Invited Articles

The Cost of Free Water

Richard Tren

Richard Tren is an independent environmental economist based in Johannesburg. He has been active in the fight against Malaria, and was instrumental in founding the Africa Fighting Malaria NGO. Mr Tren has also been researching the issue of water in South Africa, a water-poor country.

The allocation of water in South Africa has been used as a political weapon since the earliest colonists began to use the resource for agricultural and commercial reasons. Rent seeking, or the legitimate manipulation of the political process for personal or group gain, has ensured that water allocation has become a highly contentious issue around the world. There are numerous examples in South Africa of where special interest groups managed to lobby government for increased water allocation, favourable pricing and for the development of new and highly costly water infrastructure.

In so many areas of life in South Africa, the government has made its presence felt, using its power to reach the outcomes that it has felt desirable. For many years, government dictated where people could live, where they could work, who they could marry and what they could do with their money. The government's involvement in water allocation has been no different, with central government deciding in most areas who could use water, how much they could use and the purpose for which it could be used. This of course led not only to injustice and inequity, but in the case of water, to the widespread misuse and misallocation of the resource.

In, The Cost of Free Water, co-authored with Dr. Roger Bate and published by the Free Market Foundation, we examine the history of water law in South Africa and look at the case study of the Crocodile River in Mpumalanga. This provides an excellent example of how political imperatives decided how water should be used. This resulted in grossly inefficient water use, to the disadvantage, economically and socially, of all groups that were not politically favoured at the time.

Our historical analysis however is only useful if it can provide lessons for the future and can be a guide for government so that it does not repeat the mistakes of the past. One of the most exciting events on the Crocodile River during the severe drought in the early 1990s was that irrigation farmers began to trade their water entitlement with other farmers. This informal market was soon legitimized by the Department of Water Affairs and the subsequent trading of water rights was highly beneficial for the catchment.

We estimate that efficiency gains of around R25 million were achieved with the trades. Water began to find its way to higher value agricultural uses and given that farmers were prepared to pay over three times the government set water tariff for the traded water, the resource was used far more carefully and efficiently. One of the less obvious gains from the trading was that it ensured that the Mountain View Dam, which had been proposed for a tributary of the Crocodile River was delayed. It seems as though the project will be permanently shelved, saving the taxpayer R230 million. The reason is that the presence of the water market freed up unused water and ensured that water was used more efficiently, obviating the need for new water storage.

Overall, the trading was highly beneficial for the catchment and should have been welcomed by anyone who had an interest in ensuring the more efficient use of water.

The changes to the water law which came about in the 1998 Water Act have brought about some positive and some negative changes. On the positive side, the government moved away from a Eurocentric law to one that is perhaps more applicable to a semi-arid country such as our own. It also set about alienating water rights from the land, ensuring that trade or transfers of those rights was more feasible. Power over the management of water is also to be devolved to catchments through the Catchment Management Agencies (CMA). It is encouraging that non-agricultural users of water, such as industry and municipalities will be members of the CMAs which should dilute some of the political power of irrigation farmers.

There are however a number of negative aspects of the 1998 Act. Perhaps the overriding problem is that it has created insecurity for water users over the rights that they have. Water has been de jure nationalized and water licenses are to be issued for anywhere between 5 and 40 years. Government has the power to grant licenses and also to revoke them if it feels that water is not being used in what it deems to be a suitable manner. In a study along the Orange River conducted by Armitage and Niewoudt for the Water Research Commission shows that the insecurity that farmers have over their rights means that they are highly unlikely to invest in new more water efficient irrigation equipment. It also means that they are less likely to trade their resource, which limits that extent to which efficiency gains can be achieved.

Another problem is that the government has the right to impose an economic charge on water users. This charge is to be calculated by government and is supposed to reflect the opportunity cost of the resource. The problem is however that not even the most sophisticated models can even come close to calculating this cost. Markets are far better than bureaucrats in capturing this opportunity cost and should therefore be encouraged to do this. The government is not doing nearly enough to ensure that water users know that they can trade water and to facilitate that trade. Perhaps this is not being done because when two parties trade, the government does not earn anything. Bureaucrats are unlikely to change the status quo if the new system does not increase their budgets and consequently their power.

As happened on the Crocodile River, trading of water rights anywhere in South Africa will ensure efficiency gains. This is vitally important if the government is to be able to expand water supplies to poor communities and to ensure that the environmental needs in catchments are met. If municipalities are able to buy and sell water rights, they will be able to respond far more dynamically to the changing needs of local populations and will be able to manage their affairs far more effectively. Not only this however, if industry and mines are also able to trade water rights, the resource will begin to be used in its highest value use.

It seems extraordinary given the fact that South Africa has such a long history of excessive government control that has led to such injustice and inequity that anyone could still argue for more government intervention. The obvious solution to so many economic and social problems in South Africa, not least water allocation, is to reduce the power that government has and ensure that individuals and corporations have power of their own resources. Recognising this, ensuring that water users have secure title over their resource and allowing them to trade that resource could be the single most important step that government could take in ensuring efficient and equitable water use.