Water market institutions: lessons from Colorado

Important water issues in South Africa relate to equity, efficiency of use, quality (return flow pollution) and instream uses such as the environment. Farmers in South Africa pay water rates whether or not water is used and water is not volumetric priced. Water markets can attach an opportunity cost price and scarcity value to water. Opportunity cost pricing by the state has received no support in the international economic literature largely because of estimation problems. Water markets have started to emerge in the Lower Orange River and in the Fish and Sunday's rivers in the Eastern Cape in South Africa but there are two reasons why agricultural water markets do not release water in South Africa. The first reason is that the only water trades that have taken place in these rivers are between non-users of water and intensive users. It may take time before all sleeper rights (water not used) are activated which is also the case in Australia. Secondly, irrigation farmers in South Africa along the Orange and Sunday’s rivers are permitted to irrigate a larger area if they adopt water saving technology such as drip irrigation. Although this water saving technologies will reduce water application per ha, the consumptive use of water per ha may not decrease and will increase if a larger area can be irrigated. Agricultural water markets are thus increasing the use of water and not promoting its conservation. It is thus recommended that transfers should be based on consumptive use if return flow is significant.