Basil Sharp: Water rights need to be traded to find their best use

The Waitangi Tribunal wrote an interim report on Maori water rights. Photo / Mark Mitchell

Almost 30 years ago there was an opportunity to improve the legal foundations for the governance of New Zealand's water resources. In the lead up to the Resource Management Act a group advising the Labour government recommended a regime that would enhance the quality of water permits by providing more security of access and enable the transfer of water to more highly valued uses.

At a water conference in 1988, Geoffrey Palmer (then Minister for the Environment) stated that rights "could be traded on a market". Simon Upton, as Minister for the Environment with the National Government, also expressed interest in tackling the institutional foundations of water management.

Sadly, today we are once again reminded of a water management regime that is not creating economic prosperity or environmental protection.

Internationally we are well behind the play. Water allocation has proceeded on a first-come-first-served basis that encourages a race to the pump house and investment in less efficient systems of water use. Once fully allocated, limits on transfer have denied water to more efficient users.

The variability of our water resources does not excuse our failure to implement secure tradable water permits which can reveal the economic value of water and protect environmental values.

Today we are dealing with a legacy of inaction by successive governments and the cost of inaction is obvious.

New Zealand's fisheries are a world leader in rights-based management. Commercial fishers have a legal right to harvest fish, but they do not own fish in the wild. Once caught the fish become private property.

Like fish in the wild, nobody owns the rain. Governance comes into play once rain is collected in lakes, aquifers and river systems. The rain water that is collected and stored for use is private property, and the owner has exclusive use of that water and could invest in additional storage if more water is needed.

If others could tap into the stored water, the value of collected water would rapidly diminish. Value derives from the right to harvest water and, in this example, store it. Furthermore, this economic interest in water and exclusive use enables the owner to carefully align investment with benefits.

The analogy can be extended. What is the value of a hydro asset without access to water? Zero! What is the value of a hydro asset with insecure access to water or open to anyone wanting to divert the water for other uses? I suggest that it will be considerably less than under secure water access.

The same logic applies to farmers investing in irrigation systems. The payoff from a $100,000 investment in an advanced efficient water irrigation system is considerably diminished if access is likely to be limited in the future. Economic dividend falls with the dilution of water rights.

Business requires a solid foundation of property rights to make prosperity-enhancing investment. Collectively, New Zealand benefits from inclusive institutions and secure property rights.

Public response to the government's partial privatisation programme, amongst other things, appears to focus on water ownership. What is really at stake is the economic interest in water.

Currently, economic interest is associated with assumed property rights. Uncertainty and lack of clarity over property rights both contribute to lower value. Inclusive institutional arrangements recognise the legitimate interests of all.

It is for legal institutions and politics to decide whether Maori have a legitimate interest in water. I, for one, would not want to own free running water, however. Imagine the litigation that would follow from my river's water flooding out a community. We don't need to decide who owns water, and the debate over ownership only serves to create needless uncertainty.

If the legitimate interests of Maori are parked, then the battle over property rights will continue, economic opportunity will be lost and water-dependent growth will be stymied.

Fix it now, or fix it later at greater cost.

New Zealand is fortunate to be well endowed with water. It is time for the government to show leadership and lay the institutional foundations necessary for economic growth, prosperity and environmental protection.

This could have occurred almost 30 years ago. But now it has become even more urgent.

* Professor Basil Sharp is Head of Economics at The University of Auckland Business School and Director of the Energy Centre.