Water. A resource whose scarcity and inefficient allocation gives enough cause for concern. A concern which could find a solution in the concept of market-based allocation and tradeable water rights

-- RECENT years have witnessed rapid increases in the cost of investment in new irrigation projects, while at the same time, there has been a marked degradation in water quality, a slower growth in crop productivity in irrigated areas and increased competition for water for non-agricultural uses. These developments necessitate clear water resource policies that will maintain growth in irrigated agricultural production, facilitate efficient allocation of water across sectors and reverse the ongoing degradation of the resource base.

Water is the most abundant element on earth, covering about 1,400 million cubic kilometres (cii km), equal to more than 70 per cent of the planet's surface, of which only 0.003 per cent is actually useable - the rest forming part of oceans and polar ice caps. This implies that in air average Year, rivers supply over 40,000 cu km of fresh water. Against this, human society is able to abstract only a little over 3,000 cu km annually. This availability too is limited by the fact that water cannot be exported over long distances.

In most countries, public officials decide who gets water, at what price and how it is used. They assume responsibility for building and operating the necessary hydraulic infrastructure. The track record of such administered systems, however, has been far from satisfactory. Despite growing scarcity and the high cost of infrastructure, water is typically underpriced and used wastefully. The average cost of water produced by World Bank-financed water supply projects (1966-1981) was ,about US $1.29 per 1,000 gallons (one gallon is equivalent to 3.8 litres); the average tariff was about US $0.69 per 1,000 gallons. Since the mean level of unaccounted-for water was about 35 per cent, the effective price was about us $0.45 for the same.

The existing uneven systems of water distribution have tended to favour the relatively affluent. Wealthier farmers get easier access to water rights. Similarly, while better-off urban residents in developing countries enjoy access to cheap municipal water, the poor have to take recourse to expensive private water venders. Dale Whittington and his colleagues, in Water Vending and Development: Lessons from Two Countries, note that households which purchase water from private vendors pay two to six times more permonth on air average- for one-tenth as much water - than households with municipal connections.

Moreover, nearly half the world's population, mostly in developing countries, suffers from diseases resulting from insufficient or contaminated water. According to the World Health Organization, 2,000 million people worldwide are at risk from water-borne and mod-borne diseases. These are also the cause behind more than five million deaths each year of children. If we do not radically change the way in which we use water, we may find much of it no longer useable - at least not 9 without expensive specialised treatment.

There are several policy options for arresting degradation and improving productivity in irrigated areas: technological solutions, reform of public management of irrigation systems, communal water management, establishment of tradeable property rights in water and development of markets in water rights. This article will concentrate on the last option.

Trading in a right
Market-based allocation of water has the potential of securing water supply for high-value uses, without the need for developing costly and environmentally damaging new sources of supply. Moreover, if markets function properly, price signals can provide the information needed for efficient water allocation. In most countries where water is costly or scarce, systems of rights for water use have evolved implicitly through custom or explicitly through regulations. These water rights specify how water in a river is to be divided between alternative ends such as industrial, agricultural and domestic, as well as between individual users within a sector, such as water companies and farmers.

Worldwide, 69 per cent of water is used in agriculture, 23 per cent in industry and only 8 per cent for domestic purposes. Typically, the state owns the water and the hydraulic infrastructure for storing and conveying it (canals, dams, reservoirs) in order to ensure that the water becomes available where and when needed, It also endows rights to individuals or entities for particular uses.

The key characteristic of tradeable water rights is that these are secure and can be traded under the guidelines established within a legal, regulatory and institutional framework. Water rights should be separate from land and thus may be traded independently. Ideally, water rights should be sold at freely negotiated prices to anyone for any purpose. Holders of tradeable water rights would be bound to follow laws and regulations such as those relating to water quality; in addition, there may be requirements ensuring that a certain minimum flow in a stream or a river is maintained for environmental reasons and that third party water rights are not damaged by water trade.

The enforcement of tradeable water rights - which can be defined volumetrically (as a share of stream flow or stock of water in a reservoir) - may be carried out by the same means and institutions as conventional water rights. User associations can play a crucial role here, even acting as substitute for formal legal action and serving as pressure groups to enhance efficiency of the bureaucracy.

