few constraints: notification of community authorities of any freshwater use from a river, and approval of all community and state authorities through which the river passes to create a lake or dam supplied by the river. 66 In special cases, it may be the state or the nation as a whole; nevertheless, the same principles apply 67 Patrick Peduetti (Ibid)

23 upstream communities use). In addition, all riparian communities must not use more water than needed for the customary activities of that community unless all downstream communities agree that the use will still allow them enough water for their ordinary activities68. Although, this is open to interpretation, it does make upstream communities consider the impacts of their freshwater use on downstream users; furthermore, it has proven to be very successful in Switzerland, probably due to their community based freshwater ideals.

Switzerland has stated they are committed to improving the world’s freshwater situation by developing freshwater partnerships with other countries, including but not limited to members of the European Union69. According to the Swiss Government’s environmental and economic bodies, and consistent with the freshwater ideals above, the main priority in Switzerland is to ensure that all segments of the population have access to freshwater70. Therefore, it follows that firms that use water for purposes such as hydroelectricity are not the main priority. Thus, it is more difficult for such firms to access freshwater as more regulations apply. For hydropower stations to access freshwater from a river or lake, they must get approval from the community where the station is located and where the desired freshwater source is located, as well as every community that has tributary lakes or rivers and in addition the state and national government. Furthermore, this approval is not free, it will be granted at a cost that varies depending upon how large and how far upstream, the tributary extends71. It should also be noted that firms must attain approval from the entire chain of tributaries whether they are privately or publicly owned. In Switzerland, publicly owned firms such as hydropower stations are run independently as if they were private, with the same profit maximisation goals72. However, as you would expect it is easier to get the approval if the firm is community owned (public), because of political reasons. In addition, to these expensive set-up costs, any infrastructure relating to the freshwater (pipes, turbines etc.) that is built by the company becomes community/publicly owned at the end of the agreement (usually 80 years in Switzerland for hydroelectric power plants) unless a new agreement is negotiated73. The reasoning behind this is that freshwater is viewed as a community good; thus, infrastructure relating to it should be community property unless it is being used for the benefit of that community.

Similar to its approach to forests and other environmental resources, Switzerland adopts a “Thinking globally, acting locally” approach to freshwater management74. Instead of establishing national control over freshwater due to its importance, Switzerland has set up subsidiary freshwater management bodies within communities75. All quantity related issues are handled on a community basis, while quality assurance is the role of state governments76. Unlike other unsuccessful delegated responsibility structures, Switzerland has fully empowered its communities and holds them fully responsible for freshwater management within their community, as well as any downstream implications caused by their

68 Patrick Peduetti (Ibid) and Hans Loser (Ibid) 69 Swiss Agency for Development and Cooperation (SEC) and State Secretariat for Economic Affairs (seco), “Switzerland’s International Cooperation: Annual Report”, 2003, p9. 70 Swiss Agency for the Environment, Forests and Landscape (SAEFL), Swiss Agency for Development and Cooperation (SEC) and State Secretariat for Economic Affairs (seco), “Blue Gold”, Environment for Europe: Water in Focus, 2003, p9. 71 Patrick Peduetti (Ibid) 72 Hans Lose (Ibid) 73 Patrick Peduetti (Ibid) and Hans Loser (Ibid) 74 Swiss Agency for the Environment, Forests and Landscape (SAEFL), “The situation in 2003” (2003), p12. 75 Patrick Peduetti (Ibid) 76 Beat Lusher, Forrester for the Swiss Government in Semadan, Swiss Alps [Personal Interview August 2004]

24 management. Thus, Switzerland’s freshwater control structure is an example of localised and institutionalised control that gives real accountability to the local bodies.

A.3.3 Brief Comparison of Main Case Studies

From an initial viewpoint, there seems to be little benefit from analysing case studies that occur in two entirely different regions of the world as the situations and circumstances appear to be so different that no reasonable conclusions can be drawn. However, finding efficient and effective solutions to extreme cases is often the most difficult task. Even though these cases seem different, they do possess similarities and useful conclusions can be drawn from them.

Switzerland, like most countries within the European Union, has no current problem (ie. shortage) of freshwater supply, and consequently with river system flows. Furthermore, Switzerland has no previous experiences with freshwater supply problems. Contrastingly, Australia has faced many freshwater shortages and has seen this resource depleted and river flow significantly reduced. Australia is the driest continent in the world with freshwater supply problems in many areas, especially with the flow of the MD River System. The main similarity between Switzerland and Australia is in the area of planning for the future. It appears that Switzerland’s problem-free run with freshwater may end, and Australia has certainly not found any miracle cure for its freshwater shortage. Australia is undoubtedly aware of the continuing problem, but the concern is whether Switzerland will plan for their potential problems before or after they become realised. Currently, at least on the state and community level, Switzerland has no contingency plans for shortages in freshwater, but they have expressed verbally that they will be developed in the near future77. Overall, both countries now need to develop contingency plans for future freshwater shortages. However, something that may prove important in the future is the fact that Australia is an island country, which means it has a huge coastline. Currently in Western Australia (Perth) and recently in Sydney there is testing of the economic viability of desalinating sea water into more useful freshwater using large industrial plants78. While this process is not yet economically viable (due to high energy costs), it is important to consider that it may become so in the near future and provide a new source of water that is not available to most major European cities.

The major difference, both historically and today, between the Murray-Darling River System and the Danube and Rhine River Systems is the dramatic difference in water flow. The flow of the Murray-Darling varies enormously compared to these two European river systems, in which the flow is somewhat constant due to their rain supply in winter and glacial melt supply from the Swiss Alps in the summer. There are however a few similarities between the rivers system. Similar to the trade access provided by the Rhine and Danube River Systems in Europe, the Murray-Darling River System was recognised for its economic significance to access the inland pastoral properties in Australia. In 1856, approximately 30 years after the discovery of these rivers and their tributaries in Australia, a conference was held in Melbourne to discuss the Murray-Darling River system79. This meeting between representatives from New South Wales, Victoria and South Australia undoubtedly involved the first cross-border agreement in Australia, even though the states were not officially combined until Federation in 1901.

77 Patrick Peduetti (Ibid) 78 Geoff Gallop (Western Australian Premier), “Perth Seawater Desalination Project” 2004 [Media Release -accessed September 2004 via Internet at http://www.watercorporation.com.au/media/media_detail.cfm?id=165]. 79 The Encyclopaedia Britannica (1937), “Inland Water Transport”, volume 12, p364.

25 Coincidentally, a meeting to manage the Danube by an international committee also occurred in 185680, and the first Rhine River agreement occurred at almost the same time that Charles Sturt was exploring the Darling and Murray Rivers. These early meetings in both parts of the world were caused by economic stimulus, as river systems were the main form of transport. In Australia, railways replaced river transport as the main form of transport in the 1880s81. There are still cross-border agreements for navigation in Europe, but the Australian focus is now on freshwater supply and quality issues as is demonstrated by the importance that the Australian Government is placing on the National Action Plan for Salinity and Water Quality Plan82. However, meetings that should have been caused by environmental stimulus and the need for integrated management did not occur this early.

Stereotypically, Australians are interested in getting the greatest personal benefit from the freshwater to which they have access; that is, to treat freshwater like a purely economic good. Conversely, the Swiss are interested in giving as many people as possible access to the benefits of freshwater; that is, treating it like a shared resource with social aspects, not simply as an economic good. It may be argued that individual Swiss people view freshwater very similarly to Australians; that is, as an economic good. However, at the community level the Swiss recognise freshwater as having a social aspect in addition to its economic aspect. Switzerland, relative to Australia, seems to have a much more equitable and successful value system regarding freshwater, which is somewhat surprising considering that Australia is the country with freshwater problems. A possible reason for this may be that Switzerland is historically a more ‘green’ and environmentally-friendly country than Australia: in Switzerland, the “Greens may not be strong as a political party, but the Swiss themselves are highly green- minded”83. However, it must be remembered that due to its huge glacial reserves, Switzerland’s freshwater system has never really had a test such as a significant decrease in the natural supply of freshwater; thus, the Swiss system has not been proven to be superior in times of freshwater scarcity. One advantage that Australia does have over Switzerland and all other nations in the European Union is that the freshwater problems are becoming well known, early in its history, to the average Australian. The ramification of this is that Australian’s attitudes and values regarding freshwater are and should be more open to new ideas, change and potential solutions that may be adopted by other parts of the world if these answers are successful.

80 The Encyclopaedia Britannica (Ibid), p364. 81 Bryce Fraser (ed) “The Macquarie Book of Events” (NSW, Australia: Macquarie Library, 1983), p97. 82 Australian Government, “About the National Action Plan for Salinity and Water Quality” (2004) [Accessed via Internet]. 83 The Economist, “Greens Grow Up” (August 1999), vol 352 (issue 8131), p37.

26 Section B: Introduction to Cross-border River Systems

B.1 Cross-border river systems and their management issues

There are almost three hundred large and significant river systems that flow through at least two nations, and their importance has been recognised by the United Nations in Chapter 18 of Agenda 2184. Furthermore, the significance of Agenda 21 was confirmed at the World Summit on Sustainable Development in 2002, when the full implementation of Agenda 21 and the Programme for Further Implementation of Agenda 21 were strongly reaffirmed85. The inherently difficult nature of river system management is well known: cross-border86, also known as transboundary, river system management is an added complexity to standard river system management. It is argued, and this author’s view, that cross-border river systems are usually of higher importance than other shorter river systems that do not cross state or national borders, because they are a larger supplier (larger volume of flow) to more people (longer in length), and consequently there is a greater human dependence on them. Therefore, there are greater benefits from the ‘good’ management of cross-border river systems over other river systems, and conversely worse implications for bad management. That is, cross- border river management is a classic financial maxim of higher risk for a possibility of higher return. Following the over-arching financial principle, which states that when dealing with high risk-return investments (in this case a freshwater resource), there should be a greater frequency and detail of monitoring, and a complete understanding of the underlying investment should be gained before making an investment decision. This theory is extremely applicable, except for the fact that the investment decision can not be delayed until a complete understanding of the cross-border river system and its human and non-human dependants are known. The application of this financial theory indicates the importance of obtaining a complete understanding, which suggests that caution (the closest thing to not investing) should take place until this is achieved. Thus, this financial theory tends to support the idea of the precautionary principle, contradictory to the traditional financial method of discounting cash flows (discussed more below in Theory Section).

