Corporatelike buybacks Prof Mike Young Research Chair Water

Corporate-like buybacks Prof. Mike Young Research Chair, Water Economics and Management The University of Adelaide Extract from Griffith University Lighthouse Lecture on Future proofing the MDB, Brisbane 2 nd June 2008

“The country that takes top prize in water management is Australia” The next prize depends upon industry & community willingness to support pursuit of robust permanent solutions 2

Volume of Water in the System Indicative template for sharing water among States and with the environment

Future-proofing the Basin www. myoung. net. au 1. A sustainable sharing system for ground & surface water • Maintenance water (conveyance, evaporation + min flow to sea) • Shares for all non-flood water 2. Put all states under the same regime and give all the opportunity to save water • Share inflows (no cap the diversions) • Shares issued to environment and States 3. • 4. • 100% carry over of all water Continuous accounting – similar to Dudley’s capacity sharing system Require off-set of all land use change that erodes entitlement reliability (forests, dams, SIS) State shares reduced as interception increases 5. An independent authority making allocations to shareholders 6. If still dry, review system configuration & size from top to bottom § Search for evaporative savings 4

Sourcing environmental water Options include 1. Simply buying water on offer in the market 1. River Bank, Living Murray, the recent Commonwealth purchase 2. An off-market buy-backs 1. As companies often do 3. Negotiating bulk purchases with water supply companies 1. Can involve restructuring as well 4. Negotiating a conditional access arrangement 1. River Reach is a proposal 5. Compensating entitlement holders for a step-change to a new futureproofed regime 1. As we have proposed In practice, a mix of approaches will be necessary 5

Off-market share buybacks Corporate experience suggests that large buyback programs are best implemented quickly using an off-market mechanism. Coles Myer in 2005 share buyback in one of the better known examples. 6

Off-market share buybacks Corporate experience reveals that large buybacks are best implemented quickly using an off -market mechanism. Coles Myer in 2005 provided one of the better known examples of a corporate buyback. 7

Coles-Myer Share Buyback Schedule 8

Coles Myer “ 2005” Press Release Price paid and volume shares purchased § Off-market buy-back price $8. 30 {All who offered $8. 30 or below per share were paid $8. 30} § 70. 4 million shares bought back for a total of $585 m § Secured 5. 7% of Coles Myer shares on issue 9

Indicative structure of a corporate-like water buyback 1. Irrigators invited to tender to sell a proportion or all of their water licence with option to lease back until 30 th June 2010. (No change to your allocation over the next two irrigation seasons). 2. Tender closes on 30 October. 3. Participants notified 2 weeks later on November 15 th. 4. For each type of irrigation licence, a single clearing price will be paid. 5. Payments made two weeks later on 30 th November. 6. Entitlements may be leased back for next two irrigation seasons at $300 per ML of allocation received. 7. All 2007/8 allocations remain with licence holder. 10

Illustrative Offer form (High security entitlement) Type of Licence South Australian River Murray Licence Offer 1 ……………. . ML @ not less than $2, 400. 00 per ML Offer 2 ……………. . ML @ not less than $2, 700. 00 per ML Offer 3 ……………. . ML @ not less than $3, 000. 00 per ML Offer 4 ……………. . ML @ not less than $3, 300. 00 per ML Offer 5 ……………. . ML @ not less than $3, 400. 00 per ML Signatures Licence holder …………………… Registered interest (if any) ……………. . Will you be leasing back any allocations made to these entitlements at $300 per ML of allocation made until 30 June 2010? Yes / No 11

Future-proofing the southern MDB 1. Future-proofed entitlement systems § First commitment is to maintain the system § Then to share the remaining non-flood water 2. Environment as equal shareholder 3. Enforceable register and accounts 4. Efficient storage and adjustment markets 5. § 6. § Carry-forward - so we can all start rebuilding (some safety) § Instantaneous, low cost trading Require offset of all increases in un-metered and un-meterable water use Forestry, dams, salinity interception, leakage prevention, etc No selective government investment in infrastructure § A level playing field with full cost pricing § Financial recompense paid to all entitlement holders and adequate warning about the nature of the once-off change to be made 7. Re- set the system as quickly as possible • NWI Consistent investment • Send out the money now and engage all in bottom-up process • Options include Coles-Myer like buy-back • Assist water supply companies to target and reconfigure inefficient areas 12

Recommended enhancements to the in-principle Co. AG Mo. U 1. Establish maintenance water as a system responsibility. • Authority to set aside enough and allocate the rest to States and the environment. • Entire connected ground & surface water system (not just the River Murray stem) 2. Environmental entitlements defined in same manner as irrigation entitlements, on system register and fines to States for over-use 3. 100% carry forward for all States and Environment. § SA with storage rights the same as other States 4. 100% offset of interception from 2010. 5. Within six months, finalise foundations and principles for development of a robust Basin Plan. 13

Access our publications and droplets at www. myoung. net. au Contact: Prof Mike Young Water Economics and Management Email: Mike. Young@adelaide. edu. au Phone: +61 -8 -8303. 5279 Mobile: +61 -408 -488. 538 www. myoung. net. au