Abstract. Water allocations as well as water quality and health concerns are often due to inadequate policies and institutions, which pose major challenges for policy reform. The necessary ingredients of such reform include four elements: rules to improve the decision-making process about water projects, principles to improve water allocation, incentives for water conservation, and incentives to improve water quality. The paper shows that improved policies and incentives can address many of the global water problems and lead to environmental sustainability while addressing distributional issues. Some of the reforms may hurt the poor in the short run through higher water prices, but may provide them better access to water and reduce the toll of unsustainable water use in the long run. The direct and indirect implications of increasing prices of energy for water reforms are also discussed.