Accompanying the increased risk and return with cross-border river management there is increased complexity87; the upstream/downstream rivalry is particularly apparent with cross-border river system88. In addition, there is generally a lower tendency to cooperate with people from other states and countries. Thus far, the world has not dealt with this added complexity very effectively. For example, where the Rhine borders Lichtenstein and Switzerland, according to international law both countries have the right to half the main flow of water and any secondary flows on their respective sides of the main flow89. Thus, in theory they could work together and stop all downstream flow of the Rhine River and sell the

84 United Nations, “Agenda 21” (2003), chapter 18, paragraph 18.4 [Accessed via Internet]. 85 United Nations, Department of Economic and Social Affairs, Division of Sustainable Development, “Agenda 21 (Overview)” (2003) [Accessed October 2004 via Internet at http://www.un.org/esa/sustdev/documents/agenda21/index.htm]. 86 From now on the term border will be used to describe national and state borders only; thus, a cross- border river system will refer to a river system that crosses a state or national border 87 Water Policy International Ltd, “The Water Page: International Water” (2000/1) [Accessed September 2004 via Internet at http://www.thewaterpage.com/internationalwater.htm]. 88 Konrad Repgen, "The Hydro-politics of The Mekong River Basin: Regional Cooperation and Environmental Security" in Non-Traditional Security Issues in Southeast Asia, p468. 89 Danilov-Danilyan (Director of the Russian Academy of Sciences Institute of Water-Related Problems and corresponding member of the Russian Academy of Sciences). In: “Water: Source of Life on Earth” International Affairs: A Russian Journal of World Politics, Diplomacy & International Relations, vol 49 (issue 6), p163.

27 freshwater to other countries. Hence, this rule does not factor in the likely consequences of such a great intake of freshwater, and is simply not adequate to ensure equitable supply to downstream users (and future generations). Even the UN have not made their priorities clear: chapter 18 in Agenda 2190 states that cooperating amongst transboundary river freshwater users may be beneficial. Almost all cross-border river systems around the world have realised the importance of cross-border cooperation for economic and environmental reasons.

River freshwater availability is not only a problem for downstream riparians where there may be a shortage but can also be a problem for upstream riparians with an abundance of water. International destabilisation is inevitable if some regions become severely short of freshwater and others have an abundance91, particularly where there is no method to move some of the water from the abundant regions to the needy regions. Thus, the regions with an abundance of water would also be negatively impacted by this destabilisation, so all river freshwater user groups need to realise that they will benefit from equitable, efficient and effective cross- border river management.

B.2 Theory applicable to cross-border river systems

There are certain goods that many people have access to and are not formally owned, such as ocean fisheries and the atmosphere; these goods are known as common resources or shared goods92. Freshwater can be considered as a quasi- common good because even when ownership is sometimes formally defined, river freshwater is most definitely a shared resource. The theory of the commons, as stated by Garrett Hardin in a famous article entitled ‘The Tragedy of the Commons’, related to the common resource of river freshwater is that it is in the interest of all individuals to use and exploit the resource; however, it is not in the interest of anyone for all individuals to exploit and totally deplete the resource93. Thus, it is necessary to establish a balance between individual liberty to use the freshwater and collective responsibility to maintain freshwater resources.

The issue then arises regarding the sharing, or allocating, of the river freshwater to ensure a balance between individual rights and the common responsibility of maintenance of supply. This involves determining whether freshwater should be treated as a public or private good. As a public good, there are no clear ownership rights and once the freshwater is supplied (by rain or glacial melt), then all people should have access to the freshwater like they do to the air we breathe94. This absolute right would cause significant problems as the individual right to consume could dominate and the resource would be depleted. The reason for this is that the underlying assumption of a public good is that use by one person does not affect the use by another person. This appears true for two people taking water from a large river system, but every person who removes some freshwater from the river reduces the amount available for the next user. This is where the ‘polluter pays’ principle applies, which is the cornerstone of many environmental policies, and the majority of those of the EU 95. The principle states that the ‘polluter’ should bear the true cost of the damages that are caused by their actions96. When applied to river freshwater, the major pollution act could be considered as decreasing the river flow, and the true cost of this decrease in

90 United Nations, “Agenda 21” (Ibid). 91 Danilov-Danilyan In: “Water: Source of Life on Earth” (Ibid). 92 Mark Diesendorf and Clive Hamilton, “Human Ecology, Human Economy: Ideas for an Ecologically Sustainable Future” (Sydney: Allen and Unwin, 1997), p332. 93 Mark Diesendorf and Clive Hamilton, (Ibid), p41. 94 Mark Diesendorf and Clive Hamilton, (Ibid), p41. 95 Environment CustomWire “EU reaches agreement on "polluters-pay" law” (Feb 2004). 96 Karma Ockenden, “Billing Fields” Utility Week (Feb 2004), vol 21 (issue 9), p18.

28 river flow needs to be passed back to the person who decreased the river flow, i.e. the consumer or user. The reasoning behind this is that unless the full cost of the damages is born by the damager then there will not be adequate deterrence from future damage causing activities. This implies we need to charge people to consume river freshwater and introduces a case for treating river freshwater as a private good, where firms sell the right to use it to other people. However, treating river freshwater as a private good requires establishing ownership rights, which is difficult due to the opposing upstream and downstream views (more details given in previous section).

Traditional economic planning recognises the time value of money, which has two equivalent facets: . Discounting the value of future outcomes (the further into the future, the heavier the discount), because of the uncertainty and lower current relevance97 . Amplifying the value of current money in the future (the further into the future, the larger the amplification), because of the increase in value of holding that money due to interest Investing in river management now will decrease uncertain costs in the future; that is, it will reap benefits in the future. Moreover, if investment is not made in river management then this money will grow in value until such time as the future costs are certain and they can be paid for then. Hence, since the costs of not implementing good river management now will only produce costs in the future, according to traditional economic planning then it is best to wait until these costs are realised, and earn interest on the money in the mean time. However, the precautionary principle has been developed to counter this type of thinking. According to the Australian Intergovernmental Agreement on the Environment definition of this principle, “lack of full scientific certainty” is not a valid reason for “postponing measures to prevent environmental degradation”98. The reason for this is that the maximum cost of poor river management now is irreversible, such as freshwater shortages in the future which no amount of money can fix. Thus, consistent with financial theory for managing risky investments (the environment is considered risky because of our little knowledge of our effects upon it), caution should prevail until it is known how much freshwater can be taken out of river systems without permanent damage. Hence, the onus of proof is left with those who wish to take no action in the present to prove that their lack of action will not cause any permanent damage now or in the future.

The application of the precautionary principle or the traditional economic discounting method depends largely upon attitudes towards inter and intra generational equity. The precautionary principle tends toward the application of inter-generational equity. The Australian Intergovernmental Agreement on the Environment states that the “present generation should ensure that the health, diversity and productivity of the environment is maintained or enhanced for the benefit of future generations”99. That is, the current generation providing future generations with a biosphere and sum capital resources that are as good as or better than what they received from the previous generation. The term ‘sum capital resources’ does not rule out trading the existence of one resource for another, which involves the complexities of comparing the value of resources. In addition to the obvious complexities of making value comparisons across all known resources, this decision also needs to be made from a futuristic view point

97 Mark Diesendorf and Clive Hamilton, (Ibid), p54-56. 98 Mark Diesendorf and Clive Hamilton, (Ibid), p77. 99 Mark Diesendorf and Clive Hamilton, (Ibid), p76.

29 (ie. future generations), which makes the comparison virtually impossible100. Therefore, instead of applying the theory overall and making value comparisons across various resources, it is important to apply the theory to each resource, such as freshwater, individually. Hence, the ‘sum capital resources’ will still remain constant or increase, and no future value judgements based on speculation need to be made.

There is another part of inter-generational equity that needs to be elaborated; that is, how many generations into the future do we need to provide for. This issue is closely related to agency theory. The theoretical debate is whether the current generation are agents for future generations (the ‘principal’ in the agency relationship)101. However, the anomaly in this debate is that the agents actually have more power than the principles, and remedies can never be sought from the agents by the principles at a later date. This imbalance in power seems to suggest that the current generation does have a moral and equitable duty towards future generations; however, the next generation must take some responsibility for providing for generations that follow them. Thus, the best that the current generation can do is to provide as good as or better freshwater resources for the future, along with the tools to maintain or even improve them.

Intra-generational, or social, equity is also an important consideration102: the duty to future generations must be balanced with providing for those currently in need. Thus, in terms of river freshwater, we must supply freshwater to those furthest downstream (effectively the riparian landowners with the poorest supply in terms of river freshwater), as well as providing for future generations.

100 Impossible to attain accurate results 101 Mark Diesendorf and Clive Hamilton, (Ibid), p76. 102 A K Shiva Kumar, “Poverty and Human Development in India: Getting Priorities Right” (UNDP, Occasional Paper 30, 1999) [Accessed September 2004 via Internet at http://www.undp.org.in/report/PHDI.htm].

30 Section C: Different Approaches to Cross-Border River Freshwater Allocation

There are two main solutions that have been identified and implemented, neither with considerable superiority. The two models are the market model and the customary laws and agreements model, which will be analysed both in theory and practice with reference to the case studies. These models attempt to solve the problem of allocating cross-border river freshwater equitably, effectively and efficiently; thus, they will be analysed from an economic (human user) and environmental perspective with reference to the theoretical issues discussed in the previous section. In addition, a hybrid model, known as environmental economics, is the most recently proposed solution. The basis of this new hybrid model will also be briefly discussed.

C.1 Market Model

The market model for managing cross-border freshwater river systems is based on the basic economic principles of supply and demand. The model recognises that water does not always fall in the places of most need or use; therefore, the concept is to set up a trading system whereby groups with net excess water can sell freshwater to groups with a net demand for freshwater103. Thus, suppliers and demanders can be identified and represented economically by supply and demand curves on a Price-Quantity graph. Basic economic theory tells us that the supply curve is upward sloping (law of supply), because the higher the price the more freshwater suppliers will want to sell; in opposition, the demand curve is downward sloping (law of demand), because the higher the price the less freshwater demanders will want to purchase104. Market equilibrium is created where these two curves meet, as shown below:

103 Dellapenna and Joseph, “Custom-built solutions for international disputes” p34. 104 Stonecash, Gans, King, Mankiw “Principles of Macroeconomics” (Victoria, Australia: Nelson Australia, 1999 (2nd edition)), p65, 73.

