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The water market has had an important role in the provision and distribution of water since the rise of an Islamic state in Arabia and has continued performing this function as the economies of Muslim countries have developed. This chapter discusses the experience of Iran with respect to the structure and behaviour of the water market and describes the innovations that have taken place in alternative forms of exchange and pricing practices before and after the Islamic Revolution.

Water resource ownership and utilization rights

Rights to ownership of water resources are discussed in the Islamic law literature, or more precisely in fiqh, along with property rights over mines. The latter are grouped into shallow or "open" mines and deep or "inward" ones. Water is generally considered to belong to the former group, and is discussed together with it. It is the consensus of the fuqaha (Muslim jurists) that both surface and underground water sources are

I am indebted to my colleague Mr A. Noori Isfandiari who encouraged me to write this essay. Ideas and information provided by him appear frequently; however, I am responsible for all errors. I am also grateful to Dr H. Ghanbari who devoted considerable time to refereeing and editing this chapter; and to the International Development Research Centre (IDRC) for providing me the opportunity to participate in the Workshop on Water Resources Management in the Islamic World.

either a common property resource (Ibn Barraj 1410 A.H., 6:257–58) or a part of anfal – a property of the Imam, the just and legitimate ruler, which can be operated directly by the government or leased out to private agents (Kolaini 1388 A.H., 1:538).

Investment by any share holder for the purpose of gaining access to these sources grants him private ownership of or a priority right to the use of the water that is so obtained, but gives him no claim to the river or reservoir from which the water comes. Wells, qanats – series of wells whose bottoms are linked by gently sloping underground canals in which water flows by gravity – or channels, which are alternative forms of investment for gaining access to water, are the private property of the investor. The water that is pumped or channelled in these ways belongs to the investor too. However, the water source as such remains the common property of the community.

While no one can "own" the water source itself, in some cases, depending on the nature of the source, one can gain exclusive water use or withdrawal rights. The different cases are outlined below.

Types of rights to water sources

To begin with, seas, lakes, and large rivers are all common property in Islamic law and no one can appropriate them exclusively. Toosi (n.d., 3:282) has declared consensus among the fuqaha on this point. Both Iranian civil law (article 155) and the Constitution of the Islamic Republic of Iran (article 45) make the same assertion. In any case, the water supply from these sources usually exceeds the demand, and thus no one earns exclusive or even priority rights to exploitation. Everybody has an equal right to withdraw water.

Again, if water naturally flows out of springs or through canals without anyone's effort or investment, it is similarly the common property of all. The flow of water through these sources may soon fall short of demand, however, because of population or economic growth. Therefore, an allocation criterion needs to be defined. Some fuqaha have offered "first come, first served" as a basis. Anyone who precedes others in obtaining access will obtain priority right to use the flow of water; the stock of the surface or underground resource remains, however, as a common property of the community.

The basis of this "preceding rule" is a hadith that states that anyone who precedes others in using a property deserves it most (Beihaqi n.d., 6:142; Noori 1408 A.H., 4:6). However, this priority right does not allow the user to appropriate more than he needs because the property is still commonly owned and the preceding principle does not negate the rights of others. Needless to say, the preceding privilege does not create an outright possession right.

If the supply of water through a commonly owned resource would not even satisfy the legitimate demand of all partners, how should it be distributed among them? Some fuqaha have suggested drawing lots. Others, however, give priority according to distance from the source, so that farms will be irrigated one after the other, and the last drops will be used by the farthest farm. Najafi (1392 A.H., 38:110) preferred this criterion over the first. This procedure is also based on a hadith, and it has been followed in many Muslim countries. The Iranian civil law (article 156) clearly states that if a stream of water is not sufficient to irrigate all adjacent land and a dispute arises among the landholders, none of whom can prove his priority right, then whoever is closer to the water should precede those farther away, and irrigate just as much as he needs.

