A Review of the Valuation of Environmental Costs and ... · valuation in 101 projects in the World...

E N V I R O N M E N T A L E C O N O M I C S S E R I E S

A Review of theValuation ofEnvironmental Costsand Benefits inWorld Bank Projects

Patricia SilvaStefano Pagiola

PAPER NO. 94

December 2003

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Administrator

29349

Papers in this series are not formal publications of the World Bank. They are circulated to encourage thought and discussion. The useand citation of this paper should take this into account. The views expressed are those of the authors and should not be attributed tothe World Bank. Copies are available from the Environment Department of the World Bank by calling 202-473-3641.

A Review of the Valuationof Environmental Costsand Benefits in WorldBank Projects

Patricia SilvaStefano Pagiola

THE WORLD BANK ENVIRONMENT DEPARTMENT

December 2003

The International Bank for Reconstructionand Development/THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

Manufactured in the United States of AmericaFirst printing December 2003

iiiEnvironmental Economics Series

Contents

ACKNOWLEDGMENTS vABBREVIATIONS viiWORLD BANK REGIONS ix

EXECUTIVE SUMMARY 1

Chapter 1Introduction 3

Chapter 2The Role of Environmental Valuation 5

Environmental Valuation in the Project Cycle 5Environmental Valuation Methodologies 6

Chapter 3Assessing Environmental Valuation in World Bank Projects 9

Projects Reviewed 9Methodology 10Limitations 11

Chapter 4Overall Results 13

How often is Environmental Valuation Used? 13Use of valuation techniques 17Impact of Environmental Valuation 19

Chapter 5Energy 21

Air Quality Impacts of Energy Projects 21Valuing Changes in Air Quality 22

Outdoor air pollution 23Indoor air pollution 25

Chapter 6Transportation 27

Environmental Impacts of Transportation Projects 27

iv Environment Department Papers

A Review of the Valuation of Environmental Costs and Benefits in World Bank Projects

Valuing the Environmental Impacts of Transportation Project 28Air quality impacts 28Land use impacts 29

Chapter 7Agriculture, Fishing, and Forestry 31

Irrigation and Drainage 31Forestry 35Natural Resources Conservation 35

Chapter 8Water, Sanitation, and Flood Protection 37

Water Supply and Sanitation 37Flood Protection 42Solid Waste Management 44

Chapter 9Global Costs and Benefits 45

Chapter 10Conclusion 47

APPENDIX — PROJECTS REVIEWED 49

NOTES 53

REFERENCES 57

BOXES

1 What Is Required? 32 Presenting the Results of Environmental Valuation 123 Which Costs Should Be Included in the Economic Analysis of a Project? 144 Selecting the Appropriate Type of Economic Analysis 165 Using Environmental Benefits Estimates to Revise Project Design 176 Valuing Environmental Costs in the Chad/Cameroon Oil Pipeline Project 247 Irrigation in Central Asia 348 Valuing the Health Benefits of Rural Water Supply and Sanitation 399 Willing to Pay but Unwilling to Charge — Do WTP Studies Make a Difference? 41

FIGURE

1 Valuing the impacts of a reforestation project 7

TABLES

1 Environmental assessment, economic analysis, and the project cycle 52 Number and cost of projects evaluated, by sector and region 103 Valuation of environmental impacts in project analysis 134 Valuation techniques employed in projects reviewed 185 Effect of including environmental benefits on estimated project returns 206 Willingness to pay for water and sanitation 43

vEnvironmental Economics Series

Acknowledgments

This paper benefited from detailed commentsand suggestions provided by Jan Bojö, DavidHanrahan, Rama Chandra Reddy, andparticipants in the 12th Roundtable on theEconomics in Environmental Assessment, heldon April 9, 2003. We would also like to thankGhanasham Abhyankar, Sameer Akbar, Manish

Bapna, Adriana Damianova, Paavo Eliste,Liping Jiang, Smita Misra, Joop Stoutjesdijk,and A.K. Swaminathan for providingadditional information regarding their projects.Alexandra Sears provided assistance withobtaining and maintenance of the database ofprojects.