31 Thus, an equilibrium point is established and the market price for freshwater is set where the demand equals the supply. The established market price will then guide demanders/purchasers to buy the amount of freshwater they are willing to pay for at that particular price (determined by their own personal utility function), which should theoretically equal the amount that suppliers wish to supply at that price level. The total amount purchased is then equal to the equilibrium quantity; furthermore, as the supply is equal with demand at this point; theoretically, the freshwater is being allocated efficiently. It should also be noted that the theory of the market model states that changes in the forces of demand or supply cause the corresponding curve on the above diagram to shift. This shift will then cause a change in equilibrium, and a new market price and quantity will occur. The two possible shifts (left, right) of each curve (supply, demand) in the above diagram are depicted below105:

Shift Left: Shift Right: a move left on the quantity axis, a move right on the quantity which represents a decrease axis, which represents an increase  Equilibrium quantity decreases  Equilibrium quantity increases Demand momentarily drops Demand momentarily rises Demand below supply; therefore the above supply; therefore the market adjusts: market adjusts:  Equilibrium price decreases  Equilibrium price increases  Equilibrium quantity decreases  Equilibrium quantity increases Supply momentarily drops below Supply momentarily rises above Supply demand; therefore the market demand; therefore the market adjusts: adjusts:  Equilibrium price increases  Equilibrium price decrease

C.1.2 Theoretical Advantages of the Model

The market approach to freshwater allocation inherently decentralises decision making. This means that the interaction between suppliers and demanders decides how the freshwater is allocated. Having a huge number of suppliers and demanders allocating resources may seem a chaotic method; however, markets have proven to be remarkably successful in allocating purely economic goods106, i.e. goods other than a mobile natural resource such as freshwater. The theoretical advantage of markets is that they are efficient107: everyone buys and sells at a single price that makes demanders desire the same amount of freshwater that suppliers desire to sell. A follow-on theoretical advantage from market efficiency is how efficient markets deal with scarcity of the freshwater resource. As the scarcity of freshwater from rivers increases it is obvious that the supply is decreasing, which will cause the supply curve to shift to the left. Referring to a ‘Supply – Shift Left’ in the table above, it can be seen that a decrease in supply will cause the equilibrium price to increase. That is, as the supply of freshwater decreases the prices will continually

105 Stonecash, Gans, King, Mankiw (Ibid), pp69-72,76-83. 106 Stonecash, Gans, King, Mankiw (Ibid), p9. 107 Dellapenna and Joseph (Ibid), p34.

32 increase until the new equilibrium price and quantity sold/purchased are reached (excess of demand removed). Therefore, theoretically under the market model, there will never be a shortage of freshwater, because as the scarcity of freshwater increases so will the price. This increased price should then make demanders purchase less freshwater and move to substitute resources or goods that now appear cheaper due to the increased cost of freshwater. However, freshwater does not have a real substitute; thus, the impact of reduced supply and increased cost may be increased environmental awareness and efficiency of freshwater use (indirect decrease in demand).

Freshwater is a costly resource under the market model; that is, there is monetary encouragement for the efficient use of freshwater. Therefore, there is less likelihood of wasting our freshwater resources. Freshwater-rich (upstream riparians) groups will be encouraged not to waste the resource as they can make revenue from the freshwater they do not use by selling it in the freshwater market. Moreover, theoretically, groups in need of freshwater (downstream riparians) will not be as likely to waste freshwater, as they have paid a significant amount of money for that amount of freshwater108.

Overall, assuming that the problems in setting up an efficient freshwater market can be overcome, then a freshwater market is an excellent solution of the allocation of freshwater (such as freshwater from cross-border river systems). Disputes should be readily resolved by a legal system, as ownership rights would have been established when the market was formed, and compensation will be given to those who have their property, in this case freshwater, infringed upon109. Thus, theoretically, a freshwater market model ensures peace and efficient allocation of the natural resource, freshwater. The added advantage of a freshwater market solution is its simplicity: a great deal of understanding is not required to establish the freshwater market. The reason is, in theory, the efficient allocation of freshwater is due to the balance between suppliers costs and profit preferences, and the demanders future expectation and personal preferences.

C.1.3 Problems and Oversights with the Model

There are two main theoretical problems that will generally apply to a freshwater market solution for cross-border river management. These are externality and market power problems, which are not catered for in the market model110. The externality problem with freshwater is that the choices of the purchaser affect more than just themselves and the seller. For example, over purchasing may mean that there is not enough water to allow recreational fishing in the river. The market power problem involves having the supply dominated by one (monopoly) or a few collaborating (oligopoly) firms. This means that these firms can raise prices as they see fit and there is no competition to force them down. This problem is made worse in the case of a freshwater market as there is usually only one supplier of water (either government or specific private company), and it is not easy for rival firms to join the market without government approval (incredibly unlikely to be granted in cases of a monopolistic government). In addition, a portion of the demand for freshwater is inelastic (vertical demand curve in previous diagram), because a certain level of freshwater is needed for survival. According to market theory, if the price rises then people will substitute relatively cheaper goods; however, in the case of inelastic demand the quantity will remain the same as the price increases111. Thus, a monopolistic supplier can

108 Dellapenna and Joseph (Ibid), p34. 109 Dellapenna and Joseph (Ibid), p34. 110 Stonecash, Gans, King, Mankiw “Principles of Macroeconomics”, p11. 111 Stonecash, Gans, King, Mankiw “Principles of Macroeconomics”, p90-98.

33 exploit (for short-term profit gain) the fact that there will always be a certain level of demand no matter how high the price is set.

In general, the market model has several assumptions that do not hold for the ambient natural resource of freshwater. The major violation is the assumption that ownership rights must be clearly determined before a market can be established; very few genuine water markets have existed in the past, because of this hurdle112. Establishing these ownership rights is inherently difficult because of established views and the difference between upstream and downstream attitudes (discussed in section A.2.2). People will not pay for something that they view to be their own, and unless clear ownership rights are established a market model will never succeed. Resources like coal are easily traded between countries, but selling a part of the contents (water volume) of a river to another country would not be so easy. Another important assumption that is violated is that everyone makes rational choices based on a full understanding of the impacts of their choices. This assumption is obviously not upheld as experts are now only discovering the full impacts of human development on our freshwater resources in river systems. Therefore, the majority of the consumer market for freshwater does not appreciate the full impacts of their decisions relating to freshwater, although their knowledge is increasing all the time with new findings being published and freshwater issues being covered more frequently by the media.

The critical impacts that our choices have on the environment suggests that the world is more than free market economics. The goals of markets are to reward those groups that produce the goods that others are willing to pay for and to provide these to the people who are willing to pay the most for them (does not always equal the people most in need)113. Thus, it does not include the concept of equity, or any social need aspect. This is the reason systems such as social welfare exist to cater for the people without enough money to purchase the essentials at market prices. As the environment is a common good it is not owned by anyone and does not have any money; therefore, it can not look after its own needs in a market situation. Hence, cross-border river systems can not ensure that there will be enough freshwater remaining in the river to maintain river health, because the river systems can not purchase the amount of freshwater needed to keep them healthy.

The counter argument is that governments and environmental groups will purchase the freshwater needed to keep river systems in good condition if it is such an important issue. However, the problem with this view is whether environmental groups and government departments receive enough funding, or have a large enough budget, to purchase sufficient freshwater on behalf of river systems. If industrial and personal users are willing to pay more than environmental groups can afford then the environment will not be fairly represented in the market114. According to the enactment of the SA Native Vegetation Act (1991), which applies to vegetation clearance and its impacts on freshwater as an integral part of the environment, “environmental degradation is not due to the inadequately defined property rights but rather due to the inadequately enforced rights of the public to community owned property”115. The meaning of this is that the degradation of our cross-border rivers systems is not so much a function of incorrectly defined ownership rights, but the fact that there

112 Dellapenna and Joseph (Ibid), p34. 113 Stonecash, Gans, King, Mankiw “Principles of Macroeconomics”, p11. 114 Allan Amos, New South Wales Department of Natural Resources [Personal Interview, October 2004]. 115 South Australian Government, “Native Vegetation Act”, Adelaide: 1991 [Accessed October 2004 via Internet at http://www.austlii.edu.au/au/legis/sa/consol_act/nva1991194/].

34 is not enough money or controls representing the river systems in the market. Thus, under the market model, the environmental interest of the river systems is only cared for when environmental departments and community groups have enough money to purchase the amount of freshwater needed for sustainability of the river systems. Therefore, the need for monetary inflows to the environmental groups is required, such as through environmental levees placed upon river freshwater users.

C.1.4 Freshwater Valuation in the Model

Imbedded within the market approach to cross-border river management is valuing the water that flows down these river systems. However, before valuing water we should consider whether we should, and how accurately we can value shared resources such as freshwater in river systems. If we attach a value to freshwater, then we are assuming that if the price was higher we would not purchase as much freshwater and forego some. However, realistically, some users require freshwater no matter what the price. Nevertheless, assuming that valuing water is moral, how accurately can the market price water? Many people believe that freshwater is endless in supply and are naïve to all its uses; in addition, governments often subsidise freshwater. Therefore theoretically, it would seem that the market will undervalue water as the demanders are not fully aware of its true value. At present, the price of water in Australia and in most other developed countries is relatively low116 and not an indicator of freshwater’s true cost. This means that the polluter pays principle (discussed earlier) is being violated. Consequently, the amount of freshwater being bought is not sustainable, because people are not being charged enough to maintain the quantity of freshwater remaining in the environment above the level needed for the river systems and lakes to remain healthy. An example of the consequences of undervaluing water is the ‘whitegoods’ market in Australia. It would appear freshwater is under-valued and under-priced, as people are still willing to purchase high-water usage dishwashers and top-loader washing machines despite a progressive increase in advertising that front-loader washing machines use significantly less water than top-loaders. This suggests that prices and the profit margins are still not low enough, e.g. on top-loaders, to encourage manufacturers to solely produce more water-efficient whitegoods. Thus, freshwater from river systems and lakes is being depleted, because of low freshwater valuation.

