The quality of institutions, legal frameworks and policies (as well as their governance dimensions) is a key factor affecting the sustainable management of water resources.

While acknowledgment of the importance of the political and institutional context is commonplace, the assessment of these enabling and constraining factors for sector-level policies and related external support is an area where experiences are only gradually accumulating. Therefore, this tool aims at identifying how can improvements in the quality, cost-effectiveness and accessibility of water resources for agriculture and energy be brought about, and more importantly, sustained over time.

With that purpose, the tool facilitates the analysis of the different institutional, legal and policy aspects that affect the development of water resources for agriculture and energy production; it also allows the identification of reforms/actions to overcome obstacles to such development.

An integral part of the tool is a public/donor budget analysis that helps assess policies and programmes introduced in a country in terms of implementation of political commitments towards objectives and targets. The analysis focuses on two key dimensions of budget analysis, for which different indicators were developed (see table below). These dimensions are:

1. Strategic priorities and political commitment of government and donors

This dimension illustrates the investment priorities and political commitments assigned by governments and donors to irrigation and hydropower investment in: a) national agricultural policy; b) national energy policy; and c) in the international agreed goals and targets.

The indicators developed under this dimension are used to produce an index that highlights the public and donor investment priorities and commitment to water management for agriculture and hydropower. The so called "Institutional and Policy Index (IPoI)" that is visually represented with a radar graph (see table below).

IPoI is the geometric average of the value of the following six indicators: a) irrigation projects budget in agricultural public budget (IPBA), b) hydropower projects budget in energy public budget (HPBE); c) irrigation projects budget in total public budget (IPB); c) hydropower projects budget in total public budget (HPB); e) irrigation projects budget in total donor budget (IDB); and f) hydropower projects budget in total donor budget (HDB).

2. Efficiency of the public spending in the irrigation and hydropower sectors

This dimension shows the level of decentralization and participation in both sectors; as well as the timely utilization of budgetary appropriations as a measure of efficiency of governance and the credibility of public budget.