viiEnvironmental Economics Series

Abbreviations

AET Actual evapotranspirationAPL Adaptable program loanCBA Cost benefit analysisCEA Cost effectiveness analysisCO2 Carbon dioxideCV Contingent valuationDFID Department for International Development, UKEA Environmental assessmentESW Economic and sector workEU European UnionGEF Global Environment FacilityHEP Hydroelectric powerIBRD International Bank for Reconstruction and DevelopmentIDA International Development AgencyIDB Inter-American Development BankIRR Internal rate of returnLIL Learning and innovation loanNOx Nitrogen OxideNPV Net present valueNRM Natural resource managementO&M Operations and maintenanceOED Operation Evaluation DepartmentPAD Project appraisal documentPCF Prototype Carbon FundPM10 Fine particulate matter (less than 10 microns in diameter)SIL Specific investment loanSIM Sector investment and maintenance loanSO2 Sulfur dioxideTAL Technical assistance loanTCM Travel cost methodTOR Terms of referenceTSP Total suspended particlesWTA Willingness to acceptWTP Willingness to pay

ixEnvironmental Economics Series

World Bank Regions

AFR Sub-Saharan Africa

Angola, Benin, Botswana, Burkina Faso,Burundi, Cameroon, Cape Verde, CentralAfrican Republic, Chad, Comoros, DemocraticRepublic of Congo, Republic of Congo, Coted’Ivoire, Equatorial Guinea, Eritrea, Ethiopia,Gabon, Gambia, Ghana, Guinea, Guinea-Bissau,Kenya, Lesotho, Liberia, Madagascar, Malawi,Mali, Mauritania, Mauritius, Mozambique,Namibia, Niger, Nigeria, Rwanda, Sao Tomeand Principe, Senegal, Seychelles, Sierra Leone,Somalia, South Africa, Sudan, Swaziland,Tanzania, Togo, Uganda, Zambia, andZimbabwe.

EAP East Asia and Pacific

Cambodia, China, Fiji, Indonesia, Kiribati,Democratic People’s Republic of Korea,Republic of Korea, Lao Peoples’ DemocraticRepublic, Malaysia, Marshall Islands, FederatedStates of Micronesia, Mongolia, Myanmar,Palau, Papua New Guinea, Philippines, Samoa,Solomon Islands, Thailand, Timor-Leste, Tonga,Vanuatu, and Vietnam.

ECA Europe and Central Asia

Albania, Armenia, Azerbaijan, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, CzechRepublic, Estonia, Georgia, Hungary,

Kazakhstan, Kyrgyz Republic, Latvia,Lithuania, Macedonia, Moldova, Poland,Romania, Russian Federation, Serbia andMontenegro, Slovak Republic, Slovenia,Tajikistan, Turkey, Turkmenistan, Ukraine, andUzbekistan.

LCR Latin America and Caribbean

Antigua and Barbuda, Argentina, Belize,Bolivia, Brazil, Chile, Colombia, Costa Rica,Dominica, Dominican Republic, Ecuador, ElSalvador, Grenada, Guatemala, Guyana, Haiti,Honduras, Jamaica, Mexico, Nicaragua,Panama, Paraguay, Peru, St. Kitts and Nevis, St.Lucia, St. Vincent and the Grenadines, Trinidadand Tobago, Uruguay, and Venezuela.

MNA Middle East and North Africa

Algeria, Bahrain, Djibouti, Arab Republic ofEgypt, Islamic Republic of Iran, Iraq, Israel,Jordan, Kuwait, Lebanon, Libya, Morocco,Oman, Saudi Arabia, Arab Republic of Syria,Tunisia, United Arab Emirates, West Bank andGaza, Republic of Yemen.

SAR South Asia

Afghanistan, Bangladesh, Bhutan, India,Maldives, Nepal, Pakistan, Sri Lanka.

1Environmental Economics Series

Executive Summary

The World Bank’s Operational Policy onEconomic Evaluation of Investment Operations(OP 10.04) requires that project evaluationsinclude all the costs and benefits generated bythe project, including environmental costs andbenefits. A well done economic analysis wouldinclude any positive or negative externalimpacts generated by the project, regardless ofwhether these impacts are directly linked tofinancial transactions or flows. In practice,however, valuing environmental impacts is achallenging exercise as they are often difficult toquantify in physical terms and to value inmonetary terms.

The review examines the use of environmentalvaluation in 101 projects in the World Bank’senvironmental portfolio approved in fiscal years2000, 2001, and 2002. It has three broadobjectives. First, it examines the extent to whichenvironmental costs and benefits have beenincorporated in the economic analysis ofprojects. Second, it examines how well valuationwas used. Third, it seeks to identify areas ofweakness so as to feed into plans for capacitybuilding.

The results show that the use of environmentalvaluation has increased substantially in the lastdecade. Ten years ago, one project in 162 usedenvironmental valuation. In recent years, asmany as one third of the projects in theenvironmental portfolio did so. While thisrepresents a substantial improvement, thereremains considerable scope for growth.