C.1.5 Water Trading in Australia

As rivers transport water from one place to another, there is the opportunity to trade the freshwater within the rivers without any transport costs. An initial pilot trial for the MD River System, involving trading between NSW, VIC and SA commenced in 1998117; that is, a trial of a market based approach to the management of the MD River System. This trial was mainly due to economic reasons, although the declining state of the River Murray was a secondary consideration. The Australian Bureau of Agricultural and Resource Economics estimated that widespread use of water trading in the MD River System would increase output by approximately $48 million annually118. Basically, all states

116 Organisation of Economic Cooperation and Development (OECD), “The Price of Water in OECD Countries” (1999). 117 Murray Darling Basin Commission, “The Pilot Interstate Water Trading Project” (2004) [Accessed September 2004 via Internet at http://www.mdbc.gov.au/naturalresources/watertrade/pilot_watertrade.htm]. 118 Murray Darling Basin Commission, “Water Trading: Benefits of Water Trading” (2004) [Accessed September 2004 via Internet at http://www.mdbc.gov.au/naturalresources/watertrade/watertrade.htm].

35 meet and allocate a certain amount of water to each state, and then each state allocates its water to user groups within that state. Following the organisation of ownership rights, user groups are able to trade freely (up to a maximum number of trades) with each other in a freshwater market. A requirement of the pilot program was a review every two years: the first two-year review (completed December 2000) has been released to the public. Overall, the first review was positive and stated that inter-state trading arrangements were improving119. However, it also identified a number of political and economic issues, which are discussed in detail below:  The value of freshwater use in the Murray-Darling Basin was increased by interstate trading, because 99% of water being traded was not being previously used by the seller120. This means that the market model is increasing the efficiency of freshwater allocations along the MD River System. However, it could also be a result of initial licences or allocations being too large. Improvements in the allocation have been made progressively by each state at different rates: allocation was firstly based on the land area regardless of the land use, this approach then changed to a volumetric measure (generally related to the historical land use), and now the allocation process is regulated as a percentage (determined by volumetric measure) of the available supply, which varies from both year to year and at different sites along the MD River System. This last change is very important as it now incorporates the supply aspect into the market, so that the market can react to natural changes in supply.  Interstate trading agreements are needed to keep the markets working efficiently by regulating and negotiating the tradeable volumes at the political level121. This is a very important finding, as it shows that the people commissioning the trial do not have faith in the internal workings of the market to be able to maintain the level of flow needed in the River to sustain the river’s health and supply. This is a choice that has been made consistent with the precautionary principle, especially considering the huge possible variations in freshwater supply in Australia, caused by changing rainfall pattern and new industry development such as the proliferation of irrigation requirements for grapes in recent years. These high level political agreements to administer the river freshwater market have used a priority of allocation that aids in determining supply quotas. Human use needs, through city and town allocations are always first, followed by environmental considerations (currently contentious issues about how much freshwater the River System needs to sustain itself), and then industry and agricultural considerations.  “All states need to improve mechanisms for regulation and enforcement” 122. This conclusion implies that there is a need for government or community backing to support and help enforce the market model; that is, self regulation by the market is not enough to ensure efficiency. For example, the fines administered in South Australia for using more than an allocated amount of water from the River Murray are less than the cost of purchasing water from other water traders123, and thus the pricing of the fines undermines the market and an arbitrage opportunity is created.  There is an inconsistency in pricing and charging between states, which indicates the market is not fully integrated and operating effectively124. Although this may simply be because the market is new and still evolving,

119 Young, MacDonald, Stringer and Hennig “Interstate Water Trading: A Two Year Review. (Draft Final Report)”, p2. 120 “Interstate Water Trading: A Two Year Review. (Draft Final Report)” (Ibid), p22. 121 “Interstate Water Trading: A Two Year Review. (Draft Final Report)” (Ibid), p2. 122 “Interstate Water Trading: A Two Year Review. (Draft Final Report)” (Ibid), p5. 123 “Interstate Water Trading: A Two Year Review. (Draft Final Report)” (Ibid), p5. 124 “Interstate Water Trading: A Two Year Review. (Draft Final Report)” (Ibid), p5.

36 the more likely cause is the difficulty with pricing a resource such as freshwater. The conclusion made by the COAG is that water prices need to cover all operating costs, on-going maintenance costs, capital expenses necessary for ongoing operation, and costs of water use to the environment125. Furthermore, consistent with the polluter pays theory, until water users recognize and pay for the real price of water both in the city and country there will be these inconsistencies and there will be no incentive for improved efficiency of use.  All parties have agreed that from a salinity and river health perspective, in the long-run interstate trading can be expected to have a negative impact on river salinity126. Therefore, government intervention in the river freshwater market is necessary to ensure these salinity levels remain within reasonable bounds. As for the overall environmental condition of the water (taking into account water flow), it has not statistically deviated since the water trading has been implemented. Thus, no overall conclusions can be made regarding this market model’s implementation effect on the health of the MD river system.

In addition, an important message for the Australian government came from freshwater traders. It was noted that many landowner traders used their water profits to finance more efficient irrigation techniques, which will further increase their freshwater sales profits and have a positive effect on the river’s health. This process of allocation of profits back into improving the use of freshwater is a further requirement of the polluter pays principle. Once people are paying for the true cost of the freshwater, some of this money must be reinvested back into freshwater issues to ensure the sustainability of river freshwater and is occurring via enforced environmental levees.

There is one concern that has been overlooked by current market rules. Currently, in NSW and SA, it is not necessary to own land to purchase river freshwater allocations127. This raises the possibility that a large investor could buy-up all licences in an area, create a monopoly of supply and sell the freshwater at a huge margin to the people with the most money. In this case, the inelasticity of demand is being used as a mechanism to increase price, and efficient allocation of freshwater will not occur, because ownership will transfer to the user groups with the most money.

It is also important to note that a similar trading system will not work in Switzerland without significant freshwater policy and attitude reform. Two reasons for this are, the community-owned freshwater philosophy and their main objective of freshwater allocation that, everyone has access rights to freshwater, rather than the trading system’s objective to allocate freshwater in the most efficient manner.

125 John Langford and Chris Scriven, “Independent Review of Pricing Arrangements” (2001), section 2.3 [Accessed September 2004 via Internet at http://www.mdbc.gov.au/river_murray/running_the_river/projects/rmw_IRPricing.html]. 126 “Interstate Water Trading: A Two Year Review. (Draft Final Report)” (Ibid), p3-4. 127 “Interstate Water Trading: A Two Year Review. (Draft Final Report)” (Ibid), p3.

37 C.1.6 Influence of the Privatisation Trend

Privatisation regarding freshwater involves transferring some or all of the publicly owned and managed waterways and control over them to private firms. It can be simply just the operation of freshwater allocation, or it can be as complete as handing over public rights of water to the private firms. There is a current global trend towards privatisation of distribution and management of freshwater128. It is argued that without privatisation freshwater will be treated as a free public good that everybody will deplete and nobody look after, but with privatisation there will be a vested interest by firms to look after the freshwater resource. However, firms operate to make a profit and are often short-term129, so the long-term impacts on the environment will not necessarily be their main focus. Thus, there is a loss of control problem with privatisation, whereby a vital resource (freshwater) has left the control of the public to profit-driven private firms130. Moreover, there is an added pressure on the government to ensure the financial viability of the privatised freshwater firms, because they can not afford for these firms to fail as freshwater is a necessity in society.

It can easily be seen that the trend of privatisation suggests a market based approach to cross-border river management. This trend towards privatisation is very risky and contradicts the precautionary principle, as the success of the market approach to freshwater management has not been proven, and contains many theoretical and practical faults: particularly in terms of environmental responsibility and accountability. Nevertheless, global trends have significant persuasive influence on individual nations’ decisions. Thus, if indeed privatisation is inevitable then at the very least openness and transparency must be ensured so that the effects of the privatisation, and consequently the efficiency and effectiveness of applying the market model, can be closely monitored. One of the major problems with privatisation is the use of long contracts that effectively make the privatisation irreversible in the short term131. Therefore for safety, in accordance with the precautionary principle, there should also be provisions for enacting future regulations or a public (government) buy-back and compensation if the results of privatisation and application of the market model approach can not improve water use, but damage the long-term outlook for freshwater.

C.2 Customary Laws and Agreements Model

The agreements, or customary laws, model132 is based upon international law that is slowly being developed using historically proven principles for sharing goods and resources. Applying the model’s ethos to the solution to freshwater scarcity and river freshwater allocation is not in creating freshwater markets, but in consolidating the rules for sharing these resources, found in customary international law, into agreements. Hence, this model is consistent with freshwater being a common resource; in addition, due to the human element in

128 Peter Gleick, Gary Wolff, Elizabeth Chalecki and Rachel Reyes, “The New Economy of Water: The Risks and Benefits of Globalization and Privatization of Fresh Water” (California, USA: Pacific Institute for Studies in Development, Environment and Security, 2002), p1. 129 Annual losses, with possible future gains, are not usually chosen by managers because of the time value of money effect in the traditional discounting method discussed previously 130 “The New Economy of Water: The Risks and Benefits of Globalization and Privatization of Fresh Water” (IBID), p4. 131 “The New Economy of Water: The Risks and Benefits of Globalization and Privatization of Fresh Water” (IBID), p5. 132 ‘Agreements Model’ and ‘Customary Laws Model’ can be used interchangeably in most contexts

38 this model, compared to the market model, it tends more towards an implementation of the precautionary principle rather than the traditional economic approach.

A simple analogy is the most effective way to describe the idea behind the customary laws model. Suppose a community had some shared land, which they sowed with corn. This land was properly watered and maintained by members of the community and the produce was shared between community members. Suppose that over time a schedule developed where the fifteen families present in the community took one week shifts (in a defined order) in watering, collecting produce, and maintaining the land. In addition, the produce was divided up according to the number of members in each family. Eventually, everyone in the community would agree that the weekly-shift way of managing the land and the produce allocation process was the only correct and equitable way to perform the activities, even though there would be no specific time when this notion took hold. Thus, at this point, anyone who does not perform their weekly-shift is considered to be in the wrong, and if anyone takes more than their share of produce per family member then they are considered to be thieves. Thus, we have arrived at a point where the common resource is being managed effectively and efficiently under the customary laws model.