In cases where access to a common pool of water is obtained by either drilling a well or making a canal, then the investor earns private property right over the water withdrawn. Najafi writes that when commonly owned water is contained (in a pool or canal), then it becomes an exclusive property of the haez (the one who has contained the water) provided that in so doing he does not harm others. Najafi (1392 A.H., 38:116) further adds that there is no difference of judgement among fuqaha in this case. Toosi (n.d., 3:282) declares if anyone steals such water, he is obliged to return it to its owner. Articles 149 and 150 of Iranian civil law recognize the same right.

Where a person digs out a well in his own farm or in arid land, intending to withdraw water, the majority of fuqaha believe that he will become the sole owner of both the well and the water (Najafi 1392 A.H., 38:116). However, Toosi (n.d., 3:282) declares that he only deserves a use permit and cannot sell the water that is in excess of his need. Toosi's verdict is based on a few hadiths in Ibn Abbas, Jaber, and Abu Horairah, quoting the Prophet (pbuh) to the effect that selling excess water is impermissible (Beihaqi n.d., 6:151). The majority of fuqaha, however, argue that these narrations cannot limit the right of free exchange. Not only is the latter rule general and unconstrained, but there are also other traditions that specifically permit the exchange of the extra water. Thus the quotations from the Prophet (pbuh) are assumed to mean that selling the water in excess of one's need prior to hiazat is not permissible, or that such a transaction is not recommended.

Both Imam Sadegh and Imam Mossa Ibn Jafar approve the sale either for cash or for wheat of one's share of a qanat (Al-Hurr al-Amiliyy 1403 A.H., 277–78, 332).

Thus the majority of fuqaha hold the view that if anyone can obtain occupancy right over a stream of water channelled or pumped from a commonly owned source, he can sell freely all or part of his lot. The same right is recognized in article 152 of the Iranian civil law.

Government and water rights resources

Water resources are common property of people and not a government domain. Thus everybody has equal right to withdrawal, and this private activity is honoured and cannot be interrupted as long as it does not harm anybody. But the exercise of this right may lead to overuse, and underground water reservoirs are particularly susceptible to exhaustion through overpumping. In such cases, the rule of "no harm" or "no overuse" will overrule freedom of the operation. Government authorities at the local or national level then will proceed according to the rules discussed earlier in pursuit of the public interest. Other rules that serve the same purpose are discussed in the next section.

Governments may also sometimes need to resolve the conflicts that may arise among competing users of common water property. For instance, construction of dams in rivers usually increases the supply of both drinking and irrigation water, and expansion of agricultural activities or rapid growth of population, or both, may lead to shortage of water for either or both sectors. In such cases, government can interfere to determine the utilization priority. This will result in depriving one beneficiary group of sufficient access to water, thus bringing it under the "no harm" rule. By compensating the losers, governments can resolve the problem.

Government and water markets

The early Islamic state

One of the characteristics of an Islamic economic system is that economic activities are totally delegated neither to market organizations nor to public sector planning boards. Economic affairs are divided between the two sectors and each carries out its own provision, allocation, and distribution function. In fact, the two prominent economic institutions at the time of the Prophet (pbuh) and his successors were the market, which carried out the supply and distribution of private goods, including water; and the public treasury or baitulmal, which was responsible for economic planning and establishment and operation of infrastructure investments, including dam reservoir construction.

During the early Islamic era, many participants were active in each market, and their behaviour was controlled by inspectors (Sadr 1996).

Sellers and buyers could freely enter or leave any market to choose the best enterprise based on available information. The government's right to interfere in the market to set prices was limited. On the basis of this early practice, a general agreement – although not a consensus among the jurists – seems to have arisen that if the market is behaving well, then nobody is permitted to interfere by setting prices. On the other hand, governments may do so if prices are fluctuating and equilibrium cannot be restored in the market government (Rajaee 1996, 57–98). Regarding the criteria for price setting, most fuqaha insist on a "just price," a price that will be determined in the market if the rules of sharia are operative and the market is in the normal condition (Khomeini 1989, 4:318–19). Otherwise, the price to be set must be equal to the equilibrium price under normal conditions. This criterion is usually called "the likeness value" in the fiqh literature (Toosi 1404 A.H., 4:23).

