The value of water in the Fish-Sundays scheme of South Africa

Abstract

This study analyses the economic efficiency of water allocation on the Fish-Sundays scheme in the Eastern Cape Province of South Africa. The objective is to develop a basin-wide model of water use that calculates total and marginal water value. Estimates of total value are used to confirm financial feasibility while marginal values measure the efficiency of current allocation as well as gains from reallocation. A linear programming model shadow prices commercial irrigation, which controls 97 percent of available water on the scheme as a first attempt to value an ecological reserve, irrigation equity and municipal demand. Total water value is defined as residual farm profit after all fixed resources have been remunerated at their opportunity cost. Risk is introduced through MOTAD, which penalises the objective function by an exogenous weighting according to risk preference. Accounting for risk reduces total and marginal water values, which are also sensitive to the value of crops and input prices. Total water value for the scheme is estimated to be R27 million in 1999 Rand (± S2.24 million) and irrigation shadow prices range from zero to R0.2115/m3 (± $0.0176/m3). Results indicate that 77 million m3/year can be transferred out of irrigation at zero opportunity cost. Two thirds of the current allocation to irrigation can be bid away at a price of R0.0352/m3 (± $0.003/m3). Thus equity objectives can be satisfied at zero or very low opportunity cost to commercial irrigation. The typical model of water value relies on a vast array of assumptions that all influence final values. While orders of magnitude and directions of reallocation are therefore meaningful, one should not attach too much meaning to any particular result. Administered prices are too data intensive to be practical. Water markets represent a more reliable and cost effective institutions to derive subjective willingness to pay.