Bjornlund (2002)

Environment and Development
Economics
http://journals.cambridge.org/EDE
Additional services for Environment
and
Development Economics:
Email alerts: Click here
Subscriptions: Click here
Commercial reprints: Click here
Terms of use : Click here
Aspects of water markets for developing countries:

experiences from Australia, Chile, and the US
Henning Bjornlund and Jennifer McKay
Environment and Development Economics / Volume null / Issue 04 / October 2002, pp 769 - 795
DOI: 10.1017/S1355770X02000463, Published online: 02 October 2002
Link to this article: http://journals.cambridge.org/abstract_S1355770X02000463

How to cite this article:
Henning Bjornlund and Jennifer McKay (2002). Aspects of water markets for
developing countries: experiences from Australia, Chile, and the US. Environment and
Development Economics, null, pp 769-795 doi:10.1017/S1355770X02000463
Request Permissions : Click here
Downloaded from http://journals.cambridge.org/EDE, IP address: 147.142.186.54 on 13 Aug 2015
Environment and Development Economics 7: 769795 2002 Cambridge University Press

DOI:10.1017/S1355770X02000463 Printed in the United Kingdom
Aspects of water markets for developing

countries: experiences from Australia, Chile,
and the US
HENNING BJORNLUND and JENNIFER McKAY1
School of International Business, University of South Australia, Adelaide
ABSTRACT. Water market reforms are being promoted by international organisations,

such as the World Bank, and pursued within many developing countries. Actual experiences with water markets are limited and the opinions regarding the beneficial or
detrimental impacts diverse. It is therefore crucial to learn from the few functioning
markets. Some of the longest operating, and most mature markets in the world, are to be
found in Southeastern Australia. This paper examines the outcome of water trade in
Southeastern Australia and combined with US and Chilean experiences outlines some
lessons for the introduction of markets in developing countries.
1. Introduction
Water reforms have been promoted widely during the 1990s by international organizations such as the World Bank (1993), United Nations
(Sitarz, 1993), FAO (1999), OECD (1989), and UNESCO (2000). Since water
reforms now are an official World Bank policy, they are an integral part of
new projects in developing countries. Key elements of such reforms are
market mechanisms and full cost recovery pricing. Actual experiences
with water markets are still sparse, and doubts about their beneficial
impact still exist among policy makers, water managers, and in academia.
It is therefore imperative to learn from countries where markets have operated for some years. Even though there can be no right way of designing
and implementing water markets, since such systems have to be designed
within the local climatic, hydraulic, economic, social, and legal context,
important lessons can still be learned.
Apart from Australia, water markets in two other countries are frequently mentioned in the literature. In the southwestern US, many states
1
Dr. Henning Bjornlund is a Research Fellow and a member of the Centre for Land
Economics and Real Estate Analysis and Dr. Jennifer McKay is Professor of
Business Law and the Director of the Water Policy and Law Group. The Land and
Water Resources Research and Development Corporation in Canberra, Australia
funded this project until April 2001 and the Australian Research Council and nine
industry participants are funding ongoing research.
770
specifically allow water trade, and regulations set out the conditions for
such transfers. However, water transfers are still relatively limited, and
settlements of related disputes are largely referred to the judicial system
making transfers expensive, time consuming, and uncertain (Huffman,
1997). Also, strong urban and industrial demands have influenced market
outcomes (MacDonnell, 1990). In Chile, markets are based on a neoclassical economic approach, backed by a judicial system with minimal state
intervention (Bauer, 1998). However, market activities in Chile are very
limited. Few empirical studies exist from either country about the operation and impact of markets.
This paper will discuss the experiences gained in South Australia and
Victoria in southeastern Australia, where markets have developed since
1983, within a highly regulated and administrative environment, with
strong State-, Federal- and Basin-wide intervention, to safeguard social
and environmental values, with little resort to judicial decision making.
This development has seen the gradual evolution of water market policies,
resulting in less and less impeded markets. The development of the water
industry has followed different patterns across jurisdictions. This has
resulted in different definitions of water rights and tradable systems,
reflecting the variability of water use, ranging from intensive high value
uses, mainly horticulture and viticulture, through dairy to less intensive
and valuable uses such as cereal and mixed grazing.
The first part discusses the reasons for water markets and the expectations of policy makers. The second part outlines experiences with water
trade in other countries while the third describes southeastern Australia
and the evolution of water market policies in Victoria and South Australia.
The fourth part discusses the outcome of trade and the final part highlights
the lessons learned and their implications for water markets in developing
countries.
2. Why water trading
Within many developed countries, in semi-arid regions such as the southwestern US and southeastern Australia, early developments saw
significant investments in water infrastructure, to support human settlement of remote areas and boost national production. Today the water
economy is in its mature phase (Randall, 1981). The costs of increasing
supply have risen sharply, and the political will to finance new projects has
decreased, with concern for the environment and increased demand for
public funds from other sectors of the society. During the mature phase,
the emphasis is on making do with what we have, by reallocating it among
competing uses.
Developing countries have experienced the same need for reallocating
existing resources due to increased demand, increased cost of new
supply and reluctance by financial institutions to fund new water infrastructure (Thobani, 1998). Reflecting this trend, the World Bank in 1993
introduced a new water resources policy (World Bank, 1993). This policy
has, at its core, the treatment of water as an economic good, including
such features as property rights, full cost recovery pricing, removal of
government subsidies, the use of market mechanisms, and calls for
Environment and Development Economics 771

decentralization of water authorities and devolution of the management
of water resources.
Policy makers place considerable expectations on economic instruments,
such as water markets, privatization and full-cost recovery prices.
Academics, and among them foremost economists, have predicted considerable gains from trade. These are founded on the belief that:
Tradable water rights give water a value separate from land, and
provide an incentive to use water more efficiently, since water saved
can be used to increase production or sold.
Full-cost recovery prices will facilitate this process, by encouraging or
forcing inefficient irrigators on degraded soils, as well as low value
users, to sell their water, since they will not be able to sustain farming.
High value producing irrigators, with efficient water use on suitable
soils will purchase the water. This will result in increased output from
the water and thereby improve the financial position of the irrigator as
well as the local community. It will increase economic activity, since
high value crops are more labour intensive in the fields, transport, packaging, and processing. Gaffney (1997) said that when water is
expensive, less water is used to produce more value of crop, and that
areas with cheap subsidized water have more unemployed and people
on social security.
Reallocation by market forces reduces government costs, by limiting
demand for new supply, while privatization and full-cost recovery
prices reduce government responsibilities for maintenance of infrastructure.
It is important to understand that two distinctly different markets exist.
The often most discussed and practiced is the informal markets or temporary transfers of the right to use water. This market has often been
preferred, because it does not change the underlying allocation of the
resource, since the water right remains the property of the seller. This
market allows irrigators to respond to temporal changes in market conditions, climate, farm problems, and personal circumstances. However,
productions involving considerable long-term capital investments
require formal water markets with permanent transfers of the water
rights, especially if such crops suffer long-term or permanent damage
during prolonged periods of insufficient supply. Permanent water
markets often encounter more resistance because of the potential longterm community impact, but permanency is imperative if one of the
policy objectives is to promote structural adjustment and/or to remove
threats of environmental impacts from intensive irrigation of unsuitable
soils.
3. Country experiences with water markets
Mexico
Water trading both permanent and temporary took effect in Mexico in
1994 with a new water act. Water rights are based on consumptive use,
water lost through seepage or return flows can therefore not be traded.
772
When water transfers do not change the intake or discharge of water no

