Hemesiri world env day 2012

Visible Failures and Invisible Successes:
Economics of Water Management in Oman
Hemesiri Kotagama and Slim Zekri
Department of Natural Resource Economics
College of Agricultural and Marine Sciences
Sultan Qaboos University
World Environment Day 2012 1

Content
• Theory: Water as an economic commodity and
management approaches:
» Market approach
» Institutional approach
• Practice: Economic root causes of water
management:
» Failures (Ground water)
» Successes (“Surface” water)

Theory:
Water as an Economic Commodity
• Water is an economic resource.
• It generates utility in use and it is scarce in
relation to human wants.
• The challenge of allocating water efficiently
and equitably is the same as for any other
resource.
• Economic and political institutions of varied
nature have evolved to address this challenge.
• At present the market is a dominant economic
institution that allocates resources including
water.

The Market Economic System
• In the market economic system individuals decide on
the resource allocation
– How much
– When
– Who
• The market co-ordinates "wishes and abilities of
individuals" on consumption (demand) and production
(supply) through negotiation of prices.
• The relative prices guide the resource allocation.
• The market would allocate resources Pareto efficiently;
– under prevailing distribution of income,
– if perfect market competition prevails, and
– if property rights are defined and enforced.

Market Failure
• Despite the strength of the market institution it has
weakness internal to the system that leads to
“market failure” in allocating particularly
environmental and natural resources efficiently.
• These failures arise due to (consider water):
– barriers to perfectly competitive markets,
–deficiencies in property rights,
– prevalence of public goods,
– prevalence of externalities,
– missing present and future preferences of society.

Water Market Failure:
Lack of Property Rights- Tragedy of the Commons
• Water (surface and ground) has following
characteristics of CPR
– Non-excludable (lack of property rights)
– Rivalrous in use (one persons use precludes the same
used by another)
– Private costs of consumption (abstraction) do not
reflect total social costs (externality of depletion,
salinity etc.)
– Costs of consumption by one individual are spread
to the entire group
– Tragedy of the commons: Rational actors following
private incentives lead to Pareto-inefficient
overconsumption and eventual resource destruction

Oman’s Water Management:
Once upon a time … there were beautiful oasis and
self-reliant communities

Surface water was accessed sustainably and
shared harmoniously among people and uses

By the 1970’s cheap energy and subsidised
technology allowed pumping ground water

So … each one dug wells …
pumped water

Each person benefited …
and as it was no ones property every one dug wells

But then …

And many wells can deplete the
water table unsustainably

Salinity creeps in … agricultural
productivity drops in all farms

Research Evidence
• Dr. Slim Zekri
• Dr. Ghazi Al-Rawas
• Dr. Abdullah Al-Ghafri
• Dr. Hemesiri Kotagama
• Et.al., …

Wells and Salinity Association …

Salinity effects all farmers

Yet more land thus water is extracted …
World Environment Day 2012
Evolution of the agricultural area in Al-Batinah's study area
124,635
130,895
121,000
122,000
123,000
124,000
125,000
126,000
127,000
128,000
129,000
130,000
131,000
132,000
1992-1993
2004
-2005
Agricultural Census
Agriculturalareain1000
feddans
18

Whilst salinity is seeping in …
0
2000
4000
6000
8000
Shinas
Liw
a
Sohar
Saham
Khaburah
Suw
aiq
M
usanah
Barka
Willayat
AreainFeddans
1995
2000
2005
19

Land with salinity > 9,000 uS/cm in Feddans
1995 2000 2005
Shinas 539 4,867
Liwa 106 1,071
Sohar 9 590
Saham 360 926
Khaburah 2,942
Suwaiq 134 284 522
Musanah 15 19 752
Barka 2,997 5,219 7,918
Total 3,685 5,997 19,589World Environment Day 2012 20

96%
83%
14%
54%
69%
19%
33%
57%
0%
20%
40%
60%
80%
100%
120%
Shinas Liwa Sohar Saham Khaburah Suwaiq Musanah Barka
Area with salinity > 6,000 uS/cm

Root Cause Analysis
• What were the root causes of past invisible
success and present visible failure in water
management?
• The root cause of success was socio-economic
and the root cause of failure is socio-economic.
• Success (surface water) was due to managing
market failure/ tragedy of the commons through
socio-economic institutions.
• Failure (Ground water) due to not managing
market failure leading to tragedy of the commons.