Tradeable water property rights endow water with an implicit value that creates an inbuilt incentive to conserve water and to put it to the most productive use. For example, if farmers were able to sell their water rights at freely negotiated prices, some of them might choose to generate extra income by selling the surplus rights. If well-defined rights are established, owners would have an incentive to invest in water-saving techniques. Moreover, such a system would provide an impetus to the efforts to battle degradation of water resources. For example, a farmer at the head of the canal who overuses water, causing waterlogging through excess seepage and percolation, would conserve resources if he could trade the excess water instead.

In addition to stimulating growth directly by improving the productivity of water, tradeable water rights can encourage investment and growth in activities that require assured supplies of large quantities of water. These must assure investors that their water rights will not be subordinated to those of other users during shortages. It is interesting to note that Chile's sustained annual growth of six per cent in agriculture during the 1980s occurred despite the absence of public investments in new hydraulic infrastructure from 1975 to 1990.

In terms of moolah
How much will new water supply and sewarage cost?
  1990 population served (millions) 2000 total population (million) Additional population to be served (million) Assumed unit cost, US $/person Total cost, US $ (million)'
Urban water supply 1,089 1,900 811 130 105,000
Urban sewerage 955 1,900 945 350 331,000
Total         436,000
Source: United Nations Economics and Social Council


While tradeable rights imply a power shift from the government to users, it also relieves the government of enormous expenses in infrastructure, operations and maintenance that are also shifted to the final users. Potential investors will be confident that once they obtain the rights to the water generated by their investment, these will be theirs to keep or sell. These large private investments will also enable faster and cheaper completion of hydraulic infrastructure. Finally, the rights-based approach would be more ,acceptable to farmers in comparison to the volumetric pricing of irrigation water, since volumetric pricing is seen by farmers as expropriation of traditional water rights.

Cases to consider
To allow water users to secure water on a permanent basis and to facilitate water leasing, some countries have permitted tradeable property rights in water: tinder Chile's 1981 water law, the state grants users property rights to water without charge. It auctions new water rights. Subject to certain regulations, these rights can then be sold to anyone for any purpose at freely negotiated prices. They may also he used as loan collateral. By increasing the efficiency of water use through the introduction of these rights and by placing decisions for investing in water-related infrastructure in private hands, government investment has been drastically reduced.

In recent years, Mexico and several states in Australia have established property rights to water. fit northern Colorado, US, water brokers assist in millions of dollars of water trades annually and commercial banks routinely accept water rights as loan collateral. Peru's 1993 constitution treats land and water resources equally, permitting tradeable property rights to water. Property rights may be given free of charge to those who already hold water rights by custom or by licence. Rights for unused water are auctioned to ensure that availability of water to others is not reduced and the minimum ecological flow is maintained.

The Indian story
The three major goals of India's national water policy - conjunctive use, supplemental irrigation and switchover to water-saving cropping patterns and irrigation technologies cannot be achieved in an economic and institutional vacuum. The System Of tradeable water rights might prove beneficial here; but a realistic appraisal of the feasibility of establishing and managing such a complex system in the Indian context is necessary.

Traditional water-sharing arrangements and distribution systems, capable of being developed into water rights networks, could be studied -- for example, the 200-year old phad system in Dhole (Maharashtra), the pani panchayat system of Pone and the shejpali system of western Maharashtra. Also, there are officially granted non-transferrable water lease systems prevalent in the deltaic regions of Orissa, West Bengal and Madhya Pradesh.

In the proposed system of tradeable water rights, there is the danger of widespread monopolies. Such a possibility warrants an efficient regulatory framework, which will also have to supervise the initial allocation of the rights. Besides, there is sometimes art interdependence of water sources - Such as that between stream flows and underground aquifers - which may require extensive and costly monitoring of the amount of water drawn from each source. The impartiality and transparency of the procedure will be crucial for the acceptance of such a system.

Although many farmers see the potential benefits in water trading, certain agricultural- rural interests have opposed rapid privatisation of water trading, fearing economic losses following massive transfers of water to cities. Finally, there are the humanitarian, national security and other beneficiary aspects of flood, pollution and disease control along Water courses which should be given due consideration.

The system of having tradeable property rights to water, thus, assumes significance for India, where, as per the estimates of the Central Groundwater Commission, in January 1993, 324 blocks were suffering from over-exploitation of groundwater. Studies by the Delhi-based Council for Social Development have shown the emergence of a new class of waterlords (similar to landlords) who appropriate the bulk of the water in a region without paying charges. These grim realities should prod the government into a serious rethink of its prevailing policies.

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