Coming to agreement on the customary law is not always as simple as in the above analogy. For complex issues such as cross-border river freshwater allocation there is a more defined approach to resolving differences in opinion and coming to a resolution, known as a customary law or agreement. Firstly, it is recognised, with most nations’ agreement, that only riparian nations (river flows through, or along a border of a nation) have any claim to the freshwater in that river system, with the exception of any past agreements that state otherwise133. However, past this initial agreement the usual upstream and downstream differences (discussed previously) start to take effect: upstream-riparian nations make claims based on territorial sovereignty and other upstream views, while downstream-riparians make claims based upon the obligation to maintain the integrity of the river systems and other downstream views. These conflicting views are then solved by a claim, counterclaim system, which is a cyclical process until an agreement is made. The agreement comes about by applying the principle of equitable utilisation. Equitable utilisation is based upon each riparian nation recognising the right of all other riparian nations to use freshwater from the common river system source; in conjunction with the notion that each riparian nation has an obligation to use and manage the river system in a way that will not ‘reasonably interfere’ with ‘similar uses’ of other downstream riparian nations134. Under the application of this principle, the claim and counterclaim system is resolved by allocating freshwater from the river, based on objective standards such as historical patterns of land use and irrigation, as well as objective factors such as the need for extra freshwater to grow populations and economies.

Although it would seem logical that agreements pertaining to the use of freshwater from cross-border river systems would date back centuries, and consequently have been refined into a developed effective set of rules, regulations, and processes, it is still an evolving model. The reason for this is the importance of cross-border agreements which refer to the integrated management and use of cross-border river systems as a whole, rather than management and use of individual segments of the river system within a nation or state. This has only recently been realised. Thus, there is not a highly refined and effective set of agreements; however, they are slowly being developed and

133 Dellapenna and Joseph (Ibid), p36. 134 Dellapenna and Joseph (Ibid), p36.

39 refined into a set of river-wide agreements, based mainly upon historic customary laws and results of previous agreements. Cross border agreements for other purposes such as navigation would be easier to negotiate than for water supply as they do not imply or contain issues of ownership.

C.2.2 Advantages of the Model

The customary laws model recognises the uniqueness of freshwater, and consequently avoids the issue, and difficulties associated with, ownership rights of this ambient resource. Furthermore, by recognising the uniqueness of the freshwater resource, this model does not make any incorrect assumptions as the market model does. Rather it sets down rules for sharing the water based on the rights to use the water, rather than developing ownership rights. Assuming all nations agree to the set of customary laws and agreements that lead to equitable, efficient and effective management and use of the freshwater, the customary laws model will lead to a utopian world regarding freshwater and river systems. That is, the management and use of freshwater in cross-border river management systems will be optimised. However, the best set of agreements will always remain a mystery, and the process of getting nations and states to agree and accept agreements is extremely political and difficult. The implementation of the customary laws model relies on optimisation and continual improvement of the set of agreements. If the set of agreements can be sufficiently optimised in practise so that the outcomes of the agreements model are superior to other models, then this is the model that should be implemented. Thus, it’s a question of how effective, efficient and equitable are the agreements that can be made.

C.2.3 Disadvantages of the Model

Even though theoretically agreements should ensure cooperation without disputes, there will always be disputes between groups with freshwater issues135; thus, this customary laws approach is very time and consequently, money consuming. Furthermore, this process of turning customary laws into carefully worded agreements that are agreed upon is very important in conflict resolution. A major disadvantage of the customary laws model is that there is no equitable way of enforcing customary laws; however, if these laws are set down on paper and agreed upon then the dispute resolution process is significantly simplified. Perhaps the most obvious and important disadvantage of this model is that it is very vague and a large part is left up to individual case analysis and interpretation, which does not ensure that a nation will receive its “fair” share of freshwater. Thus, it is the informal nature of the model, which is its major downfall. For example, in the Mekong case discussed earlier, had Cambodia initially agreed to the water utilisation rules declaration that the Mekong Committee drafted, then a project such as the Thailand Dam project would have had to be passed by all riparian nations136. However, due to the informality of the declaration the principles within it were not enforced. Hence, within the agreements model there is a push towards clearly documenting (‘codifying’) customary laws into signed agreements137. Although this does not cure the unenforceability problem of the agreements model, the nature of signed written documents makes the model much stronger and persuasive. In addition to this, similarly to Australian contract legislation, incorporating conflict resolution and enforceability systems into agreements will also increase the strength of the agreements model.

135 Dellapenna and Joseph (Ibid), p36. 136 Konrad Repgen, "The Hydro-politics of The Mekong River Basin: Regional Cooperation and Environmental Security" in Non-Traditional Security Issues in Southeast Asia, p478. 137 Dellapenna and Joseph (Ibid), p36.

40 While customary laws model enthusiasts will not admit it, the process of claim and counter claim resulting in an agreement is actually similar to the laws of demand and supply determining the market equilibrium. However, due to the individual nature of the customary law resolution system it may be the more equitable approach. Nevertheless, as significant monetary power can influence and cause inefficiencies in the market model, significant political power can influence and cause inequitable agreements in the customary laws model.

C.2.4 The Model in Australia

In Australia, the right to freshwater is embodied in the Commonwealth Constitution. The Australian constitution at section 100 states “The Commonwealth shall not, by any law or regulation of trade or commerce, abridge the right of a State or of the residents therein to the reasonable use of the waters of rivers for conservation or irrigation"138. As a result, the State governments, although the Commonwealth has limited involvement, are the principle customary law and agreement makers regarding freshwater in Australia. This divestment of responsibility to the States has created a myriad and minefield of legislation relating to the management and protection of freshwater and river systems. For example, 12 pieces of Commonwealth legislation apply to freshwater in Australia and NSW as an example has 60 extra pieces of State legislation139.

Two major Commonwealth Government initiatives have driven the states towards addressing the issues, and making reforms, related to freshwater: firstly, the Council of Australian Government’s (COAG) National Water Reform Agenda (1994) and secondly the National Action Plan for Water and Salinity with its specific reference to the MD Basin. In addition, in the recognition of the complexity of this river system, the Murray-Darling Basin Commission was established to provide policy and broad management oversight for the 5 States/Territories that are involved, i.e. QLD, NSW, VIC, SA and ACT. The Commonwealth Government also has significant participation in the Commission.

South Australia has taken a major step to both simplify and amalgamate different legislation relating to water, soil and pests into a single ‘The Natural Resources Management Bill’, which was passed by both Houses of Parliament in July 2004140. The Bill created a management structure to promote integrated management141 that will replace the current system of more than 70 boards that separately manage issues relating to freshwater, pest plants and animals, and soil conservation. Furthermore, while a similar bill in other states has not been passed yet, other states are set to follow South Australia under the current Commonwealth Integrated Natural Resource Management funding initiatives. Currently, in other states, the MD Basin freshwater management is being undertaken individually for each tributary, based on the significance and issues involved with that tributary. Therefore, we have plans such as the Goulborn- Broken River Catchment Plan, without any integrated interstate legislation. This makes downstream management incredibly difficult, especially for South Australia. There are no tributaries to the River Murray within South Australia; thus, South Australian managers must carefully monitor all upstream

138 Darla McDonald and Brenda Dyack, “Exploring the institutional impediments to conservation and water reuse –national issues” (Adelaide, South Australia: CSIRO Land and Water, Policy and Economic Research Unit (PERU), 2004), p8. 139 ABC National Radio, “The world today” 22 October 2004 [transcript available at http://www.abc.net.au/worldtoday/indexes/2004/twt_archive_2004_Friday22October2004.htm]. 140 South Australian Government, “National Resources Management Act” (2004) [Accessed October 2004 via Internet at http://www.austlii.edu.au/au/legis/sa/consol_act/nrma2004298/]. 141 South Australian Government, the Department of Water, Land and Biodiversity Conservation, “Natural Resources Management –National Resources Management Act 2004” (2004) [Accessed October 2004 via Internet at http://www.dwlbc.sa.gov.au/nrm/legislation.html].

41 management plans as they all have significant impact on the Murray River and its flow into South Australia. Ultimately a single integrated management plan is needed to amalgamate the individual management plans currently being developed in NSW and Victoria.

The outcomes of the agreements model implemented in Australia are limited. Based on the data available it seems that overall, while there has been a significant increase in the financial allocations for environmental flows in freshwater resources, the agreements model in Australia has not been successful in achieving its goals142. A recent publication in a national magazine supports this view: “While funds have been allocated, the physical water, and the mechanisms by which it will be reallocated, are yet to be [clearly] identified”143 The reason for the failure is not a flaw in the theory of the agreements model, nor is it based upon different user groups within Australia refusing to cooperate. The overarching institutional impediment to conservation of freshwater is a lack of coordination of both policies and regulations that govern water conservation and use. This problem is endemic to many areas of natural resource policy where local governments, regional authorities, States and the Commonwealth all have roles to play, responsibilities and overlapping concerns. Complicating the challenge to coordinate policy and regulation is the problem of how best to facilitate flows of information to ensure that policy, regulation and practice change with the evolving state of knowledge. Recognizing the ambient nature of water, the various layers of government in Australia, and the number of different relevant agreements or laws, there is little wonder that achieving a coordinated approach to water issues is a major problem in Australia. Hence, the reason the agreements model has not succeeded in Australia, and within the MD River System, is because there have been too many laws made, especially in jurisdictions that only affect segments of the river and not the river system as a whole. In response to this, Deputy Prime Minister Mr. John Anderson has raised the suggestion that water should be viewed as a national issue for policy and management144. This statement correctly recognizes the need for a simplified overarching approach to overcome the current complexity.

C.2.5 The Model in Switzerland145

Possibly the oldest cross-border agreement in Europe is that relating to navigation rights on the Rhine and Danube Rivers. These were originally negotiated in the mid 19th century, and have been maintained to the current day146. Such cross-border agreements that do not have issues of ownership and consumption have proven to be much easier to negotiate and sustain. However, cross-border agreements involving freshwater use have been much more difficult to negotiate. The recent approval of the United Nations Convention on the ‘Non- Navigational Uses of International Watercourses’ is a huge leap forward (note that no outcomes on this agreement are available yet)147. Moreover, in Switzerland, the agreements model seems to have been very efficiently implemented regarding allocation of river freshwater within its own borders.

