The cost of free water : Water resources allocation and use in the Curu Valley, Ceará, northeast Brazil

Abstract: Despite enormous investments in water storage infrastructure over past decades, the Curu Valley in the semi-arid state of Ceara, Northeast Brazil, is subject to increasing water stress. This study explains the current situation in the valley and explores institutional alternatives for the achievement of more efficient water resources allocation and use. First, the study analyzes the existing institutional arrangements and ensuing incentives for water allocation and use in Ceara, with emphasis on the Curu Valley. Second, two models are developed which incorporate the institutional requirements for a water market and a negotiation modelfor water resomces allocation. The trade-offs of these two alternatives are analyzed in relation to the transaction costs incurred if either were to be implemented in the Curu Valley.The results show that while some positive incentives originate in other sectors, neither the current formal nor informal institutional arrangements in the water sector provide incentives for efficient water allocation and use in the valley. Thus, engineering measures per se are not sufficient to resolve water scarcity. Both use and allocative efficiency can be improved, but with more information transparency, and enforcement, if incentives such as pricing and water rights are to be used.The study also shows that the institutional requirements for a water market, as compared to a negotiation approach similar to the French Model for river basin management, are basically the same. The transaction costs for implementing a market in the Curu Valley are nevertheless higher due to legal, political, and cultmal reasons. Due to the cmrent weak institutional framework, the functioning of a water market would be hampered and the outcome in terms of economic efficiency and equity uncertain. Although it lacks market flexibility, thenegotiation model would lead to a substantial improvement over the current situation and ought to be introduced first. Its implementation does not exclude a future market, but leads to institutional arrangements that are vital for the functioning of a water market if such were to be the choice at a later point.The principal differences in costs for the implementation of the two models are not of a financial natme, but originate in the political and social realm. This type of transaction cost has to be addressed when a new institutional framework is to be introduced. The costs of achieving institutional change, necessary for the proper implementation and running of a new system are too frequently neglected, especially regarding projects in developing countries, resulting in potentially good projects not achieving predicted results.