Water will become the most prized and precious commodity in the coming years. Internecine conflicts over the resource are already the order of the day and a global water crisis seems not too far …

Water waste: Siphon tubes in a HOLLYWOOD and its stars, Silicon Valley and its software giants, miles of sunny beaches and their sunbathers - these are the images California normally evokes in people. But the state means much more than that. For the cognoscenti, it means water and its viable use; it means the Hollywood hit Chinatown, which tells a story of murder and intrigue over control and diversion of water from farmlands in the north to Los Angeles (LA) in the South; it means the premier agricultural province in the us. More than a quarter of California's agricultural land is irrigated, compared to an average of only two per cent in the grain-belt states (Iowa and Illinois, for instance) in mid-western US.

There is, naturally, a story behind California's success. Between the period 1987-92, the state had reeled under the impact of a prolonged and severe drought, during which annual water availability was less than 50 per cent of that in normal years. The state responded by overhauling its archaic water management system and by introducing innovative economic concepts like water trading and water banking; the policies resulted in a dramatic increase in the efficiency of water use.

Most precipitation in California occurs in winter, while agricultural and urban demands peak in summer. The major croplands are in the Central and Imperial valleys where the demand for water outstrips the rainfall. Eighty per cent of the available water is consumed by the agriculture sector. The state is also highly urbanised, with huge metropolitan centres around LA and San Francisco adding to the pressure on the limited water supplies. The situation has induced the creation of a vast network of reservoirs, canals and aqueducts one of the most sophisticated water systems in the world that collect water in the north during winter months and transport it to the southern parts of the state in summer (see map:Water maze).

Infrastructure for storing and transporting water was expanded earlier in the century by farmers in the Sacramento and San Joaquin valleys by building a network of private aqueducts and canals to provide surface water for irrigation. During this pre-war period, urban municipalities in LA and San Francisco also developed their own water supplies. After the war, the federal and state governments responded to the post-war boom in California by completing two major public water projects, the Central Valley Project (CVP) and the State Water Project (SWP) to provide water to parts of the Central Valley and to cities in the southern part of the state. A network of gigantic pumps is used to transport water to southern California that otherwise would have gone to the San Francisco Bay and Delta districts.

This major diversion of water away from the Bay and Delta has had an adverse effect on water quality. The pumps killed a large number of fish. Several species of salmon were endangered. Today, California's environmentalists are fighting to save the salmon and restore some of their natural habitat in the San Francisco Bay and Delta. Recent water reforms in California have attempted to restore some of the Central Valley for environmental purposes.

Also, environmental groups have successfully lobbied to use a part of the existing water resources for controlling environmental degradation. For example, the Wild and Scenic Rivers Act passed by the US Congress has put limits on water use from the North Coast rivers. Similarly, litigation has restricted the access of LA city to Owens Valley.


A problem of management "In the 1980s, California water planners realised that they have to do more with less," says Tracy Slavins of the US Bureau of Reclamation, the federal agency responsible for building and managing water projects in the state. Stavin is also the president of the California Irrigation Association. She adds, "To meet steadily increasing demand, we need a continuous improvement in water efficiency at the farm, district and state levels."

Farmers in California grow nearly 200 different crops with varying water use requirements. Crops such as rice and alfalfa require relatively large amounts of water, while vegetable and fruit crops (lettuce and strawberries) require less and also fetch higher prices. Nearly half the farmers use furrow and flood irrigation technologies, a third use sprinklers and the remaining use the more efficient micro-sprinkler and drip technologies on their lands. Thus, differences in crop water use and technology cause wide variations in the productivity of the water used. "The problem is not of availability of water, but its management," argues Ariel Dinar, water economist at the World Bank who has worked extensively on California water issues. "There is inefficiency both in agriculture as well as in urban uses. For example, upto 25 per cent of the water carried by canals is lost because they are not lined. In many cities, residential use is not metered and consumers get as much water as they need for a fixed fee," he adds.

