6 18. In conclusion, while the integrated water resources management approach has worthy goals, finding incorruptible and competent administrative bodies that are able to accurately estimate water demand and supply over time and then design and implement investments and pricing policies effectively will be very difficult, especially in developing countries. Despite market imperfections, an alternative approach using a system of secure and tradable water rights is worth serious consideration.

# **Tradable Water Rights Regimes**

## _Characteristics_

19. _Formal Markets:_ The key characteristics of formal secure tradable water rights is that the rights are independent of land and can be traded separately from land within a legal and institutional framework. As such they are property rights to water (Box 2). Ideally, the water rights should be sold at freely negotiated prices to anyone for any purpose. However, sometimes countries impose restrictions such as requiring the buyer to use it for some beneficial purpose or that they only be sold to a public agency at an administratively set price, thereby weakening the property right associated with the water right (see the example below from the western United States). There may also be other restrictions relating to water quality, to ensuring that a certain minimum flow in a stream or river is maintained for environmental or recreational reasons and to protecting the water rights of third parties.' 20. _Informal markets,_ whereby individuals or groups of water rights holders sell water to other users at freely negotiated prices, have evolved spontaneously in many countries as a response to the failure of public allocation of water. A 1990 survey of surface water systems in Pakistan (Pakistan Water and Power Development Authority 1990) found active water trading for irrigation water in 70 percent of the watercourses studied. In India, an estirated one-half of the area irrigated by tubewells belongs to farmers who buy water (Shah 1991). While such markets help resolve water shortages, the fact they are not supported by existing laws limit such transactions to spot sales of water or to the sale (lease) of water for a single year rather than to permanent sales of water rights. The difficulty in enforcing such contracts has also tended to confine the transactions to those within the same sector, often between neighboring farmers. The lack of long-term secure access to water under such a system also discourages investment in activities that require access to large quantities of water. Thus such informal water markets can realize only part of the potential gains from trade and do not strictly fit the mold of tradable water rights regimes that are analyzed in this paper.

> I. One of main sources of hydrological third-party effects stems from "return flows", which is the water returned to the ground after use (e.g., the irrigation water that was not fully absorbed by the crop), and which may infiltrate down to an aquifer that joins a water source. If another user has rights to this water and if the upstream user were to sell all the water he received to someone whose return flow was different, the rights of the downstream user would be diminished.