142 Murray Darling Basin Ministerial Council “The Living Murray: A Discussion Paper on Restoring the Health of the River Murray”, (Canberra, Australia, 2002), chapter 6, p25-29. 143 Guy Webber, “Fair Price Focus in River’s Flow Plan” Grape Growers, January 2004, p8. 144 ABC National Radio, “The world today” 22 October 2004 [transcript available at http://www.abc.net.au/worldtoday/indexes/2004/twt_archive_2004_Friday22October2004.htm]. 145 This section uses many points made in the previous section A.3.2.b 146 The Encyclopaedia Britannica (1937), “Inland Water Transport”, volume 12, p364. 147 Dellapenna and Joseph (Ibid), p36.

42 Switzerland’s view of freshwater as a shared resource that individuals have little control over, has lead to a customary laws and agreements model for freshwater management. The community ownership and consideration of downstream users has been well communicated by water authorities through their policies and statements. Many of the efficiencies that the Switzerland system possesses are derived from culturally-ingrained customary laws. While there has been no specific legislation that requires consideration for the environment and downstream users, Swiss communities always considered these two factors in their river freshwater allocation plans148. Another encouraging customary law that is present in Swiss communities is the separation of freshwater revenues. The revenues associated with the supply of freshwater are isolated, so that they can be reinvested to continue the sustainability of the freshwater infrastructure149. For example, the River Inn (tributary to the Danube) flows through a 1 kilometre section of man-made river bed in the small village of Samaden in the Swiss Alps. However, for the health of the river and protection against flooding they have now found they must re-divert the river back to its original bed. This would seem a costly project, and it will cost in the order of millions of dollars; however, this is being easily paid for by the community and state governments with their revenue from freshwater supply.

The agreements that must be set up with private firms are also an indication of Switzerland’s priority to freshwater as a social good rather than an economic good. The customary laws that have turned into legislation regarding indirect uses of freshwater such as hydroelectricity have been extremely successful. While the legal requirements are both onerous and expensive to get permission to access the freshwater, the potential returns of the proposed business have far exceeded the costs of this agreement model. Thus, they have been able to charge a price high enough to encourage efficient use by large firms; however, low enough not to put them out of business or discourage new firms from entering the indirect freshwater use market.

Hence, the current situation in Switzerland is very healthy and it would seem their implementation of the customary laws model has been very successful. Nevertheless, the question remains how they would react to a dramatic decrease in natural supply. Would communities still consider downstream users when it requires taking steps to use less freshwater in their own communities? In addition, as the scarcity of freshwater increases, will Swiss communities maintain the strict rules and high costs on private firms to ensure that there is enough money reinvested back into the sustainability of their freshwater resources? Accurate answers to these questions will aid in definitively determining whether the Swiss model can be transplanted elsewhere (an issue that will be discussed further in the conclusions section).

C.2.6 Stewardship Agreements: importance of encouraging self- management

Under the precautionary principle, inter-generational equity, and the duty of care that everyone has to the environment, users have a responsibility to protect the environment for the future. An environmental duty of care requires duty holders and responsible persons to take all reasonable and practical steps to prevent environmental harm arising from their activities. “The baseline principle is to prevent harm to market and non-market values embodied in land and water resources, and to encourage ongoing environmental improvement”150. These

148 Patrick Peduetti (Ibid) 149 Patrick Peduetti (Ibid) 150 M Young, T Shi and J Crosthwaite, “Duty of Care: An Instrument for Increasing the Effectiveness of Catchment Management” (Melbourne: Victorian Government, department of Sustainability and

43 ideals can not be met through standard cross-border agreements, but rather individual riparian landowners along the river and at its source need to be encouraged to perform ‘environmentally-friendly’ activities. While large companies have incentives and explicit duties to river systems that they influence under international standards such as ISO (International Standards Organisation) for care and protection of the environment, this concept for individual landowners is reasonably new. Although forcing landowners to perform such activities with similar standard to those as companies, it would be more beneficial to encourage them with incentive agreements.

Recently farmers in western NSW have been paid by the Government to retain and protect some areas of native vegetation151, which effectively reduces their grazing area and hence their gross income. However, the amount of the payment that they receive for the “stewardship” of the land allows them to sustain their income and lifestyle. This success or failure of this agreement has not yet been established, but the theory unanimously suggests that this will cause the farmers to pay much more attention to the environmental needs of their land. This will then be seen in larger scale environmental impacts, such as a decline in the salinity of the MD River System. However, to highlight the lack of consistency between states in Australia, Qld not only does not have a stewardship incentive agreement but laws that almost encourage activities that will cause damage to the environment, particularly rivers. Unlike other states, Queensland legislation continues to allow ‘bunding’ of freshwater that is collected from rainfall. All the water that occurs on a landowner’s property can be withheld behind walls, except for the water that falls 20m either side of proclaimed streams or rivers152. This piece of legislation significantly reduces the amount of downstream flow in rivers, and permitted the dam at Cubbie Station to retain as much water as occurs in Sydney Harbor. This retention alone has reduced the net flow down the Darling River from 22 to 8%153.

There are currently no stewardship agreements in Switzerland154, nor does there seem to be any need for them due to the ingrained consideration for others regarding freshwater decisions. However, it has become apparent that there is a need for stewardship compensation where it matters most, at freshwater sources. As internal and external pressures mount, mountain communities in Switzerland (the stewards for the vital glacial freshwater reserves in the Swiss Alps) are often forced to sacrifice the integrity of the environment for necessary short-term gain155. Although they are not damaging the environment on purpose, when faced with a trade-off between standard of living and maintaining the Alps as a freshwater reserve for other people and future generations, it is no wonder they base their decisions on how their own standard of living is affected. Hence, there is an environmental need to compensate the mountain communities for their services in protecting the freshwater reserves so that these choices need not be made. As identified by Switzerland’s policy advisors, the compensatory money should be provided by revenues that are associated with the freshwater further downstream, such as entrance fees to national parks, water use fees, fishing fees and so on156. However, what was not mentioned was the fact that the cost of the compensation should be born by all downstream riparian users, not just those

Environment, 2003), p3. 151 Allan Amos, New South Wales Department of Natural Resources [Personal Comment on October 2004]. 152 Allan Amos (Ibid). 153 Allan Amos (Ibid). 154 Patrick Peduetti (Ibid). 155 B Messerli and J.D. Ives (editors) “Compensating the stewards of mountain resources” Mountains of the World: Challenges for the 21st Century (Switzerland: Mountain Agenda, 1997), p27. 156 “Compensating the stewards of mountain resources” (Ibid).

44 within Switzerland’s national boundary. All countries that use the River Rhine or Danube should be bearing some of the cost of the stewardship compensation, since they are all part of the beneficiaries.

C.3 Hybrid Models

It has been demonstrated that neither the market model, nor the agreements and customary laws model, are without flaws. Therefore, research has continued in search of superior models: new research has produced adaptations of the market model that attempt to address and solve some of its problems. The two main new models are the environmental economics model and the extremely new market based incentives model. Both of these models show great promise as improvements over the market model by maintaining its advantages and reducing its disadvantages. However, neither model has been fully implemented in practice nor applied to cross-border river systems; thus, an outcomes-based analysis can not be fully done on these models. Nevertheless, a brief analysis is presented below to establish the future potential of these models.

C.3.1 Brief Overview of the Environmental Economics Model

One of the main identified problems with the market model is the undervaluing of freshwater. This is the main issue environmental economics is attempting to address. Environmental economics is actually a huge new branch of economics, and its applicability to cross-border river freshwater allocation is just one, albeit extremely important, application of this model. The environmental economics model will now be analysed broadly using river freshwater examples to clarify its application to river freshwater management.

The basic decision making framework for the market model is the traditional discounting of cash flows method, whereby all economic costs and benefits (confined to effects within the market) of a decision are discounted to the current time. Then, a positive decision is made if the present value of benefits exceeds the present value of the costs and vice-versa. Hence, this traditional cash flow method is the basis for demanders and suppliers determining how much they wish to purchase and supply at different prices; that is, determining their demand and supply curves. Therefore, by determining the supply and demand curves, the traditional discounting method determines the undervalued market price. On the other hand, environmental economics extends beyond the traditional discounting method, because it incorporates costs and benefits external to the market, namely environmental effects. It identifies and attempts to place values on all components of an environmental ‘good’, and thereby effectively includes environmental ‘goods’ into the decision making process. Hence, according to the theory, the market price should no longer undervalue freshwater and the polluter pays principal should be satisfied.

Environmental economics attempts to value all components of environmental ‘goods’, by summing their use and non-use values. In the case of river freshwater, it can be valued for its many use values, such as for drinking, irrigation and industrial processes, as well as non-use values such as a beautiful setting for a picnic (tourist aspect values) and an environment for aquatic flora and fauna. The use values are already incorporated in the market model; however, the exclusion of the non-use values is believed to be the reason for the undervaluing of the freshwater. Thus, environmental economics attempts to incorporate these non-use values into the value of freshwater. The main non-use values that the environmental economic model identifies are:

45 . The existence values are the benefits that people derive from the knowledge that environmental resources exist. Knowing that there is a pristine lake or clean river system generally makes people feel good, and thus is of value to people.157 . The option values are the benefits that come from having the option, or the right, to use (or even simply to protect in some cases) an environmental resource in the future. Furthermore, it supports the concept of sustainable use of resources, so that there is both use now and an option for further use in the future.158 . The bequest values are derived from the benefit that current generations obtain by preserving the environment for whatever uses future generations may choose159. The basis for this is that without considering the needs of the future then there will be no future, which is something that is considered a loss (and not considered in the pure market model). Consequently, there is value in ensuring a future and preserving the environment. That is, the bequest value suggests there is value associated with ensuring inter-generational equity and that this value should be incorporated into environmental resource valuations.

