Defining the investment value of Water Entitlements

• Author: Jeff Camkin,Angela De Duonni,Susana Neto
• DOI: http://doi.org/10.1002/wwp2.12010
• Published date: 01 November 2019
• Date: 01 November 2019

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wileyonlinelibrary.com/journal/wwp2 World Water Policy. 2019;5:94–117.

© 2019 Policy Studies Organization.

Published by Wiley Periodicals, Inc.

DOI: 10.1002/wwp2.12010

ORIGINAL ARTICLE

Defining the investment value of Water Entitlements

AngelaDe Duonni1

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SusanaNeto1,2,3

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JeffCamkin1,2

1International WaterCentre,University of

Queensland, Brisbane, Qld, Australia

2CESUR,University of Lisbon, Lisbon,

Portugal

3UWA Institute of Agriculture,The

University of Western Australia, Perth,

WA, Australia

Correspondence

Angela De Duonni, 87 Beach Street,

Grange, SA 5022, Australia.

Email: angeladeduonni1@gmail.com

Abstract

As tradable rights to access an exclusive share of a water

resource, Water Entitlements (WEs) may be regarded as

assets that have the potential to provide substantial returns

to investors. In this study, I investigated whether the clas-

sification of WEs as an “asset class” could improve the

distribution of costs and benefits derived from water entitle-

ment investment decisions between private investors, water

entitlement (WE)holders, and regional communities. This

study explored the intersectionality between the water en-

titlement investment strategies of asset managers and the

water management strategies of water resource managers.

This involved a review of literature in the areas of financial

investment, water markets, Indigenous values of water, and

common‐pool resource management, as well as surveys and

interviews of investment industry (Group 1) and water re-

source managers (Group 2).

Key findings noted the consensus between the survey groups

regarding the importance of the following on asset managers’ WE

investment decisions:

1. the classification of WEs as financial assets but not as

an asset class influences their selection, acquisition, and

allocation within investor managed asset portfolios;

2. the classification of WEs as intangible assets impacts

on the allocation of WEs within investor managed asset

portfolios and reported rates of returns on portfolios; and

3. government policy regarding the water resource plan-

ning framework underpins investors’ long‐term WE in-

vestment strategies.

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INTRODUCTION

Since the mid‐1980s, Australia has transitioned to market‐based mechanisms for the reallocation of

water resources within the consumptive pool through multiple independent state and commonwealth

government initiatives and subsequently through consolidated action via the National Water Initiative

(NWI). This NWI has supported the development of one of the most advanced water markets in the

world (Grafton & Connell, 2011). Key NWI actions have created a legal share in the physical resource

and a tradeable asset through the legal separation of land and water property rights. This legal sepa-

ration has embedded a reformed national water resource planning framework in state water planning

processes that includes participatory processes to assist in the determination and allocation of the

available water for extraction within the consumptive pool (sustainable diversion limit—SDL) and

the environment.

The successful expansion in the use of water markets has increased their accessibility to investors

(Grafton & Connell, 2011), particularly global institutional investors seeking direct exposure to the

physical water resource by acquiring water entitlements for inclusion within their managed asset port-

folios (Boreham, 2011). Regional communities have expressed concern over the perceived inequitable

distribution of the costs and benefits resulting from investment strategies and water resource manage-

ment policies related to water entitlements (Frontier Economics, 2007). They are further concerned

about those decisions being made outside of the region in which the water resource is located, citing

broader impacts on the social fabric of their community, economy, and environment (NWC, 2012).

Sullivan and Meigher (2007) recognized that attempts to manage water resources through institutional

or governance frameworks without reference to local socio‐economic considerations may not be com-

patible with the interests of regional communities.

This study focused on the increasing investor interest in Australian WEs. It also considered asset

acquisition strategies facilitated by the water markets, asset portfolio management strategies, and the

subsequent broader implications for regional communities and water resource management resulting

from water investment strategies. The objective of the study was to determine how the classification

Overall, the findings of the survey, interviews, and literature

review provide the basis for the inclusion of a common property

regime within the water resource planning framework to improve

the distribution of costs and benefits attributed to WE investment

decisions. A common water entitlement (CWE), allocated to re-

gional communities within an enforceable legal framework pro-

vides opportunity to integrate collective community values into

the water allocation process. CWE, like WEs, are tradeable assets

from which communities could reasonably expect to generate an-

nual financial returns, realize capital appreciation, and manage the

underlying physical water resource.

KEYWORDS

Asset Management, Common Property Regime, investment, water

allocation, water entitlements