So in all the wash-up from last week Nick Xenophon emerged the winner, having extracted — apparently — $900m from the Government for the MDB.

Nick Xenophon and Steve Fielding are both enthusiastic practitioners of stunts and publicity gimmicks. And in that regard, Xenophon, who’s only been around Federal politics seven months, gave the more experienced Fielding a caning. Xenophon also gets bragging rights over the Murray-Darling ahead of the Greens, although the latter have been generous in their praise for Xenophon.

A closer look at the actual deals hammered out paints a slightly different picture. The letter from Wayne Swan to Xenophon spells out some of the details of the agreement the latter extracted from the Government.

The original MDB plan settled by Penny Wong last year committed to the following funding for water buybacks:

  • 2007-08 $55m
  • 2008-09 $157m
  • 2009-10 $466m
  • 2010-11 $468m
  • 2011-12 $346m

This sort of money, needless to say, makes the Federal Government the biggest player in the market, even compared to the NSW and Victorian Governments. How the Federal Government proceeds buying back water significantly affects the water market in the MDB.

The Xenophon deal will cause a massive shock to that market, as NSW Irrigators’ Council CEO Andrew Gregson told Crikey today. It will bring forward from the later years of the decade-long plan $500m into 2008-09, 2009-10, 2010-11 and 2011-12, expanding the water buyback funding by more than one-third.

Governments buy back water by requests for tender. There’s no compulsory acquisition, which has been repeatedly rejected by Wong. In the first water buyback round in 2007-08, the Government received 992 expressions of interest for the sale of water rights. They were selected on a price basis, meaning cheaper rights are purchased first, then more expensive rights, until the allocation for that round in the relevant basin is exhausted. 123 EOIs were initially accepted in 2009-10, although a number were later withdrawn after due diligence.

With more than one-third additional money on top of a substantial ramping up of the buyback program from 1 July, that means the Federal Government will keep going further down the list of EOIs, each one more expensive. This graph from the Hyder Consulting review of the 2007-08 buyback shows the price curve of EOIs in response to just $50m:

The 2009-10 buyback will be about ten times larger in total than the 2007-08 round, meaning the Federal Government will be purchasing water at significantly higher prices. Irrigators who have remained in the market will face substantial price rises to access water, while those who sell will be securing the deal of a lifetime at the expense of taxpayers.

The buyback will be further compressed because Victoria retains its 4% trading cap, despite its commitment to “review” it. Therefore, all additional buybacks will come from NSW.

Gregson also pointed out a peculiar consequence of the compression and design of the buyback program. There’s no tail-off of buybacks in the program. The Federal Government simply drops out of the market in 2014. The withdrawal of the dominant buyer will cause a collapse in water prices, and at around the point when the NSW water allocation plan expires, meaning there will likely be a significant reduction in allocation caps. If you were a bank lending to irrigators, you’d have serious questions about how they will fare after 2014 in the face of a huge drop in the value of one of their key assets, and a virtually guaranteed reduction in the amount of water they are permitted to use.

The Rudd Government has repeatedly said it is interested in “market design”. In this case, its design is potentially disastrous for the market concerned — and almost certainly extraordinarily expensive for taxpayers.

In contrast to perceptions, Steve Fielding actually did quite well in exchange for his support. In a move that puts Brian Harradine’s efforts for Tasmania in the shade, Fielding convinced the Government to allocate $200m of new money — the Government spent all of its $400m savings from the $50 shaving of the bonus on the Greens — for his “Get Communities Working” program of small grants to local communities. The program will be overseen by a council, of which Fielding will be a member, and the rollout will commence in Victoria. Fielding not merely secured the money, he will get a role in doling it out, in his home state.

Xenophon might have got all the headlines but the deals he and Fielding got might yet play out in interesting ways.