W H AT ’ S N E W I N F E D E R A L I S M W O R L D W I D E

FederationsFederationsCa

nada

C$9

.00

| S

witz

erla

nd C

HF11

,50

| U

K £

5.00

| I

ndia

Rs4

00 |

Mex

ico

Peso

s100

.00

| E

uro

Area

€7.

25 |

USA

and

els

ewhe

re U

S$9.

00

forumfed.org

JANUARY / FEBRUARY 2009

SPECIAL SECTION: WATER AND INTERgOvERNMENTAL RELATIONS

Managing water in federal countries

ETHIOPIA: CURBING FAMINE

PAKISTAN: A ROUGH YEAR AHEAD

gERMANY: AVERTING LEGACY DEBT

Fede

rati

ons

January | February 2009 Volume 8, Number 1

Visit forumfed.org for new developments.

Nigeria CanadaSwitzerland Australia India Mexico Ethiopia Germany Brazil…

Our Mission

The Forum of Federations is an independent organization that was initiated in Canada and

is supported by many countries and governments.

The Forum is concerned with the contribution federalism makes and can make to the

maintenance and construction of democratic societies and governments. It pursues this

goal by:

• building international networks fostering the exchange of experience on federal

governance;

• enhancing mutual learning and understanding among practitioners of federalism; and

• disseminating knowledge and technical advice of interest to existing federations and of

benefit to countries seeking to introduce federal elements into their governance

structures and constitutions.

Nine federal countries have become partner governments of the Forum of Federations. We bring together public servants, elected officials and academics from federal countries to share knowledge and best practices in meeting difficult challenges. Check our website at forumfed.org to see what’s new.

REUT

ERS/

ANTO

NY

NJU

GUN

A

The split-image cover is of two federation’s r ivers, Ethiopia’s Blue Nile (top) and India’s Ganges River (bottom). The Blue Nile forms part of the Nile, the world’s longest and most his-toric river. The Ganges and i t s t r i b u t a r i e s d ra i n a 1,000,000-square-kilometre fertile basin.

FLIC

KR: C

C

EDITORIAL 2 Editor’s Column By ROD MaCDONEll

2 In the News

NEWS 3 Pakistan struggles to restore democracy and end terrorism By IsMaIl KhaN

5 Italy’s fiscal devolution moves it towards federalism By luCIO lEvI

23 u.s. trade and commerce power shapes american federalism By GREGORy GERMaIN

26 Indian states agree to create a value added tax By suKuMaR MuKhOPaDhyay

SPECIAL SECTION: WATER AND INTERGOVERNMENTAL RELATIONS8 Ethiopia’s famines to decline with enhanced water management By ROD MaCDONEll

10 Forcefully flows the Nile: downstream By TaMRaT G. GIORGIs

12 spain faces growing desertification By vIOlETa RuIz alMENDRal

15 Thirsty australia: dealing with drought that crosses state lines By asa WahlquIsT

18 Wildlife trumps money interests under u.s. federal water laws By GEORGE WIllIaM shERK

21 Waterway wrangles beset India’s federalism By ash NaRaIN ROy

OTHER DEPARTMENTS

28 PRaCTITIONER’s PaGE Premier Peter Müller explains saarland’s innovations as a German state INTERvIEW By FElIX KNÜEPlING

33 PREsIDENT’s PaGE Best Practice By GEORGE aNDERsON

8COvER:

SPECIAL SECTION Water and intergovernmental relations

forumfed.org

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

2

BY ROD MACDONELL

HIS ISSUE OF FEDERATIONS MAgAzINE CONTAINS AN AMbI-tious package of news articles including a penetrating look into the cauldron that is Pakistan, the linchpin of terrorism in the region and beyond;

and a fascinating set of articles on water and intergovernmental relations in five federal countries.

Our thematic section, pages 8-22, was inspired by the International Conference on Water Management in Federal Countries held in zaragoza, spain from July 7-9, 2008, of which the Forum was a co-organizer. The twenty papers pre-sented at the event are available on our website at www.forumfed.org/en/global/thematic/water_papers.php

In our news articles we learn that Italy is increasingly becom-ing federal as devolution was not a sufficiently sharp tool to deal with the gap between the struggling south and the booming North. This is the view of lucio levi, a professor of political sci-ence at the university of Torino.

Prof. levi, who is also editor of the review, the Federalist Debate, explains that the North is pushing for a form of fiscal federalism because in the long run, transfers to the poorer south will be reduced; while the south has been persuaded to go this way because their taxes will not be affected, for now.

For Pakistan, Ismail Khan of the Daily Dawn presents us with a study of extremes. after Benazir Bhutto was assassinated in December 2007, the country seemed en route to anarchy. In a fortunate turn of events, a calm set in by February 2008 when her widower, asif ali zardari and his Pakistan People’s Party, won a decisive electoral victory over the forces of the reviled General Pervez Musharraf.

That relative calm was exploded by terrorist bombs at an

Islamabad hotel in september 2008, killing 60, and a gunfire terror attack on Mumbai, India, on Nov. 26, 2008, that killed another 180 plus victims. an enraged India is demanding that elements of the Pakistan-based Lashkar-e-Taiba group respon-sible for the attack be turned over.

against that backdrop, President zardari is also facing an increased demand for greater provincial autonomy, mainly from Balochistan and the North-West Frontier Province.

The neighboring federation of India is contending with fiscal concerns, as the last eight of its 28 states replaced their sales tax regimes with a value added tax system known as the vaT.

Mr. sukumar Mukhopadhyay, formerly of India’s Central Board of Excise and Customs, writes that the phase-in of the vaT, as expected, has been bumpy. Tax revenues have fallen short of previous tax collections and the central government has had to compensate the states for the shortfall. In the long term, the vaT is expected to be a fairer tax which will help curb tax evasion.

In North america, Professor Gregory Germain paints a pic-ture of how the face of business in the u.s. has been determined by the so-called Commerce Clause of the u.s. Constitution, a provision that prevents states from passing laws that interfere with trade between the states. The one-line clause has helped make the u.s. the most prosperous free-trade country in the world.

Rounding out the menu is an interview with Peter Müller, the Premier of the German state of saarland. Premier Müller speaks about innovation, autonomy and diversity among Germany’s 16 states, and how federalism, in his view, is a bul-wark against the concentration of power.

I N T H E N E W S

T

Iraq’s provinces agitating for greater powers

Developments are moving quickly in Iraq. The country is currently witnessing the campaigns of candidates and politi-cal parties as 14 of Iraq’s 18 provinces are to hold provincial elections at the end of January 2009.

By the end of 2009, citizens will also be voting in national elections, the first since Prime Minister Nouri al-Maliki came to power in 2005.

Iraq’s provincial map may also be changing in the near future. a bill to allow the mergers of provinces, thereby creat-ing new regions with greater powers, was passed in Iraq’s parliament in 2006 with a slim majority.

The 2006 law also allows an individ-ual province to gain greater powers by becoming a region. Because of opposi-

tion from nationalist-minded parties, the implementation of the bill was subject to an 18-month freeze. That waiting period ended in april 2008.

The first region to capitalize on this law could be a single province, Basra. The most complex and challenging constitu-tional development is taking place in this oil-rich province.

In an example of bottom-up federal-ism reminiscent of the agreement between spain’s central government and the region of Catalonia, the people of Basra launched on Dec. 15, 2008, a peti-tion seeking to hold a referendum to transform its governorate into a region with greater powers.

The leader of a major shia party, abdul aziz al hakim, had hoped that, like the Kurds and their autonomous region of Kurdistan, he could reign over a nine-

province, shia-dominated super-state in southern Iraq, leaving behind a skeletal Baghdad government.

But his dream has faded, largely because of his party’s poor relations with nationalist parties, tribes, secularists and others in the south, especially in the province of Basra,

By the middle of January, if 10 per cent of Basra’s 150,000 eligible voters sign the petition, a referendum will be held on whether Basra can become an autono-mous region.

according to recent statements by proponents of autonomy, they do not intend to interfere with the central gov-e r n m e n t ’s a u t h o r i t y o v e r t h e administration of the oil sector.

E D I T O R ’ S C O L U M N

forumfed.org

ELEvISION FOOTAgE OF LOCAL Taliban driving captured humvees near the Khyber Pass in Pakistan in mid-

November painted a grim picture of the strains on Pakistan’s armed forces.

These strains, plus intense pressure on its economy will make the year 2009 extremely crucial for the country’s some-what shaky civilian government. late in the summer of 2008 a balance-of- payments crisis hit the country’s cash-strapped government – months before the global economic crisis.

Pakistan’s army is once again engaged in battles with a local Taliban group near the border with afghanistan – battles which began after members of the group

bombed a hospital in august. The subse-quent fighting signalled the breakdown of a truce that had been signed with the group in May 2008.

In November, when 75 per cent of all of NaTO’s supplies for afghanistan were coming up from Pakistan and through the Khyber Pass, attacks on convoys of food and fuel by Pakistani Taliban have made conditions critical.

The situation looks much worse than it did in the glory days of February 2008 following the victory of the liberal and secular Pakistan People’s Party over the forces of General Pervez Musharraf.

The convincing win in the nationwide elections allowed the party to form a national government in Islamabad in a

coalition with the other major secular party.

some analysts attributed their win, following the assassination of the party’s leader Benazir Bhutto in December, 2007, to a sympathy vote.

Coalition government breaks downThe coalition finally broke down only months after it had come into being, over the pledges it had made in March 2008. The coalition had pledged to restore true democracy, do away with dictatorship and to restore the 1973 constitution as it existed on Oct. 12, 1999, before the mili-tary coup of Gen. Pervez Musharraf. The coalition also promised to abolish the concurrent list of powers in Pakistan’s constitution so as to grant more powers to the country’s four provinces. The coali-tion also wanted to increase the strength of the senate, the upper house of parlia-

Pakistan struggles to restore democracy and end terrorismPresident Zardari seeks accommodation with border provinces, victory over insurgents

Ismail Khan is an Editor at the Daily Dawn, North-Wwest Frontier Province, Pakistan. He is based in Peshawar, covering the province and the Federally Administered Tribal Regions.

P A K I S T A N

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

�

T

Pakistan’s President Asif Ali Zardari (right), accompanied by his Afghan counterpart, Hamid Karzai, addresses a news conference in September 2008. Zardari faces many hot-button issues in governing Pakistan. Gone are the glory days of February 2008 when Zardari’s secular Pakistan People’s Party defeated the forces of General Pervez Musharraf.

BY ISMAIL KHAN

REUTERS/MIAN

KURSHEED

forumfed.org

ment where the provinces have equal representation. The lower house, called the National assembly, runs on a system of representation by population. The assembly is dominated by members from Punjab province, which has more than 50 per cent of the population.

Benazir’s spouse, Mr. asif ali zardari, had a tarnished image, riddled with accusations of corruption. Incarcerated for years, but never convicted, zardari was eventually released into exile by Musharraf’s administration. he was cat-apulted back into the political limelight by his wife’s tragic assassination in the garrison city of Rawalpindi.

apart from the political legacy left by his popular wife, Mr. zardari was also the beneficiary of a so-called National Reconciliation Ordinance, a type of ‘get-out-of-jail-for free card.’ This ordinance was a controversial piece of legislation that Musharraf negotiated with Ms. Bhutto to drop all corruption charges against the couple and others.

Forcing Musharraf outNotwithstanding pressure from the com-munity of lawyers and pressure from his erstwhile coalition partner, Mr. zardari managed to manoeuvre the ouster of Musharraf from the presidency, threat-ening him with impeachment if he did not resign. The General blinked. On august 18, he resigned and was shown the door after ruling Pakistan for nine

years as a virtual autocratic ruler.But no sooner had Musharraf

resigned than political bickering erupted between Bhutto’s party and their coali-tion partner, over the issue of judges who had been forced out of office by Musharraf. The coalition partner demanded that Chief Justice Iftikhar Muhammad Chaudry and the other judges be restored forthwith.

Mr. zardari moved swiftly to get him-self nominated and later elected to become the President of Pakistan, on sept. 6, 2008.

shortly before he became president, zardari reneged on a promise to restore the judges. he never gave a reason but critics charged that he was afraid that the judges would allow corruption charges against him from the 1980s and 1990s to proceed. zardari’s refusal to reinstate the judges prompted the coalition partner to pull out of the government, dashing all hopes of a stable central government.

analysts believed that Mr. zardari had outsmarted the coalition partner by using it to undo Musharraf and have the general leave peacefully. That appeared to be the case, as it was a journey few would have believed zardari would travel

– from jail to the presidency in Islamabad. Now that he has arrived, Mr. zardari

has inherited a complex series of prob-lems in Pakistan ranging from an economic meltdown to a full-blown insurgency in southwestern Balochistan

province and a hornet’s nest of Taliban a n d a l - q a e d a i n t h e Fe d e r a l l y administered Tribal areas to signs of an overall “creeping Talibanization.”

Mr. zardari also faced a weakened state apparatus and an increasing demand for more provincial autonomy, mainly from Balochistan and the North-West Frontier Province.

Redressing provinces’ demandsMindful of these problems, the newly-elected president in his maiden speech asked parliament to scrap presidential powers – including the power to dissolve the National assembly – and to address the issue of provincial autonomy. Mr. zardari also asked the legislators to take steps to redress Balochistan’s grievances and to change the name of the North-West Frontier Province to Pukthunkhwa to meet the long-standing demand of its people. he vowed to pursue terrorists and extremists who were harming Pakistan.

Others are looking for stability in afghanistan by bringing peace to the bor-der regions of Pakistan. On sept. 25, Owais Ghani, governor of the North-West Frontier Province, suggested that the united states should talk to the afghan Taliban in order to broker a deal for peace for the entire region.

CONTINUED ON PAGE 31

Border province votes out religious coalition

RECENT EvENTS IN PAKISTAN’S NORTH-WEST Frontier Province have proven to be a true echo of events nationwide. The secular awami National Party, which swept the polls in the February 2008 elections, vowed to do away with armed militants and to restore peace.

During the six-year rule of the previ-ous provincial government, a religious coalition called the Muttahida Majlis-i-amal, there were several Taliban groups founded in Pakistan’s tribal backyard that borders afghanistan.

The different Taliban groups later merged to form a united Pakistani orga-nization called Tehrik-i-Taliban Pakistan in December 2007 and they

not only rule the roost in most of the seven federally administered tribal areas but also pose a serious security threat to the province, and by extension to the whole of Pakistan.

It was during their rule in the prov-ince that suicide bombings, roadside bombings and bombings of girls’ schools became commonplace.

a peace agreement struck with armed militants in May 2008 proved to be short-lived.

