Water resources are a crucial resource in a large proportion of economic activity, both in rural and urban areas and resource sharing has become an increasingly important concept to achieve equitable distribution of scarce resources which are social-ecological, socio-economic and political in their nature (Breen et al., 2003). Water scarcity and the increased demand from high value water users have decreased opportunities for increased stakeholder participation. The National Water Act of 1998 is part of environmental legislation promulgated to redress the historical inequitable access to natural resources. Previous studies (Versfeld, 2000; Schreiner and van Koppen, 2001; Armitage et al., 1999; van Wyk et al., 2006) have indicated that the current allocation mechanism of compulsory licensing, mainly in the agricultural sector, has not resulted in meaningful resource sharing or empowerment as agriculture does not seem to perform as well as other water use sectors in terms of provision of economic benefits. Within the context of striving for greater equity and empowerment (1) in resource sharing, the key issues of participatory governance of water resources in creating sustainable revenue from sharing water resources are evaluated in this study as a basis for the aim of investigating water trading as a suitable allocation mechanism to promote equitable water resource sharing. Resource sharing will “ultimately rest on negotiated trade-offs between resource users” (van Wyk et al., 2006:9) and there are therefore two considerations for achieving equity in water allocation: capacity through legislative means, and stakeholder perception of how access to resources can be beneficial, which will in turn “influence how human behaviour, and ultimately resource use patterns, evolve” (van Wyk et al., 2006:7). Traditionally, water has been allocated as a usufructuary resource in value chains, such as agriculture, forestry, mining and industry, in addition to fulfilling its function within the Reserve for ecological and basic human needs. Water thus becomes an integral part of a value chain which extends from allocation and conservation of water resources, through various production functions, culminating in the consumption and disposal functions associated with products created from use of water, in other words, a tradable economic commodity (Backeberg, 1997). The objectives which guide this research are focussed on understanding the dynamics of the water value chain and status of resource sharing, and whether water trading can promote empowerment through increased resource sharing and creation of benefits. The objectives are: I. Using value chain methods to understand the status of resource sharing in the Mhlatuze Catchment. II. Using a value chain method of analysis to identify constraints to empowerment of rural communities within the water sector, and identify how water trading as an allocation mechanism could provide potential solutions. III. Investigate the stakeholder perception of the suitability of water trading in promoting resource sharing through empowerment. Using the value chain methodology to understand the dynamics driving stakeholder participation and production functions, the resulting water sector map was used to identify flow of benefits and constraints in creating benefits from access to water. Further analysis of the value chain explored the possibility of enhancing governance through increasing subjective, objective and competency based capacity. Inductive qualitative research investigated the acceptance of water trading as an allocation mechanism which could improve empowerment in the context of resource sharing. This methodology could be replicated to investigate the potential of any resource allocation policy. Preliminary literature reviews revealed the Mhlatuze catchment as a suitable case study area as it is an over-allocated system (Versfeld, 2000; Pott et al., 2005) in which the compulsory licensing mechanism is being implemented. The majority of economic activity still takes place through commercial agriculture and industry in the middle and lower catchment, although demand for water exceeds supply within these groups of participants, whilst the majority of the population resides in the upper catchment. The sector map identified the status of the stakeholders and the extent to which they participated and interacted within the value chain. Semi-structured interviews were then conducted with previously identified participants selected from each of the main groups in the value chain to determine whether there was understanding of the empowerment possibilities presented by water trading as an allocation mechanism. The findings of the sector study showed that the rural poor communities were an integral part of the water value chain, although the status of creation of benefits was limited to those who had access to additional resources to create revenue from water use. Analysis of the value chain indicated that benefits could be created from water trading without having to increase the resource base, important in the context of scarce resources. In addition, the ability of poor communities to participate in the value chain through water trading, as opposed to traditional resource hungry production functions, has the potential to create meaningful empowerment in terms of improving the confidence, opportunity and capacity of these stakeholders to participate in creating benefits. The discussions with stakeholders indicated that water trading as an allocation mechanism would more likely lead to empowerment of previously disadvantaged communities whilst not adversely affecting current value chain actors by disenfranchising them of a necessary resource as could happen through compulsory re-allocation. (1) Empowerment in this dissertation is defined as procedures and legislation which improve access to, and use of, resources in order to create beneficial outcomes for the previously disadvantaged groups in South Africa. / Thesis (M.Sc.)-University of KwaZulu-Natal, Pietermaritzburg, 2009.