approval is necessary the transfer simply has to be registered.
Consequently, transfers within water user organizations can take place
freely and at low cost. Water transfers can also be made on a communal
basis. In Modulo 7 of the Delicias system, in the state of Chihuahua, the
community meeting decided to irrigate only part of the Modulo in 1999. It
was agreed that the irrigators in the rest of the Modulo should sell their
water to the selected area, which was the most productive and efficiently
irrigated, and the price was agreed on as well (Siqueiros, Gerent
Associacion de Agriculture Modulo 7, pers com 1999). If the transfer is to
another district, the situation is vastly different. In that case, a majority of
the water user organization must agree, the government must approve it,
and the proceeds are paid to the organization not the individual. This
severely curtails transfers between districts (for a further discussion see
Rosengrant and Binswanger, 1994).
India and Pakistan
Informal water markets have existed within irrigation districts in countries
such as Pakistan (Meinzen-Dick, 1998) and India (Shah, 1993) for many
years, often against the law. Markets are rather localized and facilitate a
flow of water from larger selling farmers to smaller buying farmers. Water
is extracted by tubewells with either diesel or electric pumps. Smaller
farmers cannot afford such installations while larger landholders can.
Many of these install pumps with excess capacity and therefore can sell
water. Various arrangements for payment are in operation. Payment can
either be in the form of cash or labour, it can be both two- and three-way
share farming. Two-way share farming, where one party supplies the
water and the other the land, and then all other costs and the profit are
shared. Three-way share farming is where one party supplies the water,
one the land, and a third the labour and then all other costs are shared.
Share farming arrangements ease one of the problems associated with this
market system, that in case of shortage or crucial timing the sellers tend to
look after their own interests first. Under any of the share farming arrangements the water sellers will have a direct interest in securing a timely
supply of water to the buyer.
These informal markets have increased both the availability of water
and the reliability of supply and facilitated a more socially equitable
outcome of irrigated farming within the community. However social concerns are also raised: groundwater in both countries is an open access
resource and electricity cost often heavily subsidized, hence the ability to
sell water encourages sellers to keep pumping to maximize the profit from
the investment in infrastructure. This results in declining groundwater
tables and thereby increased pumping costs for all pumpers. In some
instances smaller landholders with more shallow wells and smaller pumps
might be unable to continue pumping. Further, in smaller villages with
only one large seller and many small buyers monopolistic outcome is the
result with high prices and social hardship for the small buying farmers.
Markets work most effectively in areas where a large number of pumps
exist. If one seller supplying one particular area increases prices, other

sellers will extend their pipe system or canal system to supply that area as
well, thus eliminating monopolistic behaviour.
The southwestern US
In the southwestern US, water rights are defined by prior appropriation,
which follows the concept of first in time, first in right. The person first registering the beneficial use of a certain volume of water, at a given point of
the river, will have a senior right to that water. Water users registering subsequent rights, will be junior and can only use the water, when the senior
right has received entitlement. The judicial system has developed over
many years, to settle disputes related to water transfers between individual diverters, resulting in a change of the point of diversion. Changes
to the point of diversion have impact on return flows and thereby changes
water availability for downstream right holders. Some US jurisdictions,
such as Colorado, New Mexico, and California, have attempted to solve
this problem, by only allowing transfers of the volume of water which has
traditionally been consumed, leaving the return flow in the river (Gould,
1989). However, the judicial system has caused significant transfer costs
and lengthy processes in determining what consumptive uses are and
varies greatly across jurisdictions (MacDonnell, 1990). In New Mexico and
Utah, where the office of the State Engineer determines whether or not the
transfer will adversely affect other water users, transfer times and costs are
lower. While buyers and sellers can appeal the decision of the Engineers
Offices, they are accepted and not challenged 99 per cent of the time
(Howe, 1998). Archibald and Renwick (1998) found that the presence of
administrative and policy induced transfer costs significantly reduced the
potential efficiency gains from trade, and concluded that such gains could
not be realized without institutional changes. As a consequence, water
markets have largely been limited to inter-organizational transfers where
no change in point of diversion takes place (Thompson, 1997).
Most water trade in the US involves transferring water from agriculture
to urban uses, or to industrial, uses such as mining and power generation.
This involves significant volumes of water, and therefore causes serious
concern about the long-term impact on community cohesion and culture
(Dumars and Minnis, 1989; Mumme and Ingram, 1985). In some areas
markets experienced significant fluctuation in activity and prices during
periods where major companies required water to start up new projects
(Colby and Bush, 1987).
Many water sources in the US are organized within mutual or ditch
companies providing water through a network of canals. Irrigators own
shares in the company entitling them to a certain volume of water. These
shares are freely transferable within the area, and with them the water.
Trade therefore takes place frequently without controversy and within an
administrative environment at low cost. An example used quite often is
the Colorado Big Thompson Project (Person and Michelsen, 1994). Another
water delivery system, within which trade can move water freely, is the
Bureau of Reclamation projects. Internal water markets have been active
within some of these organizations, such as the Northern Colorado
Conservancy District (Wahl, 1989) and the Central Valley Project in
774 Henning Bjornlund and Jennifer McKay

California (Rosengrant, 1995). The opposition to external transfers have
been persistent (Thompson, 1997) despite the significant benefits for some
members of the community from such trade (Wahl, 1989).
Water Banks have developed within a number of western states
(MacDonnell et al., 1994). The longest serving bank is in Idaho, while the
best know is Californias Emergency Drought Water Bank (Carter, Vaux,
and Scheuring, 1994). The California Bank sets both the purchase and the
sales price based on farm budgets with some profit incentives for sellers
(Howe, 1997). The Idaho Bank sets prices to approximate the sellers
financial obligations with no profit (Thompson, 1997). Both banks prioritize buyers and the California Bank also determines what water can be
deposited in the bank. They therefore do not represent a normal market,
where willing buyers and sellers exchange goods at agreed prices. They
do, however, facilitate sales of large volumes of water, in periods of
extreme shortage, by providing smooth and fast transfers.
The US experiences indicate that water markets work most efficiently,
and produce most consistent prices, the larger the trading area, the more
diverse the water user group and the more developed the network of
market facilitators (Gardner, 1985; Brown et al., 1982). They also show, that
within areas where property rights are clearly defined and linked to shares
in the water delivery authorities, markets develop easier. Outside such
systems, the legacy of past water paradigms has proven very hard to overcome, despite several state governments attempt to protect water sellers
against claims of non-beneficial use (Thompson, 1997).
Chile
Chile has encountered drastic changes to its economic system since the
1960s. Prior to then, water trade had been possible since the Spanish colonization, though not within what we would consider a free-market
environment. The period leading up to the Allende government in 1970
saw increased state intervention. A comprehensive agrarian reform in 1967
redistributed both land and water to the peasants and abolished trade in
order to improve social equity. The 1973 military coup changed this trend
radically and introduced free-market systems following a neoliberal economic ideology. Formal secure property rights in water were introduced in
1976, markets in these were re-introduced in 1979, and included in the new
National Water Code in 1981 (Bauer, 1998; Lobos, 1999).
The Code separated the water right from the land, made them freely
tradable, enabled them to be registered in the Real Estate Title Offices, and
made it mandatory to register all water transfers there. The Code distinguishes between consumptive and non-consumptive rights. Nonconsumptive rights are mainly for power generation, and the holder of
such rights must return the water to the river in a way that does not
damage the rights of other users. This issue has created conflicts between
irrigators and power generating companies (Brehm and Quiroz, 1995;
Bauer, 1998). Consumptive water rights allow for full consumption of the
water, which means that downstream users have no right to return flow. If
water use patterns upriver are changed, due to water transfers or
improved water use efficiency, the return flow to the river is reduced, with