Early Islam likewise set precedents for prevention of hoarding, waste of commodities or inputs, and imposition of external costs on neighbouring operators, which, in addition to full observation of Islamic codes of contract, contributed to an efficient exchange in the market. The absence of quotas, customs, or tariffs further facilitated trade. Thus the prices that were determined in the market were efficient, that is, no other prices, if set, could further increase consumers' satisfaction or sellers' profits (Sadr 1996, 188).

The rise of the water market

In many parts of the world, such as Africa and Asia, water has been a cause of human settlement and civilization (Issawi 1971, 213). People have settled around rivers and springs to be able to make a living in dry climates. In the initial stages of development of such communities, water supply usually exceeds demand. However, at later stages of growth, because of the rise of population, income, and a variety of economic activities, the demand for water increases and eventually exceeds the supply, and water usually comes to be rationed through the guidance of the community's norms and customs. Because the rationing methods are suggested by the community members themselves, they are coherent and in conformity with the community's accepted set of rules and rights, and lead to legitimate devices for water distribution.

Over time, in growing human societies when demand exceeds supply, new market institutions are created, because the existing sets of rules and traditions fall short of an efficient allocation. In such segmented water markets, whose size depends on the supply of water, the most reliable and accessible means of exchange is water itself, because it can be used to produce any crop. In some parts of the Middle East, for example Iran where 80 per cent of the land under cultivation is used for wheat and barley, it is natural that these crops would serve as means of exchange in the market for water. This phenomenon, that is, transactions in kind rather than in cash, may have caused the impression that water has not been a commodity and has not been sold or bought in the market.

The legal system of rights in Islam, as mentioned earlier, recognizes the market institution for water transactions. The cases that have been reported by Safinejad (1985, 1996) and other anthropologists present the evidence. The media of exchange, in their reports, are the staples – food and water – and seldom money.

Private and public water supply

The market is not the only institution that manages the supply and demand of goods and services in communities. Many public firms and group organizations have been formed to carry on the same function. Buchanan (1968) foresees variable but continuous types of organizations supplying or allocating public and private goods. His analysis is based upon the external decision-making cost of providing these commodities (Buchanan and Tullock 1971). He anticipates the formation of markets for private goods, group or communal organizations for public goods, and government takeover of the pure public goods (Buchanan 1968). His prediction has been validated in many societies, but in Muslim countries, water is a commodity for which all three types of organization have been used, because it can be considered as a private good at some times and a public one at others.

Monopoly and government supervision

In many economies, the market for gas, water, electricity, and telephone service tends toward a natural monopoly structure. The share of initial fixed investment for provision of these services is high and that of variable costs is low. As a result, the average variable and marginal cost of offering a new extension or serving a new customer is very low; no other supplier can compete with the one who is already in the market. This monopoly situation and the high cost of arbitrage among consumers tempt sellers to indulge in price discrimination. Thus water is sold at different prices to urban consumers, industrialists, and farmers.

Another type of discrimination is to reduce prices as the quantity purchased increases and so to encourage the customer to buy more. Recently, realizing that the demand for water is inelastic, many sellers have followed an increasing-block pricing scheme (Sadr 1996). Finally, sellers are able, at times, to practice perfect discrimination using both techniques together. These practices lead governments to supervise the performance and price strategies of the utilities.

Water pricing practices in Iran

In Iran, major rivers flow mainly in mountainous areas where surface water is the main source of irrigation. The rest of the country depends on underground water drawn up from qanats.

Surface water

Rivers are used by farm operators on the basis of proximity (article 156 of the civil law). As Lampton (1969) reports, the village of Toroq, near Meshed in northeastern Iran, is irrigated after the villages that lie closer to the local river. The same is the case in Kurdestan, where the villages located close to rivers use as much water as they need, and whatever is left is allocated to the distant villages. However, no one can build a dam or a floodgate in the fields through which water flows. During the summer season, the flow of water in many rivers declines so that villages that have appropriated water rights have priority to use the water. For example, Lampton reports that the water of Zayanderood is distributed according to practice dating from Safavid times. From 15 November until 5 June, withdrawal of water is unlimited. However, in the summer, water is allocated to certain regions and villages. From Jadjrood, river water is also distributed according to an old tradition: some counties have appropriated rights, and others must pay for it.