Many projects that did not use environmentalvaluation pleaded the difficulty of doing so.This review, however, included severalexamples of projects that valued the sameenvironmental benefits that other projects in thesame sector claimed were too difficult to valueor “un-quantifiable.” Given the substantialmethodological progress that has been made inthis field in the last decades, “un-quantifiable”can no longer be considered an acceptableexcuse in most cases. Lack of data can be moredifficult to overcome, but is also not insoluble inmost cases.

Among those projects that value environmentalimpacts, only one values environmental costsand all the others focus solely on valuingbenefits. This asymmetry can be partlyexplained by the fact that most projects seek toavoid or mitigate potential negative impactsthrough project design or the implementation ofenvironmental management plans, although itstrains credibility that there would be noremaining damages.

The degree to which environmental benefits arevalued differs from sector to sector. In theenergy and transportation sectors, the valuationof changes in air quality benefits from a largebody of literature that has developed andapplied the existing valuation techniques.Quantifying the impacts of project measures onoutdoor air pollution does not appear to be asignificant obstacle, at least not in the energy

Environment Department Papers2


sector. However, not all projects which quantifyemissions reductions take it to the next stageand value these environmental benefits. In theagriculture and water supply and sanitationsectors, on the other hand, quantifying thephysical impacts of project measures aregenerally the major obstacle to valuation ofenvironmental impacts.

To ease the task of project teams, a series oftoolkits is being assembled for some of the morecommonly-occurring valuation problems. Thesetoolkits will describe the available valuationmethodologies from a problem-centricperspective and provide detailed examples ofhow to use these methodologies in a projectcontext.


Introduction

The economic analysis carried out to ascertainthe desirability of a project should take intoaccount all the costs and benefits generated bythe project. In principle, that should includeenvironmental costs and benefits as well (Box 1).In practice, however, including environmentalimpacts is a challenging exercise because theyare difficult to quantify in physical terms and tovalue in monetary terms. The EnvironmentalAssessment Sourcebook states that “in spite ofthese difficulties, a greater effort needs to bemade now to ‘internalize’ environmental costsand benefits by measuring them in money termsand integrating these values in economicappraisal” (World Bank 1991). A well doneeconomic analysis is more than just a process foradjusting prices from the financial analysis tocorrect for market inefficiencies. It should be aprocess that includes social costs and benefitsregardless of whether the impacts are directlylinked to financial transactions or flows. Inparticular, it should include in the evaluationany positive or negative external impacts whichare generated.

This review examines the use of environmentalvaluation in World Bank projects. It has threebroad objectives. First, it examines the extent towhich environmental costs and benefits,whether direct or in the form of externalities,have been incorporated in the economic analysisof World Bank projects. Second, it examineshow well valuation was used. Third, it seeks toidentify areas of weakness so as to feed intoplans for capacity building.

An earlier review of the quality of economicanalysis in Staff Appraisal Reports (SARs)1

carried out by the Operations EvaluationDepartment (OED) found that only one of the162 projects examined quantified environmentalcosts and benefits and considered those in thecost-benefit calculation (OED, 1995).2 Thepurpose of the current review is much narrowerand does not focus on the overall quality of theeconomic analysis, but solely on howenvironmental values are incorporated into thatanalysis. We therefore adopt a differentsampling strategy. The main finding of this

Box 1.What Is Required?

The requirements for the economic evaluation of projects are given in the Bank’s Operational Policy (OP) 10.04on economic evaluation of investment operations, and its companion Bank Procedure (BP) 10.04. OP 10.04specifies that “economic analysis [must be conducted] to determine whether the project creates more net ben-efits to the economy than other mutually exclusive options for the use of the resources in question.” BP 10.04further elaborates that “[t]he economic evaluation of projects integrates financial, institutional, technical, so-ciological, and environmental considerations.”

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review is that, there has been a substantialincrease in the number of projects incorporatingenvironmental values into the analysis since theearlier review. However, many projects thatcarry out a cost benefit analysis (CBA) still donot quantify or value environmental impacts.The use of environmental valuation in projects,moreover, is often poorly documented, makingit difficult to assess both the extent to which it isused and the quality of the work.

The review begins by discussing the potentialrole of environmental valuation in World Bankprojects. The methodology used in the review ispresented in Chapter 3. The overall results arepresented in Chapter 4. Chapters 5 to 8 thenexamine in more detail the use of valuation ineach broad sector: agriculture, energy, trans-portation, and water supply and sanitation.Chapter 9 discusses the special case ofevaluating global environmental benefits.


