This research article published by Taylor & Francis Online, 2013Water scarcity caused by increased demands often leads to competition and conflict over water in many river catchments in Sub-Saharan Africa. At the local level, water users have in many places been able to solve water allocation problems by crafting institutions based on customs and traditions. These self-governing arrangements are not necessarily fair or good, but are able to adapt to the changing resource context. Simultaneously, many African governments have adopted new policies and laws, and established new institutions to achieve equitable and sustainable management of water resources. The formalization of the property right to water is often part of the recipe. This paper analyses the impact of one such government-led formalization process on local water allocation practices. Based on a field study in the Hingilili sub-catchment, Tanzania, we find that government interventions do not achieve the goal of equitable and sustainable water management. However, we find that the principle of good neighbourhood that still exists between the highland and lowland farmers in Hingilili could form a base to reconcile diverging water interests between the highland and lowland farmers. The paper shows that the concept of bricolage [Cleaver, F., 2002. Reinventing institutions: bricolage and the social embeddedness of natural resource management. The European Journal of Development Research, 14 (2), 11–30] is useful to demonstrate the need for new institutions to be sufficiently embedded in existing local practices to succeed, but this is not a sufficient condition. The hydraulic position of the various actors (upstream or downstream) must also be taken into account, and may be considered a driver for institutional innovation.