Recent water sector reforms and increased scarcity and vulnerability of water resources, combined with declining public funding available for large scale infrastructure investment in the sector, have led to a greater awareness by the Government of Vietnam for the need to analyze water resource allocation and use in an integrated fashion, at the basin scale, and from a perspective of economic efficiency. In this study we focus on the development, application, and selected policy analyses using an integrated economic hydrologic river basin model for the Dong Nai River Basin in southern Vietnam. The model framework depicts the sectoral structure and location of water users (agriculture, industry, hydropower, domestic, and the environment) and the institutions for water allocation in the basin. Water benefit functions are developed for the major water uses subject to physical limitations and to constraints of system control and policy. Based on this modeling framework, we will analyze policies that can affect water allocation and use at the basin level, including both basin-specific and general macroeconomic policies.

Fresh water, essential to sustain life, development, and the environment, is an increasingly vulnerable resource in Asia, where population and economic growth creates serious challenges for meeting water demands for food requirements and other uses. Asian countries face rising competition for water resources from rural and urban sectors for agricultural, industrial, and household uses, combined with declining investments in infrastructure. Water quality is increasingly threatened as agricultural, industrial (including rural industrial), and domestic users in increasingly crowded watersheds compete for scarce water supplies. In this water scarce and often polluted environment, it is essential to understand the impacts of specific policy alternatives for water allocation among these users: whether they are feasible, what they will cost, and how they will affect water users and the overall prospects for agricultural production and economic growth.

Water policy analysis requires the application of comprehensive policy analysis tools that need to be adapted and expanded depending on the river basin in question. Economic optimization models that optimally allocate water based on an objective function and accompanying constraints, along with hydrologie simulation models and a representation of institutional rules, can be complementary tools to traditional river basin simulation models to address problems related to the competition over scarce water resources and the design and assessment of alternative systems of water allocation. In this study we take a holistic approach in analyzing the complexities involved in water allocation to generate options for water policy reform in the Dong Nai River Basin for optimal utilization that is also sustainable, efficient, and equitable (Rogers and Fiering, 1986; McKinney et al., 1999). The alternative policy analyses presented here have been developed with and can support the recently established Dong Nai River Basin Planning Management Council. The policy scenarios developed can help policy makers and basin water planners gain a better understanding of water availability, demand, and its value in various uses; provide insights into the role of alternative policy instruments in alleviating likely future water shortages; and thus contribute to more efficient and sustainable allocation of scarce water and financial resources across irrigation, hydropower development, and urban demands.