Project stage EA activity Associated economic analysis activity

Preparation Environmental screening Potential environmental costs and benefits are considered on a preliminary basis

Preparation of EA terms of reference (TOR)

Requirement to quantify environmental impacts and assign monetary values spelled out

EA team selection EA team includes resource or health economist, as appropriate

EA preparation EA team analyses the impact of project alternatives and compares them, using monetary values on their costs and benefits, where feasible

Review of EA The Bank reviews the EA report, including the economic analysis

Appraisal Incorporation of EA into project design and documentation

EA findings, including the environmental costs and benefits, are incorporated into the project economic analysis and the estimation of the economic rate of return

Negotiations Agreements reached on actions to be taken, based on the findings of the EA

Implementation Environmental supervision Supervision includes monitoring the project’s actual environmental costs and benefits

The Role of Environmental Valuation

For many years, the environmental impacts ofprojects—whether positive or negative—wereeither ignored or, at best, placed in a list of‘intangible’ costs and benefits thatcomplemented the formal economic analysis.This was due partly to a lack of awareness aboutthe importance of environmental impacts, andpartly to a lack of appropriate methodologies tomeasure them in a way that would allow themto be incorporated into standard cost-benefitanalyses. Both problems have been largelyovercome in recent years. In particular, a veryextensive literature has developed on thevaluation of environmental costs and benefits.

Environmental Valuation in the ProjectCycle

Environmental valuation can play a role at manypoints in the preparation of Bank-financedprojects. The most obvious, of course, is inappraisal—in helping determine whether thebenefits of a project justify its cost, or whether aproject is a cost-effective way of meeting a givenobjective. Many of a project’s costs and benefitsare likely to be environmental in nature, andvaluation allows these costs and benefits to beincluded in the overall analysis. But valuationcan also play an important role at many otherstages of the project cycle, as shown in Table 1.

Table 1. Environmental assessment, economic analysis, and the project cycle

Source: Dixon and Pagiola, 1998.

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• At the identification stage, or in prioreconomic and sector work (ESW), it canhelp diagnose problems and prioritizeinterventions. For example, by showing thatcurrent land use practices lead to severedownstream problems, it can helpdetermine that a watershed managementproject may be necessary.3

• During preparation, it can help determinewhat approach is best suited to addressingthe problem. In the case of land usepractices that cause downstream problems,for example, it might point to the need forcreating a mechanism that internalizes thoseexternalities (as in the Costa Rica EcomarketsProject). Alternatively, if use of damagingland use practices is driven by policydistortions, it may point to the need for apolicy reform program. As preparationprogresses, valuation of expectedenvironmental costs and benefits can alsolead to adjustments in project design—bydropping sub-components that appear lessbeneficial than originally anticipated, forexample, and expanding others that nowappear more beneficial.

• During implementation, the extent to whichexpected environmental costs and benefitsare being realized—and whether anyunexpected impacts occur—should bemonitored, just as other project impacts aremonitored, so that mid-course correctionsmay be made if necessary.

• During evaluation of completed projects,valuation plays the same role as it does inappraisal, namely it contributes to theoverall evaluation of the project’s impact,this time on an ex post rather than ex antebasis.

Although valuation of environmental impactscan and should play an important rolethroughout the project cycle, the analysis in thispaper focuses on its role in project appraisal, asthis is the step in which the best documentationis available.

Environmental Valuation Methodologies

Many methods for valuing environmentalimpacts are found in the resource andenvironmental economics literature (Dixon andothers, 1994; Hufschmidt and others, 1983;Braden and Kolstad, 1991; Hanemann, 1992).Some are broadly applicable, some areapplicable to specific issues, and some aretailored to particular data sources. As in thecase of private market goods, a common featureof all methods of economic valuation ofenvironmental goods and services is that theyare founded in the theoretical axioms andprinciples of welfare economics. Thesemeasures of welfare change are reflected inpeople’s willingness to pay (WTP) orwillingness to accept (WTA) compensation forchanges in their level of use of a particular goodor service (Hanemann, 1991; Shogren andHayes, 1997).

Valuation is a two-step process. The first step inany economic valuation of environmentalimpacts is to determine what those impacts are.This includes understanding the nature of theimpact and its magnitude; who is affected andin what way; and what alternatives they have.As shown in Table 1, this step is often closelytied to the environmental assessment (EA)process. The bulk of the work involved invaluation actually concerns quantifying thebiophysical relationships. In many cases, thisrequires tracing through and quantifying achain of causality such as that shown in Figure 1



for a hypothetical reforestation project.Valuation in the narrow sense only enters in thesecond step in the process, in which the value ofthe impacts is estimated in monetary terms.