detrimental impact on downstream users, against which they have no
cause of action. The Code also provides other classes of water rights, such
as contingent rights giving the right to extract water during specified
periods of excess flow. Water rights can also be defined as continuous or
discontinuous rights, where the continuous rights can be used 24 hours a
day, while discontinuous rights can only be used during certain periods.
Finally rights can be defined as alternate rights, where the water has to be
used alternately by different users (Brehm and Quiroz, 1995).
If the transfer changes the point of diversion, government approval is
required, and affected parties can protest if stream flows are changed.
Since the disputes have to be settled in the courts, it appears that the
person who can afford the best lawyer wins. These are normally the
buyers, represented by urban water suppliers or larger farmers (Gonzales,
Gerent Junta de Vigilancia del Rio Grande y Limai, pers com 1999).
According to Sr. Peralta (Presidente Confederacion de Canalistas de Chile,
pers com 1999) this is due to lack of expertise by the authority estimating
the potential changes to stream flows and not a problem with the Water
Code. The Director General De Aquas believes that changes are required
to give the Director greater influence on granting water rights, approving
water transfers, and settling water disputes. However, such changes have
always been defeated in Parliament (Pea, Director General de Aquas, pers
com 1999) due to the significant political influence of major private business interests and neoclassical economists.
It is interesting to note that during the process of developing the Water
Code, water users showed little interest in water trade per se, but great
interest in providing security of water rights. They did not expect that
much trade would take place, but that greater security would encourage
water users to invest in more efficient water infrastructure (Bauer, 1998).
This point was highlighted, when the national water users organization in
1985 negotiated a new Act, giving assistance to new irrigation infrastructure by up to 75 per cent of the cost, once the water user(s) have completed
and paid for the project (Peralta, pers com 1999).
The success of the new Water Code has been widely acclaimed by
Hearne and Easter (1995), Rosengrant and Binswanger (1994), Schleyer
(1994), and Brehm and Quiroz (1995), while Bauer (1998) has taken a more
critical stand. In reality the volume and frequency of permanent transfers
have been low, mainly involved urban or industrial users, and activated
unused water (Pea, 1996). Hearne and Easter reported 47 transfers during
a seven year period in the Elqui Valley, while Bauer recorded 13 transfers
per year in Los Angeles and 23 in Los Andes, which is a higher value producing area. The exception is the Limari Valley, where market activities
are high, due to the flexibility of gated canals with flow meters, and the
definition of water rights as volumes of water stored in three interconnected reservoirs (Pea, 1996, Hearne and Easter, 1998). Temporary
transfers are more common and mainly take place between farmers on the
same canal (Brehm and Quiroz, 1995).
Bauer (1998) therefore raised the question. Why have there not been
any more transfers?. The following impediments to trade have been identified based on Bauer (1998), Pea (1996), Brehm and Quiroz (1995), and
776
discussions with Peralta, Gonzales and Pea as well as personal observations during a visit to Chile in July 1999:
The rigid system of water distribution. Water rights in Chile are defined by
flow, controlled and divided according to water rights by fixed gates at
each property. If a buyer and a seller on the same canal transfer water,
only the sellers and the buyers gates have to be altered. If the water
moves from one canal to another, all gates in both canals have to be
altered making it very costly.
Legal uncertainty. Only a relatively small proportion (3550 per cent) of
rights have been registered in the Real Estate Title Offices. The Director
General De Aquas has his own register, also covering only a fraction of
all rights. The most secure registers are the canal associations, but these
are not coordinated. Further, water rights have been based on facts
more than formal law, that is, if you can prove you have used water for
many years, you must have a water right.
Social values. Many small water users are traditional farmers, for whom
irrigation is a way of life and part of a culture, and, therefore, they could
never sell water despite economic reasoning. This corresponds with
findings within Hispanic and Indian communities in the US (Mumme
and Ingram, 1985; Ingram, Schneider, and Nunn, 1989).
Availability of cheaper options. Irrigators can increase their irrigation
efficiency, and under the new Water Code receive government
subsidy for such work. On the El Palqui Channel, irrigators are lining
part of their 44 km long supply channel with plastic. Water losses due
to seepage are estimated at 42 per cent (Aquirre, President of the El
Palqui Channel Water Users Association, pers com 1999). Similarly,
many farmers have recently converted to drip irrigation, or are in the
process of doing so. Irrigators can also get ground water or contingent water rights, which can be used to fill dams or recharge
aquifers.
Bauer (1998) provides a discussion of the contradiction between the new
National Water Code, modeled on neoliberal economics developed in the
US, with a strong judiciary and a system of precedent. In Chile, the
judiciary is formalistic, interprets the law strictly and literally and is not
used to play a pro-active role, and the lack of precedent and adequate
hydraulic knowledge have caused court findings to be unpredictable and
contradictory.
4. Southeastern Australia
Southeastern Australia constitutes the southern part of the MurrayDarling Basin (MDB), which includes Australias largest water resource,
and covers parts of four states New South Wales (NSW), Victoria (VIC),
South Australia (SA), and Queensland (figure 1). The Murray-Darling
Basin Commission (MDBC), which consists of the relevant Ministers from
the States, the Capital Territory, and the Federal Government, manages the
Basin under the MDB Agreement. This Agreement has existed since 1915.
Initially it was only concerned with how the water resources of the Basin
were shared. Since the 1970s, the MDBC has steadily increased its sphere
Figure 1. The MurrayDarling Basin

Source: Map prepared by the Graphics Group, CSIRO Land and Water,
Adelaide, December 2000.
of influence to the wider management of natural resources and environmental issues.

It has long been evident that the Basins water resources are over used
and that use still increases with potentially detrimental environmental
impact. The MDBC therefore initiated an audit of water use. As a result, a
Cap on water use was implemented in 1997, effectively limiting water use
to the 1993/94 level of development. How to achieve this was left to the
States, which all have the legislative power over water resources. Due to
the different development of water resources and water rights the impact
of the Cap varies across the Basin. Further, the issues of allocations for the
environment and in-stream flows are still being investigated, and the final
outcome is likely to further restrict water availability for consumption.
These issues have had a significant influence on the use and impact of
trade across the Basin. To overcome these cross-jurisdictional differences,
state and federal governments as well as basin managers are driving the
development of a National Water Trading Framework, and an Interstate
Water Trading Pilot Project has been in operation within a section of the
MDB (see figure 1) since 1998.
South Australia (The River Murray)
The predominant water uses along the River Murray in SA are viticulture
and horticulture especially in the Riverland which are located upstream of
Morgan (figure 1). These industries are characterized by high levels of
capital investment, long lead time before financial break-even, and high
sensitivity to variability of water supply, with significant long-term losses
caused by water shortage. The aim of the State government has therefore
been to develop a water right with a 100 per cent security of annual supply.
The government therefore moved early to prevent over allocation. In 1969
778
a moratorium was placed on new licenses, and in 1969 and 1976 private
diversion licenses were adjusted according to past actual use plus committed use. A similar adjustment was not made to water rights within
irrigation areas. Water rights within these areas were determined by property size and crop water consumption figures, based on inadequate
knowledge of actual plant water use and on inefficient irrigation methods.
This has resulted in excessive water rights within many irrigation areas,
and since these areas are land constrained, irrigators within them cannot
use this excess water to expand.
All resources were allocated by 1976 and existing water rights reduced
to reflect actual or committed use. This created community pressure to
introduce instruments which could provide water to new enterprises,
mainly horticulture. South Australia was therefore the first state to
officially introduce temporary and permanent trade between private
diverters in 1983. Trade was not introduced within irrigation areas,
because of the fear of the impact on individual systems if large volumes of
water were traded out of an area. Trade within irrigation areas was introduced in 1989. With the new Irrigation Act in 1994, trade was opened up
between irrigation areas and with private diverters. To allow the authorities, and irrigators within irrigation areas, to adjust to changes, the
volume of water exported out of any area has always been capped at 2 per
cent of total entitlement.
Water transfers are subject to the buying property producing an
Irrigation Drainage and Management Plan. This plan has to show that the
irrigation activities on the property have zero impact on the quality of river
water. The implementation of these plans has however never been policed.
Consequently the plans have not had the desirable impact, even though it
seems to have increased over time (Bjornlund, 1999). Due to the conservative allocation policies, and the early voluntary intervention to rein in
excess water rights, the MDB Cap was set at the 1993/94 level of allocation
and not the level of development. As a result, trade can activate unused
water without having a negative impact on water right holders.
Victoria (Goulburn-Murray Irrigation District, GMID)
The GMID is Australias largest irrigation district, located in the northern
part of Victoria along the Murray River upstream of Nyah (figure 1). It consists of two supply systems, the Murray and the Goulburn. The
predominant water use is dairy farming with sections of cropping and
grazing. The dairy industry, which is the high value user, has a high
dependency on security of supply but also an ability to benefit from extra
water. The other water users are mainly cropping and grazing, having the
ability to adjust water use to fluctuating supply. The allocation policy is
therefore two folds. First, water rights with a supply reliability of 97 years
out of 100, and, second, sales-water allocations, which are announced
annually as a percentage of water rights depending on availability and are
generally higher within the Murray system. No sales-water is announced
until the following seasons water rights are secured in the reservoirs,
thereby ensuring the high reliability level of water rights.
Throughout the GMID, the water table is very high, but its impact varies

significantly. In the east, the groundwater is fresh and can therefore be
managed. In the west, it is highly saline causing areas with high soil
salinity levels resulting in reduced productivity, abandoned land, and
severe environmental impacts. The dairy industry is concentrated in the
eastern part, with a pocket around Cohuna in the Murray supplied part of
the west, while the low value water uses are in the west. These differences
significantly influence the outcome of water trade.
Victorias response to the MDB Cap was to maintain the security level of
water rights, while keeping total water use at the 1993/94 level of development, by reducing annual sales-water. Consequently, as trade activates
unused water, annual sales-water declines. Since the Cap, sales-water allocations have been very low or zero, this has caused problems within the
dairy industry. Due to past experiences, with sales-water allocations in
excess of 100 per cent, dairy farmers have based their permanent pastures
on an average of 160 per cent of water right.
The first experiments with temporary water trade were introduced in
1987. Permanent and temporary trade was formally introduced with the
Water Act, 1989. Regulations regarding permanent transfers were not in
place until 1991, and the first transfers registered in January 1992. Trade
was not permitted between private diverters and irrigation areas until
1994. To control environmental impacts restrictions were placed on trade.
The underlying principle is that trade can only take place if the water can
physically be transferred between the selling and buying property. Trade
can therefore not take place from the Murray to the Gouldburn system,
only in the opposite direction. Further, trade is not allowed into properties with highly saline soils. To avoid increased accession to the water
table, guidelines are in place, setting maximum water use levels
depending on irrigation and drainage infrastructure. To be allowed
maximum water use, the property need to be laser graded, have adequate
surface drains, and have either a re-use system or access to off-farm
drainage.
5. Early experiences with water markets
Even though markets are quite active, relatively small proportions of the
total volume of water allocated for irrigation are traded permanently.
Within the GMID, permanent transfers moved on average 0.35 per cent
per annum of total allocation. Along the River Murray in SA, trade
moved 1.7 per cent per annum. The analyses in this section are based on
extensive interviewing by mail of buyers and sellers of permanent water
rights, and buyers of irrigated farm land, during the 19871994 period in
SA and the 19911994 period within the GMID, and telephone interviews
during the 19941996 period in both areas. A total of 921 interviews were
completed.
Market activity and market prices
Figures 2 and 3 show the number of transfers, minimum and maximum
prices on a quarterly basis, and volume of water traded on an annual basis,
during the 19871996 period in SA and 19921996 period within the
GMID. Along the River Murray in SA, trade was steadily increasing both
780
Figure 2. Minimum/maximum prices and number of transfers