These values can not be determined by way of market prices, as markets for such things as a river backed setting for a picnic do not exist. Nevertheless, a demand for them appears to exist because people express their preferences through ‘non- market’ mechanisms such as the political process. Thus, environmental economics has developed three techniques for determining these non-use values, which are briefly discussed below. . The contingent valuation technique creates a hypothetical market in which people are asked by means of a survey what they are willing to pay for, e.g. keeping the river clean and with a significant flow. The amount that people are willing to pay is recorded as the economic value of the ‘environmental’ good.160 . The travel cost method is used for determining most tourist related non-use values. The non-use value of a river as a tourist destination is determined by the average amount that people pay to go and see the river; that is, all the costs associated with travelling to and from the river is the river’s tourist value.161 . The hedonic price technique is a way of valuing an environmental good by considering its impact on property prices. Assuming no other effects on property prices, the value of a river can be shown by increased property prices for land closest to a river.162 Realistically, this technique will yield very similar results to the travel cost method; however, sometimes one technique is far more practical than the other. There are many problems with the above techniques, mainly related to statistical issues: the hedonic price technique will be open to criticism regarding the fact that property prices are affected by a wide number of factors thus making isolation of one factor very problematic; the travel cost method does not allow for the river to be ‘on the way’ to somewhere else and therefore all the travel costs can not be allocated to the value of the river; and the contingent valuation technique is open to standard survey criticism relating to bias from the wording

157 Mark Diesendorf and Clive Hamilton, “Human Ecology, Human Economy: Ideas for an Ecologically Sustainable Future”, p42. 158 Mark Diesendorf and Clive Hamilton, (Ibid), p42. 159 Mark Diesendorf and Clive Hamilton, (Ibid), p42. 160 Mark Diesendorf and Clive Hamilton, (Ibid). p42. 161 Mark Diesendorf and Clive Hamilton, (Ibid). p42. 162 Mark Diesendorf and Clive Hamilton, (Ibid). p42.

46 used in the survey. In addition, all processes will rely on sampling, which can be adversely affected by selection biases if proper statistical standards are not followed. However, all the potential sources of problems for this environmental economics example have been identified and the above processes have been, and are continuing to be, tested and refined to remove these potential problems163. Nevertheless, all these processes still rely on observing or hypothesising about people’s private market behaviour. Therefore, the market power, ownership, and the market player’s (demanders and suppliers) lack of environmental knowledge, especially of river freshwater problems, related to the market model still exist in environmental economics. In addition, introducing and enforcing the more accurate valuation of environmental resources to include their non-use values in a self regulating market model may prove to be a future hurdle for the environmental economics model.

C.3.2 Brief Overview of the Market Based Incentives

The area of market based incentives (MBIs) in economic research is very new. It is attempting to achieve desired environmental outcomes within a market model in a practical and efficient manner by changing the behaviour of consumers and businesses164. It recognises that the world, especially for issues relating to river freshwater, is more than can be represented in a pure market model. This new approach assists environmental protection by adding incentives onto the market model to encourage healthy use of environmental resources. However, the success of MBIs will depend heavily on effective regulation and monitoring procedures.

There are a number of MBI instruments that can be potentially employed on top of the market model. In the case of river freshwater management the goal of the MBIs would be to change the effective price of river freshwater to encourage efficiency of water use in order to save and protect volumes of freshwater (this may also have indirect effects of improving freshwater quality). The following MBIs have been developed165 that can potentially apply to a freshwater market, and would make people more aware of the importance of freshwater, its value, their impact on it and result in the desired environmental outcomes166: . Tax those who pollute or deplete resources, which is based upon the polluter pays principle . Provide environmental rebates for those who act in a way as to aid the sustainability of river systems . Impose severe penalties on those who disregard the market rules or any additional MBI rules . Subsidise the use of freshwater for basic necessities . Provide information to the main river freshwater users . Provide an opportunity to gain offset credits for saving river freshwater in one venture, so that more freshwater may be accessed for a future venture

Hence, similar to the environmental economics model the MBIs address the serious valuation problem with the market model: the MBIs try to solve the problem by incorporating a ‘polluter pays tax system’. In addition to addressing the valuation problem, the MBIs address additional market model problems. The

163 Mark Diesendorf and Clive Hamilton, (Ibid). p42. 164 Darla H Macdonald, “Improving the Catchment through Market Based Instruments Freshwater Beach catchment” (Sydney: CSIRO Land and Water, Policy and Reform Unit, 2002), p1. 165 Darla H Macdonald, “Improving the Catchment through Market Based Instruments Freshwater Beach catchment”, p(i). 166 Listed in reference to river system management

47 market parties’ lack of knowledge is addressed in this model, and it is argued that the penalties, monetary discouragers, will aid in reducing the likelihood of market failure through excessive market power of one or a few parties. This seems plausible and likely as the penalties will not only financially discourage monopolistic behaviour and an increase in public knowledge, but will put additional social pressure on companies to act with consideration for the environment. However, these MBIs are still very broad and have not been refined as MBIs are a new area of research. Furthermore, the practical issues involved with administering the MBIs have not been addressed as yet. Nevertheless, there is no reason to discard this model at this stage. It is an extremely promising addition to the market model as it addresses all the main problems with the market model except for the ownership problem, which seems to be a hurdle that will always be associated with a market model variation.

48 Section D: Conclusions

D.1 General Freshwater and River System Management

As freshwater is critical to the survival and development of the human race, managing the freshwater that flows through river systems is an extremely important task. Although water is extremely common on our planet, less than one percent of that is potable freshwater. In addition to this, there are many established views on river systems, some of which oppose each other: particularly the absolute integrity of the river versus the absolute right to the river’s freshwater on property adjacent a river. Furthermore, the supply of freshwater is controlled by the climate, which the human race has not learnt to manipulate. Thus, the vital task of managing river freshwater, especially large cross-border river freshwater systems, in an effective, efficient and equitable way has been shown to be incredibly difficult, because of a diverse rage of social, economic and environmental factors.

There is no doubt that currently there is under-investment in freshwater issues, and that they require more attention. Furthermore, there is no realistic danger of over-investment in these freshwater issues, because the identified problems are real with possible irreversible damaging consequences. Admittedly, there is a theoretical level of over-investment in this one area; however, opposing views that do not realise the benefits of investment now, due to their use of the traditional discounting method, will not practically make the need for reaching this significantly high level of over-investment a problem in the near to medium future. Then again, there is a very realistic danger of investing in non-beneficial projects and research, because the investment decision makers are often not well versed in the freshwater area. Consequently, the most effective and efficient investment can be overlooked. For example, an expensive part of the recent analysis outsourced by the Murray Darling Commission, recorded the modification level of riparian land along a large percentage of the MD River System167. One must ask what conclusions can be drawn from knowing the modification level of riparian land without recording what caused the modification and whether it had a positive or negative impact on the MD River System. Therefore, while the data is somewhat useful in determining past activity levels along the MD River System, the amount of money put towards the study could have been used more efficiently, such as recording the causes and effects of this modification along a slightly smaller percentage of the MD River System. Hence, the allocation of funds towards freshwater issues is an important choice and should be made by people who are involved with the overall management of freshwater resources.

River systems are managed the most effectively when they are treated as non- renewable resources. Treating rivers as a renewable resource whereby each segment is continually refilled by freshwater from upstream in the river system is a naïve approach. It is naïve both in the sense that freshwater supply to the entire river system changes depending on the weather and freshwater supply can be significantly affected to that segment by upstream usage or developments along the river (such as the building of dams). In contrast, the more effective approach that is consistent with the precautionary principle is to manage the entire river system as one huge dam. That is, manage it as a non-renewable resource, but recognise that freshwater can be taken out and put back into the dam. Thus, to keep the entire river system sustainable, there needs to be a balance between removal and replacing the freshwater. Therefore, it becomes

167 Richard Norris, Peter Liston, Nerida Davies, Julie Coysh, Fiona Dyer, Simon Linke, Ian Prosser and Bill Young, “Snapshot of the Murray-Darling Basin River Condition” (Report to the Murray Darling Basin Commission, 2001), p10.

49 necessary that the uncontrollable freshwater supply to the river system is dealt with by controllable removal of freshwater from the river system. Hence, freshwater usage from river systems needs to be based on a variable related to freshwater supply (rainfall or glacial melt) and not in absolute terms.

Freshwater from river systems is a shared or common good; therefore, the success of a cross-border river system model is its ability to achieve compromises between involved parties. The model must establish a compromise between upstream and downstream views, while maintaining the river system environment. That is, upstream and downstream users must be managed in an equitable way to ensure intra-generational equity. In addition, this intra- generational equity must be adopted in a way that the real costs are borne by the current generation (polluter pays) so that the sustainability of the river system is ensured, which is inter-generational equity.

D.2 Models of Cross-Border River Freshwater Allocation

D.2.1 The Market Model and its Hybrid Variations The problem of establishing ownership seems to be a complication that even the new hybrid models have not been able to tackle. In addition to ownership issues, there are significant theoretical and practical problems that have been identified, such as undervaluing of freshwater, lack of environmental consideration and market failure through market power. Thus, from a theoretical and practical viewpoint, a purely market model solution to cross-border river freshwater management is not optimal in achieving intra-generational or inter-generational equity.

However, the market model has some important advantages over the agreements model. The market model involves setting up a market for river freshwater, which is an efficient and low-cost solution. Setting up a market involves little set-up overheads and is theoretically self-regulating: all that must be done is set up the market (ie. establish ownership or trading rights over freshwater) and regulate the market to ensure market rules and regulations are adhered to. Thus, the significant advantages of the market model have given rise to the idea of using the pure market model as a basis for developing hybrid models that attempt to harness its advantages while overcoming its disadvantages.

The hybrid models address (only MBIs deal with market failure issues) problems with the market model and propose variations to it to provide potential solutions. One or both of the hybrid models (environmental economics and/or market based incentives) may turn out to be practical models that solve problems with the market model (except ownership), whereby society will be forced to conserve freshwater by efficient and equitable use. However, there still remains doubt whether these new hybrid models will truly enforce the correct valuation of freshwater, or will they solely increase its value closer to the true value without actually reaching it, and therefore freshwater will remain undervalued even in these hybrid models. Even if these hybrid models are not a practically optimal solution, they will still be an improvement over the market model if they can be successfully implemented.