Different users and authors often classify thevarious methods of valuing environmentalimpacts differently, but the different groupingand naming systems converge to a broadclassification that depends on whethermeasures are based on observed or hypotheticalbehavior, and whether measures are direct orindirect.

• Measures of economic value based onobserved behavior. This category includesmethods of valuation that use data onactual observed behavior and is furtherdivided into direct and indirect observedbehavior methods. These methods, whenthey can be applied, are generallyconsidered preferable to those based onhypothetical behavior.

• Direct observed behavior methods. Thesemethods derive estimates of value from the

observed behavior of producers andconsumers. They often use market pricesand are most often applicable in caseswhere the environmental impacts are ongoods and services traded on markets.

• Indirect observed behavior methods. Thiscategory of methods also uses actualobserved behavior data but not that of thespecific environmental good or service inquestion. In absence of actual marketbehavior, these methods use observationson actual behavior in a surrogate market,which is hypothesized to have a directrelationship with the good or service ofinterest. Examples of methods in thiscategory include hedonic pricing methods(which use statistical techniques to breakdown the price paid for a good and serviceinto the implicit prices for each of itsattributes, including environmentalattributes such as access to recreation orclean air) and travel cost methods (TCM)(which use observed costs to travel to adestination to derive demand functions forthat destination). This group also includes

Figure 1. Valuing the impacts of a reforestation project

Reforestation Change in

hydrological flows

Change in availability of water to irrigation

Change in production of irrigated agriculture

Change in farm household

income

Other changes in ecosystem functioning

Other changes in ecosystem

services

Other impacts on human activity

Other impacts on human well-

being

Biophysical relationships

Valuation in narrow sense (e.g., price of crops produced under irrigation)

Source: Adapted from Pagiola, Acharya, and Dixon (forthcoming).



cost-based methods (such as replacementcost methods, which value services at thecost of replacing them, for example, the costof building a water treatment plant toreplace a water purifications serviceprovided by an ecosystem) that do notexactly reflect (sometimes underestimateand sometimes overestimate) welfare(benefit-based) measures of value.

Measures of economic value based onhypothetical behavior. In this category ofmethods, valuation is based on hypotheticalrather than actual behavior data: people’sresponses to direct questions describinghypothetical markets or situations are used toinfer value. These methods can be divided intodirect hypothetical (for example, contingentvaluation (CV), in which respondents are askeddirectly how much they would be willing to payfor specified benefits) and indirect hypothetical(contingent ranking or conjoint valuation, whichask respondents to rank different bundles ofgoods) measures of WTP or WTA.

Benefits transfer. A final category of approachis known as benefits transfer. This is not amethodology per se, but rather refers to the useof estimates obtained (by whatever method) inone context to estimate values in a differentcontext. For example, an estimate of the benefitobtained by tourists viewing wildlife in onepark might be used to estimate the benefitobtained from viewing wildlife in a differentpark. Benefits transfer has been the subject ofconsiderable controversy in the economicsliterature, as it has often been usedinappropriately. A consensus seems to beemerging that benefit transfer can provide valid

and reliable estimates under certain conditions.These include that the commodity or servicebeing valued is identical at the site where theestimates were made and the site where theyare applied; and that the populations affectedhave identical characteristics. Of course, theoriginal estimates being transferred mustthemselves be reliable for any attempt attransfer to be meaningful.

Each of these approaches has seen extensive usein recent years, and an extensive literature existson their application. In general, measures basedon observed behavior are preferred to measuresbased on hypothetical behavior, and more directmeasures are preferred to indirect measures.However, the choice of valuation technique inany given instance will be dictated by thecharacteristics of the case and by dataavailability. Several techniques have beenspecifically developed to cater to thecharacteristics of particular problems. The TCM,for example, was specifically developed tomeasure the utility derived by visitors fromsites such as protected areas. The change inproductivity approach, on the other hand, isvery broadly applicable to a wide range ofissues. CV is potentially applicable to any issue,simply by phrasing the questions appropriately,and as such has become very widely used—probably excessively so, as it is easy to misapplyand, being based on hypothetical behavior, isinherently less reliable than measures based onobserved behavior. Data availability is a veryfrequent constraint and often restricts the choiceof approach. Hedonic price techniques, forexample, require vast amounts of data, thuslimiting their applicability.