Since 1943, provision and management of surface water has been offi-cially controlled by a governmental water agency (Ministry of Energy 1994, 16–21). Later, regional water organizations were established that monitored dams in each region and distributed water among villages. As of 1968, after the enactment of the Nationalization of Water Law, regional water agencies were required to charge for the distributed water enough to cover their average expenses, which should include variable costs of maintenance and the fixed cost of depreciation and interest (Ministry of Energy 1994, 392). In 1982, the same law was revised, extended, and approved by the parliament as the Just Distribution of Water Law. The irrigation water must be priced on the basis of average variable cost and depreciation as before, but interest is not included. In areas where metering is difficult, water can be charged for by the farm size and the type of crop (Ministry of Energy 1994, 234–40).

The procedure that is approved by the Ministry of Energy for agricultural water charges as of 1990 is as follows.

• The average price of water withdrawn from "modern networks" – that is, primary and secondary canals of dams – is 3 per cent of the total revenue of the crops planted; of water from traditional canals, 1 per cent; and of water transferred by a combination of the two, 2 per cent.

• The average production of crops in each region is obtained from the yearly statistics of the Ministry of Agriculture. The value of each crop is measured either by the guaranteed price, if there is one, or by the farm-gate price. Using these data, water agencies determine the price of water per cubic metre (Ministry of Energy 1994, 295–96).

In 1990, municipal water and sewer companies were established after approval of the corresponding bill by the parliament. The bill states that the private sector, the banks, and the municipalities can participate in the investment and management of these plants, which will be operated as companies and according to the Trade Law. This bill, which clearly lays down the legal foundation for private sector participation in urban water affairs, indicates a policy change, too. The subscription rate for water and sewer service will be calculated and proposed by the companies' boards of trustees based upon operation and depreciation costs and go into effect upon approval by the government's Economic Council.

Consumption of water up to five cubic metres per month is exempt from any charges – to ensure that low-income families have access to water for drinking, health care, and religious obligations. An increasing-block rate is charged for higher-level consumption: that for Tehran Province in 1995 is shown in table 1. Similar rates are charged in other provinces. In 1996, the charges were increased. Monthly consumption up to 5 m3 was exempt, and water use up to 25 m3 was charged at the 1995 rate. However, the rate for the block between 25 m3 and 45 m3 was increased by 25 per cent, and the rate for water use above 46 m3 was increased by 30 per cent. In 1998, the tariff for commercial and industrial use of water was set higher than for residential consumption. This reversed the policy of previous years.

Underground water

Qanats have been the main technology for withdrawal of water from underground reservoirs, although pumped wells have recently begun to replace them. It is natural that in arid regions of Iran, water utilization rights, types of exchanges, and pricing practices are all associated with qanats. Therefore, the discussion here concentrates on water markets based on this type of water withdrawal.

The water of each qanat is initially divided among the share holders; thus a water rotation period is observed wherever this technology is used. This period is naturally shorter in spring and summer than in other seasons because of higher evapo-transpiration and consumption use of crops. Division of qanat water among one or more villages that are quite far from each other (Yazdani 1985) has necessitated, over time, training skilled technicians for both maintaining qanats in operation and distributing the water among many farmers without loss. Thus the market for two types of jobs has arisen. The first is highly technical, requiring knowledge of building and dredging qanats. The second requires a talent for adopting a distribution scheme by which water loss would be minimum. In addition, the distributor must be trusted by all, because he can manipulate everybody's lot. The value put on this job has resulted in alternative forms of group decision-making to select the distributors. The common feature in all forms is that an irrigation task force is chosen by the holders of the water rights, to nominate a head distributor; the holders of the water rights must then approve the choice by majority vote (Safinejad 1985).

