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Chapter 11: Water resource management services


The purpose of this chapter is to examine some of the particular features of water resource management services that need to be considered in deciding what forms of, and approaches to, decentralization may be appropriate.


11.1 The nature of water resource management services

Is water use rivalrous?

The economic nature of water is a complex subject and this has implications for water resource management and the services associated with it. For example, whether water use is rivalrous and the extent of this depends critically on the degree of scarcity of water in different circumstances. Various types of users have widely differing requirements. As usage increases relative to supply the degree of rivalrousness can increase leading to conflicts between and within groups of users.

Is water use excludable?

There are also particular considerations relating to excludability and the nature of water users’ rights. Because water is essential to human survival many cultures and societies have conventions and legislation that recognize water as a common property good (see Section 2.1) ‘belonging’ to the community (to the state). The community or state grants permission to use the resource taking into account needs (or demands, present and, to the extent feasible, future) of all members of the community.

Are there externalities?

Some types of water use create externalities for other users. For example, in many situations not all the water used is consumed and the surplus is discharged into the system that services other users. If this water is polluted it can cause negative externalities for users down stream of the discharge.

The need for investment

A further consideration is that, typically, natural sources of water cannot be exploited without some form of investment. This is required to extract the resource, store it if necessary or convenient and convey it to the site were it is actually used. The size of the investment required to develop and distribute a given source of water varies enormously, depending on the source and local conditions, and hence the cost of water actually delivered to end users also varies considerably. Financing and recovering the costs of these investments is one of the major problems to effective decentralization.


Many water sources, including most intakes of the surface water flows, are not technically or economically divisible, so those users within the command area of one source normally cannot resort to alternative suppliers. Thus competition in water markets is practically excluded since suppliers enjoy a monopoly position. However, there are circumstances where alternative sources of water are available, albeit at a higher cost, and this can allow some competition to develop. Indeed, water markets have developed much more intensively where the monopolistic nature of water supply is less marked.

The need for a rule-making authority

As a result of rivalrousness, externalities, monopolies, and equity considerations (most societies support the principle that the rights of all people to a minimum supply adequate for survival must be protected), certain limitations to the exclusion principle are normally imposed. This calls for a superior authority establishing rules relating to individuals’ rights of access to the resource and the management of water resources. Essentially, these rules concern:


Major considerations that justify the intervention of a rule-making authority thus include:

11.2 Factors affecting demand and supply

Requirements versus demand

It is useful to distinguish the concept of water requirements from that of demand for water. The term ‘requirement’ refers either to a historical volume of use by a given subject (he/she ‘requires’ such quantity because this is what has been consumed in the past), or to technical coefficients (a crop ‘requires’ a certain amount of moisture to grow and mature, an animal, or a human being, must consume a minimum amount of water to survive). Typically, the productivity of the subjects requiring the water will decrease at an increasing rate as the availability of water falls below their ‘requirement’. On the other hand, effective demand is a function of the price the user of water must pay to obtain it. If price is low, more water will be used than if the price is high. Typically, the higher the price, the more care will be exercised in using the resource.

The value of water to agriculture and industry

A common feature of water schemes is the striking difference between the benefit/cost relationship of water to agricultural and industrial uses. Broadly speaking, the situation in most countries is that, while by far the largest share of available water is utilized by agriculture, the benefit/cost ratios are in the opposite direction. Industrial users, it is estimated, draw benefits up to 50 times as high as agricultural users per unit of water used. As a result non-agricultural users are more willing and often able to pay much higher prices than agricultural users who tend to resist higher water charges. For each unit of water delivered to end users, water charges generally recover a much larger share of the costs from non-agricultural uses, leading to cross-subsidization of some uses at the expense of others.

The price of water and quantity demanded

When water is used for crop production, low water prices may permit the cultivation of water-intensive crops, which cannot be economically grown if water commands a high price. In theory, as water becomes more expensive, one would expect farmers to economize on and/or restrict its use to higher value-added crops. In some areas, the demand for irrigation water is price elastic[69] for a full range of price changes. However, in other areas conditions may be different and the demand for irrigation water may be very price inelastic, particularly where water charges represent only a small proportion of the total costs of production. In this latter case, increasing water charges will have little effect on cropping patterns, up to the point when irrigated cropping is suddenly no longer profitable, and farmers are forced to look for alternative forms of livelihood. Obviously, if farmers can avoid paying water charges they have little economic incentive to save water.

Thus the price of water may be a factor determining the cropping pattern of an irrigated area, and farmers’ capacity to produce certain crops, particularly popular food-crops. Crops such as rice, for example, require large amounts of water, and can only be produced profitably where the price of irrigation water is low. If the net benefits from irrigation are less than the cost of providing water, farmers will not be able to pay water charges, which recover the cost of the service, and would not demand irrigation water if such charges were enforced.

The effects of subsidies

A common feature of irrigation schemes throughout the world is that the price of water sold to farmers is subsidized. A justification sometimes made for this action is that irrigation has large multiplier effects in terms of increased economic activity in other sectors (transportation, trade, storage, processing industries, etc). However, there are frequently political, social and administrative reasons for not passing on the full costs of provision to water users. For example, governments may consider that subsidies are justified on equity or income distribution grounds.

Subsidies generate distortions in resource allocation, loss of economic efficiency and loss of welfare. They typically generate excessive demand for water and reduce the resources available for system maintenance. From an economic efficiency viewpoint, any trade-off with equity through the use of subsidies should involve the lowest possible loss of welfare. If subsidies are financed by government through inflationary means, rather than by transferring real resources collected with taxes levied in a progressive manner, the cost is borne by the general public, including the poor, many of whom may be poorer than irrigators or villagers using public domestic water supplies. In these cases, the subsidies would result in a loss of aggregate welfare, and in worsening its distribution as well.

Equity considerations in water pricing

Poor people, it has been argued, cannot afford to pay for the full cost of water, hence the service must be heavily subsidized for them. Similar arguments have been used in the case of smallholder irrigators. Matters are, of course, rather less straightforward. In many cases the hard facts of life are that poor people pay exorbitant prices for water. This is either to the water vendors of the urban centres in dry areas, or in terms of women labour days spent to fetch the minimum required supplies and in terms of diseases contracted by using inadequate sources. As to smallholder irrigators, it is by no means evident that they are among the poor members of rural societies.

