TRADITIONAL INDIGENOUS WATER MARKET IN OMAN AND RESPONSE OF FARMERS TO WATER PRICES Slim Zekri, Hemesiri Kotagama and Houcine Boughanmi Department of Agricultural Economics & Rural Studies, College of Agricultural and Marine Sciences, Sultan Qaboos University IG/AGR/ECON/05/02 INTRODUCTION AND THE PROBLEM Since the early 1990s market based volumetric pricing has been proposed to manage demand for irrigation water. Water price would be an incentive for efficient use of water, recover cost of water supply, and enable further investments. A primary requirement for water pricing, to induce water saving behavior, is that the own price elasticity of irrigation water (η iw ) be sufficiently elastic to generate a response from water users. Despite the policy significance and conceptual simplicity, there are only few empirical studies that have estimated η iw. This study estimates the η iw based on market prices and quantities as observed in community managed irrigation systems in Oman. TRADITIONAL INDIGENOUS WATER MANAGEMENT INSTITUTIONS IN OMAN. Falaj irrigation systems are a long-established indigenous engineering and social heritage of Oman. Falaj is a network of man-made underground galleries conveying groundwater to a community for domestic and irrigation uses. The community has managed the aflaj for centuries. Two types of water rights prevail in the falaj; theses are private and common rights. The common water rights are auctioned weekly, semi-annually, or on an annual basis. The income raised from the sale of common water rights finances the operating and management costs of the systems. A bidding process for common water rights generates a water price on a weekly basis. Each water right is leased to the farmer offering the highest price. Different water shares are auctioned, with a minimum timing of half an hour for any share up to a six hours time-share. Any farmer from the community can participate in the auction. Farmers are price takers and cannot strategically affect water market prices given the large number of farmers. METHODOLOGY The prices and quantity of water auctioned at each auction (once a week) in four aflaj representing two falaj types over the years 1994 to 2003 was used in this study (Table 1). The water quantities and prices are based on records maintained by Ministry of Regional Municipalities, Environment and Water Resources and the aflaj books, conjointly. The four aflaj considered in this study are situated in the region of Samail in Oman. Table 1 Sample afalaj and data availability The η iw was estimated using a log-log function of quantity and price as given below. Estimations were made by adding control variables of the falaj (4 aflaj), the falaj type (2 types), and year (1994 to 2003) to represent space and time variations. Ln Q if = α 0 + α 1 Ln P if + α 2 D f + α 3 Dt + α 4 D y + e if Q if = Quantity of water auctioned (cubic meter X 100) at the i th auction and f th falaj. P if = Price of water at the i th auction and f th falaj. D f =Dummy on 4 aflaj. D t =Dummy on 2 falaj types (Daudi and Ghaili) D y =Dummy on years. e if =Error term of the i th auction and f th falaj. α =Intercept (α 0 ) and coefficients (α 1 … α 4 ) RESULTS Figure 1 (A) and 1(B) shows the trends in quantity of water traded and the prices over years. The negative relationship between quantity of water traded and price is clearly observed. The quantity of water traded has decreased by 42% and water prices have increased by nearly 132% over the years. The estimates of the demand models on the pooled data (over years and the 4 falaj) are given in table 2. All the estimated models have reasonably high adjusted R 2. Model 5 has the highest R 2 of 0.84 with all coefficients significant at 95% level of confidence. The signs of coefficients, particularly of the price variable are consistent with expectations. The falaj type and individual falaj has a significant impact on the quantity of water traded. It is also revealed that a significant difference exist on the quantity of water traded over years. The η iw varies between (model 5) to (model 2). These estimates of η iw are consistent and fall within the range of estimates reported in previous studies. CONCLUSIONS The traditional aflaj irrigation water management institution in Oman emulates markets effectively.It signifies the possibility of using indigenous traditional institutions to meet present day expectations of using market-based approaches in irrigation water demand management. It also needs to be recognized that even if the elasticity of demand is considered to be low given the high quantity of water used for agricultural purposes the water savings will be substantial. The irrigation water prices in the study area have increased substantially in response to water supply decrease. Such adjustments are made systematically via the market without the any government intervention. The development of institutions such as defining water rights and introducing trading a mechanism to use the market processes is generally difficult, as it may be costly and may not be socially accepted. The advantage in Oman is that such institutions are already in place.