The Murray RiverSouth Australia: 19871996
Figure 3. Minimum/maximum prices and number of transfers

GMIDVictoria: 19921996
in volume and price. Price increases have continued, and are now consistently above A$1,000/ML. Price dispersion in percentage terms has
decreased. Within the GMID, both prices and volumes of water traded
have been steadier during the first five years, and price dispersion more
pronounced. This could be a sign of a more immature market, but also
reflects spatial restrictions and the differences between private diverters
and irrigation area irrigators. Volumes of water traded have since
increased considerably to almost 25,000 ML during the 1997/98 season
involving 350 transfers.
Within both areas, the removal of restrictions on trade between private
diverters and irrigation areas in 1994/95 significantly changed the pattern
of water trade. Along the River Murray in SA, irrigation areas only
accounted for 4.8 per cent of water traded from 1987 to 1994. This
increased to 35 per cent from 1994 to 1996. However, trade within or
between irrigation areas still accounted for only 5.3 per cent. Within the
GMID, private diverters accounted for 10 per cent of water traded from
1992 to 1994. This share increased to 24.3 per cent from 1994 to 1996, with

trade between private diverters accounting for 13.4 per cent. Within both
states, the policy change increased market activities in the sector with the
lowest activity level and moved water into the sector with the highest
activity level, only the direction of the move was opposite.
Bjornlund (2002) applied hedonic price functions to sellers and buyers
during the two study periods, to establish which factors influence water
prices. The large price dispersion within GMID was caused by three
factors: 1 The restriction on trade between private diverters and irrigation
areas. Prior to 1995, private diverters paid up to A$150/ML less. This difference was reduced to around A$40/ML after the restriction was
removed, and was only if both the buyer and seller were private diverters.
If a private diverter sold to an irrigation area irrigator, there was no price
reduction. This suggests lack of information. Private diverters, selling to
other private diverters, are obviously not aware of the change in policy, or
the fact that the price level within irrigation areas is higher. 2 Within the
Murray system, where trade is spatially restricted and sales-water allocations higher, water prices were A$85/ML lower. 3 From 1992 to 1994 water
buyers in the western part of the Goulburn system, where water is applied
to lower valued commodities and salinity problems most severe, paid
A$32/ML less than in the high value producing east. Since water could be
freely traded to the east, prices should not be lower. This is only possible
if information flow is inadequate. This is supported by the fact that water
sellers in the west only received A$16/ML less. Obviously, sellers aware of
the price level in the east, and selling their water that way, get higher
prices. This changed during the 1994/96 period, where the hedonic function did not suggest prices to be lower in the west, possibly reflecting
increased information flow within a maturing market.
Along the River Murray in SA, there were no spatial restrictions on
trade, but there were spatial differences in production. The high value efficient users were mainly located upriver in the Riverland. Downriver, at the
mouth of the river, water was mainly used for low value crops and irrigation methods were less efficient. During 198793, it was found that the
more efficient irrigators, using drip irrigation and micro sprinklers, paid
more for water, while irrigators using flood and furrow irrigation were
able to purchase water at lower prices. This suggests that in the immature
market, with little information flow, opportunistic inefficient buyers, who
could not afford full market prices, are capable of finding cheaper water.
During the second period, when irrigation area irrigators increased their
market share, the price difference between private diverters and irrigation
areas became measurable. Private diverters paid A$47/ML more for
water, whereas irrigation area sellers only received A$17/ML less. This is
because most irrigation area sellers sold to private diverters and received
higher prices, whereas those selling to other irrigation area irrigators
received lower prices. This issue was further emphasized by the fact, that
sellers using water brokers received A$22/ML more benefiting from the
brokers market knowledge. It was also found, that sellers located at the
mouth of the river sold water for A$40/ML less. These examples indicated
an inefficient and immature market with a lack of information flow.
The importance of market facilitators as price stabilisers is clearly
782
illustrated under the MDBCs Interstate Water Trading Pilot Project. Due
to significant distances between buyers and sellers as well as increased
administrative complexity, 99 per cent of both sellers and buyers used a
broker. As a result prices varied within a fairly narrow band during the
first two years of trade (Young et al., 2000).
Reasons for buying and selling
The buyers and sellers were asked to rate how important they found a
number of reasons for buying and selling. They were asked to rate them
on a one to seven scale. Discussions with irrigators in the regions, indicated that many are purchasing water as part of a whole of farm plan
to both consolidate existing production and increase production. Buyers
and sellers were therefore asked to rate all the reasons for buying and
selling. Table 1 shows the reasons for buying and Table 2 for selling. In
the tables the percentage of buyers and sellers finding each reason
important is reported. For the purpose of the tables, all ratings from 3 to
7 are considered to reflect some importance. The mean rating for each
reason is also reported in brackets. The reasons can broadly be grouped
into two categories: expanding reasons, where the purchase of water
results in an expansion of production, and non-expanding reasons,
where the purchase of water is mainly used to protect and maintain
existing production. However, buyers might rate an expanding reason
important without actually increasing the area. If they rated the reason
in the lower range of the scale (3 or 4), they might consider expanding
at a later stage. Similarly, sellers might not rate it important to reduce
their irrigated area, they might have sold because they needed the
money, but as a consequence they might have reduced their irrigated
area. Acknowledging this, buyers and sellers during the 1994/96 period
Table 1. The importance of various reasons for buying
The GMID and the River Murray in SA
Reason:
Expanding reasons:
Increase area of existing crops
Grow new crops
Establish first irrigation
Enterprise
Non-expanding reasons:
Increase water application
on existing area
Security against drought
Speculate in water
% of buyers finding the reasons important1

198794
199496
GMID
SA
GMID
SA
47 (3.4)
60 (3.6)
52 (3.8)
55 (4.0)
56 (3.7)
56 (3.8)
65 (4.6)
66 (4.7)
15 (1.8)
32 (2.8)
16 (1.9)
22 (2.3)
53 (3.7)
70 (4.8)
23 (2.0)
27 (2.4)
30 (2.3)
5 (1.2)
78 (5.0)
76 (5.1)
38 (2.7)
36 (2.9)
31 (2.4)
13 (1.6)
Note: 1 These categories are based on the respondents rating of the importance
of each of the listed reasons on a 17 scale. In the above table 12 is not
important, 37 is important. Figures in brackets refer to mean values of the
17 ratings.
Environment and Development Economics
783
Table 2. The importance of various reasons for selling
Reason:
% of buyers finding the reasons important1

