This work reports on a mathematical model dealing with the optimal development of marginal water sources in the Negev Desert, a region located in the south of Israel, inhabited by less than one-tenth of the whole population of Israel, and consisting of about half of its area. A decomposable mixed linear zero one integer programming problem is formulated and analyzed to integrate decision-making at the local and regional levels. At the regional level, the problem is one of allocating a limited supply of high quality water from a primary regional source among a number of local demand sites. Each demand site must then determine the optimal investment strategy for developing its local marginal water sources in order to make up the deficit in supply and meet net water quality and budgetary requirements at the site. The relationship between the local and regional levels of decision-making is studied, and a procedure to solve the combined problem is proposed. A small case study is presented to illustrate the model.