Allocation of the water is dictated by a system of property rights known as the 'prior appropriations' doctrine. This is a 'queuing system' of water rights that can be aptly summed up by two simple rules: 'First come, first served' and'Use it or lose it'. Farmers are assigned water-use rights according to the time when they start diverting water. They are not restricted to any fixed quantities as long as they put the water to 'beneficial use',. but can lose the right if the water is not used., They are no allowed to sell their excess water and if they decrease their withdrawals, they lose the rights to the water they did not use. Given this system, no wonder that farmers apply as much as possible, without any qualms. They have no incentive to conserve their water and use it efficiently.

These inefficiencies are compounded by government subsidies. In the past, the federal government has paid rice farmers in the state 40 per cent more than the world price for their crop. So, farmers continue to grow rice, which is a large user of water, even though it fetches incomes of only us $500 per acre compared to more profitable alternatives such as peach and citrus (us $5,000-8,000 per acre) and strawberries (us $20,000-40,000 per acre). However, environmentalists in the state are much less opposed to the use of water in rice than in other crops such as cotton because rice production has important environmental benefits. Over the years, rice paddies have become wetlands that provide a feeding and nesting area for thousands of migratory bird. In the CVP and SWP, a variation of this doctrine holds, in which farmers called 'contractors' are assigned contracts that specify the volume and price of water for a specified period of time (as long as 40 years). In theory, the water is supposed to be priced to cover operational and capital investment costs; in practice, as a report by the University of California observed, project water has been "notoriously cheap". In many districts, farmers do not pay by the volume of water used but on a per acre basis, using as much water as they can beneficially. This has resulted in inadequate conservation by users and inefficient use of water.

The right to sell
Economists have long argued that the efficiency of water use in agriculture will increase dramatically if only farmers were allowed to trade in water rights. This will reduce inefficiency because farmers will adopt better conservation measures on their fields, enabling them to sell part of their water rights. Over time, a market for water rights could be created that will, using famous 19th century economist Adam Smith's "invisible hand", guide the water to its most efficient use. These issues have been recognised in recent years by water managers and governments not only in other states in the us, but also in other countries.

However, unlike other commodities such as land, markets in water are more difficult to establish. Buying and selling a commodity like water requires investments in infrastructure such as canals, improved measurements, metering, billing and monitoring and protection of water flows. These investments are more likely to be made by the government than by a private entrepreneur. In California, at least until the drought of 1987-92, a sufficient amount of water was available and thus there was no compelling reason to reform the antiquated water allocation system.

Fielding tools
The drought forced farmers to adopt better irrigation technology. A survey conducted by the University of California revealed that 35 per cent of farmers installed new sprinklers and 33 per cent installed new drip irrigation systems. Before water the drought, farmers used no drip irrigation on vegetables. After the drought, they irrigated 10 per cent of the vegetable crop with drip systems. Land under drip irrigation for fruit production went up by more than 50 per cent. A fifth of the cotton growers started using sprinklers and the number of farmers using computer-aided irrigation also doubled. Many laser-leveled their fields, and others were reported to be applying water during cooler hours (to reduce evaporation). Some districts lined their canals to reduce conveyance losses.

The water crisis caused by the prolonged drought triggered major institutional changes. Water districts that received less water from the projects introduced block-pricing, in which farmers got a fixed quantity at a base price and options to buy additional quantities at higher prices, which forced them to opt for more efficient crops and improved irrigation methods. An example of the chain reaction set off by an increase in water price is the Broadview Water District. In 1988, it adopted a simple two-block structure for water prices: the initial block at a price of us $16/AF (acre-foot) and additional tail water at us $40/AF. Fixed costs were recovered by an annual assessment of us $42/acre unrelated to water consumption. It was estimated that Broadview farmers responded to a 10 per cent increase in the price of water by decreasing consumption by more than eight per cent. These tiered pricing schemes have two beneficial effects: they encourage conservation and adoption of modern technology and provide revenues to the water districts, which can be used in turn to provide subsidies for technology adoption by farmers. Novel methods
Water districts and government agencies increasingly realise that they cannot dictate to the farmers," says Richard Howitt, professor at the University of California at Davis and a leading water economist in the state, "But they can provide farmers with economic incentives to conserve water. This can be done through providing mechanisms such as trading, water banks and innovative pricing schemes that will allow water to be moved from low-value to high-value uses."

