Impact investing might be a new buzz phrase, but it’s here to stay. Estimates of the amounts that will be directed towards impact investing over the next decade run as high as $32 billion in Australia and US$1 trillion globally. This article looks at an example of an impact investment.
A delicate balance
The Murray-Darling Basin is one of the largest and most important river basins in the world, sustaining $19 billion in agricultural production and providing one-third of Australia’s food supply. Increasing global demand for Basin-grown almonds, walnuts, hazelnuts, olives, table grapes and dried fruit combined with decreasing water supply and a three-year depreciation of the Australian dollar mean investment in irrigated agriculture is expected to accelerate over the medium term.
While domestic and export markets make the Murray-Darling one of the world’s most productive river basins, it is also one of the most vulnerable. Decades of engineering, over-allocation of water entitlements and the drying effects of climate change have significantly reduced runoff to rivers, creeks and wetlands. As a result, 80% of the Basin’s ecosystems are now in poor or very poor health.
Its rivers and creeks are the lifeblood of many Australian farmers, but its wetlands are also home to endangered fish, mammals and birds. And therein lies a problem: there’s not always enough water for both.
The Australian water market
Australia has a large and most sophisticated water trading market. A water entitlement is a perpetual or ongoing entitlement to receive exclusive access to a defined share of water from a consumptive pool. Entitlements are classified according to their seniority or security, with those classed as higher ‘security’ or ‘reliability’ receiving priority in gaining access to water in a given year.
A water allocation is the volume of water allocated to an entitlement, which can be accessed and used or sold in a given period. Water allocations are announced by the relevant water authorities throughout the year based on volumes held in storage, inflows and seasonal expectations. Water allocations can be traded within and between connected rivers in Victoria, South Australia, and NSW.
Over recent decades, federal and state governments have implemented a series of regulatory reforms that aim to provide investment certainty and encourage efficient water deployment. Key regulatory reforms include: the separation of water ownership from land title; development of a nationally compatible water market; and the establishment of a cap on water extraction from the Murray-Darling Basin.
Investments that meet the challenges
To help meet this challenge of enough water for both the environment and agriculture, the Nature Conservancy and Kilter Rural developed the Murray-Darling Basin Balanced Water Fund, a world-first investment model generating returns to investors while providing water security for people and nature.
The Fund acquires permanent water entitlements and distributes annual allocations between agriculture and nature on a ‘counter-cyclical’ basis. When water is scarce and agricultural demand is higher, more water is leased or traded to irrigators. When water is abundant and agricultural demand is lower, more water is made available to wetlands. This novel approach seeks to reinstate the wetting and drying rhythms that occurred naturally across the Basin before it was interrupted by the development of irrigation infrastructure.
The Fund’s financial returns are generated by the capital appreciation of its water entitlements, by proceeds from the long-term lease of water to irrigators and by the sale of annual water allocations not used for environmental watering.
Up to 60% of the Fund’s entitlement portfolio is currently under long-term lease to irrigators. By entering into a lease with the Fund, irrigators achieve the same level of water security as they would with ownership, while also receiving a capital injection into their businesses. This capital is often used to pay down debt, expand farming operations or improve water-use efficiency.
Outcomes to date
The Fund’s first capital raising closed oversubscribed in December 2015, raising almost $22 million from investors and $5 million in debt from National Australia Bank’s agribusiness division. A second raising of up to $73 million is currently open.
The initial capital from the first raising was fully deployed to entitlement purchases covering 8,322 megalitres (8.3 billion litres) of high-reliability water entitlements across NSW and Victoria, with leases established on close to 60% of the portfolio.
The Fund’s largest transaction to date is a long-term water purchase and lease-back agreement with Murray River Organics (MRO), a pioneering horticultural business near Mildura in Victoria, focused on the production of organically certified dried vine fruit. MRO has developed an innovative process to quickly and efficiently convert unprofitable wine grape vineyards to profitable dried vine fruit varieties which enables a significantly faster path to full production at a much lower capital cost than a greenfield development. The transaction delivers stable lease income for the Fund, and provides capital and secure water, allowing MRO to expand to meet its growing domestic and export demand.
In addition to the agricultural and financial returns achieved to date, the first environmental watering supported by the Fund has been completed, with 950 megalitres of Commonwealth water delivered to the Carrs, Cappitts and Bunberoo (CCB) wetland system west of Wentworth in NSW. The progress of the Fund is being monitored with an eye to developing similar models elsewhere including Chile, China, and the United States.
The Murray-Darling Basin Balanced Water Fund is one of the many impact investment transactions that will be featured at this year’s Impact Investment Summit Asia Pacific. To learn more about the Summit, view the programme here.
Rich Gilmore is Country Director of The Nature Conservancy Australia. For information on the Balanced Water Fund, see www.kilterrural.com. Cuffelinks offers this article as an example of new opportunities arising in impact investing. We have no opinion on the investment or environmental merit of the transaction, and investors should undertake their own enquiries.