Hemesiri world env day 2012

1

Visible Failures and Invisible Successes: Economics of Water

Management in Oman

Hemesiri Kotagama and Slim ZekriDepartment of Natural Resource EconomicsCollege of Agricultural and Marine Sciences

Sultan Qaboos University

World Environment Day 2012

World Environment Day 2012 2

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 …

Evolution of the agricultural area in Al-Batinah's study area

124,635

130,895

121,000122,000123,000124,000125,000126,000127,000128,000129,000130,000131,000132,000

Agricultural Census

Ag

ricu

ltu

ral are

a in

1000

fed

dan

s


Whilst salinity is seeping in …

0

2000

4000

6000

8000

Willayat

Are

a i

n F

ed

da

ns 1995

2000

2005


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 19,589

World Environment Day 2012 21Shinas Liwa Sohar Saham Khaburah Suwaiq Musanah Barka0%

20%

40%

60%

80%

100%

120%

96%

83%

14%

54%

69%

19%

33%

57%

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


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


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.


Root Causes of Success Vs Failure: 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


Root Causes of Success Vs Failure: 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.


Thank you

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