The dredger's wage is generally paid in kind, most frequently in the form of a share of water. In a village in Gonabad, in the northeast, any particular field is irrigated every fourteen days in summer and every twenty-one days in other seasons. Payment for dredging is made by adding one share, or day, before a field is irrigated, and "paying" this extra day to the dredger. In another village in Gonabad, the period between irrigations is increased from sixteen to seventeen days and in Ghaylen from seventeen to eighteen days and once again, the additional day of water is paid for dredging (Yazdani 1985). In a village in Yazd Province (central Iran), the four-member group of distributors were paid a wage that was equal to 18.5 hours of water that they could use on their farms or sell (Safinejad 1996). Once, in a village of Tafresh, a qanat was ruined by a major flood and its repair was very costly for the poor peasant owners. The landlord proposed a deal: he would pay the reconstruction cost in return for one day of water in each rotation, that is, by extending the rotation from eight to nine days (Safinejad 1985).

Over time, however, payment in cash as well as in kind has become customary. In a village of Ferdous as in other parts of the country, water was distributed by a "water clock" – a device for measuring water use, in this case in the local unit, the fenjan. In 1971, for each fenjan of water, fifty rials (US$.0125 at 1997 rates) were collected for both dredging and distribution. The same price was charged in another village in 1976, and in a rural community of Yazd in 1978, every joraeh of water cost one thousand rials and, in total, water share holders paid 2.6 million rials (US$650) (Safinejad 1996).

As described previously, in the initial stages of community development, the water distribution task is handled by existing norms and traditions. Eventually, as the market organization is formed, transactions will be in kind initially and in cash after the community undergoes the final stages of development. Today, in rural communities of Iran, the cash valuation of water is so common that the Statistics Department of the Agricultural Ministry can easily collect water price information in different parts of the country. This information is used to calculate the average cost of crop production and suggest a guaranteed price for wheat and other supported crops to the government.

As described earlier, the private sector is quite active in extracting water from underground resources. At present, wells are replacing qanats because the cost and time for construction are lower than for qanats. However, this advantage has caused excavation of too many wells and, hence, overpumping of water. Many underground aquifers are now under stress and further well drilling is forbidden.

The Just Water Distribution Law authorizes the Ministry of Energy to supervise withdrawal activities from underground pools. A supervision charge can be levied based on a percentage of the crop price (table 2). The charges are calculated for each region and their equivalent cash value is collected. This procedure further validates our hypothesis that, as the economy grows, markets for water will be established. Initially, the unit of value is the staple food or the water itself because this medium of exchange can accelerate transactions more than others. Eventually a monetary numéraire will be adopted as trade expands in the economy. The water market seems to have undergone such development in Iran.

Conclusions

Despite the fact that water is a pious commodity in Islamic culture and its natural sources are owned in common under Islamic law, the market has played an important role in demand and supply management of water since the rise of the Islamic state in Arabia. The system of property rights in Islam allows those who spend effort and expense to withdraw water from a commonly owned source to secure private possession rights, provided that the rights of other users are preserved. This recognition provides the opportunity for the exchange of water with other goods, that is, formation of a water market, whose various organizational forms have been observed throughout the Muslim countries. But in the early Islamic state, dam construction and water reservoir developments were financed by the baitulmal. These two institutions – private and public – initiated and directed water supply, transfer, and distribution activities.

Utilities tend toward a monopoly structure if both provision and distribution of service are entrusted to the market. Neither Islamic jurisprudence nor economic logic justifies privatization of the whole water sector. Instead, what is recommended here is co-ordination between the public and private sectors for handling water-related activities. Overhead investments for the provision and preservation of water will be carried out by the public sector but transfer and distribution of water will be carried out by the private sector. If Islamic rules and values prevail in the market, the price that will be determined can be expected to be efficient. This price will serve as a norm for the water that is provided and sold by the public sector, and the latter's price should cover the average total cost of operation. No discrimination in water pricing should be used in practice. This proposal is consistent with the legal system of Islam and management of water supply and demand in Iran.

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