The militants reneged on the agree-ment, accusing the government of backtracking on its promise to release prisoners and enforce Islamic laws in the region. The government hit back, accusing the Pakistani Taliban in swat of bombing schools and target killings.

swat is in flames again. The situation around Peshawar, capital of the North-

West Frontier Province - is precarious. surrounded by three tribal regions to the south, west and north, Peshawar has witnessed a surge in militant activities.

Elsewhere in Pakistan, the situation remains volatile in the southern part of the federally administered tribal areas, North and south Waziristan, which the u.s. government believes are al-qaeda’s safe-heavens.

Federalism is said to be a useful form of governance in countries popu-lated by diverse elements. But federalism, or any other form of gover-nance, can only take traction when it is backed by firm and unflinching politi-cal will. That is the question in Pakistan: do its diverse elements want the federa-tion to function?

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

4

forumfed.org

BY LUCIO LEVI

LANDMARK bILL ON FISCAL FEDER-alism has been submitted to the Italian parliament, setting i n m o t i o n It a l y ’s m ove

towards becoming a truly federal nation.The bill fulfills Prime Minister silvio

Berlusconi’s electoral promise to devolve an unprecedented amount of financial resources to the country’s provinces and municipalities.

The bill has the backing of Italy’s

regional, provincial and municipal authorities.

The parliament had been expected to approve the bill, submitted to it on Oct. 3, 2008, by the end of the calendar year.

There had been mounting pressure to devolve financial powers because Berlusconi’s government, elected in april 2008, is a coalition with the decisive sup-port of two territorial movements, the Northern league, rooted in Northern Italy, and the sicilian league for autonomy.

The main proponent of the bill is the Northern league, which at times took a decidedly secessionist stance. It won eight per cent of the vote in april’s election.

Berlusconi is facing the challenge that he has to reconcile the differing views on the federal future of Italy of his coalition partners. They oscillate between a push for greatest autonomy possible for the North by the Northern league and the wish for a strong central government that safeguards the unity and solidarity of the country. The latter is expressed by the post-fascist alleanza Nazionale, which has a strong backing in Italy’s south and elsewhere as well.

Italy’s fiscal devolution moves it towards federalismPM Berlusconi aims to give each region the funding of the most efficient region

Lucio Levi is Professor of Political Science at the University of Torino in Italy, Editor of the review The Federalist Debate and author of 15 books on federalism, European integration and globalization, the most recent of which is Federalist Thinking, University Press of America, 2008.

I T A LY

A

Italy’s Prime Minister Silvio Berlusconi holds a news conference during a summit of European Union leaders. Berlusconi has vowed to devolve an unprecedented amount of financial resources to the country’s provinces and municipalities.

REUTERS/YVES HERM

AN

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

5

forumfed.org

under the bill, the three levels of sub-national government – regions, provinces and communes – will share a quota of income tax and of the value added tax (vaT) with the central government. In principle, the deal will not entail a tax increase, but simply a shift of the fiscal burden from the centre to the periphery. Taxes could potentially increase, but only if regional and local governments levy new taxes for specific initiatives.

In 2001, power was given to Italy’s 20 regions to deliver services in health, edu-cation and welfare. But this bill goes further and changes the way Rome deliv-ers funding to the regions to pay for the cost of social services. The principal mechanism of the reform is to calculate the “standard costs” of public services in areas such as health, education, welfare and public transit in every region.

This will mean that inefficient regions will be identified and assessed accord-ingly. Initially, every region will receive funding that matches the cost of program delivery in the country’s most efficient region. That will be the baseline. however,

the regions which are unable to meet that standard will be assisted by an adjust-ment fund.

an important feature of the bill is that the current transfer of tax revenues from richer northern regions to poorer south-ern ones will be wound down gradually over a five-year period.

Making regions accountableThe stated goal of introducing fiscal fed-eralism in Italy was to enhance the accountability of local authorities and to reduce the income gap between North and south. The reason the politicians of the less efficient regions like the fiscal bill is that they believe the resources made available to them will increase.

The North is happy because equaliza-tion payments - transfer payments that go to the south - will be reduced over the long run. The south is happy because they can keep “their” taxes although they may not be looking too closely at the long-term effects of this change.

however, the government may be breaching its own commitment to heighten the accountability of local and

regional governments with a generous grant to two local governments ruled by centre-right majorities - Rome and Catania (in sicily) - plus the region of lazio to relieve their heavy financial defi-cits. To an outside observer, it has the markings of rewarding inefficiency.

The implementation time for the bill, if passed, is expected to be lengthy. The parliament is now expected to approve it by the end of the year. Then, the govern-ment will have two years to set the pieces in place before the bill comes into effect. The transitional period will last at least five years. In 2015 or even in 2020 the new fiscal arrangement is supposed to be up and running at full speed.

Now it is up to the Italian Parliament to assume a leading role in discussing, amending and passing the bill. a joint commission for the achievement of fiscal federalism, made up of representatives of the four levels of government (from municipalities to national government) has been entrusted with the task of cal-culating the cost of services, which is key for determining fiscal allocations.

The joint commission must create

Italy’s zigzag path to federalism

In 1861, immediately after the birth of the Italian state, Count Camillo Cavour, the architect of political unifi-cation, introduced a bill for the establishment of a regional order of government in Italy. It proved to be an impossible dream.

Inspired initially by the French uni-tary state model, Italy remained unchanged for a century. The roots of inward-looking centralization lay in the context of ever-present tensions between the states of the European continent, which shared long territorial borders. This inward trend was rein-forced by the process of economic integration of the national space brought about by the industrial revolution.

It was only in 1970 that a regional order of government was established in Italy, even though the Constitution of the Republic of Italy, of 1948, contained a provision for it. Decentralization did not begin due to political concerns related to the Cold War and to the dom-

inant role of the Italian Communist Party in some regions.

But it was only over the last decade that Italy transformed its political sys-tem with the objective of “federalizing” the country. various reasons led to an increased push for federalization. First, the general dissatisfaction with the cen-tral political institutions and the inability of the central government in Rome to fulfill its tasks. second, there was a growing unwillingness in the northern part of Italy to endorse trans-fer payments to the poorer south. an important role was played by the popu-larity of the idea of subsidiarity, according to which powers and activi-ties must be allocated as near as possible to the citizens.

T he most voca l proponent of federalism was the sometimes seces-sionist Northern league. European integration and then globalization also progressively eroded Italian national sovereignty and paved the way for the current experiment with decentralization.

In 1999 and 2001 the Ital ian Constitution was amended in order to

expand the powers of the regions. Following the federal principle, the residual competencies – those not e x p l i c i t l y m e n t i o n e d i n t h e Constitution‘s list of national govern-ment’s competencies or in the list of shared competencies – were assigned to the regions.

Presidents of the Regions began being directly elected in 1993. at the s a m e t i m e , a r t i c l e 1 1 9 o f t h e Constitution, which sets out the notion of financial autonomy for Italy’s regions, had not yet been put into effect by any Italian government. This financial autonomy is an essential element of the devolution of power and one that is necessary for a federal Italy.

and yet, Italy has to contend with financial obligations flowing from its m e m b e r s h i p i n t h e E u r o p e a n Economic and Monetary union, including a commitment to balance its budget and to reduce its colossal debt, which is more than 106 per cent of Italy’s GNP. It is against this backdrop that the devolution of real fiscal resources to the regional and local authorities began in late 2008.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

�

forumfed.org

from scratch a common data-base of costs that could be shared among all the actors in the negotiations.

Before the introduction of its fiscal federalism bill, the first major initiative of the Berlusconi government was to abolish the municipal real estate tax, as promised during the electoral campaign. This was the only real local tax in Italy. The municipalities have been compensated for the loss of this income with a transfer of funds from the cen-tral government proportional to the income for merly received from the municipal tax. Owing to the difficulties deriving from the interna-tional financial crisis, for the time being, only half of the fig-ure has been transferred.

Centralizing a tax levy – while decentralizing the spending of tax revenues – does not promote financial restraint, accountability and efficiency of regional governments.

Regions collect taxesPrincipled proponents of federalism in Italy have argued that this practice is very distant from federalist principles, which require that regions collect and spend their own tax revenue rather than cen-tralize it in the hands of national government.

The fact is that, owing to the income gap between Italy’s North and south, federalism is facing serious difficulties. The average income in Calabria, at the

“toe” of Italy, is 40 per cent lower than in lombardy, whose capital, Milan, is the centre of fashion and finance in Italy.

The Northern league party is opposed to the policy of monetary transfers from rich northern regions to poorer southern regions. according to the party’s electoral program, 90 per cent of the tax yield should stay in the territories where it is generated.

On the other hand, the autonomy Movement demands that income from gasoline taxes refined in sicily should remain in sicily. It is almost impossible to reconcile such contradictory demands. The bill contains a compromise between the two contradictory positions that is

meant to square the circle. Only recently has the notion of feder-

alism taken any traction in Italy. This is a consequence of transfer of powers to the European union on the one hand and to the regions and local communities on the other.

yet despite all the steps Italy has taken toward federalism so far, there are some important reasons that further steps in this direction may prove difficult.

Power to the regions … and to the Mafia?In most cases, it can be argued that feder-alism improves the management of public service and public resources, since it enhances the responsibility of local and regional authorities. But this argument is not universally applicable.

In Italy, there are regions that escape the control of central government, which has thus far been unable to subdue the gangs of organized crime – not only the Mafia in sicily but several other major crime organizations in the south, namely the Camorra in Campania and the ‘Ndrangheta in Calabria. In these regions, a decentralization process could well mean strengthening the power of criminal gangs.

also, an essential aspect of the Northern league’s program is its micro-nationalism – based on its members’ affection for “Padania,” or the Po valley,

in Northern Italy, a community with no particular historical roots.

The Northern league has been accused of xenophobia and even racism and the Berlusconi government itself was criticized for xenophobia by the Council of Europe in June 2008.

To press their demands for regional autonomy, the Northern league’s lead-ers periodically threaten the secession of Padania. They have gone so far as to pro-claim that their activists are ready to resort to armed conflict.

around the same time, six black farm labourers were murdered by the Camorra in Castelvolturno, near Naples in s eptember 2008, prompting the Northern league’s Minister of the Interior, Roberto Maroni, to declare that

“the government is facing a civil war.”Italy’s recent history shows how frag-

ile are the fundamental principles of the rule of law and democracy.

Major forces outside the govern-ment ’s control include not only multinational corporations, but also the Roman Catholic Church and organized crime.

The situation is so delicate that there are some political observers who warn that the establishment of federalism in Italy could jeopardize the unity of the state.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

7

Italy’s populist Northern League Party, led by Umberto Rossi (right), staunchly supports devolving financial resources to the country’s provinces and cities. Rossi is flanked by party colleague Roberto Calderoli at a party rally in June 2008.

REUTERS/STRING

ER

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

SPECIAL SECTIONWater and intergovernmental relations

Managing water resources in five federations

“THERE IS ENOUgH WATER FOR EvERYONE. THE PRObLEM WE FACE today is largely one of governance: equitably sharing this water while ensuring the sustainability of Natural ecosystems.”

These upbeat words come from the united Nations’ 2006 World Water Development Report.

But elsewhere in the uN’s statistics, we are told that 1.1 bil-lion people lack access to clean drinking water. Other uN water deprivation statistics are equally disturbing.

so, the world is facing a water crisis, but a crisis that can be attenuated by better sharing and managing this vital resource.

This issue of Federations magazine focuses on how five federations manage their water resources, how the intergov-ernmental machinery operates in australia, Ethiopia, India, spain and the united states to ensure that the central govern-ments and the subnational units exercise their authority in ways that protect the interests of the country as a whole and those of the constituent units.

a common thread in these articles is that parts of all five countries currently face periodic water shortages or expect to soon be contending with alarmingly insufficient supply.

In australia, where the constitution assigns authority over

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

�

FLIC

KR: C

C

The Blue Nile Falls are a waterfall on the Blue Nile river in Ethiopia. Known as “water and smoke,” they are situated about 30 kilometers downstream from Lake Tana, the source of the Blue Nile.

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

E T H I O P I A

BY ROD MACDONELL

S THE RAvAgES OF FAMINE PLAgUE THE EASTERN AND southern regions of Ethiopia, the country’s vul-nerability to wildly fluctuating rainfall levels cries out for the implementation of long-term water management solutions in this nation on the east-ern tip of africa – called the horn of africa.

Famines in 1973 and 1984 claimed the lives of about 1.3 million in africa’s second most populous nation of 77 million. The current blight is not expected to result in large-scale loss of life, due to the efforts of the Ethiopian government and international donors.

however, it represents a massive setback for Ethiopia’s poor, with 6.4 million people newly dependent on food assistance in addition to the 7.3 million Ethiopians that normally rely on food relief programs.

The current drought, which is also affecting the state of

Tigray, is caused by the failure of the “short season rains” between March and May 2008.

It is cyclical for Ethiopia, states a 2006 study by the World Bank: “Droughts and floods are endemic, with significant events every 3 to 5 years. Droughts destroy watersheds, farm-lands and pastures, contributing to land degradation and causing crops to fail and livestock to perish.”

according to the World Bank paper, titled Ethiopia: Managing Water Resources to Maximize sustainable Growth, rain-dependent agriculture employs 85 per cent of the popula-tion and accounts for 40-45 per cent of the country’s gross domestic product and most of its exports. Ethiopia also gener-ates 90 per cent of its electricity from hydropower, which results in power shortages when reservoirs run low during severe droughts.

Ethiopia is the only african nation to not have been colo-nized. It is among the world’s poorest nations with about 40 per cent of the population living in poverty, according to the World

Ethiopia’s famines to decline with enhanced water management

A

This article is drawn in part on a paper by Mr. Imeru Tamrat, an Ethiopian lawyer and legal expert in the field of water management in Ethiopia. The paper was presented at the International Conference on Water Management in Federal Countries held in Zaragoza, Spain, on July 7-9, 2008. Rod Macdonell is senior editor of Federations magazine. In 1999 and 2000 he trained Ethiopian journalists in Investigative Journalism.

various aspects of water to the two orders of government, we learn that the federal government and the states recently came to a landmark agreement that enables the central authority to manage the water resources in an area the size of France and Germany, and potentially rescue the country’s food basket, known as the Murray-Darling Basin.

Ethiopia, a young federation, is hit with cyclical droughts and famines because it cannot capture and store its rainwater. The legal framework and the infrastructure is coming into place however for the central government and the states to better share responsibility over its waterways, and to extract greater benefit from the Blue Nile, before its waters flow to Egypt.

