Brazil’s poorest region, located in the country’s northeast, suffers mainly because of its dry climate and limited water resources. The demand for water and irrigation is very high, and shifts in Brazilian water resources policy can minimize drought social impacts. The most important source of water supply is the Sao Francisco river basin. Many years ago a water transfer system was designed in order to address the planned irrigation demand in the dry area. At that time the main conflict was between irrigation demand and the hydroelectrical impacts on the Sao Francisco hydropower system. The project changed its basic objectives and today the main water uses are irrigation and water supply in many cities located in the dry areas. Today the quantity of water planned to be transferred from the Sao Francisco river to the semi-arid area of the northeast region known as the “Drought Polygon” is small compared to the originally proposed amount, so the impacts on hydropower production are minimized. Despite this the project is still very controversial due mainly to its negative environmental impacts related to water quality in the Sao Francisco river. In order to minimize these impacts it is necessary to develop a highly efficient model to plan the operation of the system. The SISAGUA model developed by Barros et al. (2005) is a very convenient tool to accomplish this goal. This paper presents the application of SISAGUA to the optimal operation of the Sao Francisco river water transfer system and some very interesting results related to environmental impacts.