Assessing Environmental Valuationin World Bank Projects

This review focuses on the use of environmentalvaluation in the economic analysis of WorldBank projects. It examines the extent to whichthe economic analysis of World Bank projectsincorporates environmental costs and benefits,whether direct or in the form of externalities,and how well valuation was used.

Projects Reviewed

The review examines projects in the WorldBank’s environmental portfolio, namely projectswhich are classified as environmental accordingto the new thematic codes.4 The selection ofthemes is based on the objectives of the project’soperation. The ‘Environment and NaturalResources’ thematic group includes thefollowing sub-themes: biodiversity, climatechange, environmental policies and institutions,land management, pollution management andenvironmental health, water resourcesmanagement, and other environmental andnatural resources management. Projects withenvironmental themes approved in fiscal years2000, 2001, and 2002 are considered.5 Thisportfolio of some 150 projects includes severaltypes of lending instruments. The reviewfocuses primarily on investment lendinginstruments: specific investment loans (SIL),sector investments and maintenance loans(SIM), and adaptable program loans (APL).6

Some learning and innovation loans (LIL) andtechnical assistance loans (TAL) are alsoincluded, when they have substantial

environmental components and carry out someanalysis of project benefits. However, most LILand TAL projects are excluded, as those types ofloans generally do not require a full economicanalysis. The review focuses on projects whichwould usually be required to carry out a fullcost-benefit analysis, but also includes someprojects that carry out a cost-effectiveness orincremental cost analysis.

The final sample of projects reviewed includes101 projects. A full list of the projects examinedis provided in the Appendix. Table 2 shows theprojects included in the review, categorized intofour major sectors: agriculture, energy,transportation, and water supply andsanitation. The agriculture sector includesirrigation and drainage projects, as well asforest or other natural resource management(NRM) type of projects. Some projects havecomponents in more than one sector; they arelisted under both sectors as appropriate. Forexample, the Beijing Second Environmental Projecthas a sewerage component (water sector) and aboiler conversion component (energy sector).The total number of project components is 108.Table 2 also shows the total costs of the projects,which includes the amounts financed byInternational Bank for Reconstruction andDevelopment (IBRD) and InternationalDevelopment Agency (IDA) loans, GlobalEnvironment Facility (GEF) and other donors’grants, as well as any public and private sectorfinancing of the project.7

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Agriculture and water supply and sanitation arethe two sectors with the most projects. Theaverage cost of projects in the water supply andsanitation sector is about twice that of projectsin the agricultural sector. Although there arefewer projects in the energy and transportationsectors, they have the highest average cost perproject, reflecting the magnitude of investmentsin these sectors.

Table 2 also shows the distribution of projectsevaluated by sector and region. Most regionshave several projects in each sector. The MiddleEast and North Africa (MNA) region has thefewest number of projects reviewed and also noprojects in the energy or transportation sector.There is only one energy projects in the samplefrom the Latin America and Caribbean (LCR)region, but seven projects in the water supplyand sanitation sector. The East Asia and Pacific(EAP) region has the highest number oftransportation projects reviewed, while the

Europe and Central Asia (ECA) region has thehighest number of energy projects reviewed.Projects in the agriculture and water supply andsanitation sectors are found in all regions.

Methodology

The review is based on information contained inthe project’s appraisal document (PAD),particularly the summary informationconcerning the EA and the cost benefit analysis(CBA) in Annex 4 of the PAD. It does not takeinto account any other documents that mayhave also been presented as a part of theproject’s approval process. In some cases,additional documentation was sought from taskteams to clarify how the analysis wasconducted, but time and resource constraintsprecluded doing so for more than a handful ofprojects. With some notable exceptions, theresponse rate to such requests for additionalinformation was very low.

Table 2. Number and cost of projects evaluated, by sector and region

Notes: Projects with components in multiple sectors are counted separately in each appropriate sector.*Does not include the Chad/Cameroon Oil Pipeline Project, which alone costs US$3.7 billion.