198794
199496
GMID
SA
GMID
SA
Non-reducing reasons:
Did not need the water
Needed the money
59 (4.1)
57 (3.9)
45 (3.2)
71 (4.6)
69 (4.5)
61 (3.7)
59 (4.1)
58 (4.1)
Reducing reasons:
Reduce irrigated area
Stop irrigating
Retire
25 (2.3)
24 (2.4)
13 (1.7)
20 (1.9)
19 (2.1)
15 (1.8)
20 (1.9)
21 (2.1)
12 (1.6)
20 (2.1)
18 (1.8)
15 (1.9)
Note: 1 These categories are based on the respondents rating of the importance
of each of the listed reasons on a 17 scale. In the above table 12 is not
important, 37 is important. Figures in brackets refer to mean values of the
17 ratings.
were asked, whether they actually reduced or increased their irrigated

area.
Within the GMID, where irrigators have permanent pastures and other
significant investments depending on dwindling sales-water allocations,
much higher importance is placed on non-expanding reasons, such as
increasing water on existing crops and drought security. The importance
of these reasons increased over time, as the impact of the MDB Cap
increased the pressure on sales-water allocations. The expanding reasons
are also rated highly but constant. Cross tabulations and Chi-square tests
were applied to the respondents ratings. These supported the initial
expectations, that irrigators purchase water both to secure their existing
production and to expand their irrigated area, to make their properties
more viable as a part of the general structural adjustment toward larger
more efficient farms (Bjornlund and McKay, 1999).
Along the River Murray in SA, where all plantings are supported by
secure water rights, the expanding reasons were rated most important
and increased in importance, reflecting the boom in viticulture and some
horticulture. The non-expanding reasons were rated least important and
remained steady. Within both areas, speculation in water increased in
importance showing growing awareness of water as an asset. Speculation
was rated most important within the GMID. This reflects that the ability to
cash in on capital gains is much higher within this pasture- and croppingbased area. Once permanent plantings have been established, based on
such water, it cannot easily be detached again. Analysis of irrigated farmland in the Riverland showed that water, land, and improvements cannot
be separated in the hedonic price function (Bjornlund, 2001). Looking at
how many buyers actually increased their irrigated area, it was found that
within the GMID only 40 per cent did so buying 43 per cent of the water.
Along the River Murray in SA 75 per cent increased their irrigated area
buying 90 per cent of the water emphasizing that trade in SA increases production more. This reflects the different allocation policies and the
different definition of the Cap.
784
The reasons for selling can also be grouped into two categories. The
non-reducing reasons, where the sale mainly activates unused water and
does not cause a reduction in productivity, and reducing reasons, where
the sale does result in a reduction in productivity. Within both study areas,
the non-reducing reasons were by far the most important and generally
increasing in importance. Less than 25 per cent rated reducing reasons
important, and the importance of these was declining. This suggests that
most water traded is unused water. Looking at sellers actually reducing
their irrigated area, it was found that along the River Murray in SA, 31 per
cent of the sellers reduced their area, selling 31 per cent of the water.
Within the GMID, 27 per cent reduced their irrigated area, selling 41 per
cent of the water. These figures suggest, that around one-third of all water
sellers reduced their irrigated area indicating a quite significant adjustment impact in both areas.
Analysing water rights, volumes sold, and volumes used prior to sale, as
well as the sellers intentions to reduce irrigation, indicate that a number of
sellers, within GMID, might have to reduce their irrigated area in the
future. About 25 per cent sold water on which their existing production
depends, without any intention of reducing their irrigation (Bjornlund and
McKay, 2000b). This indicates a group of struggling farmers, unwilling to
accept reality and make the inevitable adjustment, which might be to their
long-term financial detriment. Irrigated farmland analyses show that properties with insufficient water for existing production carry a price penalty,
and that the value of actively used water, when attached to land, tends to
exceed the price paid for water in the water market (Bjornlund, 2001).
Higher value uses
Analyses of the water use of buyers and sellers, as well as which crop they
were going to expand/establish or reduce, enable an evaluation of trades
ability to promote higher value production. The answer in both study
areas is cleartrade does promote higher value production. Water purchased to expand production, as well as that purchased to secure existing
production, was applied to higher value crops and was sold by lower
value users. Without trade, water would have remained with the low
value users, who are unlikely to have the financial means to convert to
higher value production and would therefore have remained unused or
been activated for low value use.
As discussed above, most water was unused prior to sale (58 per cent in
GMID and 69 per cent in SA) but was sold by low value users. Within the
GMID, cattle producers sold 45 per cent of the water, sheep producers 26
per cent, and 9 per cent did not have any water use. Major reductions in
water use took place among cattle and cereal producers, and many with
mixed grazing and cropping reduced their cropping component rather
than their grazing activities. Along the River Murray in SA, cropping properties sold 42 per cent of all water and sellers not having any irrigation sold
4 per cent. Most actual reduction in irrigation took place within cropping
and vegetable production (Bjornlund and McKay, 2000a).
Within the GMID, dairy farmers purchased 69 per cent of all water and
cattle producers 18 per cent. Out of the 43 per cent used for expansion,

dairy farmers used 67 per cent. Along the River Murray in SA, vineyards
purchased 36 per cent of the water while other horticulture and vegetable
producers purchased most of the rest with 9.8 per cent being purchased by
new enterprises. Looking at the 90 per cent of the water used for expansion, 57 per cent was used to establish vineyards and 30 per cent for
horticulture with 8 per cent for vegetable production (Bjornlund and
McKay, 2000a).
More efficient water uses
Buyers and sellers of water were asked about their water use efficiency at
the time of trade. The issues were different within the two study regions.
Within the GMID, water is supplied in open channels and applied by
gravity using flood irrigation. The issues here are whether the land has
laser grading, surface drains, and re-use system. Buyers and sellers were
asked whether they had these facilities, and whether the buyers have
installed them as part of the water purchase. Along the River Murray in
SA, pressurized pipes supply almost all water, and water is applied using
irrigation systems, either overhead sprinklers, micro sprinkler, drip irrigation, or centre pivot. Buyers and sellers were therefore asked which
irrigation system they used before trade, and buyers were asked which
irrigation methods they were going to use on new plantings.
Within both study areas, there was evidence that water moved to more
efficient water users, especially when considering the improvements that
buyers have done in connection with the purchase (Bjornlund and McKay,
2000a). For example in SA, drip irrigation was used by only 3.3 per cent of
the buyers, whereas 35.1 per cent of all water purchased will be applied on
new plantings using drip irrigation. Buyers also monitored and managed
their water application better, with 56 per cent of the buyers using potentiometers to schedule irrigation, against less than 15 per cent of sellers.
Within the GMID, almost twice as many buying properties were laser
grade and had re-use systems.
Social, community and environmental impacts
It has been the hope of policy makers, that water trade would facilitate a
socially equitable redistribution of water. It was anticipated, that the
buyers would be able to fully compensate the sellers and that sellers could:
sell the water and the land separately in situations where that would
bring the highest return, and the seller wanted to leave the property;
sell the water and return to dry land farming, supported by off-farm
work and/or return earned on the capital gained from selling the water
or retire on the property;
sell part of the water, either unused water or reducing the irrigated area,
and invest the money in improving the remaining irrigation, and
thereby make them long-term viable.
Our analyses suggest that these expectations were not fulfilled. Within the
GMID, only 20 per cent confirmed that they used the proceeds from the
sale to improve irrigation, whereas 63 per cent put it toward general
revenue and 26 per cent toward debt reduction (Bjornlund and McKay,
786
2000b). Along the River Murray in SA, 27 per cent said they used the proceeds to improve their irrigation efficiency, of those who did not, 59 per
cent put the money toward general revenue and 22 per cent used it for debt
reduction (Bjornlund, 1999). These findings reflect the fact that the most
common reason for selling was the need for the money. To sell a long-term
asset, to pay running costs or cover short-term debt, does not improve the
long-term viability of the property and cannot be repeated.
Comparison of water market prices and water value when attached to
land raises some further social impact issues. Within both study areas, it is
indicated that sellers of unused water are being handsomely compensated
compared with the value of unused water when attached to land. On the
other hand, if water is actively used for production, the value of that land
is reduced by a larger amount than the seller receives for the water in the
water market. These problems are aggravated in areas where significant
capital investments are made in long-term water dependent farm improvements, such as plantings and irrigation systems. When attached to land,
the value of water depends on the use to which the water is put, since part
of the value of water has been capitalized into the value of these water
dependent capital investments. To fully compensate sellers of water used
for production, prices need to be high enough to pay for both the water
and the water dependent farm improvements left idle by selling the water.
(Bjornlund, 2001).
It thus appears, as if a group of sellers are selling water, on which their
present production depends, for less money than it is worth when attached
to land. These farmers are eroding the capital value of their property, and
many of them are using the proceeds to cover annual expenses. Such developments can only further consolidate these farmers in the rural poverty
trap. On the positive side, there is 25 per cent actually using the proceeds
to improve their irrigation efficiency and 15 per cent in order to retire.
Analysing changes to farm and water right sizes indicates that trade
generates larger properties with more appropriate water rights. After
trade, farm sizes are still within what must be considered family operations. Trade, however, seems to widen the gap between smaller and
water-poor farmers and larger water-rich farmers. The former group
depends on off-farm work, especially during periods of drought, while the
latter depends on a non-family workforce. There is no evidence that trade
causes a decrease in the rural population or a loss of amenities in rural
communities. Rather, trade seems to facilitate a stable but changing rural
community by consolidating productive land and water into larger units,
separating excess farm improvements and unviable land to be purchased
by life-style farmers helping to uncouple the economy of rural communities from farming (Bjornlund and McKay, 1999).
It follows, from the findings discussed under water use efficiency, that
water trade generates environmental benefits. If water is sold, out of inefficiently irrigated and drained properties on saline soils, into properties
with more efficient drainage and irrigation management practices on suitable soils, it will reduce the negative environmental impact.
Analysing the soil salinity levels on selling and buying properties, in the
western part of the GMID, where salinity problems are worst, shows that

