Water market transfers in South Africa: Two case studies

Abstract

Statistical analyses (discriminant, logit, and principal components) of water transfers in the Lower Orange River showed that water rights were transferred to farmers with the highest return per unit of water applied, those producing table grapes, and with high‐potential arable “outer land” without water rights. Only unused water (sleeper right) was transferred, while water saved (through adoption of conservation practices) was retained possibly for security purposes. A second study in the Nkwaleni Valley in northern KwaZulu‐Natal found that no water market had emerged despite the scarcity of water in the area. No willing sellers of water rights existed. Demand for institutional change to establish tradable water rights may take more time in the second area since crop profitability in this area is similar for potential buyers and nonbuyers. Transaction costs appear larger than benefits from market transactions. Farmers generally use all their water rights in the second area and retain surplus water rights as security against drought because of unreliable river flow. This study indicates that these irrigation farmers are highly risk averse (downside risk). Government policies that increase the level of risk and reduce security of licenses are estimated to have a significant effect on future investment in irrigation. In an investment model the following variables explain future investment: expected profits, liquidity, risk aversion (Arrow‐Pratt), and security of water use rights. The study is seen in the light of the New South African Water Act of 1998. According to this act, the ownership of water in South Africa has changed from private to public. This reform may not impede the development of water markets in South Africa since in the well‐developed water markets of the United States, western states claim ownership of water within their boundaries. All states in the western United States allow private rights in the use of water to be established and sold.