In India, where Gandhi skimped on water while bathing in the sabarmati River almost 90 years ago, 15 of India’s 28 states have had internal water disputes or are squabbling over water projects. One main reason for the disputes is the

doctrine that states “what falls on our roof is ours to use, without regard to any potential harm to downstream parties.”

spain, we are told, is facing increasing water scarcity due to climate change and irresponsible use of the resource. In an example of classic subsidiarity, spanish style, authority over its water has shifted from the centre to the autonomous communities and even to municipal authorities.

The united states follows an opposing path. There, when there is a federal-state conflict over the management of water resources, the federal law prevails. This is because the so-called supremacy Clause of the Constitution which makes federal law supreme and trumps any notion of state primacy.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

9

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

Bank’s 2008 country assistance strategy for Ethiopia.

Ethiopia is a young federation. It is still feeling its way around the contours of federalism after voters accepted its federal con-stitution in 1995. Prior to that it had been ruled by a brutal social-ist military dictatorship, which had toppled Emperor haile selassie in 1974.

It faces numerous develop-ment challenges and water management is near the top of the list.

In addition, recent strong e c o n o m i c g r o w t h – w h i c h increased demand for food–c o m b i n e d w i t h h i g h international food and fuel prices, have the country reeling. In september 2008, food prices in Ethiopia had risen by a stag-gering 81 per cent over the previous 12 months.

But it is not all bad news for Ethiopia. Over the last five years, annual economic growth was as high as 13 per cent and did not fa l l b elow eight p er cent. however, the Bank study high-lights the country’s precarious water supply and suggests its

“variability costs the economy more than one-third of its growth potential.” In other words, reducing this volatility must be an economic priority.

Capturing the waterEthiopia has water. Its renewable surface water resources from 12 river basins and lakes provide an estimated 122 billion cubic metres of fresh water. The problem is that the resource is highly variable both in time and space, and the country lacks the

Forcefully flows the Nile: downstreamBY TAMRAT G. GIORGIS

HE NILE RIvER, AFRICA’S WATER TOWER AND LONgEST IN THE world, is a source of ongoing tension between Ethiopia - the source of this historic waterway - and Egypt, the primary beneficiary of this biblical wonder.

The Nile is so precious to Egypt, with 95 per cent of its people living along or near its banks,

that former Egyptian president anwar sadat once threatened war if Ethiopia interfered with the Blue Nile – the branch of the Nile that originates in Ethiopia and flows through sudan and Egypt to the Mediterranean sea. (The other main branch of the Nile, the White Nile, originates in lake victoria – a lake shared by Tanzania, Kenya and uganda.)

For Ethiopia, said water expert Imeru Tamrat, “admit-

tedly, most of our water resources are in the Nile Basin.” Indeed, about 85 per cent of the natural flow of the Nile River at aswan in Egypt originates in Ethiopia.

“The Nile continues to be the main focus of public dis-course, including the media and government,” Tamrat said in an interview. he once served as a lead negotiator for Ethiopia on the Nile.

Egypt, where 98 per cent of its land is covered by dessert, has 64 million of its people living on four per cent of its land. a study commissioned by the united states agency for International Development predicts that Egypt will experi-ence a 16 to 30 per cent water deficit by the end of this century.

This explains Egypt’s declaration that the Nile’s water is a “vital priority of national security.”

In many federations, much of the onus on water manage-ment is on the subnational while the central government’s change to work out how to best manage the trans-regional rivers and lakes within the federation.

But for Ethiopia, the trans-border dimension is a chal-lenge of equal and perhaps greater magnitude.

Other than a 1959 treaty which allocates all the water to

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

10

T

REUTERS/ANTO

NY N

JUGUN

A

Sudanese villagers travel by boat on the river Nile in Sudan’s capital, Khartoum. The Blue Nile, whose source is in Ethiopia, joins with the White Nile near Khartoum. The World Bank and international donors are to lend and contribute US$3 billion to assist 10 countries bordering the Nile develop water projects along the world’s longest river.

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

two countries, Egypt getting 55.5 billion cubic metres of water annually and 18.5 billion cubic metres going to sudan – there is no formal water- sharing agreement between the 10 coun-tries in the Nile River Basin.

“Many countries on the basin share our views on how to utilize the Nile water,” Prime Minister Meles zenawi of Ethiopia said at a convention of the ruling EPRDF party in september.

“There are differences with Egypt, though, which I believe are a matter of negotiations.”

But serious efforts, which show great promise, have been deployed by all Nile Basin countries to get on side. The 10 Nile countries have been working since 1999 on what is known as the Nile Basin Initiative (NBI).

The initiative serves as a platform to help countries along the basin transform their relationships from confrontation to co-operation, thereby building mutual trust and confidence through executing joint projects; and will continue until such time that there is a comprehensive deal signed on sharing the Nile water.

The World Bank is managing a multi-donor trust fund to finance the first phase of investment projects under the NBI,

the costs of which have been estimated at $3 billion. In fact, the first investments are already in progress,

including irrigation projects in Ethiopia and Egypt, an inte-grated water resources development project for the Tana and Beles basin in Ethiopia, and the connection of the national electricity grids of Ethiopia and sudan, in order for Ethiopia to sell surplus hydro power to its neighbour.

Tamrat said the Nile initiative has a clear goal. “The basic objective of the Initiative is not to allocate the volumetric of the water.”

“It is to share the benefit of the resources. There will be a joint irrigation system. Food production can be shared by both. Watershed management and environmental issues are also included in the initiative.”

his prime minister sums it up succinctly: the initiative is not an agreement on water sharing in itself; but this is a pos-sibility further down the road.

Tamarat g. giorgis is the managing editor of Fortune, Ethiopia’s largest circulation business weekly.

financial resources to build the necessary dams and reservoirs to draw upon during times of shortage.

The Bank’s prescription for Ethiopia to achieve water secu-rity is multi-pronged: to spend on infrastructure, on key elements such as dams and irrigation; to develop human capacity to manage its water resources; and to set up effective

institutions to make it all work. Other elements include having a smaller number of people dependent upon agriculture.

The Bank’s assistance has risen over recent years to the current level of about $800 million annually in loans and grants, a large portion of which is intended to address water-related issues such as irrigation, drainage, and curbing land degrada-tion. Government and other donors are also financing water-related infrastructure, but the available resources are dwarfed by the scale of the needs.

In recent years Ethiopia has put a legal framework in place to manage its water resources, but it is unclear if there is sufficient space for the regional state governments to be fully involved in the co-manage-ment. Ethiopia has nine regional states.

Ethiopia’s Constitution states that the country’s water resources are publicly owned. like many federa-tions, the federal government has the overall mandate to determine the

administration and management of the utilization of waters that are inter-regional and trans-boundary in nature while regional states have jurisdiction over the water resources within their respective borders, in accordance with federal laws.

CONTINUED ON PAGE 32

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

11

A young Ethiopian fishes on the banks of the Blue Nile. In most federations, the main challenge in water management is for the various orders of government to agree on sharing responsibilities. But for the Nile, Ethiopia must deal with eight other countries, Burundi, Democratic Republic of Congo, Egypt, Kenya, Rwanda, Sudan, Tanzania and Uganda in an organization called the Nile Basin Initiative

CREA

TIVE

CO

MM

ON

S

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

BY VIOLETA RUIZ ALMENDRAL

ESERTIFICATION – THE TRANSFORMATION OF ARAbLE LAND into desert - has hit three of the 17 autonomous Communities that make up spain, and there are serious water shortages in others. Water, like other natural resources, tends to be unrelated to politi-cal boundaries.

authority over spain’s water – formally a shared compe-tence – has shifted from the centre to the autonomous Communities, the equivalent of states or provinces, and to municipal authorities in a number of cases. But the system has come under acute stress in the last decade because of severe water shortages.

“The rain in spain falls mainly on the plain,” or so the song goes. Well, not anymore. spain is one of the countries most deeply affected by climate change. vast areas in the Communities of Murcia, andalucía and valencia are slowly but surely becoming desert. There are several reasons for this.

The first, which is quite obvious, is climate change. The average temperature in spain has increased 2.7 degrees Celsius since 1880, compared with the 1.4 degrees globally recorded for that period. Other estimates include a projection published by the united Nations suggesting that rainfall will fall about 40 per cent by 2070.

another reason for the growing scarcity of water is the irre-sponsible use of resources in spain, including the use of more than 80 per cent of water resources for farming. Irrigation-based farming produces higher yields and is very profitable for farmers (who pay discounted rates for water), so it is very widely practised.

D

A water reservoir in Saint Llorenç de Morunys, Spain, nearly went dry in the summer of 2008. Rationing of water and a growing black market are the outcomes of accelerated climate change and inadequate water management practices in a country that has yet to develop a water conservation culture.

REUT

ERS/

GUS

TAU

NAC

ARIN

O

violeta Ruiz Almendral, professor of tax and finance law at Universidad Carlos III de Madrid, is a member of the board of directors of the Forum of Federations.

Spain faces growing desertification Federal system and agencies struggle to meet water shortages

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

12

S P A I N

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

Water system stressedThe irrigation systems themselves are under a lot of stress, as most of them are old and inefficient in terms of water usage. Greenpeace, the environmental organization, claims that poor maintenance and the use of very old watering systems account for about 18.5 per cent of the water being lost to leakage.

The geographic distribution of water makes matters more difficult because spaniards tend to live, and the economy thrives, in water-poor areas, particularly on the coast. The coastal settlements were not agricultural and therefore tradi-tionally not dependent on large quantities of water. however, as coastal cities grew from the boom in tourism and other indus-tries, the demand for water outstripped the supply. Water usage in urban centres now amounts to 14 per cent of total consump-tion, and tourist areas have seen rapid growth. This aggravates the problem because water is scarcer in areas with the most tourism.

as well, the tourism model that has been fostered since the 1960s, beginning under Franco’s dictatorship, is that of sun and Beach. This included the massive building of water-consuming resorts, including golf courses, part of a booming industry in spain, swimming pools and artificial lakes. One of the best examples of this is Murcia, a former poor farming region that has become a growing tourism resort centre in the past two decades.

This has clearly contributed to the drying up of land in south-ern and eastern spain, and to the need for rationing water in a growing number of areas. Finally, this has also led to water dis-putes and a booming black market for water. The construction of illegal wells in spain has become alarming. although a licence from the Ministry of Mines is required to drill a well, many spaniards don’t bother to get one. some estimates sug-gest there are up to 510,000 illegal wells in the country, accounting for up to 45 per cent of total water extraction.

Aquifers drying upThe sad reality is that the aquifers, underground reservoirs of water, are drying up. The spanish Environment Ministry esti-mates that one-third of the county is at risk of becoming a desert because of climate change and poor land use.

aside from the problem of scarcity, water pollution is also a major issue in spain, one that has been partially ignored for decades. One cause is the increasing use by farmers of pesti-cides that are eventually washed away and absorbed by the water systems. Ministry of Environment officials say 33 per cent of spanish rivers (with a total length of about 25,000 kilome-tres) are severely contaminated. (see www.marm.es).

a third major water problem in spain, besides scarcity and pollution, is the lack of a “water culture,” a sense of its impor-tance and preciousness. There are several reasons for this. an obvious one is the price of water, which is way too low for con-sumers or farmers to grasp its importance and scarcity. The price does not even cover all costs, which are subsidized by general taxes. Environmental taxes established by municipali-ties and some autonomous Communities have not helped much. a major side effect of the price problem is the low level of recycling. Only in seriously water-depleted areas such as the Canary Islands or Ceuta (a province in northern africa across the strait of Gibraltar), is water normally recycled by desaliniza-tion plants. In 2005, the average household’s annual bill for drinking water was nearly us$300 in France but only us$224 in spain.

The crisis over water in spain has reached the point that it is dramatically reshaping how the distribution of authority over water works in practice among the different levels of government.

Water responsibilities are shared in spain. Thus far, the machinery of intergovernmental relations has been working well when it comes to water issues . however, it remains to be seen whether it will stand the challenge of further devolution. Right now only six autonomous communities have negotiated an expanded water authority, but others have expressed an interest in taking it on.

Constitution deals with waterThe spanish Constitution has two provisions dealing with water. The first article, which also refers in general terms to other natu-ral resources, emphasizes the relevance and potential scarcity of water. article 45.2 specifies that: “Public authorities (at all three orders of government, centre, regions and municipalities) will ensure that all natural resources are managed in a rational manner, in order to protect and improve the quality of life and to defend and protect the environment, based on the essential collective solidarity.” as both the central government and the

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

1�

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

1�

A drought in late 2007 depleted this reservoir north of Barcelona of any trace of water, forcing the city to import from afar. The Spanish Environment Ministry warns that one-third of the country is at risk of becoming a desert.

REUT

ERS/

ALBE

RT G

EA

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

regions have authority over the environment, this section can act as an indirect clause that expands authority over water, particularly for the central government. article 149.1.23 of the Constitution specifies that Madrid has exclusive authority to establish the basic framework for environmental protection.

The second relevant constitutional provision concerns water exclusively. article 149.1.22 states that the central gov-ernment has exclusive authority to “legislate, co-ordinate and manage all water resources when it passes through more than one autonomous Community.”

This section is particularly relevant because most impor-tant bodies of water are in more than one autonomous Community, thereby justifying the role of the central govern-ment as the exclusive authority for their management.

Today, all water usage is regulated by two laws of the cen-tral government adopted in 2001: (see chart above Who controls water in Spain ?) one establishes the basic framework for water usage; the other covers the distribution of water for a number of years. This second law, the so-called National hydrological Plan, provides for the possibility of diverting water from one area to another. Because this can concern more than two different Communities, bitter rows over such transfers arise frequently.

The biggest controversy since the introduction of the National hydrological Plan concerned the proposed transfer of water from the Ebro basin to agricultural and housing developments on the Mediterranean coast. First there were public demonstrations against the transfer. Then the aragon autonomous Community prepared an appeal to argue the constitutionality of the transfer before the Constitutional Court and reported the infringement of community directives before the European Commission. Finally, aragon made repeated administrative appeals until the plans for the trans-fer were abandoned in June 2004.

The most recent planned transfer from aragon to Catalonia, which also created political uproar, was not needed in the end as the intense drought affecting Catalonia ended in May 2008.