water is moving out of more saline soils and on to less saline soils
(Bjornlund, 1999). This is a positive result, provided some management
program is put in place to rejuvenate the saline soils. On the negative side,
analysis of water movements up and down the River Murray in SA indicates that river salinity levels have raised by 0.6 EC due to changes in
dilution flow (Bjornlund and McKay, 2000b).
What is the state of water trading in Southeastern Australia now?
When looking at the temporary water market, it becomes apparent that
some issues still need to be addressed for the permanent market to
flourish. Within the GMID, there was almost 4,500 temporary transfers
moving nearly 250,000 ML of water during the 1997/98 season. Within the
Murray Region of NSW, the 1998/99 season saw 250,000 ML purchased by
1,766 buyers compared with only 2,000 ML permanently traded.
Within all three states, water exchanges now exist for temporary trade
managed by the water authorities. Such exchanges have had a major
impact on market operations. Supply, demand, and prices are now publicly known. Transfers, using individual agreements, are still most
predominant, but the exchanges facilitate a considerable proportion of
transfers, varying from 10 to 40 per cent. Analyses of the temporary
markets for the 1998/99 season indicate that the exchanges mainly facilitate trade between distant parties, and transfers of smaller volumes of
water. Larger transfers, and transfers between known parties, still tend to
take place on an individual basis. However, the Exchanges serve as price
setters for such private deals, and also facilitate some trade between neighbors, avoiding conflicts over payment. As an outcome price fluctuations
have declined. During the 1998/99 season, within the Murray Region of
NSW, supply and demand changed during the season. Because of the
public nature of the exchange, high standard deviations of prices only
lasted a short period (Bjornlund and McKay, 2001a).
The exchanges cannot be compared with the US Water Banks. Prices
reflect buyers offers to pay and sellers offers to accept. Two different
methods are applied. Within the GMID, a weekly clearing price is set,
based on all offers to buy and sell, which facilitates the largest volume of
trade, what Howe (1997) calls a sealed-bid double auction. As a result,
some buyers pay less than they are willing to pay, and some sellers receive
more than they are willing to accept, but no sellers receive less and no
buyers pay more. Within the Murray Region in NSW, buyers publish their
offer to pay, and sellers their offer to accept, on a notice board at the office
of the authority and on the web. Trade can then take place between corresponding offers. Some buyers might choose to change their offer to match
sellers or vise versa. Deals can be concluded by mail, fax, or on the Web.
This is a continuing auction system. Howe (1997) calls this method the
Bulletin Board Water Bank.
The question arises: Why this difference in market activity? Discussions
with irrigators, their organizations and water authorities indicate a
number of reasons for the preference for temporary trade:
1. Many industries are moving toward a position where they do not own
all their assets. Many farmers are cash strapped and leasing capital
788
equipment is therefore an option and becoming increasingly used. The

short-term lease of water suits this concept, satisfies the institutions
financing leases, and can be organized to coincide with contracts for
sale of produce.
2. Under the present tax system, temporary trade has tax advantages.
Lease payments are costs, to be offset against annual income, and lease
income can be offset by annual cost. For permanent trade, the purchase
is an investment and cannot be depreciated. For the buyer, such sales
might be subject to capital gains tax.
3. When buying annual water, the buyer knows when he or she buys one
ML, that is what will be delivered, there is no uncertainty. On the other
hand, if an irrigator purchases one ML of water right, the annual allocation varies every year. The long-term allocation is uncertain, since the
impact of the Cap, on annual allocations, is not yet fully known, and the
issue of environmental rights is still under investigation.
4. Sellers expect water prices to continue to increase, and know that selling
water permanently has a negative impact on the value of their property,
if and when they will have to sell. It is therefore better to hold on to the
asset, if they can.
6. Lessons for developing countries
Efficient market outcomes will only be achieved under certain conditions
such as: an efficient flow of market information, for example price,
demand, and supply; secure property rights; efficient market facilitators,
and sufficient research effort. Probably the best example of such an efficient market is the share market. Water markets, however, lack most of
these characteristics largely due to the nature of the resource and the
market place, hence it is prone to market failures. An institutional framework must therefore be developed, forming the foundation for efficient
market outcomes by providing incentives and information, guiding behaviour, and thereby influencing market outcomes. This section will outline
some of the areas that need to be addressed by such an institutional framework, based on the experiences discussed in this paper.
Within southeastern Australia it was demonstrated, how the early
periods of trade saw low volumes of water traded at widely fluctuating
prices. As markets matured, with increased market activity and the emergence of market facilitators, price dispersion was reduced. The introduction
of Water Exchanges for temporary transfers played an important role in
communicating market information and thereby increased market
efficiency. This situation saw buyers and sellers adjust very quickly to
changes to demand and supply during the season. This was also reflected
under the MDBCs Interstate Water Trading Pilot Projects and is supported by findings of Brown et al. (1982) in the US.
Lesson 1
New countries intending to introduce water markets, must develop
methods of communicating market information to irrigators at the outset,
and design the practicalities of market operations. The methods should be
adapted to local circumstances, and preferably utilize channels of commu-

nications which already exist and with which irrigators are familiar and
confident. Especially this could be important in many developing countries, where the ability of well-informed and well-financed buyers to
benefit from ill-informed and poor sellers is much greater than in a country
like Australia. Experiences from Chile support this. It was found that lowincome farmers did not benefit from the new Water Code and water trade,
rather they were at risk of losing out.
The research by Gardner (1985) pointed out the importance of freeing up
market restrictions, allowing a wider group of buyers and sellers to trade,
representing both low and high value users, and users with different
security of supply. This was clearly demonstrated in Australia, where
restrictions on trade between different classes of irrigators were removed,
resulting in more uniform, higher prices, and the activation of unused
water. This is also supported by experiences in Chile, where the most
active trading developed in an area where water could be freely transferred over a large region, due to the interconnection of three major dams.
Lesson 2
Effort should be made to remove obstacles to the spatially free movement
of water, as well as the movement between different classes of water
rights. This might be an area where government intervention can be beneficial, by financing the necessary infrastructure to facilitate or free up the
spatial movements, since such investments are not within the reach of
most individual water users.
In Australia, the issues of total resource use, unused entitlements, and
environmental and in-stream needs were not addressed prior to introducing water trading. This has resulted in uncertainty about future
allocation levels and is generating conflicts within irrigation communities
(Bjornlund and McKay, 2001b). This uncertainty also constitutes an impediment to the use of permanent water trade, in preference to temporary
trade which does not promote long-term investment in efficient and
environmentally sustainable water uses.
Lesson 3
The issues of total resource use, unused entitlements, and environmental
and in-stream needs should be addressed prior to the introduction of
trade. This process is politically sensitive, and the need for the devolution
of resource management is imperative here. Local communities need to
understand the necessity of this process, and gainers and losers need to be
identified and accept the outcome, and compensation issues addressed.
In many countries, such as Germany, Spain, Mexico, Argentina, and most
of the west US, a version of the beneficial use doctrine is used to deal with
the issue of unused water (Solanes, 1999). According to that doctrine,
water has to be put to a beneficial use or the holder loses it. It has been
argued that this doctrine is an impediment to efficient water use since irrigators will pour water on the field rather than loosing it. This is not
necessarily so; in Arizona it is combined with definitions of maximum
790
water use for all productions, and such norms are regularly revised in
order to reflect the development of technologies to use water more
efficiently (Johnson and Caster, 1999). In Chile, the lack of penalty on nonuse has lead to the fear of speculation in water (Solanes, 1999).
Lesson 4
It is important to consider the issue of unused water. Failure to address
this issue with adequate regulatory mechanisms can lead to inefficient and
unsustainable water uses and opens up for speculation and monopolistic
behaviour which can result in environmental damage, social hardship, and
negative economic impacts.
Australian experiences indicate that market outcomes vary significantly
from jurisdiction to jurisdiction, depending on the legacy of past water
policies and differences in major water uses. In Chile, the allocation policy
is to issue more water rights than the available resource, factoring in traditional return flows from upstream users as downstream supply. As
water rights are defined as consumptive use, this return flow is not guaranteed. As water trade, or increased water prices, encourage upstream
users to introduce more efficient irrigation or conveyance methods, return
flows are reduced with detrimental impact on downstream users.
Lesson 5
When developing water market policies and evaluating their potential benefits, it is important to thoroughly understand the legacy of past policies.
Free market environmentalists argue that as long as the government keeps
hands off, market forces will solve all problems (Anderson and Leal, 1991).
This relies on the existence of strong interest groups, able and willing to
lobby and pay for environmental and recreational benefits. In most developing countries, such groups do not exist, or do not have the necessary
political and financial clout. In such instances, a balance must be struck, to
reflect the society in which markets have to operate. On the other hand, we
agree with Huffman (1994), when he says that there is no reason to abandon
markets to protect the environment, but rather to introduce defensible regulatory instruments, designed to minimize market distortions. In essence
markets are excellent servants but poor masters (Young, 1997). They can be
used to reallocate natural resources, providing a regulatory framework
exists, to guide the process in the direction desired by the society.
Lesson 6
The balance between private market forces and government regulation to
protectthird-partyinterest,includingenvironmentalconcerns,mustbefound.
It is essential that water rights are clearly specified and formally registered,
so that the buyers have full information about the product that they are
buying, and ownership is secured. Such registers will also enable third
parties to register an interest in the right, such as mortgages. In a recent
paper we suggested that the following issues must be addressed to maximize the outcome of water markets:

