The São Francisco River has been, and continues to be, the only major river in arid Northeast Brazil and, as such, continues to be a major focus for development policy in this poorest part of the country. In a context of persistent water scarcity and recurring drought, the imperative is to develop a water development and management framework capable of simultaneously creating a platform for growth, dealing with distributive conflicts and ensuring rational usage. Addressing this challenge has been complicated by the multi-layered institutions of Brazilian federalism. This paper traces the development of the institutional framework for water management in the São Francisco Basin, highlighting the role of both local innovation and the pressures of federal centralization. The single most important policy debate currently affecting the basin is an ambitious inter-basin transfer project that aims to provide secure water supply to major cities and irrigation projects in neighboring basins. The paper provides an in-depth analysis of the project, with a special focus on understanding the policy process underpinning the project. This analysis anchors the discussion in the difficult dilemmas currently faced by policymakers and gives some insights into the actual functioning of a complex and sometimes ambiguous institutional set-up.

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