approach in a particular country will depend in part on existing institutions, the ability to enforce rights through formal systems, and social cohesion within a particular area. Market mechanisms are one approach to improving the efficiency of resource use by ensuring that users pay the true cost of their actions (making the polluter pay; charging for water taken from rivers or aquifers). However, given that many farmers in Africa are poor, there are considerable equity issues to be considered. Further, the costs of establishing and monitoring such market institutions could be high. Ensuring the appropriate institutions also entails ensuring that farmers are able and willing to choose water-efficient technologies and drought-resistant plants. Hence issues of risk and risk aversion, and access to credit are relevant.

A key problem to tackle with respect to improving water efficiency in agriculture is that typically individual farmers do not currently bear the true costs of the water that they use (many of these costs are externalities to the farmers), whether in terms of resulting downstream pollution, or in terms of taking water away from other more socially efficient uses. When water is relatively readily available this is not a problem. However, all forecasts are that water scarcity will become an issue in SSA in the future.

There is a natural tension between water for agriculture and water for ecosystem services. For example, farmers taking upstream water may harm downstream ecosystems. If water is free at the point of access, farmers can pump water from an underground aquifer or divert water from a river without paying for the water and will typically use more water than is socially efficient because they do not have to bear the costs of the water use. Moreover, farmers will likely not have an incentive to adopt relatively costly but efficient drip irrigation or water-harvesting techniques. In these circumstances efforts to increase productivity through the greater exploitation of water may be at odds with the assessment goals with respect to ecosystems and biodiversity. Yet more efficient water use requires markets other than those for water to function efficiently. For example, farmers may need access to credit to afford more efficient water-harvesting and water-use technologies, access to insurance if they are exposed to higher risk, or better access to markets given expected increased outputs and higher input costs. South Africa has explicitly addressed the problem of competing claims for water between agriculture, industry, human use and ecosystems by introducing a “reserve for the environment” in the 1998 National Water Act that reduces available water for other uses by 15-20% (Inocencio et al., 2003).

Typically in SSA there are few formal mechanisms for allocating water efficiently among different users and needs, though local and traditional mechanisms naturally tend to develop, at least among farmers, as water scarcity increases in the absence of formal rules. If these local mechanisms
are ignored, the likely result will be conflict and a reduced likelihood of any new initiatives working. For example, in Tanzania there has been a focus on the use of the statutory legal system to allocate water that ignores the plurality of systems operating in the country and the prevalence of customary arrangements, which has resulted in conflicts between traditional water users and new water regulations (Maganga et al., 2004).

        Approaches to “internalizing the externalities” associated with water use include pricing (such that the price reflects the marginal benefits to different users—though tricky to implement, even in richer countries), regulation (such as assessing and regulating environmental flow requirements to sustain specific ecosystems and the services that they provide), allocation of property rights enabling private markets to develop, and negotiation. Without changes in the current system (water typically being free at the point of access for those with de facto access rights), the appropriate incentives for farmers to adopt more efficient water technologies will not be in place, and water will continue to be used inefficiently. That is, getting the regulatory and institutional environment right is critical before attempting to introduce new technologies. There are also equity considerations—poorer households may simply not be able to afford water if it is priced at its true cost.

5.5.3.1 Fiscal incentives
In South Africa, the 1998 National Water Act attempts to balance efficient and equitable water allocation using what is termed a pro-poor “some for all” approach. Improving the productivity of water use in the agricultural sector— the biggest user of water—was seen to determine the extent to which the efficiency, equity, and sustainability objectives could be reached (Kamara and Sally, 2004). In 2000 the government decided that households would receive 6000 liters per month free. Remaining water would be allocated to domestic uses such as small-holder livestock and small-scale gardening. After these needs were fulfilled, compulsory licensing was introduced to allocate water among other needs including larger-scale agriculture and forestry. Further, rather than considering conventional measures of agricultural water productivity such as “crop per drop” or “monetary value per crop”, other measures are included such as “jobs per drop” (Kamara and Sally, 2004) (Box 5-4).

Whether pricing, regulation, property rights, or negotiation is chosen as a route to allocating water in a more efficient (and possibly equitable) way, a better understanding of the value of water for different competing users is required, as is research into new institutions for allocating water more efficiently and thereby creating appropriate incentives for farmers to adopt water-efficient technologies. Most likely this research will recommend changes in access to water, either through pricing or regulation. But it must also link to technology developments such that the conditions for farmers to adopt the technologies are appropriate.

A lack of credit and risk-sharing institutions reduces the likelihood that farmers will adopt technologies that conserve the natural resource base. In SSA rainfall is highly unpredictable, resulting on average in complete crop failure once every ten years in semiarid lands. Farmers are typically unable to insure themselves against the risky environment within which they farm and so would benefit from technologies that reduce the risks of farming such as improved waterharvesting techniques. However, farmers also often lack access to credit to make such investments, and taking on debt also increases their risk. Hence in parallel to introducing new technologies for water management and harvesting, credit, insurance and other risk-sharing institutions would improve the enabling environment for farmers and increase