Water ‘rationing’ and pricing

As demand outstrips supply, water becomes an increasingly scarce resource. However, the extent of water scarcity varies in different areas, and the cost and the ‘value’ of water differ also, often to a significant extent, between one area and another. In some situations there is an absolute scarcity of water and it is extremely difficult to increase the available supply even through capital investment. Increasing scarcity implies that some form of allocation mechanism or ‘rationing’ is required to ensure sustainability of use in the interest of present and future generations. Allocation may be by administrative measures or by pricing, or by a mixture of both. Experience shows that the most effective allocation mechanism is by adequate pricing.

Administrative and market prices

Financial sustainability is typically one of the objectives of decentralization and a major theme of the institutional reform of the sector. The revenue of the service providers depends on the quantity delivered to users and on the price charged for the delivery. Water users remunerate suppliers by paying either market or administrative prices. The structure of water rates varies in different countries. Broadly speaking, however, the following types of components (names can differ depending on countries and legislation) can be identified:

Pricing an increasingly scarce resource

Historically, not all water rate structures include all the above components and most are not calculated to reflect the real cost of each item. Moreover, the increasing scarcity of water poses a problem in determining an appropriate price. In a competitive environment, the equilibrium price is determined by the long run marginal (and average) cost of providing a good or service. That is, the price will be driven down until firms are just earning a return that covers the full replacement cost of the resources needed to sustain additional production of that service. This is a necessary condition for socially efficient pricing (see Chapter 2).

As discussed in Section 3.1.4 in a non-competitive environment this price would have to be determined administratively. Typically it might be estimated on the basis of historical investment costs and current operating costs. However, service providers must be in a position to supply future, as well as present, requirements. In a dynamic situation, where demand tends to grow rapidly and the exploitation of marginal resources is increasingly costly, this means that, in theory, public water prices should be based on projected future long-run marginal costs[70] (LRMC), which may exceed the short term market price. This LRMC should fully reflect the cost of the conservation of the resource, incorporating all costs related to the safeguard of the environment, reclamation of released water from pollution caused by different uses, and recycling costs.

The impact of LRMC pricing

The LRMC approach is not compatible with the current widespread practice of interpreting ‘cost recovery’ on the basis of the historical financial costs incurred by the supplier in developing and operating a primary or a secondary source of water. The adoption of the new approach would require drastic modifications of the legislation currently extant in most countries. Such drastic changes in water pricing policy would have far reaching implications. From the point of view of agricultural production, an important consideration is that the impact on water saving, on the revenue of water supply organizations, and on farmers’ income will be very different depending on the circumstances in which the new rates are applied. This is because each hydrological basin has its own characteristics, its own different systems of land use and irrigation practices, its own spatial dimension and sector-wise consumption demand and its own specific inflexibility with regard to technical modifications of the infrastructure. The economic demand for irrigation water varies with the type of existing infrastructure, the reliability of the service, the guarantee of supply of their entitlement, the nature of the soils, the on-farm technology used, the current cropping pattern and the economic potential for changing the cropping pattern[71].

Technical and economic implications

The impact may differ depending on the price elasticity of water demand Furthermore, the impact in cases of drought may also be very uneven depending on local conditions. One conclusion seems to be fairly certain, namely, that the details of price reforms must be backed up by very careful considerations of all the local technical and economic implications. For example, a reform that would impose the application of the same water prices in all the hydrological basins of a country, on the ground that there is one single social value of water for the economy as a whole, would be highly questionable.

The problem of adequate cost recovery

Irrespective of the general economic issue about the scarcity value of water, there is little disagreement about the principle that adequate cost recovery by public sector water agencies must be established and enforced. Similarly there is general agreement that the level of subsidies must be reduced or eliminated altogether to ensure financial sustainability, sustainable efficient delivery of water to all users, and adequate conservation of the resource by eliminating wasteful uses. However, there are three major problems to be addressed to make this possible, which decentralization policies may help to solve.

Appropriate accounting practices

The first problem is that current accounting practices make it impossible to ascertain the true cost of the water delivered to different categories of users, or to individual users. In a decentralized system, organizations responsible for the management of water delivery assets have separate accounts, which in principle ought to make the assessment of costs, and the ‘need’ for, and the purpose of, subsidies transparent. Financial decentralization is thus a first necessary step to reveal how much water deliveries cost, and what (and whom) the government subsidies actually finance.

Measuring deliveries

The second problem is specific to water and concerns the technical possibility of measuring deliveries in cost-effective ways. Water quantities can be easily measured at the level of the main works, for example at a dam site, or at the outlet of a secondary canal or well, but measurements become more and more difficult, and exponentially more costly, as one goes down the distribution system. When the conveyance is under pressure, automatic measuring devices can be installed at the intake of the ultimate user, but this is not feasible in the case of conveyance by open canals. However, installing a measuring device in every urban dwelling house, or at the delivery point of every irrigated farm property, may not be always practical. Some water measuring devices can be installed in open canals down to the lowest distribution points[72], but the operation and control of such devices is very costly in terms of manpower, and there is a moderate probability of incorrect reporting and abuse. In the rural areas of developing countries, drinking water deliveries to village communities are generally not measured, as it would be too costly or totally ineffective. Nevertheless, if decentralization is to work effectively, mechanisms to improve cost recovery must be devised, even in circumstances in which a reasonably accurate measurement of the delivery is not practical.

Identifying users

The third problem arises in those cases in which the individual user of a water supply is not identifiable, nor his/her consumption is measured. For example, water can be drawn from a public standpipe in an urban area or from a village well by anyone, with no record possible of the beneficiary and how much water has been taken.


What appears to be important for effective decentralization is to move to a situation whereby the scarcity value of water plays a role in allocation mechanisms. Moreover, the quantities used by individuals and the real cost of providing the service needs to be reflected as much as possible in the price paid by all types of users.

11.3 Appropriate forms of decentralization

11.3.1 Component functions of water provision services

Before considering the options for decentralizing water resource management services it will be useful to examine the components of the water provision service, that is, planning consumption, regulation, production and delivery and financing and the main functions and tasks involved in each component.