Causes of successes of aflaj management

Aflaj Engineering

Aflaj managing multiple water uses

Aflaj social organization

Aflaj property rights

Aflaj attributes of property rights

Markets to manage
aflaj irrigation water
• Since early 1990s, market based volumetric
pricing has been proposed to manage
demand for irrigation water (Fraiture and
Perry, 2002; Schoengold, et al., 2005).
• Water price would be:
– an incentive for efficient use of water,
– recover cost of water supply, and
– enable operation and maintenance and further
investments.

Efficiency of markets in managing
irrigation water
• Although theoretically acceptable and has
been strongly advocated, to adopt markets
to manage irrigation water, there has been
little empirical proof of its efficiency.
• Studies on water markets have been
constrained due to the unavailability of data
on volumetric water prices.
• Aflaj communities in Oman have
maintained such data!!!

Aflaj based irrigation water markets
in Oman
• The community for centuries has managed
the aflaj, emulating the market process.
• Water price is arrived through a farmers’
bidding process on a weekly basis by
auctioning the common water rights.
• Each water right is leased to the farmer
offering the highest price.

Empirical test of efficiency of
aflaj water markets in Oman
• Two approaches
– Estimation of price elasticity of water
– Time series analysis on efficient market
hypothesis
• Primary data from 4 aflaj.

Where,
Qif = Quantity of water auctioned at the ith auction and fth falaj.
Pif = Price of water at the ith auction and fth falaj.
Df = Dummy on 4 aflaj.
Dy = Dummy on years.
eif = Error term of the ith auction and fth falaj.
α = Intercept (α 0 ) and coefficients (α 1 … α 3 )
• The estimated water demand functions have reasonably high adjusted R2
• The signs of coefficients, particularly of the price variable, are consistent with expectations
• Water price elasticity varies between -0.10 and -0.28
 Statistical analysis of prices vs quantities of exchanged water
 Estimation of demand functions using linear and non linear
econometric models
Ln Qif = α 0 + α 1 Ln Pif + α 2 Df + α 3 Dy + eif
Estimation of price elasticity of water

Time series analysis on efficient market hypothesis
• Box-Jenkins (ARIMA) analysis was used to
test for water market efficiency through the
existence of patterns in time series data
• The results of the ARIMA model showed
that only 2 out of the 4 water markets
considered were efficient.
Log Pt=C+β1 logPt-1+ β2 LogPt-2 +εt + θ1εt-1
35

Root Causes of Success Vs Failure:
Aflaj vs Groundwater
Elinor Ostram’s Framework
• Attributes of Resource Systems
• Size of resource system (RS3): The CPR is sufficiently small, given communication and
transportation technologies in use, that the users can acquire accurate knowledge about the
boundaries and dynamics of the system.
• Productivity of system (RS5): The productivity of the CPR has not been exhausted nor is it so
abundant that there is no need to organize.
• Predictability of system dynamics (RS7): The system dynamics are sufficiently predictable that
users can estimate what would happen if they continued old rules or changed the rules and strategies
in use.
• Indicators of the productivity of the system (RS5a): Reliable and valid indicators of CPR
conditions are available at a low cost.
• Attributes of Users
• Leadership (U5): Some users of a resource have skills of organizing and local leadership as a result
of prior organization for other purposes or learning from neighboring groups.
• Norms/social capital (U6): Users have generally developed trust in one another so as to keep
promises and return reciprocity with reciprocity.
• Knowledge of the social-ecological system (U7): Users share knowledge of relevant CPR attributes
and how their own actions affect each other.
• Dependence on resource (U8): Users are dependent on the CPR for a major portion of their
livelihood.

Aflaj vs Ground water
Aflaj Groundwater
Users (U)
Number of users Small and controlled Rapid growth
Local leadership Strong and cultural None
Trust and reciprocity Culturally strong None
Shared local knowledge of the resource High levels None
Dependence on resource High Low with other income
Technology Indigenous Modern
Governance System (G)
Formal property rights Present Absent
Operational rules Present Weak
Monitoring and sanctioning Strong and internal Weak and external
Resource System (R)
Resource size Small and known Large and unknown

Aflaj vs Ground water
• The root cause for success (Aflaj) was:
– Socio-economic
• The root cause for failure (Groundwater) was:
– Socio-economic
• Hence solutions ought to be at least partly
socio-economic

Ground water depletion:
Attempts to solve
• Water permits
• Nejed project
– Transfer part of Rhodes grass to Nejed
• Recharge Dams
• Treated wastewater
• Etc, …
• But the root cause of the tragedy of the
commons has not been adequately addressed.

Water quota through smart energy
control and water right…

Conclusion
• If the root cause of a problem is socio-
economic seek for socio-economic solutions
too …
• Oman though is faced with challenges in
water management it has rich heritage of
successes in water management.

Hemesiri world env day 2012

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