Going global with water trading

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Water trading is going global.

While the U.S. market seems to garner most of the attention from investors, markets for water are emerging in various forms throughout the world. In fact, the U.S. was a late adopter of water trading. Some of the earliest forms of water markets date back to the 8th century in the southern region of Spain, where farmers would gather every Friday in the village square to auction off allocations of water. Since then, markets have formed in some of the most remote corners of the globe. For example, groundwater trading is common among farmers in many regions of Pakistan, India and Bangladesh.

The formation of some water markets has been more forced. The return home of the “Chicago Boys,” a group of young Chilean economists – most of whom trained with Milton Friedman – brought about a system of tradable water rights during the Pinochet regime. Other countries continue to toy with the idea of tradable water entitlements. Britain, for example, has looked at abstraction license trading since the mid- 1990s. However, concerns about the market being f looded by so-called “sleeper licenses,” held mostly by the brewing industry, have halted any meaningful policy discussion. Clearly, the Brits need to drink more beer if breweries hold rights to enough unused water to f lood the market.

Challenges and opportunities in emerging markets
 
A recent issue of “Impact,” a publication by the American Water Resources Association, highlights specific water rights markets around the world to look at how issues of equity, ownership and regulatory policies have inf luenced water trading in the region. The issue provided a nice comparison of markets that are developed and markets in regions that may be primed for future water trading. Some of the key findings included:
 
  • A developed market for water entitlements has emerged in Australia’s Murray-Darling Basin, in which farmers are leasing water to one another, and the Australian government is setting aside $3.1 billion for environmental water acquisition. Annual trading volume has risen to approximately 25 percent of average surface water diversions in the basin with nearly $500 million traded in total over the 2008-2009 season. Trading over the past decade was driven largely by severe drought. Now that hydrologic conditions have improved, the fate of the Aussie market remains uncertain. The predominance of lowvalue buyers in the market and an inability to arbitrage information asymmetries due to publicly available water price data quash some private investment opportunities in this market.
  • In the Western U.S., the prior appropriations framework, along with economic growth under water shortages, is driving an active market for water entitlements. While prices and trading in some areas have faltered during the current recession, private investment in this market is rushing ahead. It has been suggested that more trading could be encouraged through policy changes in some basins. It is clear, however, that even without improvements in the regulatory framework, market transactions of water entitlements will continue to play an important role in facilitating growth and preserving the environmental amenities that westerners enjoy.
  • In the Middle East and North Africa, cultural values and governmental policy make some room for water trading. The macro-level supply and demand fundamentals of severe water scarcity and booming populations indicate that, while a water rights market has not developed, the region could benefit from market-based reallocation of water supplies. Private investors, however, are likely to be timid about entering this water rights market as a result of the region’s uncertain regulatory framework and political instability.
  • Chile’s geography is diverse, ranging from arid desert in the country’s north and central regions to forest in the south. With increasing irrigated agriculture, growth in the mining business and residential development, an informal water market in the country’s arid regions has emerged with active privatesector participation. The market is helped along by the welldefined water rights established under the 1981 Water Code. While facilitating water trading has been a goal of Chilean policy, the market is plagued by claims of adverse impacts to local communities and the environment resulting from water trades.
  • Europe has long been fascinated with the idea of water trading. Stringent legal barriers, however, created a market that is virtually non-existent. A few government-sponsored trades occurred during the 2006-2008 drought to reduce groundwater pumping. Following the drought, the market disappeared. Unless drastic market-oriented policy changes are implemented around raw water, private investment in Europe is likely to remain focused on water-related technology and services.

Many parts of the world are experimenting with water rights trading. Some areas, such as Australia, have succeeded in fostering a robust market. The water rights market in the western U.S., however, remains the front runner in terms of opportunity for private investment and private-sector market participation.

Clay Landry is managing director and a principal at WestWater Research LLC, a leading advisory firm in the water rights market based in Boise, Idaho. He and associate Matt Payne, who contributed to this column, can be reached at (208) 433-0255.