Number of project components

Sub-SaharanAfrica (AFR)

East Asia and

Pacific (EAP)

Europe and

Central Asia

(ECA)

Latin America

and Caribbean

(LCR)

Middle East and

North Africa

(MNA)

South Asia

(SAR) Total

Total cost

(billion US$)

Average project

cost (million US$)

Energy 2 6 10 1 0 6 25 6.0* 251.2*

Transportation 5 5 0 3 0 3 16 5.7 354.0

Agriculture, fishing, and forestry

4 4 7 8 4 5 32 2.6 78.5

Water, sanitation, and flood protection

6 8 6 7 5 3 35 4.8 136.5

Total/Average 17 23 23 19 9 17 108 19.1 174.8



All projects do not necessarily require the use ofenvironmental valuation, and even amongthose that do, needs are likely to varysubstantially, given differences in localcircumstances and in project activities. Thereview initially planned to rely largely on theEA carried out for each project to assess theneed for valuation. The EA summary, however,proved to be of limited usefulness in thisregard. In particular, there was little discussionof any expected positive environmental impacts,even though all the projects included in thereview have one or more environmentalobjectives. Indeed some of the projects with thestrongest environmental objectives havesometimes been classified as category Cprojects.8 The EA process, or at least thesummary of it provided in the PAD9, seemsgenerally primarily concerned with identifyingadverse environmental impacts that wouldviolate the Bank’s operational and safeguardpolicies or the country’s own environmentalregulations. Where positive environmentalimpacts are expected, these are often discussedoutside the EA summary.10 In many cases, thePADs contain little if any discussion of specificenvironmental impacts. In only a few cases issufficient information provided to indicate thata project is likely to have few significantenvironmental impacts that would warrantvaluation.11

Several additional criteria were used, therefore,to assess whether environmental impacts in anygiven project are likely to be sufficientlyimportant to warrant a valuation effort. Projectsthat listed one or more environmental themes astheir primary objectives were considered likelyto have environmental impacts significantenough to be valued. Projects that listedenvironmental themes as secondary objectiveswere compared to other projects with similar

objectives, similar types of interventions, andcomparable scale of investments. This leftseveral projects for which no information wasavailable on likely environmental impacts. Inthe absence of any other information, theseprojects were assumed to have either noenvironmental impacts or only minor impactsthat might not require valuation.

Limitations

Several limitations of the analysis should beborne in mind in interpreting results. First, theanalysis focuses only on approved projects. Bydefinition, these are all projects for whichbenefits are deemed to exceed costs. If projectswith large environmental benefits were notapproved—or perhaps not pursued in the firstplace—because their environmental benefitswere not measured, they would not be in thesample.

By focusing on PADs, the analysis also onlylooks at the use of environmental valuation inthe completed project design. The extent towhich valuation may have been used inpreceding steps, as discussed in Chapter 2, islargely invisible.

Determining whether projects valued anyenvironmental impacts and included those inthe CBA proved much more difficult thanexpected. In large part, this difficulty stemsfrom the limited amount, and sometimes poorpresentation, of the information provided in thePAD. In several instances, the environmentalbenefits generated by a project are discussed ata great length in qualitative terms, but then onlyan overall net present value (NPV) of costs andbenefits is given. Whether any of theenvironmental benefits discussed were actuallyvalued, and if so, how they were valued, is often



Degradation halted b

Degradation reduced b Comments

Costs Project expenses 6 6 Includes post-project maintenance costs Forgone agricultural income 2 2 Forgone logging income ? ? Unlikely to be large Total quantified costs 8 8 On-site benefits Tourism potential ? ? Significant, but needs additional

investment Sustainable harvest of

• Timber ? ? Limited potential in one area

• Non-timber products ? ? Probably important, but no data

Biodiversity/natural habitats ? ? Global benefit: regionally outstanding ecosystems, many endemic species

Off-site benefits Reduced damage to irrigation 4-14 6-24 Does not include maintenance cost

savings Reduced flood damage 2.5-5 3.5-6 Only includes damages to roads and

canals Increased water availability ? ? Reduced siltation ? ? Total quantified benefits 6-19 9-30

unclear. Although BP 10.04 stresses thateconomic evaluations need to be “transparent

Source: Staff Appraisal Report, Haiti Forest and Parks Protection Technical Assistance Project. Report No.T–6948–HA. 1996.Notes: a Quantified benefits shown in present value terms, discounted at 10% over an infinite time horizon.

b Alternative scenarios of project outcome.

Box 2.Presenting the Results of Environmental Valuation

Presenting the results of the environmental valuation in a clear and transparent way is essential to assessing it.Unfortunately, most projects reviewed performed very poorly in this area. The table below shows an exampleof good presentation, taken from a project outside the review sample. In this case, all the benefits listed areenvironmental, but similar tables could easily combine environmental and non-environmental benefits. Thistable has several desirable properties:

• It shows different benefits separately. This is particularly useful when projects have both environmental andnon-environmental benefits, as it allows their relative importance to be compared.