Planning water resource use

Efficient water resource utilization requires good flexible indicative long-term planning on a national basis. The reason for this is essentially the potential offered by integrating different hydraulic systems with a view to maximizing returns on investment for sustainable exploitation of the national resource. Flexibility is required because the patterns of demand vary with time as a result of demographic, economic, social, and technology developments. Planning is required at the national level, at the self-contained water basin level, the local, municipal and/or community level and at the individual supplier and user level.

Planning at the national level

A major outcome of effective planning at national level is the broad allocation of available water resources to different sectors and uses. The national water plan (and national water laws) provides the global water allocation mechanisms and the framework within which specific allocation mechanisms should be designed. For a long time this function has been interpreted as a central government responsibility (see Section 11.3.3). However, in many countries the management of water resources is shared between several ministries and a comprehensive effort to coordinate their needs is often lacking. In these circumstances, a process of integration, to achieve this desirable integrated planning at national level, is required as a precursor to decentralization.

In principle, national water plans ought to be formulated in every country. However, in many countries it may not be practical, and even not desirable, to elaborate and update a detailed sustainable water resource development plan on a continuous basis. Collection and updating of all the necessary data is very costly. The long-term dynamics of the demand for water, particularly with respect to the impact of different water pricing policies and of technological development, are difficult to estimate. It is generally not easy to arrive at a consensus on major investments that fix long-term water rights and benefits on a territorial basis, particularly if they involve large transfer of resources from one watershed to another.

Planning at river basin level

Hydrological plans for a river basin, however, are more common. They can provide a basis for formulating and updating the general framework within which specific allocation mechanisms must be devised and applied to regulate the rights of access to sources of water. However, there is a danger that river basin plans may become nothing more than ‘shopping lists’ for local needs unless set in the context of an overall national plan. An effective river basin plan would include:

Some indicative quantification of objectives would also be included, along with mechanisms allowing for flexibility and adjustment on a rolling basis.

The regulatory role

National water laws provide for specific allocation mechanisms that govern how much individual water rights holders are allowed to extract, convey, sell or use. These empower different levels of governance, or special organizations, to issue and enforce administrative regulations to implement the law in practice. Existing legislation is frequently the greatest obstacle when attempting decentralization of water resource management. A thorough study of the existing legislation is therefore necessary in order to determine the changes that are required.

Enforcing the rules

Rules are useful only if they can be enforced. In the water sector, over-extraction from private wells leading to overexploitation of the aquifers is common. There are also frequent cases of individuals ‘stealing’ water from open canal systems, creating problems to downstream users. There are cases of industrial users who release heavily polluted waters, despite the rules they have subscribed to in the water right concession. Enforcing rules requires two things:

Effective rule enforcement thus implies the existence of powerful water authorities at the central or decentralized level to undertake these functions. Failure to vest the relevant authorities with sufficient powers, staff and resources to perform these functions will undermine the effectiveness of any attempts to improve the effectiveness of water allocation mechanisms.

Conflict arbitration and resolution

Conflicts may arise independently of how well the rules have been originally designed because of changing conditions that could not, or were not, forecast at the time of the design of a system. Conflicts also arise because of changes in the rules that may not fit a local situation even if the change has a sound general objective. Mechanisms must be devised to resolve such conflicts. Some conflicts are resolved in the Courts of Law, others at lower administrative levels. In both cases, conflict resolution raises serious equity issues because smallholder irrigators, and farmers living in villages, whose source of water is affected, cannot fight their case against more powerful or influential subjects because of high transaction costs. We will see that decentralization, through the promotion and empowerment of water users’ associations, of community water supply projects, and of other forms of associations, may help moderating the effect of such inequitable situations.

Production and delivery of water

Production and delivery of water involves a great variety of systems and of agents. Broadly speaking, in rural areas one would distinguish:

The production and delivery of water from each one of these types of project requires the implementation of three main functions:

The implementation of each one of these functions requires a different skill-mix, depending on the scale of the project and on the technologies applied, and involves different operators. Efficient management of each line function calls for entrusting them to separate agents. In large schemes, practical and sometimes institutional considerations call for separating the operation and maintenance of the main works (for example, head works such as dams, and main canals in an irrigation system) from that of secondary and tertiary works. This separation may entail separate ownership of assets and of the right to use water. In these cases the owner of the head-works sells water to the owners of the lower distribution systems, who, in turn, sell to ultimate users. The scheme is applicable to irrigation, rural domestic, urban domestic and industrial water supplies as well.


As discussed earlier, financing service provision includes funding and recovery of capital investment costs and of operation and maintenance costs. The sources of funds include:

Efficiency and transparency principles require that established commercial type practices are followed and accounts are made public. In many countries this is not current practice, particularly in the public sector. The procedures of accounting and financial reporting of water development agencies, in the private or in the public sector, should be transparent and uniform within a country. Whenever this is not the case, establishing such procedures and enforcing their application is an important responsibility of central water authorities.

11.3.2 Stakeholders and decentralization criteria

In Chapter 5 we outlined four major general criteria - legitimacy, accountability, competence and financial sustainability - that that are relevant in making decisions regarding the appropriate organization to assume the responsibility of different water resource management functions. The main potential actors to assume control of these functions include:

Good governance and efficient management of the resource require transparent and precise definitions of the different functions of each actor, and the application of well established principles governing the implementation of the functions.

Stakeholders, conflicting interests, and power games

Let us look at how the interest of different stakeholders may affect institutional arrangements, and the way water management functions are performed. There are numerous groups of stakeholders ranging from politicians through public and private sector managers and employees to large and small-scale water users and individual households. Each category of stakeholders has its own different interests, which may be consistent with those of another category or be in conflict with them. The interest and the importance of different categories of water users may vary over time.

The potential effect of decentralization on stakeholders

The institutional design, or the institutional reform of a water management system, must take into account the different interests of water users, the power configurations of the organizations responsible for managing the resource, and the impact of the potential dynamics of situations. Failure to do this may have serious practical consequences. The current political environment inevitably influences reformers’ decisions in any case, and a transparent discussion of the issues and options involved would allow less biased decisions to be taken. In this respect, decentralization offers the advantage of improving the process of identifying the potential contrasting interests of different stakeholders, and of searching for solutions which minimize the risk of conflicts emerging that are difficult to resolve. Decentralization may provide the flexibility required to deal with the changing objectives and interests of different categories of stakeholders in the course of time.

