Potentials and Prerequisites of Water Rights Markets

The foregoing discussion suggests that water rights markets can offer several kinds of benefits. In the words of Thobani:

Economic principles and lessons from experience suggest that formal enactment of tradable water rights permits rapid and voluntary changes in water allocation in response to changing demands, thereby improving water use. These formal water markets also increase user participation in allocating water and planning new investments, while allowing businesses to invest in activities that require assured access to water. The resulting increase in employment and income generation can help reduce poverty.140

Above all, water rights markets lead to pricing water at its full value (when O & M charges are taken into account also), thus enhancing the prospects for achieving objectives (i), (ii), (iii) and (v) listed in Section 6.5.3 above, without imposing administered price increases, which are equivalent to confiscating a basic right that many farmers hold, even if under customary or informal rules.

Although the initial implementation of systems of transferable water rights has occurred in Latin America, interest has been aroused in other parts of the world. For Sub-Saharan Africa, Sharma et al. have recommended that:

Sub-Saharan African countries should - whenever feasible and appropriate - develop marketlike solutions. . .. The main economic instruments which could be considered are: (a) market-related and demand-oriented laws, policies, regulations, and incentive structures;

(b) water markets with tradable water rights;

(c) more extensive utilization of the private sector.141

Sampath makes a comparable recommendation for all areas of the world, with emphasis on Asia, in light of the growing demands for municipal and irrigation water associated with population increases. His conclusion is that it is hard to over-emphasize the need for better pricing of all water services and the encouragement of water rights markets.142 The FAO has concluded that the work on water pricing systems and on forms of water markets has converged in the idea that systems transferable water rights best reflect the opportunity cost of water.143

While the potential benefits of water rights markets make them an attractive proposition, caution should be exercised in ensuring that all of their prerequisites are satisfied before they are implemented. Thobani has commented that:

. . . tradable water rights are not a panacea, and an effective system is not easy to introduce. Chile's experience and the demonstrated superiority of markets over publicly administered means of resource allocation in general suggest that markets are preferable when water is scarce, when the infrastructure to effect transfers exists or can be cheaply developed, when there is a minimum institutional capacity to implement trades, and when there is political will to establish appropriate legislation.144

Some of the specific prerequisites of a water rights market have been summarized by Hearne and Easter:

(a) [in defining water rights] in areas where water supplies are highly variable, it is necessary to designate how water is allocated during times of scarcity;

(b) great care should be exercised in the initial allocation of water-use rights among users in order to make sure that all the rights are not captured by a few individuals;

(c) proper technology and institutions such as adjustable gates and effective water user associations can substantially reduce transaction costs. ... ;

(d) [defining] a continuing role for water management authorities in enforcing rights and resolving conflicts.145

To this list may be added:

(e) Defining procedures for the treatment of return flows and third-party rights.

(f) Thoroughly disseminating information on how water rights markets work, to potential participants.146

In addition, probably the most basic requirement of all for introducing a system of water rights is:

(g) a clear and strong political commitment and the patience required to develop and implement the system.

It should be emphasized that most of these requirements pertain to administered irrigation systems as well, and that failure to fulfill them adequately has accounted for many of the observed problems in irrigation systems.

The use of water rights markets in developing countries is still in a very early stage. Therefore, the pace of adoption of water rights markets is likely to be slow, but close study of this option can be recommended when it appears that its requirements can be satisfied. In the longer run, the unavoidable necessity of better water management is likely to accelerate the pace of its adoption. In any given case, however, it is advisable to start slowly and assure the development of adequate institutional structures for monitoring and managing water rights transfers. Usually, it is preferable at the outset to limit transactions to farmers in the same valley, and only later open up the possibility of transactions with other users.

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