Sharing a river: Potential performance of a water bank for reallocating irrigation water

This paper presents an ex-ante policy analysis of the implementation of a publicly run active water bank operating at the basin level designed to temporarily reallocate water resources between farmers considering different scenarios of reduced water availability (cyclical scarcity due to droughts). For this purpose, the Guadalquivir River Basin, located in southern Spain, is used as a case study. Fifteen representative farm types were considered to simulate water trading through public tender for purchasing and selling temporary water rights. The model is built at the basin level to estimate the aggregate demand and supply curves to establish expected exchange prices, volumes of water traded, enhancement in economic efficiency and improvement in rural development as measured by employment generation. The simulation results show that the proposed water bank encourages water transfers from 19% of the total water used in the case of a moderate drought to almost 40% in the case of an extreme drought, significantly reducing the economic and labor demand losses due to water shortages. The public water agency can recover all of the incurred water bank operation costs by implementing a €0.01/m3 price differential between purchase and sale prices without meaningfully affecting the performance of the water bank. Thus, we conclude that the implementation of this kind of water bank during droughts would be useful in mitigating negative effects of droughts. Thus, policymakers are encouraged to create water banks as an effective instrument to cope with droughts.