An economic analysis of irrigation water rights transfers in selected areas of South Africa.

Abstract

Due to the enormous incremental construction cost of water storage and conveyance infrastructure, and because most water resources in South Africa have been fully appropriated, attention has changed from supply side responses to water scarcity to demand side responses. Emphasis is now on providing for optimal allocation and efficient use of water. Establishing water markets will generate significant efficiency improvements in water allocation and use. A survey of irrigation farmers along the Lower Orange River in November 1997, revealed that a market for unused "outer land" water rights had emerged. Discriminant analysis results show that water rights transferred to farmers with the highest return per unit of water applied, producing table grapes, and with high potential arable "outer land" without water rights. Trading developed within a centralised allocation system, and despite a significant extent of bureaucratic regulation. The institutional arrangements facilitating market development were well defined, reliable, enforceable, and transferable water rights, a large number of willing sellers, and an administrative function performed by the regional offices of the Department of Water Affairs and Forestry. Strengthening the market could be achieved by delegating authority to the regional Water Affairs office to approve trades, eliminating the need for a cultivation certificate to develop land, and in extending the support of Water Affairs to market transfers of canal and conserved water. A second survey of irrigation farmers in the Nkwaleni Valley in May 1998 found that no water market had emerged despite the scarcity of water. While 41 percent of farmers wanted to purchase water rights, no willing sellers existed. Demand to establish tradable water rights seems unlikely at present since crop profitability is similar for potential buyers and non-buyers. Further, farmers generally use all their water rights, and may be unwilling to sell water rights for land they have developed. Under the new Water Act, improving the equity in access to water resources is an important objective to be addressed by Government. However, in so doing it is not necessary to destroy water markets. Water markets will require that water use allocations be specified for reasonable periods, be inherently secure, and trading be legally permitted.