ACCC on right track, brokers, analysts

Analysts and brokers cautiously supportive of ACCC report


ACCC's report reflects concerns of brokers, analysts.

CHANGE NEEDED: ACCC deputy chair Mick Keogh says change is needed for the market to operate efficiently and for the benefit of industries, that depended upon it.

CHANGE NEEDED: ACCC deputy chair Mick Keogh says change is needed for the market to operate efficiently and for the benefit of industries, that depended upon it.

Water brokers and market analysts have reacted positively to the Australian Competition and Consumer Commission's interim report into Murray-Darling water markets.

The ACCC found the markets needed a major shake up, to allow for open, fair and efficient water trading.

The ACCC's interim report on its Murray-Darling Basin Water Markets inquiry found the $1.5 billion-a-year sector had outgrown the frameworks that governed it.

ACCC deputy chair Mick Keogh said change was needed for the market to operate efficiently and for the benefit of industries, that depended upon it.

The ACCC was asked to recommend options to enhance markets for tradeable water rights, including strengthening their operations, transparency, regulation, competitiveness and efficiency.

The report sets out the ACCC's preliminary views on the Basin's water markets, including the issues it has identified and potential options for addressing them.

"Water trading has brought substantial benefits to water users across the Murray-Darling Basin, including by allowing irrigators to manage the amount of water they use, to earn income by selling excess water or their water rights, and to release capital to invest in their businesses," Mr Keogh said.

"However, these markets have significant problems.

"In basic terms, there is overly fragmented or complex regulation in some areas, not enough regulation in others, and a concerning lack of regulatory oversight and robust enforcement in important areas."

The ACCC found a significant issue was that a range of different bodies oversaw water markets in the Basin, under different legal frameworks.

"The Basin's water markets, and the bodies that oversee and interact with them, operate in a complex, fragmented and inconsistent system," Mr Keogh said.

"To make real and lasting improvements, we need to rethink how these water markets are governed."

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Positive reaction

Analysts and brokers backed the call for greater consistency and better governance.

The Murray-Darling Basin Authority's Basin Plan Regulation executive director Tim Goodes, said the organisation would thoroughly consider the issues raised by the ACCC.

"It is clear that efforts to increase transparency and improve the regulation of water trading in the Basin need to keep pace with the market's increasing sophistication," Mr Goodes said.

"The water market in the Basin is worth $1.5 billion, and over the past ten years, it has become an incredibly important way for farm enterprises to manage their business.

"As trade activity grows, we need to ensure market processes within and across state jurisdictions are transparent and open, as required by the Basin Plan.

Mr Goodes said of particular interest woud be ideas that could lead to better governance of Basin trades.

Lex Batters, H20X chief executive, said many of the issues around brokerage had been concerns his company had been highlighting for years.

"H2OX has been pushing for increased regulation of intermediaries, and welcomes the ACCC echoing these sentiments," Mr Batters said.

"We believe most brokers act with integrity, but there are issues in the water brokerage space that have reduced confidence in the market and the brokerage industry as a whole - issues such as conflicts of interest, broker water accounts, and information asymmetry."

He said these were issues H20X was working to remove.

"H2OX is the only water market intermediary to charge a volumetric fee for allocation trades, ensuring the exchange does not benefit from higher water prices," he said.

"H2OX does not hold any water accounts, with all transactions occurring directly between the seller and buyer; we never stand between a buyer and seller, ensuring all transactions are transparent and visible on our exchange."

Mr Batters reiterated calls for the establishment of a central water trading exchange.

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"From our point of view, two issues impact every transaction: price discovery and market depth," Mr Batters said.

"Both relate to pre-trade information.

"Many of the ACCC's interim recommendations relate to post-trade improvements, such as improved reporting to water registers and reducing processing costs and timeframes. "

These solutions provided only limited benefit to the process of price discovery and market depth, as they only reported what had happened historically.

"The market needs improvements to the pre-trade process, and only a central exchange can solve these issues," Mr Batters said.

"The other major benefit of a central exchange is that it provides a level playing field for all participants, regardless of size.

"A common concern is that investors and corporate agriculture have a significant market advantage over irrigators, because they have the resources to build relationships with myriad intermediaries, ensuring they can shop around to get the best prices."