Institutions share responsibilityhistorically, water policy in spain has been based on increas-ing water resources through building dams and other water reservoirs. spain ranks fourth in the world in terms of major dams, with about 1,200. Today, all the country’s major rivers have been physically regulated in one way or another. Public intervention in water distribution and management issues has always been very intense.

as water is basically shared, it is an area where intergov-ernmental relations play a major role. The main consultative body for water is the National Council for Water, created in 1985. This semi-independent body is responsible for water planning and advising on the drafting of the National hydrological Plan.

as well, there are key intergovernmental Water Management Confederations, which are under the jurisdic-tion of the central government and are the main bodies responsible for each river basin (including underground waters) that goes beyond a single autonomous Community. The main demarcations are linked to the major rivers in spain – the Ebro, segura, Duero and Guadalquivir – which all flow through more than one Community.

Water basins limited to one Community are managed by the autonomous Communities, which have taken on this authority in their statutes of autonomy (their basic norms that establish which level of authority each region may reach). so far, only six of 17 communities have taken on this authority: andalucía, Balears, Canarias, Cataluña, Galicia and the Basque Country.

The distribution of authority over water is undergoing sub-stantial changes. There are two strong forces pulling on this issue in opposite directions. One is the tendency toward greater decentralization of authority, fostered by the process of reforming the statutes of autonomy. The second, and by far the most difficult challenge spain faces today, is the need for the central government to co-ordinate an increasingly scarce resource and to improve the sustainable use of water.

WATER USESORDER OF gOvERNMENT RESPONSIbLE

CENTRAL REgIONS MUNICIPALITIES

AgRICULTURE LEgISLATES ADMINISTER (SHARED) ADMINISTER (SHARED)

TRANSPORTATION LEgISLATES ADMINISTER (SHARED) ADMINISTER (SHARED)

SANITATION SETS bASIC gUIDELINES SET DETAILED gUIDELINES bUILD & RUN SANITATION SYSTEMS

CONSERvATION SETS bASIC gUIDELINES SET DETAILED gUIDELINES ADMINISTER (SHARED)

gROUNDWATER SETS bASIC gUIDELINES SET DETAILED gUIDELINES ESTAbLISH & ADMINISTER

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

14

Who Controls Water in Spain?

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

BY ASA WAHLqUIST

HEN OUTSIDERS THINK OF AUSTRALIA AND WATER, they are likely to imagine the beaches and Great Barrier Reef of the east coast or the crocodile-infested swamps of the Northern Territory. But for most australians, water has become increasingly scarce.

The australian people and their governments are confronted today with the most severe water crisis in their history. Prolonged drought, exacerbated by climate change, has sparked water restrictions in every town and city in the south-ern part of the continent, where most of the population lives, and drastically reduced the supply of irrigation water.

australians themselves are having difficulty adjusting to this dramatic new reality. Many have long loved to recite the words

of the popular poem My Country by Dorothea Mackellar, which describes the “sunburnt country” as a land “of drought and flooding rains.” The poem, published in 1908, describes an australia that is fast disappearing. Over the past decade, there has been extended drought and very few flooding rains.

australia is the driest inhabited continent. It has the most variable rainfall and the lowest run-off of water into its rivers in the world.

The early exploration of australia involved a constant search for fresh water. But the rivers the explorers found were quite unlike those of Europe. The rivers spread out across the flood plain in wet years and dried to chains of ponds in dry periods.

Rivers gush, then dryhow drastically a river changes can be measured by comparing its maximum flow to its minimum over the course of a year. The amazon’s maximum is 1.3 times its minimum flow and the yangtze is two to one. australia’s most important river, the Murray, has a highly variable ratio of 15.5 to one, while its tribu-tary, the Darling River, has an extraordinary ratio of 4,705 to one.

Thirsty AustraliaDealing with drought that crosses state lines

Asa Wahlquist is the Rural Writer for The Australian. She is the author of Thirsty Country: Options for Australia.

W

Decreasing rainfall and plummeting water storage levels are plaguing Melbourne, Australia’s second largest city. It is hoped that a planned desalination plant and a pipeline to bring water from 70 km north will alleviate the city’s chronic water shortages.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

15

A U S T R A L I AIM

AGE SO

URCE/ WILFRIED KECICH

WO

ST

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

The Murray, despite its importance for australia, is a com-paratively modest river. as much water flows out the mouth of the amazon in one day as flows out the Murray in one year.

But lately, the vital wetlands of the Murray River have been drying out. The old River Red Gum trees are dying, the popula-tions of migratory water birds and native fish have plummeted and the lakes at the end of the system are dying.

The Murray-Darling basin, which covers an area the size of France and Germany combined, is australia’s food basket. The basin is composed of the lands bordering the Murray River, the Darling River and all their tributaries and consists of most of the land in New south Wales and significant sections of victoria, south australia and queensland – four of australia’s six states – plus the australian Capital Territory.

The country, which exports about 70 per cent of its agricul-tural production, is expected to earn a$30 billion (the equivalent of us$20.4 billion), or about 20 per cent of its export income, from the sector this year. Much of its agriculture is cen-tred in this vast basin.

however, the basin is being rapidly depleted of its water, and the agricultural industry is reeling. about 23,000 of australia’s 112,000 farmers, more than one-fifth, have received drought aid of about $1.6 billion us since 2002.

a decade ago, all the states agreed that too much water was being taken out of the river, but they could not agree on a plan to limit water use.

Control of water was a highly contested topic as long ago as the 1890s, when australia’s Constitution was drafted, largely because of the importance of river transportation for trade and commerce. section 98 of the Constitution extended the federal parliament’s jurisdiction over trade and commerce to the area of navigation and shipping. however, this was limited by section 100 which states that the federal government “shall not, by any law or regulation of trade or commerce, abridge the right of a state or the residents therein to the reasonable use of the waters of rivers for conservation or irrigation.”

The Murray-Darling river basin has recently been the focus

of one of the major controversies in australian federalism in the past two decades because the basin falls under the jurisdiction of four state governments. adding to this inter-state squabble was an awkward division of jurisdictions, with water controlled by the states and most drought relief funded by the federal government.

The government of former prime minister John howard came close to reaching a deal on water with the states when howard announced a National Plan for Water security costing $6.7 billion us in 2006. The money was to be spent on upgrad-ing inefficient irrigation systems and buying back water licences. a new authority, with increased powers, would man-age the Murray-Darling Basin. The howard government’s federal Water act of 2007 used a range of federal government powers (such as external affairs, trade and commerce, corpora-tions and territories) to enact legislation regulating water resources in australia.

The act was passed, but the plan was contingent on one con-dition: that the Murray-Darling states transfer all their powers over the basin’s water to the federal government. victoria, australia’s most urbanized state, held out, and a deal was not reached by the time the conservative howard government was voted out of office in November 2007.

The new federal government of Prime Minister Kevin Rudd took on the controversy and hammered out a new deal with the states – including victoria – in July, 2008 – but at a cost that will run into the billions of dollars. Rudd was able to work out the deal with the states because he had the advantage of being the leader of the australian labor Party, the party that also then held power in all six state legislatures.

State governments balkIn the talks, Rudd spoke of a new, more co-operative federalism. But victoria state resisted the deal. It only agreed after Rudd promised $667 million us to help the state modernize its old and inefficient irrigation system.

The intergovernmental agreement, signed in July 2008, pro-

Australia’s food basket now under federal controlTHE FEDERAL gOvERNMENT HAS TAKEN CHARgE OF THE MURRAY-

Darling River Basin, the country’s bread basket, as this vast farming area was struggling with a crippling drought.

On Dec. 15, 2008, a new body, the Murray-Darling Basin authority took over the Murray-Darling Basin Commission. The authority has more powers than its predecessor and will set a limit on how much water can be taken out of the system.

The changeover follows an agreement by four states and the australian Capital Territory to share certain water powers with the federal government.

Parliament passed a law giving the federal government control after successful negotiations with the states and

grudging agreement by the opposition. The states and the federal government agreed in principle to different parts of the plan first in april and then in July 2008.

The drought, which in the past two years brought the low-est river flows ever, made it imperative to balance the environmental and economic needs of the basin, the largest irrigated food producer in australia. This pressing task, plus the needs of nearby cities in different states, persuaded australians to make the basin a responsibility of the federal government.

The opposition favored the bill, but said it did not go far enough. Conservative opposition senators from the liberal Party and the National Party had earlier tried unsuccessfully to block the construction of a pipeline that will allow the state of victoria to take up to 75 billion litres of water annually out of the basin.

The labor government of Prime Minister Kevin Rudd is working on an $8.7 billion us rescue plan for the basin to pre-serve its dwindling water resources. a new authority has been created to manage the basin. Work is set to soon begin placing restrictions on water extractions from the basin.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

1�

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

vides for setting up a new basin authority that will have the power to manage its waters. The agreement states that “govern-ments commit to a new culture and practice of basin-wide management and planning, through new structures and partnerships.”

On Dec. 4, 2008, that agreement became law when the australian senate approved a new bill. The bill gave the federal government power over water in the Murray-Darling River Basin as it battled a crippling drought. (see Australia’s food basket now under federal control.)

Now that an intergovernmental deal has been struck, it will be a race against time for australia to solve its water shortage issues in the face of a grim recent past. The country has become noticeably dryer in the last decade.

Hanging on in droughtsafter 10 dry years, the Murray River is in critical condition, warns Wendy Craik, the head of the Murray Darling Commission.

The Murray is a metaphor for the plight of australia’s water resources country wide.

as a result, the country’s agriculture sector has suffered a major blow. Between 2001-02 and 2007-08, milk production fell 19 per cent while grain crops were halved in the worst years, 2002, 2006 and 2007. In 2007-08, the cotton crop was the small-est since 1982, while the rice crop was the smallest in 60 years.

against this backdrop of decreased farm production, total rural borrowing doubled between 2002 and 2007, with farm income falling to $3.3 billion us in 2007-08 from $8.1 billion us in 2001-02.

One of the few consolations for the agricultural sector is that despite the hard times, only a small proportion of australian farmers have left the land. historically, farmers hang on to their farms through drought periods, and then sell after it rains.

There have been severe droughts before. But Craik says: “average rainfall no longer results in average inflow (of water runoff into streams and rivers).”

The role of the commission, now superseded by the Murray-Darling Basin authority, is to manage the Murray River and the Menindee lakes system of the lower Darling River, and advise the minister’s office on matters related to use of the water, land and other environmental resources of the Murray-Darling Basin.

Runoff is a key factor in ecological systems. It is, according to the Oxford Dictionary, “the amount of rainfall or melted snow that is carried off an area by streams and rivers.”

In the Murray basin, less than 10 per cent of the runoff reaches the basin, compared with an average 39 per cent in Europe and 52 per cent in North america, two continents where much higher levels of water runoff reach bodies of water before it is absorbed into the soil or evaporates. This indicates to what degree the australian soil in this area is dry and thirsty, soaking up most of the water runoff before it can feed into streams and rivers.

This makes the Murray-Darling basin very vulnerable to the impact of rising temperatures, which increase evaporation. a one-degree rise in temperature in the basin causes a 15-per-cent reduction in river flow, or about 1,850 gigalitres less water in the river.

The last three years in the basin were the warmest on record, with 2007 the warmest yet at 1.1 degrees Celsius above average.

Over the last 10 years, inflow into the Murray and its south-ern tributaries has been severely reduced. levels are lower than those forecast for 2030. This is the harsh impact of climate change.

“We expected we might have to deal with that in 50 years time, but we didn’t expect to have to deal with it right now,” Craik said.

The key question now is whether this change has come in time to save the Murray as the river is running on next to empty. There is barely enough water to supply the towns and cities, and none for the environment – undeveloped lands and parks – or for irrigation.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

17

A grains farmer stands over his failed wheat crop, near the town of West Wyalong. The farm was at the epicentre of a 2007 drought. The district normally grows much of the wheat which makes Australia the second biggest exporter in the world, but in 2007 it produced next to nothing. The only really good news in Australia’s agricultural sector is that farmers have not given up and sold their farms in the face of rapidly declining crop yields.

REUT

ERS/

MIC

K TS

IKAS

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

BY GEORGE WILLIAM SHERK

few months ago, California Governor arnold schwarzenegger issued an executive order pro-claiming a statewide drought.

The order, on June 24, 2008, also provided finan-cial assistance for water conservation, facilitated water transfers, sped up drought-related climate

research and increased technical assistance to California’s political subdivisions. Governor schwarzenegger committed

four state agencies to address and, where possible, to lessen the effects of the ongoing drought.

These agencies, California’s Department of Water Resources, Department of Public health, Department of Food & agriculture and the Office of Emergency services, have a lot on their plate.

an alternative response to drought was pursued in Georgia by Governor sonny Perdue who appealed to a higher authority. On November 13, 2007, Governor Perdue gathered a group of constituents at the state capitol to pray for rain. The Governor’s prayer was blunt: “We have come together for one reason and one reason only: to very reverently and respectfully pray up a storm.”

and in alabama, according to aBC News, Governor Bob Riley asked his constituents to pray for an entire week for rain.

A

Wildlife trumps money interests under U.S. federal water laws Conflicts among federal agencies and individual states bedevil the management of water

gEORgE WILLIAM SHERK, a lawyer and an environmental scholar, is an associate research professor at the Colorado School of Mines. He is also an Adjunct Professor at the University of Denver College of Law and an Associate at the International Water Law Research Institute of the University of Dundee in Scotland.

A polar bear and its cubs are seen in the Beaufort Sea. Sarah Palin, the governor of Alaska and former U.S. vice-presidential candidate, has opposed listing the polar bear as threatened under the Endangered Species Act. U.S. courts have ruled that species whose survival is threatened will trump economic activities.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

1�

U S ARE

UTER

S/H

O N

EW

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

The actions of these u.s. governors were motivated by multi-year droughts in their states. such droughts are becom-ing increasingly common. The drought in the Colorado River Basin, for example, has lasted in excess of eight years. Both lake Mead and lake Powell on the Colorado River have seen historic low water levels. In fact, research at the scripps Institute of Oceanography suggests that both lakes could become “dead pools” within the next 15 years.

Research also suggests that climate change could cause water levels in the Great lakes to decline significantly. such declines have also been seen in the Ogallala aquifer, a natural groundwater reservoir extending through eight states from Texas to south Dakota. The drop in the level of this aquifer, which has reached up to 5 feet per year (about 1.5 metres) in some areas, is thought to be more closely related to over-pumping (taking out more water than drains in) than to climate change. It has been argued, however, that climate change is one of the factors causing the Ogallala to be over-pumped. One estimate predicts that the Ogallala aquifer will be drained in 25 years.