Although the drought was mostly a blessing in disguise, it did not affect all farmers evenly. Farmers with senior rights continued to operate with their historical allotments while supplies to the junior rights holders were cut. This caused significant economic hardships in some cities and rural communities, such as in the San Joaquin Valley. As a result, trading of water between and within districts was induced by using a variety of mechanisms. A water bank was created by the water districts to trade water. It bought water from districts with a surplus and sold it to districts that were running a deficit. The total amount bought was 825,000 AF for us $125/AF and sold 435,000 AF for US $175/AF. The water sold was withdrawn by the purchasing district from the Bay and Delta districts. Some water was also bought by the metropolitan water districts for urban and residential use. There was surplus water left in the Bay and Delta districts, which increased the water flow and led to an improved habitat for fish and other marine life. In other words, the water was reallocated but not wasted (see box: Water barter).

The experience of the California drought shows that farmers respond to economic incentives to save water and increase water-use efficiency. Policymakers recognised this potential for improvement and towards the end of the drought, the us Congress passed the Central Valley Project.. Improvement Act (CVPIA - the Bradley/Miller Bill) which recognises an environmental mission for the CVP.,, allocates 0.8 million AF of water for such benefits, and permits water contractors to sell water outside their districts.

"The most important contribution of the drought was creation of water scarcity," says Dinar. "That led to the passing by the us Congress of the historic Bradley-Miller Bill which requires transfer of a certain volume of water from agricultural and municipal uses to the environment." It instructs the government to purchase water for restoration of the San Francisco Bay and Delta districts, and it allows farmers to sell their water rights to cities and to one another. "This act was a victory for environmentalists fighting for restoration of the state's ecological habitats and who argued that the transfer of water away from environmental uses was excessive;", asserts Thomas of the NHI. Various other laws have also been enacted recently which have supported this process.

Trade ramifications
"What trading and water markets do is that they increase the value of the water without increasing its cost," says Howitt. A major computer simulation study on policy responses to the drought conducted by researchers at the University of California found that water trading is the single-most important factor that determines the impact of water supply reductions on the state agriculture sector. It found that output could be increased by more than 25 per cent with no additional water supplies, if only water trading were allowed. If water supplies in Central Valley alone were cut by 25 per cent, farmers' incomes would go down by only one per cent. However, without water trading, losses would be five times higher. This is because when water is traded, farmers will reduce acreage on low-value crops and the same will be distributed over each region in an efficient manner. Without trading, if all the water is cut from a single region, some high-value cropland will also be fallowed, leading to higher losses.

Without trading, statewide economic losses are much higher (us $300 m) and employment losses are also 11 times higher. These results suggest that if water were to be diverted for environmental uses, or to meet the increased demand from the cities, losses to agriculture could be minimal under a water market.

Another issue of importance is the question of water rights and who should benefit from the sale of water if trading were allowed. If the government were to keep the sale proceeds, then any proposed transition to a water market may be blocked. Senior rights holders, who today get large volumes of water at low prices, may need to be compensated for their participation. There are important 'third-party' effects that also need to be considered. For example, companies that sell inputs such as fertilisers and pesticides may resist the sale of water out of the region as that will decrease demand for their products among farmers. The building of conveyance facilities will decrease the amount of water that is available through groundwater pumping, mostly used by cities in California. Policies currently on the table include proposals that restrict the water being sold to the amount used by crops. Such measures will slow the introduction of full-fledged water markets.

For water planners elsewhere in the developed and developing world, the question that may be asked is: do we need a drought to trigger a major change in water policy.? From at least California's experience, it may seem so. However, as has been seen in Africa and other areas around the world, droughts by themselves cannot trigger water reform unless there is sufficient awareness among the people, and the various parties involved are able to see the tangible benefits from reform.

Ujjayant Chakravorty is associate professor of Agricultural and Resource Economics, University of Hawaii, Manoa (US). David Zilberman is professor at the department of agricultural and resource economics, and the director of the Centre for Sustainable Resource Development at the University of California, Berkeley (US)

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