With a general view of ensuring the sustainability of goods, society usually values these goods at their replacement value. For example, people take out house insurance to ensure the sustainability of the goods that are in the house against external forces (eg. fire or theft). In this case, from an insurance point of view that guarantees the sustainability of the goods, the goods that are in a house are usually valued at their replacement cost, because that is what the insurance company will agree to pay in the case of stolen or damaged goods. Relating this

50 to the theory of river systems, this replacement cost is a possible valuation concept that could be applied to freshwater. That is, pricing freshwater at its replacement cost could be a way to ensure that freshwater is not under-valued, and consequently to avoid problems of not adhering to the polluter pays principle. This replacement cost will be significantly higher than costs seen in Switzerland and Australia today, as the most cost effective way to manufacture freshwater is through desalination of salt water, which is still a very expensive process. Therefore, according to the polluter pays principle, this high freshwater cost should bring about a balance between current uses and saving for the future, which ensures sustainability (ie. inter-generational equity). The shortcoming of this new idea is that the price under the replacement valuation may prove too high to create intra-generational equity, because people with fewer funds may not be able to purchase enough water to survive. This may or may not prove to be a problem, and even if it were, it may be solvable by government subsidies for necessary uses of freshwater (MBI model). Thus, valuing water by its replacement cost is a possible solution to the under-valuing of freshwater. These issues should be researched more considering the increasing implementation of market model variations through the international trend of privatisation of water. Even if the replacement cost variation did prove to be too high to sustain intra- generational equity, raising the awareness of the replacement cost of freshwater may cause changes in freshwater usage.

D.2.2 Customary Laws and Agreements Model The argument against the market model and its hybrid variations is that environmental goods (such as river systems) and economic goods can not be reduced to a common measure, neither dollars nor anything else168. Therefore, private market evaluations are not an appropriate decision making process. Rather, social and political aspects should be incorporated into the decision making process, in which the advantages and disadvantages of different courses of action are compared informally. It is argued that this latter process will allow all aspects of each alternative to be considered; their economic, the ecological and the social impacts are all analysed with respect to their ethical and political implications. Thus, these thoughts are indicative of a customary laws and agreements approach that deals with freshwater as a complex shared resource.

The customary laws and agreements model is not effective in two main circumstances: when cooperation can not be attained, and/or in the case when the actions of parties do not adhere to past agreements and there is no way of enforcing that agreement. When the cultural and social value system supports the creating and following of agreements and customary laws, the customary laws and agreements model has proven to be very successful. In Switzerland, the cultural value system relating to freshwater makes consideration of the downstream implications a social norm. This is a major reason for Switzerland’s successful implementation of the agreements and customary laws model. From the Switzerland case, it can be seen that a cultural value system that supports consideration of other freshwater users not only promotes cooperation that makes reaching agreements more likely, it also increases the likelihood that parties will follow the agreement without strict enforcement through the existence of large penalties.

It is also apparent that the customary laws and agreements model as implemented in Switzerland will not be transportable to other countries unless they have a cultural value system that supports consideration of downstream freshwater users. In these situations, the process of obtaining cooperation and establishing agreements will be far more difficult and time consuming. In

168 Clive Hamilton, “The Mystic Economist” (ACT, Australia: Willow Park Press, 1994), p63.

51 addition, there will be a need for conflict resolution and enforcement to be included as part of an agreement, because without cultural values to ensure the parties adhere to the agreement there is a high likelihood of the parties not performing as agreed. The increased cost of incorporating conflict resolution and enforcement (either positive rewards or negative punishments) into the agreements is a time consuming process, but it will have large future benefits. It will make it significantly cheaper to resolve future issues, and increase the chance of maintaining cooperation and the agreement in the case of a party breaking the agreement. Furthermore, it increases the chance of the model being effective and creating intra-generational and inter-generational equity. Hence, under the agreements model, it is necessary for cultures different from those in Switzerland, to detail conflict resolution and enforcement systems in freshwater agreements. In the future, this may also be required in cultures such as Switzerland, because potential shortages in freshwater supply that have never occurred previously may cause the break-down of current cultural views, and consequently community support of the agreements model. Thus, incorporating conflict resolution and enforcement is desirable in all agreement model implementations.

Under the agreements model, environmental sustainability and equitable allocation of freshwater are not certainties even when the model is successfully implemented. In the successful case of Switzerland, there are currently no customary laws, agreements or plans in existence for a case of shortages in freshwater supply, which is a potential problem for Switzerland and the rest of Europe. Therefore, it is important to thoroughly analyse the agreements that have been made to date to identify agreements that should be made to ensure ongoing success under this model. It is important that sets of agreements are critiqued not only by all parties involved, but also by independent freshwater specialists. Ensuring that the specialists are kept independent will be of dual benefit to any agreement model. They will not only increase the quality of the agreements that are made, but also they will provide a critique to ensure that differences in the parties’ political power are identified and made transparent. This should ensure that politics has not impacted significantly, or detrimentally, on the parties involved or the environments.

D.2.3 Stewardship Independent of the models above, the significance of stewardship remains. Riparian groups, especially at the source, must be encouraged to do the right thing regarding the freshwater resource they have partial control over. Whether this duty of care concept be incorporated into the market model or the agreements model, there must be some consideration for the power that stewards have over our freshwater resources. The economic benefits need to outweigh the short-term economic costs of stewardship so that all river system users behave as stewards by taking actions that improve, or at least do not deteriorate, the rivers. Upstream stewards have benefits for all downstream users; therefore, all downstream users should bear the cost of encouraging upstream users to act as stewards to ensure intra-generational and inter- generational equity.

52 D.3 An Alternative Hybrid Solution

Undoubtedly, there is a role for agreements within the river freshwater management arena. Unlike a market approach, agreements can overcome those ever present short term profit objectives that do not take fully into account future implications, both environmental and other. Nevertheless, all hybrid model research seems to use the market model as a basis. Although, I would argue that, unlike the highly criticised market model, there is an inherent need for some variation of the agreements model, and thus it should be the basis for any hybrid model. Furthermore, the agreements model seems inherently attuned towards handling the basic low level, ‘need’ freshwater requirements. Freshwater can be categorised into two major uses, those which are required for current and ongoing survival and others that are not so critical such as irrigation and use in industrial processes, where usage can be varied. Essentially, the survival needs are comprised of the freshwater needs of humankind, and the freshwater needs of the environment (particularly river systems) that need to remain healthy and sustainable. Almost all countries and states agree that these survival needs are basic rights that should be fulfilled169 regardless of market efficiency issues; thus, it seems logical to use an agreements model to ensure that these basic rights are ensured. Moreover, as most people agree on these basic rights it should be possible to get riparian nations and states to cooperate, and thus this usage agreements model should function in practise.

It is much more difficult to attain cooperation and agreements that govern the use of freshwater for non-essential purposes such as in agriculture. This is because often the amount of freshwater will directly impact on the profit and growth of industry sectors in specific areas. Thus, the agreements model is not as logically applicable, and the problem presents itself better to a market based solution. The market based solution (environmental economics or MBIs if they prove to be successful) will then ensure that the residual freshwater after survival needs will be allocated effectively to the most efficient users. Nevertheless, there is still the need for an agreements model base similar to the Australian MD River System Pilot Trading Agreements that set up initial trading rights (ie. to overcome ownership issues in the market model) in the market. The small application of the agreements model is much more likely to succeed as the impacts of the agreement are not final and market forces can take over to ensure efficient allocation of the freshwater resource. In addition, the agreements base gives the market model a theoretically equitable starting point for the market.

The major criticisms of this approach will be the difficulty in determining what level of freshwater usage is a survival need and where to draw the line between need and want? The exact amount needed for humankind and river systems to survive is an area of scientific research not covered by this paper; however, the implications of the accuracy of this scientific research are very relevant. If the level of freshwater needed for survival is understated then the basic rights to freshwater (intra-generational equity) and environmental sustainability (inter- generational equity) will not be conserved. Conversely, if the survival level is over-stated then people will under-value freshwater and usage inefficiencies will occur. However, this problem will be solved by the market aspect of this approach. Anybody assigned freshwater through a survival need still has the opportunity to trade this freshwater in the market. Thus, there will be a monetary encouragement to maintain usage efficiency, because, if the survival level is over-stated then people will just sell their excess freshwater through the market. Consequently, the likelihood of understating the survival needs can be reduced by

169 Although there is a lot of debate about what exactly is needed for humans and the environment to survive

53 tending towards over-stating the survival needs, for which small errors will not have adverse affects on the model as a whole.

Purist ecologists may argue that this model does not allow for the absolute integrity of river systems, and indeed it does not explicitly acknowledge the absolute integrity of the river; however, the model acknowledges the rights of the river systems as an entity through adopting the principle of environmental sustainability to ensure inter-generational equity. Inter-generational equity (discussed in more detail previously in section B.2) encompasses the notion of passing on a river system in the same or better condition to future generations. Thus, as a consequence of ensuring inter-generational equity, the condition of the river system is preserved; that is, a result of this model is that the integrity of the river is preserved or enhanced. Hence, while the purist ecologists’ belief in the integrity of the environment is not at the root of this model, yet their beliefs are upheld under this model.

The approach of conceptually integrating the market model approach within the agreements model makes use of the advantages of both. This approach also allows the trend of privatisation to continue, but limits the power that the privatised firms will have to the market aspect of this hybrid model. Furthermore, the market model’s main problems of equity and environmental sustainability are taken into consideration external to the market. Thus, the fundamental flaws of the market model, associated with it not treating freshwater as a unique resource, are no longer relevant. The enforceability of agreements will also benefit from a more formal market model structure being added to the agreements. In addition, the agreements aspect enables this approach to recognise the basic need for freshwater and treat this vital resource with the importance and uniqueness that is required. Furthermore, this is consistent with the United Nations priorities for freshwater resources as set out in chapter18 of Agenda 21170. Hence, the market aspect ensures efficient allocation of freshwater resources for non-survival needs, while the agreements aspect ensures the inter- generational and intra-generational equity.

This agreements hybrid model (agreement model based) detailed above is a proposed model that could be implemented in both Australia and Switzerland; furthermore, it highlights the worth of a comparative study on extremely different cases. The well-documented water supply issues with the Murray-Darling Basin have significantly contributed to Australian academics, water experts, environmentalists, industries, politicians and the community becoming more aware of the vital importance of freshwater management. This is a national concern that has arisen out of a national crisis; furthermore, only after the crisis has Australia stated to solve and address its river and freshwater problems. Therefore, it is hoped that a nation like Switzerland, with a current abundance of freshwater, will not idly wait until freshwater supply reaches crisis point before it incorporates solutions to potential future problems into its river and freshwater management.

170 United Nations, “Agenda 21” (2003), chapter 18, paragraph 18.8 [Accessed via Internet].

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