Security of supply specified as the probability of receiving the volumetric entitlement. If a government has the authority to cancel water rights, the
conditions for such cancellations must be clearly specified. In areas
where allocations are announced annually, as a per centage of water
rights, it is important that the process of determining the allocation is
transparent. Announcements of allocations must be made early in the
season, and changes made regularly, as the factors affecting the allocation changes. Such factors should be public, and the changes to these
factors communicated to water users.
Reliability of delivery, specified as the period from ordering to receiving the
water.
The period during which the water can be used. The lack of this definition
caused problems in Chile between consumptive and non-consumptive
users.
The constraints on trade, such as spatial constraints, limitations on trade
between sectors in the economy, only consumptive use, etc. must be clearly
stated.
Some indication of the expected quality of the water.
The duration of the water right, either indefinite or for a specified period of time.
In the latter case, the likelihood of the right being renewed, and the
factors determining the renewal, must be stated.
Lesson 7
It is essential that water rights are clearly specified and formally registered,
so that the buyers have full information about the product that they are
buying, and ownership is secured. In many developing countries, where
records are parsimonious, the water use based on customary rights, it is
important to assist water users in rectifying this prior to introduction of
trade or allow for a transition period (Velasco, 1999).
In many states in the US, disputes are handled by the judicial system, and
can be very time consuming and costly. Chile adopted the US approach,
without a framework where the courts create precedents and with a
passive judiciary. As a consequence, the outcomes of court procedures are
unpredictable and contradictory. In Australia, disputes are settled within
an administrative framework. In Victoria, clear guidelines exist as to how
much water can be used on a property, providing some certainty. In SA,
buyers have to produce an Irrigation Drainage and Management Plan, providing less certainty. Within SA and NSW, it has been suggested to require
all irrigated properties to have a water management plan, setting out how
much water can be attached to the property, and the conditions under
which it can be used. If such plans correspond with state-wide, as well as
local water management plans, setting out environmental and socially sustainable limits for trade, the need for case-by-case evaluations would be
eliminated, and thereby speed up transfers and reduce costs.
Lesson 8
It is important that procedures and conditions for water trade are explicit,
and designed to accommodate transfers quickly and at low cost. This
792
requires that conditions for trade are clearly specified, and that procedures
for settling disputes are in place.
Societal acceptance is a prerequisite for a successful market (Simpson,
1994; Brown, 1997). Both in the US and Chile, cultural issues have been
identified as impediments to trade. In Australia community concern was
one of the initial barriers to the introduction of trade. One way of ensuring
this is to encourage and strengthen water user organizations. Experiences
in Chile have proven that such organizations can be instrumental in facilitating markets.
Lesson 9
It is important to identify cultural and religious values associated with
water use, and how these can be equitably incorporated into the market. It
is increasingly being accepted that pure neo-classical economic and market
based approaches are falling short of social and non-economic aspirations
in many developing countries (Appelgreen and Klohn, 1999).
Conclusions
There are many benefits to be gained from water markets in developing
countries, and many lessons to be learned from existing and emerging
markets. However, markets need to be adapted to the local social fabric
and environmental constraints and have to take into account the legacy of
past policies. The above lessons clearly indicate that successful markets
require complex institutional and legal frameworks, as well as strong
social and economic capacities. Many developing countries, especially
low-income developing countries, lack these structures and capacities.
Formal water markets are therefore unlikely to be successfully implemented, while their implementation in better-established developing
countries are likely to be postponed until resource conflicts are so severe
as to force the hands of governments. There is a clear role to play here for
development aid organizations to assist in setting up the institutional and
legal frameworks required. While this takes place, informal water markets,
such as those discussed in India and Pakistan can play an important role
in facilitating a more equitable access to water resources.
References
Alaouze, C. and S. Whelan (1996), Economic efficiency and property rights issues
in the management of rural water, in J.J. Pigram (ed.), Security and Sustainability
in a Mature Water Economy, Armidale, NSW: Centre for Water Policy Research.
Anderson, T.L and D.R. Leal (1991), Free Market Environmentalism, San Francisco,
Pacific Research Institute for Public Policy.
Appelgreen, B. and W. Klohn (1999), Management of water scarcity: a focus on
social capacities and options, Physical Chemical Earth (B), 24: 361373.
Archibald, S.O. and M.E. Renwick (1998), Expected transaction costs and incentives
for water market development, in K.W. Easter, M.W. Rosengrant, and A. Dinar
(eds.), Markets for WaterPotential and Performance, Boston: Kluwer, pp. 94117.
Bauer, C.J. (1998), Against the Current: Privatization, Water Markets and the State in
Chile, Boston: Kluwer.
Bjornlund, H. (1999), Water trade policies as a component of environmentally,
socially and economically sustainable water use in rural southeastern Australia,