State law prevailedEven if water is physically available, it may not be legally avail-able. The federal government has consistently espoused a policy of “state primacy” in the allocation and management of water resources and, equally consistently, has enacted legisla-tion that pre-empted state authority. The rule that has emerged is that states may use only the quantity of water that is not needed for federal purposes. This rule leads to a critical and unanswered question: what quantity of water is needed for federal purposes? Federal law is often vague on this point.

This begs another question. how much water is required to protect threatened or endangered plant and animal species? The water needs of species protected by the Endangered species act (Esa) take precedence over the use of water authorized by state water laws. This precedence was shown in Riverside Irrigation District v. stipo, a Colorado case involving the proposed construction of a reservoir. In this case, the u.s. army Corps of Engineers refused to issue a permit under sect 404 of the federal Clean Water act (CWa) to allow the builders of the reservoir to fill in part of the existing rivers or wetlands.

The Corps refused to issue the permit because operation of the proposed dam would adversely impact critical habitat of the whooping crane and therefore ran afoul of the require-ments of the Endangered species act. Reviewing courts upheld this decision, concluding that the Corps complied with the requirements of both the Clean Water act and the Endangered species act.

In a case over the pumping of groundwater, a federal judge in Texas reached a similar conclusion in sierra Club v. lujan. at issue in the Texas case was the relationship between the pumping of groundwater from the Edwards aquifer in the east of Texas (authorized by state law) and the need to provide flows from Comal and san Marco springs for species pro-tected by the Endangered species act. The federal judge’s decision on this issue was succinct: “Priority is to be given to species whose survival is in conflict with economic activities, such as withdrawal of water from the Edwards (aquifer).”

Federal authorities gain controlhow much water is required to generate hydroelectricity? Federal law requires developers of most hydroelectric gener-ating facilities to obtain a permit from the Federal Energy Regulatory Commission. In order to obtain such a permit, an applicant must comply “with the requirements of the laws of the state or states within which the proposed project is to be located with respect to bed and banks and to the appropria-tion, diversion and use of water for power purposes.”

For years following enactment of the Federal Water Power act in 1920, the Federal Power Commission (now the Federal Energy Regulation Commission) deferred to state water laws. This changed in 1946 when, in First Iowa hydro-Electric Cooperative v. Federal Power Commission, the supreme Court concluded that the detailed provisions of the Federal Power act “leave no room or need for conflicting state con-trols.” This conclusion was confirmed in a 1990 supreme Court decision in the case of California v. Federal Energy Regulation Commission.

how much water is needed to protect water quality? The Clean Water act gave the powers to states to designate the use of rivers located within the state. In 1994, the scope of this authority was addressed by the supreme Court in Public utility District No. 1 v. Washington Department of Ecology. This designation, the Court concluded, may be either in terms of water quality standards to be maintained in the river or in terms of allowable uses. Water quality standards, the Court noted, “consist of the designated uses of the navigable waters involved and the water quality criteria for such waters based on such uses.”

Dividing the waters

Where state boundaries do not correspond with the boundaries of river basins, disputes can arise between water users in different states and among states them-selves. how much water is each state on a particular river entitled to allocate to users within its boundaries?

some of these disputes have been addressed through interstate litigation: a state may sue another state to pre-vent harm to its citizens from actions of private parties in another state. These cases can be brought directly in the united states supreme Court but can also be heard in lower federal courts.

another way to solve disputes over water is for two or more states to agree on “interstate compacts.” Typically, compact agreements involve three steps. First, Congress authorizes negotiation of the compact, usually providing for a federal representative at the negotiations. second, the compact is negotiated by the states. Third, Congress consents to the compact. Through compacts, supreme Court adjudication can be avoided. so far, 25 compacts have been reached to allocate interstate waters.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

19

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

The Court also noted that the Clean Water act authorized the states to set “effluent limitations and other limitations” as needed to ensure compliance with statutory requirements. such limitations are set out in National Pollutant Discharge Elimination system (NPDEs) permits. These permits, which are required for the discharge of pollutants, contain specific provisions relating to the type and concentration of materials to be discharged.

The provisions contained in NPDEs permits are determined in part by the volume of pollutants each watercourse can assim-ilate. This capacity could change in a particular watercourse, for example, through a reduction in stream flows resulting from diversions authorized by state law. In such a case, the require-ments of specific NPDEs permits may have to be tightened to reduce the type or concentration of materials allowed to be discharged. If that is not done, then the uses that were autho-rized by state law may have to be limited.

Limiting state authorityThere are any number of other examples of federal require-ments pre-empting “state primacy” in the allocation and management of water resources. Over decades, various federal Flood Control acts and Rivers & harbors acts have limited the authority of states. additional restrictions may be imposed by other species protection statutes (such as the Marine Mammal Protection act), by resource management statutes (for example, the Wild and scenic Rivers act) and by resource protection stat-utes (such as the safe Drinking Water act).

article Iv of the u.s. Constitution (the “supremacy Clause”) makes clear how conflicts between federal and state law are to be resolved: “This Constitution, and the laws of the united states which shall be made in pursuance thereof; and all trea-ties made, or which shall be made, under the authority of the united states, shall be the supreme law of the land; and the judges in every state shall be bound thereby, any thing in the

Constitution or laws of any state to the contrar y notwithstanding.”

Settling conflictsConsequently, when there is a federal-state conflict over the management and allocation of water resources, the require-ments of federal law will prevail. In 1941, supreme Court Justice William O. Douglas noted in Oklahoma ex rel Phillips v. Guy F. atkinson Co. that “[w]henever the constitutional powers of the federal government and those of the state come into conflict, the latter must yield.”

With regard to a conflict between federal requirements and a state’s own program for water development and conservation, Justice William O. Douglas concluded that the state “program must bow before the ‘superior power’ of Congress.” This means, in essence, that the states are not sovereign over the allocation and management of water within their borders.

Resolution of the water policy gridlock is frustrated not only because it involves federal-state conflicts but also because it involves federal-federal conflicts. Each of the federal statutes noted above is implemented by one or more federal agencies. Each of these agencies has its own water policies and its own stakeholders who will defend those policies. Ever since the Water Resources Council was abolished during the Reagan administration, there has been no effective means of resolving water policy conflicts among federal agencies.

had the Water Resources Council not been abolished in 1981, there might have been an authority that could have resolved the federal-federal conflicts over water in the united states. There is no agency to take its place. until the leadership vacuum is filled by someone with the strength of alexander – or the cun-ning of Machiavelli – there will be no way to cut the Gordian knot, and sort out the overlapping layers of federal jurisdictions over water policy.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

20

The bathtub ring effect (*see arrow above) across this lake in Nevada shows the dramatic fall in water levels in a body that serves Southern California and Las Vegas. Dwindling water levels have spurred state governors in Georgia and Alabama to pray publicly for rain.

REUT

ERS/

STAF

F

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

BY ASH NARAIN ROY

HE EARTH HAS ENOUgH FOR MAN’S NEED bUT not for man’s greed,” said Gandhi. he prac-ticed what he preached.

Every day when Gandhi bathed himself in the freely flowing water of the sabarmati River in 1920, he consciously used only the

smallest quantity of water he needed for taking a bath. asked why he was using the river water so sparingly when it

was available in abundance, Gandhi remarked that “all that is flowing in the river is not mine.” states and nations fighting over water have not taken Gandhian wisdom to heart.

Water is a prime national resource, a basic human need and a precious national asset that needs to be conserved and used sparingly. The wheel of progress can run from ox carts to nuclear power; but life will always run on water. That is why water, not oil, is the prime mover in human development.

India is a microcosm for the world’s water crisis. For other federal countries, it is also a model of how or how not to deal with water and water disputes. Of India’s 28 states, as many as 15 have had water disputes or are squabbling over 8 river water projects.

One of the main reasons for some of India’s river water dis-

putes can be found in the “harmon Doctrine,” which the states seem to have followed, that is, “what falls on our roof is ours to use, without regard to any potential harm to downstream parties.”

This doctrine was set out by u.s. attorney General Judson harmon in 1896 during a controversy between the united states and Mexico over the use of the waters of the Rio Grande river. One other trend is discernible: the more recent the water dis-putes, the more intractable they are to resolve.

India of course does not possess textbook federalism, but then again, many contend there is no such thing as textbook federalism. The Indian Constitution sets out the legislative domains of the central and state governments. This is both the strength and weakness of India’s federalism. Water, for instance, is a state subject, or jurisdiction. The seventh schedule of the Constitution sets out all subjects under three lists—the union list, the state list and the concurrent list.

Prejudicing states’ interests however, because of other clauses in the constitution, water is a shared responsibility. Entry 17 of the state list includes “water, that is to say, water supplies, irrigation and canals, drainage and embankments, water storage and water power.”

But there is a caveat. Entry 17 is subject to the provisions of Entry 56 in the union list (central government list), which says:

“Regulation and development of inter-state rivers and river val-leys to the extent to which such regulation and development

Waterway wrangles beset India’s federalism

Ash Narain Roy is the Associate Director, Institute of Social Sciences in New Delhi, India.

“TPeople try to transport a car to the banks of a flooded river in northeastern India. Parts of India face severe water shortages, but not the Northeast. India’s National Water Policy emphasizes the need for integrated basin-based master planning for flood control and water management, but agreements have been hard to reach.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

21

I N D I ARE

UTER

S/ST

RIN

GER

INDI

A

SPECIAL SECTION : WATER AND INTERGOVERNMENTAL RELATIONS

forumfed.org

under the control of the central government is declared by par-liament by law to be expedient in the public interest.”

In effect, water is as much a central government subject as it is a state subject.

article 262 goes further. It says: “Parliament may by law pro-vide for the adjudication of any dispute or complaint with respect to the use, distribution or control of the waters of, or in, any inter-state river or river valley.”

Interestingly, the law so enacted can even exclude the juris-diction of the supreme Court or other courts. however, on closer scrutiny, constitutional provisions with regard to water may give the appearance of clarity, but in actual practice they are far more opaque.

Nevertheless, one can hardly fault the constitution. The spirit behind these provisions was that a state would exercise its powers in a manner that would not prejudice the interests of other states. some of the parties to the recent river water dis-putes have done precisely the opposite.

River water disputes have posed a major challenge for Indian federalism over the years. The Inter-state Water Disputes act of 1956 was enacted to deal with existing and potential inter-state disputes. It provided for the establishment of a tribunal to adjudicate among various states.

But there is one problem here: the arbitration is not binding. states have even refused to accept the court’s rulings. This has often led to a constitutional crisis. The reasons for the states’ defiance are not hard to find. The growing population has imposed immense pressure on available natural resources.

according to some projections, even if every available river and river stream is harnessed to the full potential, by 2045, India’s population will exceed the availability of water needed to support it. The future will therefore see more conflicts over water. The politicization of water disputes has made them intractable.

More significantly, mechanisms for settling water disputes were created at a time when India had a strong central govern-ment and largely non-assertive states. The advent of coalition governments has weakened the authority of the central government.

Prime Minister Manmohan singh said, while addressing the Fourth International Conference on Federalism in Delhi in November 2007, that water sharing and water disparities are a major challenge to federalism in India.

“It is perhaps no exaggeration to say that we have found it easier to manage bilateral agreements with neighbours on river water sharing than domestic disputes between states” Mr. singh said.

Feds resolve DisputesThe federal government has managed to resolve several dis-putes with relative ease. These include the Palar water dispute between the states of Tamil Nadu and Karnataka in 1956, the Tungbhadra Canal dispute between Karnataka and the state of andhra Pradesh in the same year, the sharing of subarnrekha River water among the states of Bihar, Orissa and West Bengal in 1964 and the utilization of Ravi-Beas waters among the states of Punjab, Rajasthan and Jammu and Kashmir in 1966 among others.

however, some major disputes involving large river basins

could not be resolved and hence had to be referred to tribunals. The federal government has so far set up four tribunals—the Narmada Tribunal, the Krishna Tribunal, the Godavari Tribunal and the Cauvery Tribunal. The first three disputes have been largely resolved but the Cauvery is turning out to be a tough nut to crack.

The Krishna and Godavari dispute involved the states of Maharashtra, Karnataka, andhra Pradesh, Madhya Pradesh and Orissa. This dispute was resolved by the tribunal using the rule of equitable apportionment, each party getting a fair share of the water of the common river. The Narmada water dispute involved the states of Gujarat, Maharashtra, Madhya Pradesh and Rajasthan. The tribunal, set up in 1969, rendered its ruling in 1978. The finding was respected by all parties. In 2000, the supreme Court upheld the tribunal’s award.

The Cauvery water dispute has eluded resolution because of politicization. Differences are not only about the quantity of water released into the Cauvery River by the state of Karnataka and the method of measurement, they are also about political brinksmanship.

Defying tribunal rulingsThe strident political postures of both the Tamil Nadu and Karnataka governments have made a negotiated settlement difficult. What is indeed disturbing for Indian federalism is the lack of respect for the tribunal shown by the two states. The tri-bunal had given an annual share of 419 trillion cubic feet of water to Tamil Nadu and 270 trillion cubic feet to Karnataka.

The Karnataka government sought to overturn the Tribunal’s interim order through an ordinance, arguing that Tamil Nadu’s irrigation expansion project needed to be stopped so Karnataka could appeal the ruling. The supreme Court declared Karnataka’s action unconstitutional but the Karnataka govern-ment has shown no inclination to abide by the Tribunal’s decision.

This state of affairs underscores the degree to which states located upstream benefit disproportionately by refusing to comply with arbitration – as illustrated by the Karnataka gov-ernment’s stand on the Cauvery dispute with Tamil Nadu.

The government of the state of Punjab has done the same as Karnataka by rejecting the Ravi-Beas Water Tribunal’s award. as per the Inter-state Water Disputes act, 1956, no state is com-petent to legislate with respect to water disputes or water-sharing agreements. But in July 2004, the Punjab assem-bly unanimously tossed aside water sharing accords with the states of haryana and Rajasthan and pledged to withhold its water resources for use by its residents only.

The disputes discussed above are largely the result of almost year-round water shortages in the affected states.

The situation in northeastern India is quite the opposite. against the national per capita annual availability of water at 2,208 cubic metres, the average availability in the Northeast, because of the often swollen Brahmaputra and Barak rivers, is as high as 16,589 cubic metres per capita, or seven times the country average.

however, this vast water resource remains unutilized and raises different issues related to water management in the region.

CONTINUED ON PAGE 31

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

22

forumfed.org

BY GREGORY GERMAIN

he Bill of Rights may well be a more glamorous law, but the commerce clause of the united states Constitution

has probably had far greater overall impact on the wealth and dynamism of the u.s.

