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Transaction Costs Associated With Water Policies In The Olifants Basin Of South Africa

Congress: 2015
Author(s): Georgina Njiraini
Center for Development Research, University of Bonn1

Keyword(s): Sub-theme 5: Financing, investment and pricing schemes,
AbstractIntroduction Water is a complex economic good and given rising scarcity amidst competition between users and uses world over, it calls for optimal management. In different parts of the world, market based water policy reforms have been introduced to solve the water scarcity and allocation problems, given the impossibility to augment supply (Rosegrant, & Binswanger, 1994; Earle et al., 2005). The reforms have attained different results with reports of both successes and failures in different countries. South Africa has also implemented market-based water policy reforms, which are well stipulated in its 1998 National Water Act. Despite a little improvement in water allocation in some of its catchments, these reforms have not been entirely successful and are marred with continued problems of water allocation, distribution, and deteriorating quality. This could be due to the institutional strains arising from the transition process and its associated transaction costs (TCs); research is however lacking in this regard to explain the complete interplay of issues. Methods TCs are big hindrances to policy implementation and compliance, as they constitute a large component of total policy costs. Emphasis has been laid on low TCs for market-based water policy reforms to work, hence should not be neglected to ensure policy implementation. However, TCs remain generally unmeasured yet their measurement is a step towards evaluation of their role in the policy process. This study fills in this gap for South African water policies by measuring and describing TCs faced by water users and managers in the Olifants basin. TCs measurement is not an easy task but "what gets measured gets managed" (Laura McCann et al., 2005b; Marshall, 2013). There lacks a constant method for TCs measurement and a uniform way to treat the issues involved. Previously, TCs have been left out in any form of economic analysis due to these challenges in measurement, -- lack of methodology and official techniques of measurement and also the uncertainty that lies in the lack of a proper and clear definition (Laura McCann et al., 2005b). Empirical estimates of TCs are lacking yet TCs are critical costs to consider for any policy process (Ofei-Mensah & Bennett, 2013). In the current study, we identify and quantify TCs related to water policies in the Olifants basin following a framework by L McCann & Easter, (2004); and Laura McCann et al., (2005a) .We further use linear regression methods to assess factors influencing farmer Transaction Costs. Results and Discussion Results from this study guide policy makers to evaluate existing water reforms ex post for improvement purposes and to assess the policy budgetary impact in order to establish policy sustainability and efficiency gains. In total across water policies investigated, monitoring costs are the highest followed by contracting costs then administration costs. Contracting TCs by water users are reported for majority of the policies while monitoring costs are reported for effluent permits and Water User Associations (WUAs) only. Administrative TCs are the lowest since they are only reported for the WUAs which involves participation by users. Monitoring costs are the highest but mainly from effluent industry discharge management. Enforcement costs are not reported for any of the policies. We further find that factors such as source of policy information,education, main occupation, experience in farming, and tenure security significantly influence TCs faced by water users. Conclusions We conclude that TCs of different magnitudes for different water policies exist for both private and public parties in the Olifants basin. These make important feedback into the policy process to allow for better policy decisions and choice. We also find that TCs are influenced differently by different explanatory factors. Therefore, this study concludes that local factors determining TCs borne by landowners are context and site specific. We recommend more empirical research to involve many cases. This would deepen the understanding of determinants of TCs and help to establish a more general theory on the matter. It would also aid future predictions of the interactions between factors; and especially on the direction of influence between such factors. Earle, A., Goldin, J., & Kgomotso, P. (2005). Domestic Water Provision in the Democratic South Africa, changes and challenges. AWIRU, CiPS, University of Pretoria, (September), 1–40. Retrieved from http://www.awiru.co.za/pdf/3Domestic water provision in SA - changes and challenges.pdf Marshall, G. R. (2013). Transaction costs, collective action and adaptation in managing complex social–ecological systems. Ecological Economics, 88, 185–194. doi:10.1016/j.ecolecon.2012.12.030 McCann, L., & Easter, K. (2004). A framework for estimating the transaction costs of alternative mechanisms for water exchange and allocation. Water Resources Research, 40(1), 1–6. doi:10.1029/2003WR002830 McCann, L., Colby, B., Easter, K. W., Kasterine, A., & Kuperan, K. V. (2005a). Transaction cost measurement for evaluating environmental policies. Ecological Economics, 52(4), 527–542. doi:10.1016/j.ecolecon.2004.08.002 McCann, L., Colby, B., Easter, K. W., Kasterine, A., & Kuperan, K. V. (2005b). Transaction cost measurement for evaluating environmental policies. Ecological Economics, 52(4), 527–542. doi:10.1016/j.ecolecon.2004.08.002 Ofei-Mensah, A., & Bennett, J. (2013). Transaction costs of alternative greenhouse gas policies in the Australian transport energy sector. Ecological Economics, 88, 214–221. doi:10.1016/j.ecolecon.2012.12.009 Rosegrant, M., & Binswanger, H. (1994). Markets in tradable water rights: potential for efficiency gains in developing country water resource allocation. World Development, 22(11), 1613–1625. Retrieved from http://www.sciencedirect.com/science/article/pii/0305750X94000751
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