Decentralization distributes shares of power to different stakeholders at different levels of governance. A decentralized system, therefore, is less subject to the dominating influence of a category of potential rent seekers who may acquire positions of power more easily in centralized organizations. Experience shows that concentration of authority in centralized management structures tends to generate closed coalition systems (see Section 2.4 for an explanation of this concept), which are unable to manage resources effectively, to accept new challenges, and to provide services at an acceptable level of quality. The result is continuous political interference with management, widespread patronage, a plethora of poorly paid employees, inadequate servicing of clients, poor cost recovery, bad maintenance of facilities, unsustainable financial conditions.

Decentralization aims at establishing an effective system of checks and balances among different agents operating in the sector. This may improve the degree of accountability of the agents, the transparency of decisions, and the efficiency of operations, and help to lowers costs through competition and emulation. A decentralized system may also help to diffuse the impact of possible conflicts among different stakeholders, and facilitate conflict resolution. Decentralization aims at improving the participation of water users in decision making at different levels, offering opportunities for users to influence the system performance to their benefit. Spreading the ownership of water rights among many licensees, splitting the access to water rights among different holders in different sections of a system, and the practice of temporary licensing of commercial exploiters (public or private), are important features of decentralization policy. These devices offer protection to the ultimate users against the vested interests and cultural drawbacks of technicians and administrators.

11.3.3 The role of central government

From the point of view of legitimacy, the natural functions of government generally include overall resource planning, regulation design and enforcement, information and training. The reasons for this are twofold:

As indicated on several occasions in this Chapter, central government may also have to assume a role in the financing of investments and even running costs when no other form of financing is practicable.

Global planning and coordination

As argued earlier, from an institutional point of view, the elaboration of the global water allocation mechanism (the water use plan, the national water laws) rests with the central government, as it is the primary owner of hydraulic resources. At the central level, several ministries are concerned with the use of water (agriculture, natural resources, health, and energy), raising the issue of coordination, that may be entrusted to the National Planning Agency. In some countries, Ministries of Water, or Ministries of Irrigation, are established, and these have special responsibilities in the water sector. In federal countries, water resource development planning is a state responsibility, often derived from the primary ownership of the resource granted to the states by constitutional law. In the case of large non-federal countries, central government may devolve this responsibility to regional or provincial governments, although some form of coordination and conflict resolution mechanisms are retained at the centre.

Regulation design and enforcement

Central governments are typically responsible for general regulatory functions, which determine the broad allocation of the resource and the framework within which specific allocations can be made (the national water resource utilization plan, the national water laws, the appointment of organizations having specific regulatory responsibilities). However, as discussed later, the specific regulatory functions elaboration and administration of water use regulations, granting of concessions, licences and authorizations, monitoring the activities of licensees, controlling compliance with the rules of water markets, and application of sanctions for non-compliance with obligations by water users rights holders may be delegated or devolved to other bodies.

Separating regulatory and asset management functions

Ideally, regulatory and asset management functions must be entrusted to different entities to avoid conflict of interests and to ensure unbiased and effective performance of both functions. This separation is automatic when resource utilization assets are in the private sector, but, since most water utilization assets are in the public sector, a real problem arises. In some countries the two functions, or a significant number of tasks relating to regulation and water production and delivery are still entrusted to the same organization. The role of central government in performing these functions can usefully be evaluated in terms of its legitimacy, accountability, competence and financial sustainability.

Production and delivery

From the legal point of view, the intervention of government in production and delivery of water is fully legitimate because government owns the primary hydraulic system of a country. From the point of view of the public goods nature of the service, on the other hand, it does not necessarily follow that governments should directly be involved in this component of service provision.

The financing role

As mentioned earlier, governments may have to become involved in financing production and delivery of water when:

11.3.4 Delegation of responsibilities

Delegation of responsibilities

The principle of specialization indicates that central government may delegate, sometimes devolve, some of their responsibilities for regulatory and non-regulatory public functions to public agencies operating outside the public administration structure. For example, temporary ad hoc commissions are set up to coordinate specific tasks such as the preparation of a national water plan, or the drafting of a national water law. In many cases, however, specialization requires the establishment of permanent structures.

Regulatory bodies

These permanent structures may include specialized agencies responsible for water resource management on different territorial bases, which are also responsible for managing water production and distribution facilities (see below). What often results is a very mixed situation, in which actual water allocations follow different criteria in individual areas, and the various responsible agencies advocate different policies within areas. At the same time the administration of the law is very uneven and small water users’ interests are not equitably dealt with. Moreover, in the increasingly common cases of water scarcity, the planning of resource use is sub-optimal. Sometimes a central water authority (Box 11.1) is created as an institutional solution to this problem.

Box 11.1 A central water authority

Authorities can be established to regulate the market for public utilities when critical national interests are at stake, and/or in cases of natural or other forms of monopoly cause structural market failures. In many developed countries, such authorities are established in strategic sectors such energy, communications, civil aviation, the stock exchange, etc. The conceptual approach is based on the distinction between the legislative framework, which is the initiative of the central government and requires parliamentary sanction, and the elaboration and administration of the related specific regulatory framework that may be devolved to autonomous agents. This agent may be an authority, which has jurisdiction over the national territory, and ensures uniformity and transparency of approach, and reasonable stakeholders’ representation. Responsibility for such authorities is not entrusted exclusively to the central government and its delegated agents. Authorities are typically governed by a board made up of representatives of different agents interested in the resource, including representatives of the central and local government, of private enterprise, advocacy organizations, and users’ organizations. Monitoring the way in which the private and public water users’ rights manage their entitlement of the resource, and respect the rules of the game, would be a core task of the authority.

The concept of a water authority offers the advantage of combining the necessary centralization of the functions related to the establishment and enforcement of rules and standards valid for all, with a certain degree of independence from the central government and of local interests as well. Rules and standards affecting the functioning of water markets and administered water prices should ideally apply to the whole country and therefore their formulation must be central, and so must be the control of their application. This does not mean that water prices should be uniform throughout a country, but accounting methods should be the same. Monitoring the implementation and enforcement of the rules, however, can be usefully deconcentrated to lower level operating units. This can be on regional or other geographical bases, in accordance with the principle of subsidiary that ‘nothing should be done at the higher level of an organization that can be done satisfactorily at a lower level’. Deconcentration should improve efficiency, reduce the transaction costs of water users, and increase the hold of the central authority over the national territory.