The commerce clause is a single line in the Constitution giving Congress – the u.s. house of Representatives and the senate – the power “to regulate com-merce with foreign nations, and among the several states, and with Indian tribes.”

virtually every major piece of domes-tic federal legislation, from the laws regulating securities, communications, energy, transportation, pharmaceuticals, food, employment rights, the environ-ment, social security and civil rights, to most federal crimes, to name just a few, has been enacted by Congress under its

commerce clause power. as a result of the supreme Court con-

sistently interpreting the commerce clause very broadly, it has become the bulwark of federal authority for the last century.

The transformation of the u.s. from a loose confederation of powerful inde-pendent states to one composed of a massive centralized federal government began in earnest during the Great Depression of the 1930s with President Franklin D. Roosevelt’s New Deal, which aimed to get americans working by kick-starting the economy.

By 1942, the supreme Court had elim-inated virtually all constraints on federal power under the commerce clause by holding that Congress’s federal wheat production limits could be applied to a dairy farmer who grew a small amount of wheat for his family’s own consumption. The Court reasoned that the family’s

demand for wheat in the interstate mar-ket had been reduced by the farmer’s production, causing a sufficient “effect” on interstate commerce to trigger the clause.

The modern supreme Court has maintained that extremely broad con-struction of the commerce clause, making it almost impossible to challenge federal laws that have any conceivable effect on interstate commerce. When Congress speaks under the commerce clause, the supreme Court listens.

States can’t restrict free tradeWhile the Constitution explicitly gives Congress only the power to enact laws regulating interstate commerce, the supreme Court has long recognized that the clause embodied a free trade princi-ple even in its “dormant” state, that is, even when there was no specific law enacted by Congress.

Because the Commerce Clause gives

U.S. trade and commerce power shapes American federalismState governments get few exemptions from a nearly universal principle

T

U S A

Truckers battle deadlines to deliver their shipments. Thanks to the U.S. Commerce Clause, goods and investment capital circulate easily throughout the country where almost 90 per cent of the $13.8 trillion gross domestic product was consumed internally in 2007.

ISTOCKPH

OTO

/ WEN

DELL FRANKS

gregory germain is an Associate Professor of Law at the Syracuse University College of Law.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

2�

forumfed.org

Congress – and not the states – the power to enact legislation affecting interstate commerce, the supreme Court inferred that a state could not pass legislation that might interfere with Congress’s unused power to regulate interstate commerce.

For more than 150 years, the supreme Court has invalidated state protectionist laws under the so-called “dormant” com-merce clause, even when Congress had chosen not to legislate on the issue.

laws that discriminate on their face or in their practical effect in favor of local private actors and against out-of-state competitors are struck down by the supreme Court according to what is called a “virtually per-se rule of invalidity.”

laws that have merely an unintended incidental effect on interstate commerce are to be judged by weighing the benefits of the legislation against the burdens on commerce.

This balancing test has been subject to substantial criticism because judges, while appearing scientific, can weigh and measure the various factors however they see fit.

The courts rarely engage in this bal-ancing test because instead they generally strike down a legal provision that is manifestly discriminatory when-

ever the state laws appear to be protectionist.

While the benefits of free trade among the states have been considerable, the courts have been forced to create com-plex rules by which to judge the validity of state tax laws. The supreme Court has developed a complex four-part test to assure that a tax fairly relates to the out-of-state taxpayer’s in-state activity, and is no more burdensome than taxes on in-state competitors. The organization of tax lawyers has an entire section of tax law specialists devoted to analyzing state and local tax laws for compliance with the Court’s complex commerce clause rules.

The commerce clause rules make it harder for states to enact laws favouring their own citizens at the expense of citi-zens from other states. The states must comply with the commerce clause rules when they enact such legislation.

Cash and tax subsidies Direct cash subsidies are an important exception to the commerce clause’s free trade principles. a state can provide cash subsidies to its own citizens without run-ning afoul of the commerce clause rules because the cost of the subsidy is borne entirely by local taxpayers. In this way, a state can preclude citizens from other

states from taking part and receiving such a subsidy.

a clever Massachusetts legislature combined a non-discriminatory tax on all milk sold by both local and out-of-state dairies to retailers in the state, with a program to pay the collected tax pro-ceeds in a cash subsidy to local dairy farmers.

In this case the non-discriminatory tax and cash subsidy would have sur-vived a challenge if viewed separately, but the Court recognized that the com-bined program had the effect of a discriminatory tax in restraint of free interstate trade and therefore struck it down.

unlike cash subsidies, tax subsidies have not traditionally been exempted from commerce clause scrutiny. The Court has suggested that the use of the state’s taxation machinery is inherently regulatory, although the conclusion makes little economic sense.

The supreme Court was recently asked by local taxpayers to rule that property tax and franchise tax abate-ments offered to Daimler-Chrysler for expanding its manufacturing operations

in Toledo, Ohio, violated the commerce clause.

The Court avoided addressing the dif-ficult commerce clause questions by ruling that the taxpayers lacked standing, and thus did not have the right to raise a commerce clause challenge.

The dormant commerce clause pro-tects competitors, not taxpayers. The important legal issue raised by the Daimler-Chrysler case will probably rise anew when an out-of-state competitor cries foul over tax incentives granted to a local manufacturer.

applying the commerce clause to a state’s own activities generated a huge controversy. In 1976, a divided supreme Court ruled that Congress could not impose its uniform national minimum wage and maximum hour standards on state workers engaged in traditional gov-ernmental functions.

In 1985, in another divided opinion, the supreme Court reversed course and held that Congress could impose mini-mu m w a g e a n d ma x i mu m h o u r standards on such state workers. Nevertheless, the Court stated that there are limits to Congress’s power to tax or regulate traditional governmental func-

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

24

A New York scrap yard posts its prices for disposing solid waste. Almost every major piece of domestic federal legislation has been enacted by Congress under the commerce clause, a bulwark of federal authority. In a rare exception, U.S. states can favour local scrap processors in subsidizing the disposal of scrap automobiles.

ROM

E SENTIN

EL

forumfed.org

tions. The precise contours of those limits remain undefined.

Exception for state government activitiesIn 1976, the Court also for the first time recognized an exception to the so-called dormant commerce clause. The Court ruled that when a state “enter[s] the market as a purchaser [or seller]” it can, like any private purchaser or seller, choose with whom it wishes to deal.

The state can favour local scrap processors in subsidizing the disposal of “hulk” (i.e., scrap) automobiles that it has pur-chased, can favour in-state residents when hiring workers for state-funded construction projects and can favour local resi-dents in the sale of cement produced by a municipally-owned cement plant.

In January 2007, the supreme Court substantially expanded this exception. Municipalities in upstate New york opened a waste processing facility and enacted a “flow control” ordi-nance requiring all local garbage to be processed at the municipal facility.

The ordinance forced garbage collectors to pay the facility’s high “tipping fees” for the waste disposal. a private hauler chal-lenged the ordinance under the commerce clause, arguing that the ordinance, with its local processing requirement, went far beyond the previous exception.

after all, private parties could not compel others to do busi-ness with them, while the ordinance required garbage collectors to do business with the municipality. The Court upheld the ordinance using broad language harkening back to its 1976 direct commerce clause ruling, which exempted “tradi-

tional governmental functions” from the reach of the commerce clause.

In May 2008, the Court reiterated the “traditional govern-mental functions” exemption by allowing the state of Kentucky to tax its own citizens on interest earned from municipal bonds issued by other states while exempting interest on Kentucky municipal bonds. The same discriminatory bond taxing system exists in 38 other states.

amazingly, all 50 states, even those who would benefit from free trade in municipal bonds, joined together to ask the Court to stay out of the business of regulating state proprietary activi-ties under the dormant commerce clause. apparently, the states did not want the federal courts scrutinizing their proprie-tary activities.

The courts’ broad interpretation of the dormant commerce clause has paved the way for a vigorous free market within the united states, yet that same interpretation has helped contrib-ute to the growth of an enormously powerful federal government bureaucracy.

The “traditional governmental functions” exemption from the dormant commerce clause may yet mire the Court with cases questioning the proper role of state and local govern-ments in a country dominated by a massive federal government. Ironically, this federal government was itself made possible by broad commerce clause interpretations – in court rulings that could not have been imagined at the time of the founding of the country.

The U.S. is still one of the world’s largest free trade zones

BY CARL STIEREN

until the end of the 20th Century, the united states had a higher Gross Domestic Product (GDP) than any free trade zone in the world.

It has since fallen to third place, behind the GDP of the North american Free Trade agreement (of which it is a mem-ber) and that of the European union.

The benefits of free trade were hailed by the New york Times on august 10, 1894: “Free trade within our borders, steadily extending to meet the vast and varied progress of a population that has spread over a continent and has created every ten years a dominion as large in area as many a European country and of greater resources of any but the largest, has absorbed the thought and energy of the american people.”

This too was due in large part to the supreme Court’s unusual interpretation of the commerce clause.

By opening the gates for interstate commerce – helped by the canals, rivers, railroads and Interstate highways built and regulated by Congress under the commerce clause – enabled goods and investment capital to circulate easily throughout the country.

When advertising on radio and television appeared, many

local products became national. Coast-to-coast retail chains, from sears to Target and Wal-Mart, and national brands, from Coca-Cola to Budweiser, replaced many a local store and local brewery.

By the end of the 20th century, even local convenience stores and neighbourhood bookstores had to make way for national chains. Without the judicially-created free trade principle, local political majorities would have used their political power to prevent the development of national commerce.

Most of u.s. trade today is still among the states. The u.s. GDP for 2007 was $13.8 trillion. GDP is a measure of the total value of all services and goods produced in a country in a one-year time span.

The same year, $1.6 trillion worth of goods and services were exported from the united states. These figures show that 88 per cent of the GDP was consumed domestically. Only 12 per cent of u.s. production was exported.

In 1997, the united states’ GDP was $8.24 trillion, of which $964 billion was exported, accounting for 11.6 per cent of the u.s. GDP. In other words, between 80 and 90 per cent of what the u.s. produces stays within the country.

These figures explain the periodic insular impulses of the u.s. and demonstrate that the country’s economy figuratively makes of the u.s., a near island unto itself.

Carl Stieren is the associate editor of Federations magazine.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

25

forumfed.org

ANY gOvERNMENTS HAvE stumbled on the difficult politics of tax reform. The economic imperatives of

a more rational system bump up against the difficult politics of winners and los-ers – and in federations, against the turf wars between governments.

Few tax reforms have proven more important, or difficult, than the move from sales and manufacturing taxes to value added taxes – what is known as the vaT. India finally introduced a vaT in 2005 and the last eight holdout states

gave in and replaced their sales taxes with a vaT in 2008.

The manufacturing tax, which is imposed by the central government in India, is already under a value added system called CENvaT (Central vaT), a transformation that began in 1986 and has been extended further since then. It has been a struggle for the new regime both at the central government and at the state level, and it is still far from optimal.

The federal challenge comes from the fact that constituent units in many

federations have the power to levy sales and manufacturing taxes. such taxes are quite easy to administer at the sub-national level. But a vaT is much more difficult to administer at the sub-national level and requires, at a minimum, that major elements of its design be co-ordinated across the fed-eration. so federal countries wishing to move to a vaT must also work out how to go from a decentralized regime to a co-ordinated one.

Why bother? sales and manufactur-ing taxes are economically flawed in that they are a tax on the inputs into a country’s goods and services. Thus, they favour imports over domestic produc-tion, they can involve repeated or

REUT

ERS/

PUN

IT P

ARAN

JPE

Indian states agree to create a value added taxGoods and services tax could be next if New Delhi and the states agree

BY SUKUMAR MUKHOPADHYAY

Sukumar Mukhopadhyay, a former member of India’s Central Board of Excise & Customs, writes on economic and taxation issues. He can be contacted at smukher2000@yahoo.com

M

I N D I A

Shoppers stroll in a Mumbai mall, where the goods they purchase are subject to a value-added tax (VAT). The VAT is levied on each transaction in the chain until the final product reaches the consumer, who pays the last business the full amount.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

2�

forumfed.org

“cascading” taxation as elements of the production chain move towards the final product (thus putting heavier taxes on products with longer production chains) and unless a specific exemption is made, they also tax exports.

a vaT avoids these problems. It is lev-ied on each transaction in the chain of production as businesses buy inputs and sell their outputs onward to other busi-nesses until the final product reaches the consumer. Each business collects the vaT at its point of sale, but is credited for vaT it has already paid on its inputs; thus on any one transaction, the net new tax is only on the “value added” at that stage in the chain. The final consumer pays the last business the full amount of the vaT. This system is neutral, taxing all final products the same way. The vaT is nor-mally refunded when a product is exported and it is imposed on imports.

Many exemptions from the old taxes were abolished in India during the changeover to the vaT in order to make the new regime more neutral. however, loss of exemptions could spark protests, as happened in 2007 when weavers in the state of Orissa objected to the tax exemption on saris, towels and other items being yanked.

small-scale businesses were against the vaT since it would require them to keep detailed documents and accounts. For many businesses, there was a simple lack of will to co-operate with the govern-ment on the new tax.

large industries, however, were in favour of the vaT because of the distinct benefit to them since it would give them credits on their inputs. as it turned out, vaT revenue fell short of previous sales

tax collections in many states in the first two years. as a result, the central government had to give substantial com-pensation to the states, as that was the arrange-ment for three years.

also, critics of the tax said that changing to a vaT was no guarantee of raising more revenue or reducing tax evasion, two principal justifica-tions for the new order.

Support from central governmentThe vaT system was adopted by the states with the active approval o f P r i m e M i n i s t e r M a n m o h a n s i n g h’s C o n g r e s s - Pa r t y - l e d coalition in New Delhi. In 2004, when singh’s coalition came to power, many states were still governed by the opposi-tion Bharatiya Janata Party (BJP). In these states, the governments led by the BJP and its allies were in no mood to co-operate with the Congress Party, which had defeated them nation-ally. They said they would not introduce the vaT because it would trigger agita-tion by traders. Ironically, a BJP-led coalition government earlier had actively canvassed for introduction of a vaT. The government of Tamil Nadu, though not ruled by BJP, also refused to co-operate.

The states that objected to the vaT wanted to maintain the sales tax because it gave them a steady revenue increase. however, the vaT is meant to benefit governments, which end up having less tax leakage due to the paper trail retailers have to maintain.

The key question before implementa-tion of the vaT was how the central

CONTINUED ON PAGE 30

Which state should get the VAT?

India is a federal country in which each state imposes its own vaT. Decentralized vaT regimes present major challenges.

