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Both the trend towards integrated water resources management and the evolution towards cost recovery change the outlook of the water sector in many respects. This paper uses a transaction costs economics perspective to analyse the way in which these trends affect allocation mechanisms in the water sector. We argue that the implementation of cost recovery in a context of integrated water resources management is shaped by both institutional and technological considerations. Our approach is illustrated by referring to some recent evolutions in the Flemish water supply and sanitation sector (Belgium).