Ph.D. Dissertation, Adelaide, University of South Australia, Division of Business
and Enterprise.
Bjornlund, H. (2000), To regulate or to marketstriking the balance for sustainable
water use, Proceedings of joint conference on Water and the Law, Adelaide, 18
October, 714.
Bjornlund, H. (2001), Water policies and rural land values, Proceedings of the 7th
Pacific Rim Real Estate Society Conference, Adelaide, 2124 January.
Bjornlund, H. (2002), Signs of maturity in Australian water markets, New Zealand
Property Journal (in press).
Bjornlund, H. and J. McKay (1999), Do permanent water markets facilitate farm adjustment and structural change within irrigation communities?, Rural Society, 9: 555572.
Bjornlund, H. J. and McKay (2000a), Are water markets achieving a more sustainable water use?, Proceedings from the Xth World Water Conference, Melbourne,
1117 March.
Bjornlund, H. and J. McKay (2000b), Do water markets promote a socially equitable
reallocation of water? A case study of a rural water market in Victoria Australia,
Rivers, 7: 141154.
Bjornlund, H. and J. McKay (2001a), Operational aspect of water markets,
Proceedings from the 3rd Australasian Natural Resources Law and Policy Conference,
Adelaide, March.
Bjornlund, H. and J. McKay (2001b), Environmental flows and sustainable rural
communities. profitability and sustainability at war or constructive coexistence,
Proceedings from the 19th Federal Convention a Water Odyssey, Canberra, 15 April.
Brehm, M.R. and F. Quiroz (1995), The Market for Water Rights in Chile, World Bank
Technical Paper No. 285, Washington DC, World Bank.
Brown, L., B. McDonald, J. Tysseling, and C. Dumars (1982), Water reallocation,
market proficiency, and conflicting social values, in G.D. Weatherford, L. Brown,
H. Ingram, and D. Mann (eds.), Water and Agriculture in the West US
Conservation, Reallocation, and Markets. Studies in Water Policy and Management,
Colorado: Westview Press, pp. 191256.
Carter, H.O., H.J. Vaux, and A.F. Scheuring (eds.) (1994), Sharing Scarcity Gainers
and Losers in Water Marketing, California: Agricultural Issues Centre.
Colby S.B. and D.B. Bush (1987), Water Markets in Theory and Practice. Market
Transfer. Water Values and Public Policy, Colorado: Westview Press.
Department of Water Resources (1986), Irrigation Management Study, Water
Resource Management Report Series, Melbourne, Department or Water
Resources.
Dumars, C.T. and M. Minnis (1989), New Mexico water law: determining public
welfare values in water rights allocation, Arizona Law Review, 31: 817839.
Easter, K.W. and R. Hearne (1995), Water markets and decentralized water
resources management: international problems and opportunities, Water
Resources Bulletin, 31: 920.
FAO (1999), Issues in Water Law Reform, Expert Consultation, Pretoria South
Africa, 35 June 1997, Rome, FAO.
Gaffney, M. (1997), What price water marketing?: Californias new frontier,
American Journal of Economics and Sociology, 56: 475520.
Gardner, B.D. (1985), Institutional impediments to efficient water allocation, Policy
Studies Review , 5: 353363.
Gorriz, C.M., A. Subramanian, and J. Simas (1995), Irrigation management transfers in Mexico, World Bank Technical Paper 292, Washington, World Bank.
Gould, G.A. (1989), Transfer of water rights, Natural Resources Journal, 29: 457477.
Hearne, R.R. and K.W. Easter (1995), Water allocation and water markets. An
analysis of gains-from-trade in Chile, World Bank Technical Paper No. 315,
Washington.
794
Hearne, R.R. and K.W. Easter (1998), Economic and financial returns from Chiles
water markets, in K.W. Easter, M.W. Rosengrant, and A. Dinar (eds.), Markets for
WaterPotential and Performance, Boston: Kluwer, pp. 159171.
Howe, C.W. (1997), Increasing efficiency in the water markets: Examples from the
Western United States, in T.L. Anderson and P. Hill (eds.), Water Marketing
The Next Generation, Lanham, Maryland: Rowman & Littlefield Publishers,
pp. 79100.
Howe, C.W. (1998), Water markets in Colorado: past performance and needed
changes, in K.W. Easter, M.W. Rosengrant, and A. Dinar (eds.), Markets for
WaterPotential and Performance, Boston: Kluwer, pp. 6576.
Huffman, J.L. (1993), NAFTA and water: dare we talk about water markets, in
A.R. Riggs and T. Welk (eds.), Beyond NAFTA: An Economic, Political and
Sociological Perspective, Vancouver, Fraser Institute, pp. 97101.
Huffman, J.L. (1994), A brief history of North American water diplomacy, in T.L.
Anderson (ed.), Continental Water Marketing, San Francisco, Pacific Research
Institute for Public Policy, pp. 928.
Ingram, H.M, A. Schneider, and S.C. Nunn (1989), Measuring the public welfare
value of water, Arizona, Udall Centre for Studies in Public Policy, University of
Arizona.
Johnson, J.W. and L.J. Caster (1999), Tradeability of water rights: experiences of the
Western United States, in Issue in Water Law Reform, Rome: FAO, pp. 151180.
Lobos, G.M. (1999), Transferability of water use rights and the case of transitional
legislation in Chile, in Issue in Water Law Reformi, Rome: FAO Legal Office,
pp. 5381.
MacDonnell, L.J. (1990), The Water Transfer Process as a Management Option for
Meeting Changing Water Demands. Boulder, Colorado, Natural Resources Law
Centre, University of Colorado.
MacDonnell, L.J., C.W. Howe, K.A. Miller, T.A. Rice, and S.F. Bates (1994), Water
Banks in the West, Natural Resources Law Centre, University of Colorado.
Meinzen-Dick, R.S. (1998), Groundwater markets in Pakistan: institutional development and productivity impacts, in K.W. Easter, M.W. Rosengrant, and
A. Dinar (eds.), Markets for WaterPotential and Performance, Boston: Kluwer,
pp. 207222.
Mumme, S.P. and H.M. Ingram (1985), Community values in southwest water management. Policy Studies Review, 5: 365381.
OECD (1989), Renewable Natural resourcesEconomic Incentives for Improved
Management, Paris. OECD.
Pea, H.T. (1996), Water markets in Chile: what they are, how they have worked
and what needs to be done to strengthen them?, World Bank Conference on
Environmentally Sustainable Development, Washington DC.
Person, P. and A. Michelsen ( 1994), Determinants and Trends in Water Right Prices:
An Econometric Analysis, Laramie, Wyoming, Wyoming Water Resources Centre.
Pigram, J.J., R.J. Delforce, M.L. Coelli, V. Norris, G. Anthony, R.L. Anderson, and
W.F. Musgrave (1992),Transferable Water Entitlements in Australia, Canberra, Land
and Water Resources Research and Development Corporation.
Randall, A. (1981), Property entitlements and pricing policies for a maturing water
economy, The Australian Journal of Agricultural Economics, 25: 195220.
Rosengrant, M.W. (1995), Water transfers in California: potentials and constraints,
Water International, 20: 7287.
Rosengrant, M.W. and H.P. Binswanger (1994), Markets in tradeable water rights:
potential for efficiency gains in developing country water resource allocation,
World Development, 22: 16131625.
Schleyer, R.G. (1994), Chiles market-oriented water policy: institutional aspects
and achievements, in G.L. Moigne, K.W. Easter, W.J. Ochs, and S. Giltner (eds.),

Water Policies and Water Markets, World Bank Technical Paper No. 249.
Washington DC, pp. 6578.
Shah, T. (1993), Groundwater Markets and Irrigation Development. Political Economy
and Practical Policy, Bombay: Oxford University Press.
Simpson, L.D. (1994), Are Water Markets a Viable Option, Finance and
Development, June: 3032.
Sitarz, D. (1993), AGENDA 21: The Earth Summit Strategy to Save Our Planet, Boulder
Colorado Earth Press.
Solanes, M. (1999), Institutional and legal issues relevant to the implementation of
water markets: a review of experiences, in Issues in Water Law Reform, Rome:
FAO Legal Office, 181197.
Sturgess, G.L. and M. Wright (1993), Water rights in rural New South Wales,
Policy Monograph No. 26, St. Leonards, NSW, Centre for Independent Studies.
Thobani, M. (1998), Meeting water needs in developing countries: resolving issues
in establishing tradeable water rights, in K.W. Easter, M.W. Rosengrant, and
A. Dinar (eds.), Markets for WaterPotential and Performance, Boston: Kluwer,
pp. 3550.
Thompson, B.H. (1997), Water markets and the problem of shifting paradigms, in
T.L. Anderson and P. Hill (eds.), Water MarketingThe Next Generation, Lanham,
Maryland: Rowman & Littlefield Publishers, pp. 130.
Velasco, H.G. (1999), Modernisation of water legislation: the Mexican experience,
in Issue in Water Law Reform, Rome: FAO Legal Office, pp. 83105.
UNESCO (2000), The Design and Implementation Strategy of the HELP Initiative,
Parish.
Wahl, R.W. (1989), Markets for Federal WaterSubsidies, Property Rights, and the
Bureau of Reclamation, Washington DC: Resources for the Future.
World Bank (1993), Water Resources Management, A World Bank Policy Paper,
Washington DC.
Young, M. (1997), Water rights: an ecological economists perspective, Working
Papers Series 97/7, Canberra, CSIRO Resource Futures Program.
Young, M., D. Hatton McDonald, R. Stringer, and H. Bjornlund (2000), Inter-state
water trading: a two year review, Report to the Murray Darling Basin
Commission, CSIRO Land and Water, Adelaide.

Bjornlund (2002)

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Bjornlund (2002)

Uploaded by

Copyright:

Available Formats

Environment and Development

Aspects of water markets for developing countries:

Link to this article: http://journals.cambridge.org/abstract_S1355770X02000463

Downloaded from http://journals.cambridge.org/EDE, IP address: 147.142.186.54 on 13 Aug 2015

Environment and Development Economics 7: 769795 2002 Cambridge University Press

Aspects of water markets for developing

ABSTRACT. Water market reforms are being promoted by international organisations,

Henning Bjornlund and Jennifer McKay

Environment and Development Economics 771

Henning Bjornlund and Jennifer McKay

When water transfers do not change the intake or discharge of water no

Environment and Development Economics 773

774 Henning Bjornlund and Jennifer McKay

Environment and Development Economics 775

Henning Bjornlund and Jennifer McKay

Environment and Development Economics 777

Figure 1. The MurrayDarling Basin

of influence to the wider management of natural resources and environmental issues.

Henning Bjornlund and Jennifer McKay

Environment and Development Economics 779

Henning Bjornlund and Jennifer McKay

Figure 2. Minimum/maximum prices and number of transfers

Figure 3. Minimum/maximum prices and number of transfers

Environment and Development Economics 781

Henning Bjornlund and Jennifer McKay

% of buyers finding the reasons important1

Environment and Development Economics

Table 2. The importance of various reasons for selling

% of buyers finding the reasons important1

were asked, whether they actually reduced or increased their irrigated

Henning Bjornlund and Jennifer McKay

Environment and Development Economics 785

Henning Bjornlund and Jennifer McKay

Environment and Development Economics 787

Henning Bjornlund and Jennifer McKay

equipment is therefore an option and becoming increasingly used. The

Environment and Development Economics 789

Henning Bjornlund and Jennifer McKay

Environment and Development Economics 791

Henning Bjornlund and Jennifer McKay

Environment and Development Economics 793

Henning Bjornlund and Jennifer McKay

Environment and Development Economics 795

You might also like