In federal countries with decentral-ized regimes, there is always the question of who should get the vaT when goods cross internal borders. In an origin-based system, the vaT rate is decided by the state of the seller, while in a destination-based system it is

decided by the state of the buyer.India has a destination-based

system, but it offers no tax credits on interstate trade. This means that the state where the buyer lives charges the full vaT and does not provide credits to those in other states who paid on ear-lier stages of production. a state in India with very high sales to out-of-state customers would find that it was taxing inputs, while one which imported heav-ily would be getting a disproportionate share of tax on final sales.

While a decentralized origin-based system is easier to administer in that it

does not require cross-border sales to be closely monitored, it has the disad-vantage that it taxes certain production inputs. In principle, a destination-b a s e d s y s t e m c a n av o i d t h e s e distortions if there are interstate credits.

In decentralized systems, destina-tion based regimes with interstate credits are more consistent with vaT principles. however, the administrative cost and complexity of such systems can be very high. a purely federal regime is a great deal simpler and cheaper.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

27

A shopkeeper in Jaipur, Rajasthan, sitting among his multi-coloured array of saris. Sari weavers protested the 2007 levy of the VAT on their handmade goods.

RAN

DHIR

SIN

GH

Germany, the largest federal country in the European union, became the Federal Republic of Germany in 1949. It has had a tradi-tion of federalism both in the Weimar Republic from 1919 to 1933 and previ-ously in the time of the German Empire, from 1871 to 1919. Germany’s 16 states participate in the federal leg-i s l a t i v e p ro c e s s t h ro u g h t h e Bundesrat, Germany’s upper house. all state governments are entitled to a specified number of seats in the Bundesrat based on their population.

In this issue, Federations inter-views Peter Müller, Premier of the German state of saarland. Premier Müller speaks, among other topics, about innovation, autonomy and diversity among Germany’s 16 states*.

Prior to becoming the Premier of saarland in 1999, he served from 1990 as a member of the state parliament of saarland. From 1994 through 1999, he was Chairman of the saarland Christian Democratic union political caucus as well as leader of the Opposition. Mr. Müller was recently elected President of the Bundesrat, a post he took up on Nov. 1, 2008.

Premier Müller was interviewed by Felix Knüpling, the Forum’s Director of European Programs.

* Germany has 16 subnational units called Länder (“states” in English).

PETER MÜLLER

Premier explains Saarland’s innovations as a German stateINTERVIEW BY FELIX KNÜPLING

FEDERATIONS: What does federalism mean to you?

PREMIER MÜLLER: Federalism is an expres-sion of the regional autonomy and cultural diversity of a country. It’s a bul-w a r k a g a i n s t a c e n t ra l i s m t h a t discourages innovations and against the counterproductive concentration of power; therefore, it is an important ele-ment of a living democracy. It’s easier to focus on the specific situation of a partic-ular region and the needs of its citizens in a federal country. Federalism is an institutionalized driver of innovation, since it promotes creative competition among different political models. however, to prevent this competition from becoming detrimental to the living conditions and future potential of indi-vidual regions, we need a fair set of rules and comparable opportunities right from the start. unfortunately, this is cur-rently not the case in Germany, primarily because of the current structure of finan-cial equalization among the states.

FEDERATIONS: What is saarland doing that is different or better than its neighbour, Rheinland-Palatinate?

PREMIER MÜLLER: saarland consistently takes responsibility for how it structures its own programs. If there’s a need to take action, we don’t wait for the other states to do something; we just go ahead and do it – as we did in the case of early child-hood education or the increased protection of young children against abuse and neglect. saarland is also aware of its role as a leader, even if the other states don’t immediately approve. For example, when saarland was the first state to make the third year of kindergar-ten free of charge, Rheinland-Palatinate was initially very critical of this deci-sion—then decided to adopt the same measure.

FEDERATIONS: In a recent poll, one quarter of all Germans said they were in favour

of eliminating the states.

PREMIER MÜLLER: This survey confirms my opinion that we shouldn’t take the important cornerstones of our basic democratic order for granted, but rather that we should campaign for its accep-tance every single day. I’m convinced: if everyone noticed that the alternative to federalism — namely centralization — means less innovation, less citizen involvement and inequitable living con-ditions, then the minority of those polled would join the majority.

FEDERATIONS: a major ity of saar- landers could see a merger with Rheinland-Palatinate.

PREMIER MÜLLER: after countless personal conversations, and in light of other sur-veys, it seems highly unlikely to me that a majority of saarlanders really would like to merge with Rheinland-Palatinate. aside from the difficult “technicalities”, such as the question of a new state capi-tal, a merger wouldn’t solve any problems. It wouldn’t solve the budget crisis and it would only lead to new prob-lems in areas such as economic and regional policies.

FEDERATIONS: Many of your party col-leagues in the CDu often talk about the need for more competitive thinking in support of the solidarity and equaliza-tion on which German federalism rests. What do you think?

PREMIER MÜLLER: Thinking competitively is also a basic element of German feder-alism. however, for constructive competition to develop, there has to be an appropriate set of framework condi-tions that allow all the states to start from the same point. That’s why, in my opin-i o n , t h e C o m m i s s i o n f o r t h e Mo d e r n i z at i o n o f Fe d e ra l -st at e Financial Relations (Kommission zur Modernisierung der Bund-Länder-Finanzbeziehungen) must find a fully

P R A C T I T I O N E R ’ S P A g EJA

NU

AR

Y |

FEB

RU

AR

Y 2

00

9Fe

dera

tion

s

2�

forumfed.org

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

29

integrated solution. Increasing competi-tion between the states can’t happen without increasing funding to them based on their responsibilities. all states need to see a balanced budget. In the process, various prior financial commit-ments will have to be taken into account. Then, and only then, will competition be possible.

FEDERATIONS: Because of its budget crisis, saarland has gone to the Federal Constitutional Court seeking increased support from the federal government. It and the other states believe that saarland can achieve a balanced budget on its own. What funding efforts would you introduce for the future?

PREMIER MÜLLER: During a sitting of the Commission for the Modernization of Federal-state Financial Relations a few weeks ago, it was confirmed, as part of an analysis of the state budgets of Bremen, saarland and schleswig-holstein, that saarland has the lowest structural expen-ditures of all the states. To date, we’ve severely restricted our spending and, in future, we’ll benefit from the structural savings measures that we introduced years ago. The amount and rate of increase are well below those of the national average. We’ve already consis-tently cut costs. What’s more, I don’t see the potential for any further reductions. The call by some commissioners for addi-tional and more serious reductions to achieve a balanced budget without any funding help would only mean that com-parable living conditions throughout the federal republic could no longer be guar-anteed and that the quality of life enjoyed in a particular state would greatly suffer.

FEDERATIONS: In general, what results do you expect to see from the Commission, of which you are a member?

PREMIER MÜLLER: We have a clearly defined goal: to stop the move to debtor nation that Germany began during the major financial reform of the late 1960s. To do this, the new indebtedness must be turned as far back as possible to zero. If we can codify and actually maintain this on a continuing basis, then we’ve achieved the first success. Because of their structural differences, various states are currently not in a position to respect

the current limits on borrowing, nor will they be in a position in future to comply with even stricter limits. The funding assistance proposed by the co-chairmen of the Commission represents a first step that, along with other tools, will allow all states to approve tighter controls on new indebtedness. In a second step, once a structurally balanced budget is achieved, it will be possible to focus on debt reduction.

FEDERATIONS: In your opinion, can the Commission reach a long-term, sustain-able solution when politically sensitive issues, such as financial equalization among the states or restructuring, are ignored?

PREMIER MÜLLER: yes. We shouldn’t set the ba r too h ig h w it h respec t to t he demands made on the Commission. Just a few years ago, we were going through the greatest public financial crisis in the histor y of the Federal Republic of Germany. Ever y year, Germany fails to meet the requirements of the European stability and Growth Pact. Therefore, if we succeed in agree-ing on a strict new-indebtedness rule in conjunction with funding assistance, this would be a major achievement and a prerequisite for discussions to be held in a few years, as part of Federalism Reform III, on reforming f inancial equalization and on working together to reduce old debts.

FEDERATIONS: Does the call for tax relief made, in fact, by your party, threaten the Commission’s chances for success?

PREMIER MÜLLER: Our overriding goal is the funding of government budgets, bearing in mind our responsibility towards future generations. The earliest the federal budget will not need to incur new debts will be 2011, which is why extensive tax-reduction models can no longer be implemented during this legislative period. Therefore, I consider it simply irresponsible to promise people signifi-cant tax cuts for as early as next year. Tax relief is essential, but only through a step-by-step process implemented over time and that doesn’t call into question bud-getary restructuring. I’m confident that the Commission, when it meets for the last time in mid-October, will decide on a

conclusive, total package that will take us on the road away from being a debtor nation.

FEDERATIONS: The swiss cantons or Canadian provinces have a lot more authority when it comes to tax revenues than the German states. Would you like to see more decentralized responsibility in this area?

PREMIER MÜLLER: Greater fiscal autonomy basically needs to be looked at from two perspectives. On the one hand, it would offer the states the possibility, on the rev-enue side, to make the new debt restrictions more manageable and to gain more room to manoeuvre. On the other hand, the risk of a competition that may, by its very nature, lead to a decline, always exists, with long-term, negative implications for all the states. Therefore, greater fiscal autonomy could only be justified if the initial conditions were the same for all the states and it could only exist in a narrowly defined context to avoid tax rates from drifting further apart, with the corresponding economic and political ramifications.

FEDERATIONS: The federal states are involved in the decision-making process at the European level. When it comes to matters that directly impact their areas of responsibility, such as education and culture, they sit at the negotiating table in Brussels. What importance does any development at the European level have for federalism in Germany?

PREMIER MÜLLER: If the rights of the German states to participate in European policy-making stipulated in the Basic law and in European provisions are con-sistently respected, then European integration will have no negative impact on the states of Germany. In this respect, it is important that the Treaty of lisbon be implemented, despite its rejection by Irish voters, because it reinforces the principle of subsidiarity. I also believe that Europe promotes German federal-ism, since it facilitates co-operation between municipalities and states across national boundaries. In this way, European development offers many pos-sibilities for each region to realize its potential. We must always take advan-tage of these opportunities.

forumfed.org

FEDERATIONS: What are the major ques-tions relating to German federalism that will have to be answered in the next 10 to 20 years?

PREMIER MÜLLER: Intergenerational equity, in my mind, is the topic that will influ-ence the discussion on the future of

German federalism over the next few years. We need to ensure that we don’t negatively impact the chances of future generations by leaving behind major debts and an outdated infrastructure. This will mean consolidating our budgets without neglecting important invest-ments in the future. Given the fact that major future investments—whether

they’re in the areas of education, child-care, health and long-term care or transportation infrastructure—are all definitely the responsibility of the states, intergenerational equity will be more rel-evant at the state level than at the federal level. We need to be ready to take up this challenge.

INDIA vAT [ FROM PAgE 27]

government and the states would share the revenue, and whether different states could set varying tax rates. a second question was who would collect the new tax – the central government or states? India had observed how a vaT was intro-duced relatively effectively in Canada. It took negative lessons from the experi-ence of Brazil in how not to introduce a vaT, since in Brazil the federal govern-ment and states each impose different vaTs.

Next came the question of how to implement a GsT (Goods and services Tax) by combining the existing service Tax with vaT. The key question, before implementation of a GsT system became universal in India this year, was the state of the existing vaT, which is neither uni-form nor comprehensive – goals long sought by economists, businesses and most politicians.

Debate over tax ratesEach federation’s vaT has three essential aspects to it: the tax base (the value of the taxed item), the tax rate and the mecha-nism for collection.

There are three lists of powers in India’s federal constitution: the union list, or powers of the central government; the state list, or powers of states; and the concurrent list, or powers shared by states and the centre.

India’s constitution gives taxation power to the central government for levy-ing customs duties on imports and exports and excise duty on manufac-tured goods, in addition to the power to tax services.

India’s list of state-government pow-ers includes the power to tax the sale of goods. The states implemented a state vaT with four rates: zero for commodi-ties (unprocessed and natural products) and those with social implications; one per cent for gold, silver, ornaments and

bulk-auctioned tea; four per cent for raw materials, medicines and drugs, capital goods and nearly 300 other categories; and 12.5 per cent on remaining items, which are usually manufactured goods. The list has varied over time.

although the central government’s eventual objective is to have a uniform rate, many locally important goods were presented as special cases deserving lower rates.

Gradually, more exceptions began to appear. The latest came in March 2007 when the state of West Bengal announced reduced duties on industrial compo-nents and items such as kerosene. some economists support this practice in the name of fiscal federalism, but others call it “fiscal mayhem.”

‘Complicated bookkeeping‘The state vaT is applied up to and includ-ing the retail stage though. sometimes retailers absorb the vaT, especially when they are clearing stock.

For merchants, keeping the necessary financial records for the vaT is compli-cated. For one thing, an input-tax credit is given only for materials or labour pur-chased in the same state. a further frustration is that no credit is given for payment of the central sales tax that has not yet been merged into the vaT. This is an inter-state sales tax imposed by the state in which the goods are sold. This tax was four per cent in 2005, is now two per cent and is to be reduced to zero by 2010. however, the loss to the states, especially major exporting states, will possibly be offset by the central government.

Thus the successful merger of India’s sales and manufacturing taxes into a vaT and CENvaT is only the first step. Many economists and governments have their eye on something bigger. Their ultimate goal is to create a more encompassing tax to extend the vaT to services, as well as goods. This is called the goods and ser-vices tax or GsT.

Giving states the right to charge a ser-vices tax would be a crucial step in this regard. Discussions are underway between the central government and the states on a GsT. a committee analyzing political and economic relations between governments may recommend sweeping changes in the federal structure. These discussions have taken place behind closed doors, but media reports specu-late that both states and the central government will have their own GsT, which will be called the dual GsT.

The unanswered administrative ques-tion is: “Who will collect a tax on a single combined base – the central government or the states?” It may be very difficult to get the states and the central government to agree on an answer.

In the end, there could be one of three possible solutions:• a single nation-wide GsT collected by

the central government• a single GsT collected by the states –

possibly with different rates in each state

• a “dual GsT” composed of a state GsT and a central government GsT

If India were to give up on establish-ing a single national GsT, then the existing CENvaT could be merged with service tax at the state level. The current vaT could be improved by allowing an inter-state input credit, establishing just one or two tax rates rather than the four existing ones. No serious attempt has been made by current governments at the state and central levels to move in this direction.

at the national level, the central bud-get for 2008-2009, announced in February 2008, was the last effective bud-get of the current government and another budget will be presented after the next national election. Thus, analysts do not expect that there is much of a chance of a comprehensive GsT even by april 2010.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

�0

forumfed.org

INDIA [FROM PAgE 22]

In this region, heavy rains during the monsoon season cause considerable soil erosion in the rural areas upstream, mainly in the hills, and flash floods in the downstream in the plains, including major urban areas in the state of assam. The winter months are marked by drought and subsequent lowering of ground water level, both upstream and downstream.