National water commissions

In some countries, steps in this direction have been taken by appointing ‘national water commissions’. However, these have generally only advisory functions. In other cases, such commissions are established at regional, provincial, or river basin level. Commissions may or may not include representatives of private entrepreneurs and of the civil society, depending on the degree of decentralization governments wish to pursue.

National Institutes

There are certain functions that provide public goods, such as general knowledge and technical skill. It is desirable that technical information collection and storing is centralized so that all factors relevant to the opportunities offered by integrating the facilities exploiting the national resource can be made available to all levels of planning and/or operation evaluation and control. The current solution is to delegate the function to national institutes, though river basin authorities also have sections responsible for these tasks. The actual technical work of information gathering is often outsourced to private specialists, consultants or specialized firms of contractors.


Public provision of technical and administrative training of water managers is often justified by their public goods characteristics. The combination of specialized schools/training courses provided by central government, and of similar initiatives of local governments and of specialized agencies entrusted with water development in specific areas, provides for a degree of decentralization. Similar considerations apply to public water agents’ activities connected with the support of communities and water users’ associations. However, these can be also outsourced to specialized private agents and NGOs.

National Water Supply Companies

The heavy involvement of government in the production and delivery of water has resulted in the establishment of many public sector organizations responsible for water assets management functions. These may have authority at national level, such as National Water Supply Companies. Often the specialisation principle is applied, in order to separate responsibility for urban water supplies from that of rural water supplies. At local government level, many Municipal Water Corporations exist, this being a standard practice in large urban centres of developing countries.

River Basin Authorities

We have seen that the basic technical unit of a water resource is the river basin, which often overlaps with the ground water resource basin. This provides a strong claim on technical grounds for entrusting the management of the resource on a territorial basis to a River Water Basin. This is an autonomous agency, with separate budgets, governed by a Board responsible to the supervisory line ministry and to the national planning agency. Board members may include representative of local governments, private enterprise and ultimate water users. When they exist, such agencies may be delegated the function of collecting and disseminating hydrological and other information relevant to the management of the resource in the territory of their domain. The development of the water resource of a major river basin normally involves a very complex system of interrelated infrastructure. This may comprise facilities which are inter-connected with one another such as storage reservoirs on several rivers, large main canals and lesser distribution canals and pipelines, pumping stations, flood control works, navigation facilities, power generation and distribution facilities, surface and deep ground water wells development, etc. River basin authorities are entrusted with the responsibility of elaborating and implementing a comprehensive plan to achieve an optimal integrated exploitation of the resource by the different facilities.

River basin authorities in developing countries have normally also been entrusted with the responsibility of developing and managing much of the infrastructure required to exploit the water resource. Some examples are the Khuzistan Valley Authority in Iran, the Office of Niger in Mali, the Mahaveli River Authority in Sri Lanka and the Gezira scheme in the Sudan. Over time, most of these schemes met with all the typical drawbacks of the public sector undertaking: low efficiency, high operating costs, poor service delivery, inadequate cost recovery, and poor maintenance, particularly of the lower ends of the distribution systems. Similar situations also prevailed in centralized government projects operated directly by water ministries, or in single purpose government-owned agencies or water corporations involved in urban water supply or irrigation. To remedy these situations, public attention has been drawn to the need for reforming the financial and institutional arrangements of the systems, with emphasis on further decentralization, divestment and privatization.

Planning river basin development is one thing; constructing and managing the facilities are different matters. We have argued that the government may be required to finance the construction of infrastructure where the private sector is unwilling or unable to do so, and/or on grounds of equity. However, water itself is often rivalrous and excludable and thus has the characteristics of a private good, which can be and is priced. Irrigation water, domestic and industrial water supplies, power, and navigation facilities have a market and are saleable products. Production, distribution, and sale of these products can be entrusted to agents independent of the water authority, under the aegis of a ‘utility’.


In many developing countries the ‘utility’ formula (Box 11.2) has been adopted as a useful basis for designing decentralization strategies in the field of water resource management. Under this formula, decentralization may take the form of devolution of authority and assets to an organization in the private, voluntary or public sector. Effective use of the utility formula requires a strong regulatory authority at the central and watershed level. Granting licences for a limited period of time is also recommended as good practice. This time period should be sufficient to amortize most of the initial investment made, but short enough to force the licensee to operate efficiently and to provide good service to clients, fulfilling all its obligations if it wishes to avoid the risk of non-renewal of the licence.

Box 11.2 The concept of a water utility

A utility is an enterprise that has been granted the exclusive right to exploit a specific publicly owned resource for the benefit of its clients, under obligations established by the concession agreement (licence). These obligations derive from the monopolistic position obtained by the concession, and by the need to respect other conditions related to the impact of the use of the resource (water quality, protection of third parties rights, protection of end users rights, protection of the environment, etc.). Utilities are empowered to own or lease assets, buy and sell goods and services; issue share capital and borrow funds.

In the case of large system, a mixed of public and private management of the resource is often encountered. Because of their size, governments often develop the primary systems and their operation and maintenance are retained in the public sector under the river basin authority, which is owned by the central (or state) government. Lower level infrastructure development may be decentralized to agents, which can belong to local governments, or to organizations in the private or voluntary sector. These are not necessarily utilities. In the case of irrigation facilities it is generally farmer-irrigators’ associations who take over responsibility for operations and maintenance of the distribution system in their area. The distribution system may have been constructed by the government and leased to Water Users Associations (WUA), or constructed by the association itself. We will come back to WUAs in Section 11.3.7.

11.3.5 The role of local government

Economies of scale in water production and distribution and the concept of jurisdictional spillover help to define the domain of local government in relation to other agents in water resource development. Large-scale schemes involve financial and technical resources, which are beyond the capacity of most local governments, and their impact spills over the boundaries of local government’s territorial domain. These schemes must be administered at a higher level, though participatory and subsidiarity principles demand that local governments are represented in the decision-making mechanisms of the upper level organizations, such as river basin agencies, explicitly set up to develop multiple-territory schemes. In urban areas, local government municipalities often establish their own public sector water companies to provide urban water supplies.

11.3.6 The role of the private and voluntary sectors

Water rights can be allocated to specific users under the conditions set forth in the concession (licence, authorizations), which reflect the general public objectives in water allocation and the corresponding obligations of the holder. Once this is done, the private and voluntary sectors can manage the resource, subject to the public control of their compliance with the conditions, and of any other rules affecting water resource management.