The small family irrigator didn't have the time or conduct enough trades, to have relationships with a number of intermediaries, which could result in poorer outcomes.

"A central exchange would put every buy and sell order in a single place, enabling equal access for all participants."

Centralising all transactions in a single marketplace would also resolve the divisive issue of investor's trading practices.

Recommendations expected

Former Ricegrowers Association of Australian president Jeremy Morton agreed that the report was "pretty much" as water market participants expected it would be.

He said brokers had come along way, in the last decade.

'I think everything is moving in the right direction, it's a relatively small market," Mr Morton said.

"But whatever recommendations and requirements come out of the final report, the one thing - as a farmer, irrigator and water market user - I don't want to see is excessive regulation.

"That always comes with a cost, and we know who pays for it.

"It will be us, the irrigators."

He said harmonisation of the market was required.

"We need a system where everyone is operating on a digital, web-based trading platform, that allows people to feel more secure," he said.

The biggest challenge was to ensure the ACCC's final recommendations were adopted.

"We keep hearing federal Water Minister Keith Pitt saying the time for review - whether its socio-economic, the markets, or whatever it is - is over and it's time for action," Mr Morton said.

Implementing the ACCC's final recommendations would also require bi-partisan political support.

"This is a challenge to all those involved in politics to come to a consensus," he said.

'There will be a lot of really disappointed people if our leaders do nothing.

"It's easy to blame someone else, but, at the end of the day, where we are today is a result of politicians acting together."

Anthony McCloskey, KeyWater, Griffith, NSW, said brokers agreed there needed to be greater market transparency and simplicity.

"It's pretty much what everyone expected, the market is working already but there are things that can be improved, without a doubt," Mr McCloskey said.

A key area was standardising reporting to improve the allocation trading process.

"The fact South Australia takes two weeks to process a temporary water trade is a challenge and an obvious impediment, particularly for those who hold entitlements," he said.

"It should not take two weeks to process a trade, when Victoria can do it in 30 seconds and in NSW its now less than three days."

He said there did not appear to be a significant focus on the role of speculators, in the market.

"That didn't rate a big mention, they were alluded to, but not specifically mentioned."

He said the Australian Water Brokers' Association had been working on regulation, for some years.

"AWBA is working towards standardised contracts, regardless of the trade, with the same document and the same rights," he said.

But Mr McCloskey said the concern was that it was a federally commissioned report, covering both the commonwealth and the states.

"To what extent the federal government and applicable state governments will undertake to implement the recommendations remains to be seen."

Aither director Chris Olszak said it was pleasing to see the report reinforced the benefits and importance of water markets.

"It also reinforces the need to move forward, and enhance markets, rather than move backwards, and potentially unwind the benefits markets have provided to date," Mr Olszak said.

"We note that the ACCC does not support the re-bundling of water to land, and that the ACCC has reinforced that the fundamentals of supply and demand continue to drive the market."

Mr Olszak said several of the prospective changes and enhancements to water markets had been discussed or raised in the past.

"There are likely to be some high value, near term and relatively straightforward enhancements that could be made,' he said.

"Some of these are focused on data collection and reporting issues.

"However, the ACCC has also identified some more substantial reforms, which are likely to need much more careful consideration."

Marsden Jacobs principal Simo Tervonen said the ACCC was to be commended for thoroughly mapping the current water market architecture, processes and regulatory settings, and the perceived issues associated with them.

"It is good to challenge the status quo and remind that things can be done better," Mr Tervonen said.

"We're happy to see that the ACCC has provided sound options and recommendations, and is not proposing to dismantle the whole water market as it currently stands, or to make it much more restricted."

Mr Tervonen said his reading was that the ACCC was clearly stating the regulation, governance and architecture of water markets is what was failing and needed to be improved.

"This is an important point - the ACCC is not saying that actions by participants, brokers or exchanges are leading to actual large-scale market failures," he said.

When it comes to how the price of water was determined, supply and demand was still the primary price driver, as it should be.

"There is no evidence of large scale or systematic market manipulation," he said.

"This is important - the market is performing well for its current settings."

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