The violence of the monsoon and the winter calm both have negative conse-quences for cultivation in the Northeast. s t a t e g o v e r n m e n t s h av e s o f a r approached these problems individually and through their respective local gov-ernments. however, since the upstream and downstream are hydrologically related, integrated management prac-tices have to be put in place.

The National Water Policy (2002) emphasizes the need for integrated basin-based master planning for flood control and water management; and increased implementation of non-structural mea-sures such as flood forecasting and warning, zoning and flood-proofing to minimize losses.

This required bilateral arrangement is between assam and its neighbors, espe-cially with the state of arunachal Pradesh, to manage water flow in individual river

basins. however, agreements have been hard to reach since participant states are reluctant for political reasons to displace rural or urban populations through a process of zoning or construction of flood control infrastructure.

Further complicating the situation is the fact that in several northeastern states, management of water resources is vested not with the states but is under the jurisdiction of traditional institutions (rural local councils).

Empowering local government after the 73rd and 74th constitutional amendments in 1992, a third tier of gov-ernment has come into being. under the Eleventh and Twelfth schedules of the Constitution, over two dozen subjects have been devolved to the village pan-c h a y a t s o r l o c a l c o u n c i l s , a n d municipalities. These include drinking water, water management, watershed development, minor irrigation, sanita-tion, culverts, bridges, ferries, waterways and other means of communication.

The empowerment of local govern-ment institutions has added a new dimension to Indian federalism. The advent of this new order of government, the panchayati raj, has further weakened the central government’s powers. Governance is today a far more federal enterprise than hitherto. What form or shape the conflict dimensions will take

with respect to water and water resources is impossible to predict.

In view of the increasingly difficult-to-resolve water disputes, some experts have suggested that rivers should be joined by means of canals. The BJP gov-ernment pushed the idea.

The nationalization of major inter-state rivers to avoid water disputes is constitutionally permissible, but is likely to be avoided by any central government that wants peace with the states. a more viable option could be water conserva-tion and demand management.

The sarkaria Commission on Centre-state Relations of 1988 recommended that the central government set up a tri-bunal within one year of receiving a complaint. In this regard, the Inter-state Water Disputes act should be amended to ensure that the award of a tribunal becomes effective within five years and the awards should have the same force and sanctions as an order of the supreme Court.

all said, Indian federalism has learned to live with water disputes. For the smooth functioning of federalism there is need to find ways to ensure that states don’t abuse their powers over rivers. Federalism should not be a ploy for states to function as independent republics. at the same time, the federal government must play the role of a trustee for all natu-ral resources, including rivers.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

�1

PAKISTAN [FROM PAgE 4]

Within Pakistan, the coalition govern-ment led by Bhutto’s widower’s PPP party is reaching out to smaller provinces as part of a policy of what it calls “national reconciliation.” supporting the demand to rename the North-West Frontier Province and the withdrawal of prosecu-tions against Baloch nationalist leaders are part of that strategy of redressing grievances. already, the signs are as encouraging as they are in Balochistan.

a committee is being set up to look into demands for more provincial auton-omy and to give the senate certain financial and oversight powers over nominations to key offices. another com-mittee is already looking into introducing political, judicial and administrative reforms in Pakistan’s tribal regions.

But barely hours after zardari’s maiden speech to parliament, just when

Muslims were about to break their fast in the holy month of Ramadan in late september, a suicide bomber rammed h i s e x p l o s i v e s - l a d e n t r u c k i nt o Islamabad’s landmark Marriott hotel, killing nearly sixty people and wounding many more.

Military campaign against militantsThe devastating bombing in the heart of the federal capital shook the entire coun-try. There are many more vociferous calls now for a full debate in the national par-liament on the “war on terror” to discuss its pros and cons and to evolve a national consensus.

Mr. zardari and his hand-picked Prime Minister, yousaf Raza Gillani, have promised to hold a behind-closed-doors briefing for parliamentarians on the issue, in an effort to begin building a much-needed consensus on dealing with the war on terror.

since then, there has been no national consensus. The army has continued fighting insurgents in the tribal areas bor-dering the North-West Frontier Province, and in the swat valley inside the province. But heavy government losses and the past policies of truces with Taliban and other armed militants followed by fight-ing, has diminished hopes for peace.

More recently, Mr. zardari found him-self scrambling to placate an outraged India, which blamed rogue Pakistani ele-ments for the Nov. 26 terrorist attack of Mumbai that saw more than 180 inno-cent Indians and international tourists gunned down in the heart of India’s financial capital.

With such grievous troubles erupting internally and externally, realigning the Pakistani federation is dropping lower on Mr. zardari’s to-do list.

forumfed.org

ETHIOPIA [FROM PAgE 11]

The government has adopted the river basin as a planning unit to develop and manage the country’s water resources, a step which is in line with the Ethiopian Water Resources Management Policy.

Most of the major powers and respon-sibilities of the Federal Ministry of Water Resources are to be gradually allocated to River Basin Organizations (RBOs) as they are established.

States take a roleEthiopia’s federal system recognizes the importance of decentralized manage-ment by regional states in the political, economic and social affairs of the coun-try. Moreover, the federal government cannot effectively discharge some of its responsibilities unless it adopts a decen-tralized and participatory approach to their management.

This calls for the regional states to have an adequate role and participate in decision-making regarding the manage-ment of water resources within their respective regions.

Ethiopian water expert Imeru Tamrat explains that the regional states do in fact participate in decision-making on water resources management. They prepare and implement their ow n water resources investment plans and projects.

In fact, they also issue permits to water users even though it is the federal gov-ernment, and now the Basin authorities, that are legally mandated to issue permits.

But Tamrat says “one of the problems with the intergovernmental machinery in water resource management is the weak link between the federal govern-ment and regional states with regard to water resource management.”

“For instance, the water sector in the regional states is only obliged to report its activities to the regional government and not to the Ministry of Water Resources (MoWR) at the Federal level,” says Tamrat

The MoWR therefore does not have much leverage on the regional states though it does have financial leverage as most funds for investment in the water sector - particularly medium and large scale irrigation schemes and hydro power - comes from the federal coffers.

There is also a very weak interaction horizontally among the regional states

themselves in water resource manage-ment, says Tamrat.

Regional states sharing river basins in Ethiopia do not have any mechanism such as the Canadian inter-governmen-tal basin agreements to consult and co-ordinate their activities with respect to water resources management.

Tamrat believes that those RBOs yet to be established are designed to effectively create such co-ordination and that the respective river basins in Ethiopia are managed in an integrated manner in the future.

It will therefore be necessary to clearly define the degree to which decentraliza-tion of federal powers over water management is to be devolved to the states and to water resources manage-ment bodies such as the river basin authorities to ensure effective manage-ment of the country’s water resources.

The powers the federal government will delegate to the states are expected to be defined in laws developed by the exec-utive arm of the federal government responsible for water resources.

so, as the government is planning and setting up its water-management institu-tions, it has a long-term structural deficiency to deal with.

The availability of water is not well aligned with where people live.

For instance, about 32 million people live near 90 per cent of the country’s water resources contained in four river basins including the Blue Nile. at the same time, almost 50 million people depend on only about 10 per cent of the country’s water resources.

Rainfall in Ethiopia is highly variable in terms of where it falls and when. The highest mean annual rainfall, more than 2,700 mm, falls in the southwestern high-lands of the country and gradually decreases in the north to less than 200 mm, northeast to less than 100 mm and southeast to less than 200 mm.

Moreover, most of the major river basins of Ethiopia cut across more than one regional state or are trans-boundary in nature. Ethiopia is upstream of all its trans-boundary rivers with more than 75% of the water resources flowing into neighbouring countries. This in itself is a major constraint on water resource development since Ethiopia is bound by treaties to negotiate with the down-stream countries regarding the sharing

and management of the waters of such trans-boundary rivers. (See sidebar Forcefully flows the Nile on page 10.)

Drinking water scarceOnly a minority of Ethiopians – 42 per cent – have access to potable water ser-vices and some 11 per cent have access to improved sanitation. urban areas have the highest coverage, where about 83 per cent of the population has access to improved water supply and 55 per cent to improved sanitation facilities. The esti-mated irrigation potential in Ethiopia is 3.7 million hectares. however, less than 5 per cent (approximately 200,000 hect-ares) are currently under irrigation.

The Blue Nile Basin was selected as a priority for the establishment of a River Basin authority. It has the greatest runoff (52 billion cubic metres) and is shared by three regional states. There are also sev-eral water resources development projects currently under construction and planned within the basin.

These factors lead to competition and pressures over water resources in the basin both in quantitative and qualita-tive terms. They show the need for integrated planning for water resource development with the states sharing the basin actively involved in all aspects of decision-making. In short, river basin management in Ethiopia will require more attention to intergovernmental relations than hitherto.

Moreover, the Blue Nile River is the major contributor to the entire Nile Basin flowing westward toward sudan and Egypt downstream. In 1999, the Nile Basin countries established a co-op e r at i v e f r a me w or k u nde r t he auspices of the Nile Basin Initiative.

But despite Ethiopia’s improving eco-nomic performance of late, it has nowhere near the wealth to provide quick fix solutions to attain long-term water security. For it to achieve south africa’s level of water security, for instance, the World Bank estimated Ethiopia would need to spend four times its GDP of $35 billion plus a lot more on institutions and capacity building.

“This … only serves to demonstrate that strategies focused purely on water manag ement and infrastr ucture responses are not affordable,” Tamrat concludes.

JAN

UA

RY

| F

EBR

UA

RY

20

09

Fede

rati

ons

�2

LAYINg THE “bLAME gAME” IS sometimes the way certain federations operate. The first things to pop up on Google for

‘blame game” are articles on borderline personality disorder and the psychologi-cal dynamics of childhood relations. Is this cutting a little too close to the federal bone?

The blame game involves politicians at different orders of government trying to pass the buck for things that have gone wrong. It runs counter to a supposed vir-tue of federalism, namely enhancing political accountability to voters.

sometimes, the blame game itself rouses the ire of voters. Thus in last year’s federal elections in australia, Kevin Rudd promised that his labor Party would end one particular blame game, the one between the liberal government in Canberra and the labor governments in the states. as Prime Minister, he has moved quickly on a new federalism agenda, boiling down some one hundred conditional grant programs to a handful, with much less intrusive controls. In exchange, states will develop various benchmarks by which their performance will be measured.

hurricane Katrina, which hit the Gulf Coast from central Florida to Texas in 2005, was one of the most devastating natural disasters in us history. The dev-astation extended to the reputations of many politicians and officials and to the image many americans had of their fed-eral system.

such an event provides an exceptional opportunity to look at the blame game in a federal system because the public fol-lows the details of a major disaster much more closely than they do most issues. Publius: The Journal of Federalism recently dedicated an entire issue to the attribution of blame around the Katrina disaster.

Politicians seek votes and avoid blame. In Katrina’s case, things went spectacu-larly and dramatically wrong. Who to

blame? It was not always the politicians. lack of communication between govern-ments, the physical challenges of the area and governments in general were often targeted. When blaming one govern-ment or politician more than others, partisan affiliation strongly affected judg-ments. The media played an important role in framing the debate, with stories about blame most often discussing the federal government. sophisticated vot-ers were more likely to blame particular officials or governments than were less sophisticated (typically poorer and less educated) voters. On balance, despite the partisan bias in judgments, the public was influenced by the facts of the case and this provided some weak, if rather diffuse, accountability.

It would be discouraging if things stopped there. When things do go wrong, it is important that governments and offi-cials learn from the experience and make corrections for the future. There were numerous official inquiries after Katrina and many in-depth reviews by scholars and other independent experts. These all showed that mistakes were made by all three orders of government – so there was blame for all. But they also showed major structural and personnel problems at the federal level, many related to how the emergency measures organization was integrated into the new homeland security department, whose focus was on terrorism, not natural disasters. These inquiries contain clear policy lessons.

unfortunately, these lessons have not been at all adequately reflected in reforms within and between govern-ments. and public attention has moved elsewhere. a failure to act on important lessons is not just a shame, it is perhaps the greatest justification for blame. But the public may only realize this when another disaster comes around.

FederationsA publication of the Forum of Federations

SENIOR EDITOR Rod MacdonellASSOCIATE EDITOR Carl Stieren COPY EDITORS Ernest Hillen and Robert Winters EDITORIAL/ADMINISTRATIvE ASSISTANTRita Champagne LAYOUT Yani Roumeliotis

Federations is published three times per year by the Forum of Federations. Subscription rates are C$25 per year in Canada, US$30 per year anywhere else in the world. Contributions of articles are welcome. Contact the Editors at the co-ordinates below. The Forum of Federations cannot guarantee the return of unsolicited manuscripts.

bOARD OF DIRECTORS Arnold Koller, Chairman (Switzerland); Violeta Ruiz Almendral (Spain); Samuel Assefa (Ethiopia); David Cameron (Canada); Kim Campbell (Canada); John de Chastelain (Canada); Walter Fust (Switzerland); Wolf Linder (Switzerland); Wolf Okresek (Austria); Amitabha Pande (India); Johanne Poirier (Canada); Roger Wilkins (Australia); Peter Müller (Germany); Julius Ihonvbere (Nigeria)

OTHER EDITIONS French: Fédérations Le fédéralisme de par le monde, quoi de neuf German: FöderalismusAus der Welt der föderalistischen StaatenSpanish: Federaciones Lo nuevo del federalismo en el mundo

Return undeliverable Canadian addresses to:FORUM OF FEDERATIONS 325 Dalhousie, Suite 700 Ottawa, Ontario K1N 7G2 Canada Tel: 613- 244-3360 Fax: 613-244-3372 forum@forumfed.org www.forumfed.org

Canada Post Publications Mail Agreement

no. 40745010

The Federal Blame Game

george Anderson is the president and chief executive officer of the Forum of Federations.

PPresident’s page

george Anderson

Your up-to-date source forinformation on federalism

READ CHAPTERS FROM THE FORUM’S HIGHLY

POPULAR FEDERALISM: AN INTRODUCTION

www.forumfed.org

ACCESS OVER �00DOCUMENTS IN OUR FEDERALISM LIBRARY

EXPLORE AND USE THE GLOBAL WEBSITE

ON FEDERALISM