Private companies invest resources to develop and/or manage water supplies with a view to making profit by selling water to clients. Water users’ associations may do the same on behalf of their members on a non-profit basis. Private individuals may develop sources for their own use, for selling water to their neighbours, or for a combination of both purposes. The types of water management organizations in the private and voluntary sector are generally determined by government policies and by technical features that, in turn, determine the size of the investment required to develop a given source. Over a certain size, private individuals do not have the capacity to master the required resources, and would either get together to form users’ associations, or create joint-stock companies. The ultimate users of water do generally not control the latter.

Limitations to private sector involvement

In some developed countries, notably the United States, where large financial resources can be mastered by private enterprise, water resource development has actually been largely a private sector business, though not without considerable support of federal and state government subsidies in the case of irrigation. In the developing world, the tradition of private or group investment in water development, exploiting strong water markets in dry areas, is a lively feature of the political, economic and social development history of many countries affected by water scarcity. However, in developing countries in recent times, private and voluntary sector developments have been limited to small and micro schemes supplying irrigation and drinking water. The works required for a rational and comprehensive development of the river basin resources have called for the mobilization of very large amounts of financial resources. Only governments could obtain such finance and they were generally unwilling to limit their interventions to the financing side only. Most irrigation projects have been funded by external sources, which have supported public sector undertakings. Central government controlled water development companies constructed and operated water supply schemes involving important distribution systems, and gradually took over responsibility for developing smaller schemes in rural areas as well. Urban water supplies have been the natural domain of municipalities, which established their own public sector water companies for the purpose. Under these circumstances, the role of the private and voluntary sector in water development has been confined to minor parts of the public hydraulic system, small ground water exploitations, and micro surface water developments at village level in rural areas.

Creating an enabling framework

To create a favourable environment for the private and voluntary sectors to invest human and capital resources in water management, the institutional reform has to take two directions. One prong is the separation of the ownership from the management of facilities, and eventually the divestment of public agencies from part of the facilities. The other is allowing the development of formal water markets. Under the first prong, the management and control of public water infrastructure is decentralized to private and voluntary sector operators (companies or water users associations) by the public agent-owner on a contractual basis. Various instruments are used including leasing, management contracts and outright privatization (sale of public property). Private and voluntary sector operators are transferred the right to use the resource along with all the relevant obligations. To the extent that such enterprises are interested and forthcoming (and this depends on several factors, including the opportunity for profit and the scope for improving efficiency or reduce costs) this policy can be applied by agents of the central government and also at the local government level.

Below the local government level in rural areas, the application of the subsidiarity principle requires water supply schemes that have an impact on a single community to be administered at the community level. This would open the door to further involvement of the voluntary sector. Central governments having an interest in promoting this further decentralization process, need to create the conditions that will mobilize the leadership, entrepreneurial, and economic resources of individual communities to develop and manage their own water resource schemes.

In the case of irrigation, one of the largest constraints for the participation of the private and voluntary sector in the management of schemes is the uncertainty of realizing the planned income. This arises from the difficulty of prosecuting irrigators for the non-payment of water fees and of effectively monitoring water use in open canal systems. As a result, many water users’ associations live in a critical financial situation and government agencies that operate systems face perpetual bankruptcy. This is discussed further in Section 11.3.7.

The development of water markets

The second prong is the development of formal water markets. In principle, allowing the holders of water user rights to sell their entitlement freely to other users ought to be a major incentive for private enterprise to get involved in water production and distribution. The scope for selling water to other users, and particularly for transferring entitlements from one category of users to another, depends on the way the infrastructure is constructed, on the technology applied, and on other factors which impose precise limitations. Several experiences with liberalization of water markets have been evaluated during the last 10 years. A mixed picture emerge which can be briefly summarized as follows:

11.3.7 Water users’ associations and community domestic water supplies

For a long time, governments have played a major role in constructing and managing small water supply and micro irrigation projects for the benefit of poor rural communities. Water from these schemes generally was not charged for, such practice being justified on equity grounds, by the difficulty of collecting water charges from poor people and of identifying the consumption of individual beneficiaries in the case of water supplied for human or animal consumption. In many cases, the maintenance of the infrastructure has been extremely poor, due to the inefficiency of the public agencies involved and their lack of financial resources. It often proved difficult for local communities to take over the public infrastructure, due to the technology used (spare parts are not readily available, recurrent and repair costs are too high). Moreover, the willingness of people to assume the responsibility has been weakened by the transfer dependency[75] generated by excessive past government interventions, and the feeling that as the facilities belonged to the government, it was the government’s duty to make them function properly.

Devolution to local communities from the outset of the project, combined with the provision of support to the community in helping them to decide how to construct and operate facilities while respecting the general legal framework relating to water use, may help overcoming cost recovery and effective management problems. This often affects the way in which water sources are developed and, moreover, facilitates the mobilization of local financial resources to construct the infrastructure.

In developing countries there are many examples of local non-government sponsored water developments which manage to supply water at much lower costs than official schemes of similar size although drawing on similar resources. These schemes utilize technologies described as sub-optimal, but their sponsors manage to mobilize resources for construction, operation, and maintenance to the satisfaction of water users. In the Sahelian zone of Africa, for example, important spontaneous irrigation developments are taking place without appreciable government support, let alone public financial subsidies. A typical case from Mali, which sharply contrasts with the experience of the large public investment in the Office du Niger infrastructure, is described in the Box 11.3.

In developing countries, water users’ associations (WUA) and community water supplies are very important aspects of the decentralization of the water sector. Experience has shown that stakeholders’ commitment and beneficiaries’ participation through effective community management of the resource are important ingredients of efficient and sustainable water resource development. Their importance goes beyond their contribution to improving efficiency, effectiveness, financial sustainability and equity in water utilization. In rural areas, such organizations are building blocks of a democratic system of governance as they make possible the self-government of a very essential resource by the people. They do this within the framework of established rules that must be respected, using methods that belong to the modern organization of society, and with full public recognition. Naturally, whether such organizations can thrive and develop effectively depends very much on the attitude of the public agencies entrusted with the responsibility of supporting them and on the way such a task is actually performed.

Box 11.3 Irrigation development ‘hors casier’ at the Office du Niger in Mali

According to a survey undertaken in 1998, in the Office du Niger area, local farmers have developed about 10,000 ha of small schemes, the bulk of which grow horticultural products, drawing drainage or surplus fresh water from the government canals during the dry season. The survey records a spectacular development: the area estimated to be irrigated “hors casier” in 1993 by a World Bank horticultural development project was about 3,500 ha. The extent of this spontaneous development is in itself one of the largest irrigation projects in Africa. By way of comparison, the entire Office du Niger irrigated area is about 50,000 ha, equipped to produce paddy essentially during the rainy season. The area was developed by the Government over several decades, part of it is in very poor conditions because of lack of maintenance, only about half of the total are has been rehabilitated at very high costs beginning in 1986, with the assistance of international and bilateral financing agencies. During the dry season there is a large surplus of water in the conveyance and drainage system, very few farmers grow a second crop of paddy for a combination of agronomic and financial reasons.

The 10,000 ha of spontaneous development has been fully funded by users, who pay water charges to the Office, although they received no assistance other than the authorization to use the surplus water flowing in the system. Farmers developed their land by their own labour, contracting local artisans (tacherons) capable of executing simple concrete works, bought the required design and supervision services from local private technicians or by remunerating government technicians’ working during their free time. The sponsors of these initiatives, who may or may not be formalized water users’ associations, collect resources in cash and kind to operate and maintain the facilities they have themselves financed and constructed.

Naturally the technology used in these developments is not comparable to that employed to develop large government projects, but is more sophisticated than traditional micro-irrigation schemes developed elsewhere in the Sahel. The technology used is such that water delivery costs are reduced to the point that farmers can afford to pay the full cost of water supply. There is no evidence that these groups have cost-recovery problems.

Source: R. Pantanali (personal communication).

However, the process by which communities manage to achieve sustainable and satisfactory results is neither simple nor automatic, and the time involved may be considerable. Many irrigation experts familiar with developing countries have pointed out the difficulties encountered in establishing functioning WUAs and the fairly long time that it takes to get them to be fully effective operationally once established. Despite the difficulties, end results are encouraging, and many developing countries have adopted the steps to create a favourable environment for the WUAs, as part and parcel of administrative decentralization policies in rural areas (Box 11.4).

Box 11.4 Progress in establishing water users’ associations

In irrigation projects, the number of such associations has been growing rapidly in recent years throughout the World. They have become fixtures of irrigation management in diverse countries such as Zimbabwe, Senegal, Mali, Nigeria, Kenya, Guyana, Argentina, Colombia, Chile, Mexico, Peru, the Dominican Republic, and other countries. An international network exists, the International Network on Participatory Irrigation Management (INPIM), to facilitate exchange of information and experiences. In the case of Indonesia, for example, the Government has transferred more than 400 irrigation systems, covering 34,000 ha, to water users’ associations by 1992.

Source: FAO (1998a).

With community water supplies, experience has shown that the management and technical capacities of rural communities do not develop automatically. It requires a favourable environment, training in technical and administration skills, and the employment of technologies that can be easily maintained in the environments where the facilities are constructed. A critical factor is the availability of spare parts of the equipment installed and of village mechanical skill. Occasionally, the need to install simple equipment with public support may require modifications to the standards set by government regarding the quality of the water used in the villages for domestic purposes, which may have been set with purely technical and related general human health considerations in mind. This may be done without concern for the cost implications and the practical possibility of maintaining the equipment in small towns and villages. Furthermore, there may be no consideration of the quality of the water which villagers may be forced to consume in the absence of public support for some improvement in their supplies or in case of breakdown of the equipment actually supplied. Six major factors affecting the success of community management of water supplies for human and animal consumption are shown in Box 11.5.

However, in poor rural areas, there are often insufficient means within local communities to pay for the investment costs associated with constructing micro-irrigation schemes and/or more reliable and more accessible sources of drinking water. Moreover it is difficult to develop sustainable methods of advancing funds or subsidizing these operations. In these cases, a policy of devolution to those communities may not achieve the expected results unless ways are designed to complement the resources that communities are able to mobilize, in cash and labour, on their own. Where loans are made typically an up-front payment of community contributions is necessary to ensure that their commitment is real, and that there are no conflicts about the distribution of the project benefits within the community.

Box 11.5 Factors affecting the success of community management of water supplies



Adequate incentives

  • Significant economic, health and convenience benefits to users

  • Formal recognition of the water user right of the community

  • Formal involvement of participants in the operation and management of the system

  • Rewards of public officials supporting community initiatives

Sufficient skills and resources

  • Training of community managers in the technical, financial & administrative skills required

  • Assignment of field agents of public water agencies to work with community managers

  • Public co-financing of source development infrastructure or leasing of public facilities

  • Encouragement of NGOs to support community management on a transparent and uniform national basis

Appropriate processes

  • Spreading information about the commitment of public agents to support local communities in developing and managing their water resources

  • Design simplified procedures to obtain public support and make them widely known to all communities

  • Design transparent and uniform community projects eligibility criteria to obtain public support

Effective inter-organizational relationships

  • Support from national government agencies and ministries

  • Support from local governments

  • Cooperation among community organizations at local level

  • Assistance from NGOs and other private organizations

Appropriate technologies

  • Locally adapted equipment, construction materials, and design

  • Effective availability of locally adapted spare parts and replacements

Effective monitoring and evaluation and feedback

  • Effective monitoring of construction, operation and management training activities

  • Continuous evaluation of public agencies’ performance in the application of appropriate processes/procedures

  • Effective evaluation of project impact, including beneficiary assessment

Source: adapted from: Rondinelli (1991).


Water users’ associations (WUA) and community managed domestic water supply offer several advantages:

11.3.8 Decentralizing complex integrated water systems

Charging for water

In practice, how can a complex integrated water system, generally of large or medium size, be decentralized? A major instrument of decentralization consists in splitting the responsibility for, and eventually the ownership of, different parts of a system, opening up the possibility for a plurality of organizations to contribute to managing the infrastructure. When the central government agent retains responsibility for operating only the head-works and the main distribution facilities of a system, the water delivered can be charged on a fairly accurate basis because:

A similar situation may be established for the sections of the distribution network which deliver water to any intermediary outlet, when bulk deliveries are made to other agents responsible for detailed distribution to end-users.

‘Retail’ prices

The agent assuming responsibility for detailed deliveries is faced with the most difficult part of providing the service and of cost recovery. To set an adequate rate the authority responsible for establishing administrative prices would have to estimate the cost of providing the service to different end-users. On the capital recovery cost side, it is most unlikely that established public sector water agents have kept accounts that would enable a reasonable reconstruction of historical costs incurred over many years. In part, this is because there is often a mixture of different sub-systems conveying water to users having different characteristics and requirements (small and large irrigated farms using different technologies, tube-wells and stand-pipes in rural settlements, domestic house connections or stand-pipes in urban area., etc.).

A reasonably accurate accounting reconstruction may be a hopeless undertaking. Estimates of current rehabilitation or new construction costs may be the only way possible, and this requires accepting the principle that water should be charged for on current replacement rather than on the historical cost basis. The second step would be to separate the operation and maintenance accounts of different detailed distribution networks, serving different types of users. The agent’s overhead cost would then have to be allocated to different categories of end-users. This is also not very simple, since there would be many joint-costs to be split on the basis of assumptions which are difficult to explain to end-users and sometimes would appear rather arbitrary to the non specialist and specialists alike.

Once the cost of delivering a unit (cubic metre) of water to different type of users is estimated, there is the issue, mentioned earlier of measuring the quantities actually delivered and deciding whom to charge. There are four broad methods of tackling this, although many variations exist in practice:

Financing subsidies

The first case is typical of water supplies to poor people’s communities that are generally subsidized on equity grounds. However, the service has a real cost, which must be clearly identified to ensure that the subsidy actually funds those deliveries and not other deliveries also (to users who would not qualify for subsidization). The subsidy may be paid directly by the government, in which case it involves a transfer of real resources if actual tax revenue is used. On the other hand, if paid through inflationary financing, it will affect all citizens, including the beneficiaries of the subsidy. Alternatively, the water rates charged to other users may be increased to cover the cost of supplies to the poor communities. In this case, the cross-subsidization always involves a transfer of real resources, the redistribution of benefits is from ‘rich’ to poor users of the same resource, and the water rate would strongly signal the scarcity value of water. In urban areas, such a cross-subsidization policy may be practical and acceptable, in rural areas the situation is much more complex. Many rural water supplies are of very small and micro size, which are not efficiently run by agents external to the community of users. In these cases, other means are devised, and some form of sharing of the cost of the service by water users is introduced, which is not related to the individual consumption of water.

The other three methods respond to the need of charging water according to the quantities actually used, and allow, more in one case and less in the other two, the design of appropriate rates and the calculation of reasonably accurate bills. The issue then becomes one of making the new bills, which inevitably will be higher than past bills acceptable to users particularly when there is typically a failure to collect the full revenue due from users even at subsidized rates.

Devolution to water users’ associations

In many cases, the decentralization of the distribution system of complex irrigation projects through making WUAs responsible for operation and maintenance (and sometimes even the property) has solved the problem of charging farmers a realistic price for water, while significantly improving the reliability of the service. If WUAs assume responsibility for operating sections of the system and sometimes for its construction as well it is then the WUA’s responsibility to collect from its members the full cost of operating and maintaining the facility. This may include the servicing of any loans taken to finance the construction, or the leasing charges for the infrastructure, which belongs to public agent. For example, in Spain, where this has been normal practice for a very long time, the WUAs set their own rates to cover their full cost, including the repayment of long term loans taken to construct, or reconstruct the facilities. When manual control of the delivery to field level is necessary, as in the old design schemes, the members of the WUA play a fundamental role, and the association itself is deconcentrated, with smaller users’ groups taking over operational responsibilities in their own area. All members approve the accounts of the association, so they are fully aware of the costs incurred.

Water market prices and cost recovery

Market prices may recover the full cost of deliveries borne by the supplier, and eventually reflect the scarcity value of the resource, only if reasonably competitive market conditions prevail, and if the liberalization includes the full water supply system, including the initial primary or secondary source of water. Large monopsonistic buyers, such as urban water supply utilities, may be in a position to buy water rights from small farmers below full cost. If farmer-irrigators are allowed to sell part of their entitlement, full cost recovery would take place only if the sellers extract their own water, or if they pay the full cost to the agent that delivers the water to them. If the latter is not the case, the agent does not share the benefits of liberalization. The market price would exercise its function of rationing water consumption, but not of adequately remunerating the cost of providing the primary service.

11.4 Conclusions

The vital importance of water to life influences its economic nature so that is often classified as a common property good with legally defined water users’ rights. Given its special characteristics, water use is often subsidized and in many situations use is outstripping available supplies leading to increasing scarcity and financial burdens on governments in attempting to maintain and increase available supplies. In principle, the price of water has to reflect its future long run marginal cost in order to maintain financial sustainability. The development of markets in water rights is one method of rationing water supplies and generating finance to maintain supplies.

In any decentralization reform process, central government needs to retain responsibility for global planning and the design of regulations and their enforcement. It may also retain a role in the production and delivery of water. However, it may choose to delegate this role to a wide range of specialist agencies at the national or lower territorial level.

Within this overall framework, water user rights may be allocated to specific users under conditions set out in their licence. The private and voluntary sectors can then manage the resource in a regulated environment. This may include the development of formal water markets.

Water users’ associations and community domestic water supplies are potentially important aspects of the decentralization process both in terms of efficient water delivery and as a component of democratic governance.

[69] 'Price elasticity' measures the responsiveness of demand of a good or service to a change in its price. A 'price inelastic' demand means that a given percentage change in price leads to a less than proportionate change in quantity demanded. A 'price elastic' demand means that there is a more than proportionate change in quantity demanded to a change in price.
[70] The full costs associated with producing sustainable additional quantities of water.
[71] The scope for substituting less water-intensive crops for more water-intensive ones may be far less in an African country than in the United States, Australia, or Europe, due to market constraints, for example.
[72] The "modules a masque", for example. Many Water User Associations rely on peer pressure between members to monitor irrigation water allocations to different plots.
[73] The Akosombo dam in Ghana for example.
[74] The High Dam of the Orange River in Lesotho, for example, is designed exclusively for the sale of water to South African urban centres.
[75] For an explanation of the concept of transfer dependency see Section 3.1.3.

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