• It includes place-holders for costs and benefits that could not be quantified, with comments to provide what-ever qualitative information may be available.

• It clearly shows the uncertainty of some of the estimates by giving results for different scenarios and show-ing ranges rather than single figures; further limitations of the estimates are noted in the comments.

Estimated costs and benefits of the natural reserve management component of the HaitiForest and Parks Protection Technical Assistance Project (US$ million)a

and replicable”, this is often far from the case(Box 2).


Overall Results

The broad findings of the review are presentedin this chapter. It examines the extent to whichenvironmental values are incorporated into theprojects’ economic analysis. In other words, ifenvironmental impacts are identified, are thoseimpacts valued and incorporated into theanalysis? The following sections then examinethe use of valuation in projects in each sector.

How often is Environmental ValuationUsed?

Table 3 summarizes the use of valuation ofenvironmental impacts in project analysis.Overall, these results show a very notableincrease in the use of environmental valuation

relative to that found in the 1995 OED Review.Whereas only one project in 162 undertookenvironmental valuation in that review, about athird of projects in this review undertake someform of valuation, though some do not theninclude it in the economic analysis.12

Considering that this review includes onlyprojects with explicitly environmentalobjectives, however (whereas the OED reviewwas based on a sample of all projects), the useof valuation is still in many waysdisappointingly low. The energy and watersector have the largest number of projectsvaluing environmental impacts explicitly. Theagriculture sector stands out for having thelargest number of projects valuingenvironmental benefits implicitly.

Table 3. Valuation of environmental impacts in project analysis

Note: * Two forestry projects that valued only carbon sequestration benefits were not counted as valuing environmental benefits. Seediscussion on valuation of global environmental benefits in Chapter 9.

Energy Transportation

Agriculture, fishing, and

forestry*

Water, sanitation, and flood protection Total

Environmental impacts valued

Explicitly 5 3 3 7 18

Implicitly 0 0 6 3 9

Valued but not included in analysis 2 0 1 1 4

Environmental impacts not valued

Lack of data 0 1 2 3 6

Too difficult/‘un-quantifiable’ 6 1 4 7 18

No reason given 7 5 8 7 27

No economic analysis 1 0 1 1 3

4



The treatment of negative environmentalimpacts is quite different from that given topositive environmental impacts. Discussion of aproject’s potential negative environmentalimpacts generally focuses on how they are to beresolved or are going to be addressed byimplementing environmental managementplans. The EA process is specifically designed toidentify any significant negative environmentalimpacts early in project preparation anddevelop plans to mitigate those impacts. Thesemay include changes in the project design itselfand the location of project activities.Environmental management plans may beestablished and put in place to monitor and

evaluate impacts that may be expected. To theextent that an environmental management planor changes in project design eliminate adverseimpacts, there would be no need to value them.Still, despite all best efforts, some negativeimpacts are unavoidable and may still occur. Itis surprising, therefore, to find that only oneproject in the sample, the Cameroon/Chad OilPipeline Project, directly values the negativeenvironmental costs associated with theproject’s activities—presumably because thisproject’s very high visibility required it to coverall its bases. Other projects presumably includethe cost of mitigating the negative

Box 3.Which Costs Should Be Included in the Economic Analysis of a Project?

If a project activity causes environmental damage, that damage needs to be included in the economic analysisof the project together with the activity’s benefits and any other damages. To do otherwise would be to makethe activity appear artificially more attractive than it is. Likewise, if additional costs are incurred to avoid suchdamage, those costs need to be included in the project costs considered in the economic analysis. (The decisionto avoid or mitigate expected environmental damages can, of course, itself be subjected to cost-benefit analysisor, where such an approach is mandated by Bank safeguard policies or country regulations, a cost-effective-ness analysis.)

However, projects do not necessarily include all of the estimated costs in their economic analysis. For example,most projects tend to omit the cost of institutional strengthening components in the economic analysis, argu-ing that their benefits are difficult to quantify and extend beyond the project itself. In many instances, the costsof institutional strengthening activities supported by a project are to develop the capacity of the environmentministry to monitor and enforce compliance with existing environmental regulations and the environmentalmanagement plans required by the project. These institutional strengthening costs may be only one subset ofthe overall environmental management costs associated with the project. The question that arises, then, iswhich of the costs of dealing with potential environmental impacts that are directly or even indirectly relatedto project activities should be included in the economic analysis of a project?

Several projects explicitly omit the cost of measures to abate environmental damages from the economic anal-ysis. The Georgia Irrigation and Drainage Community Development Project, for example, omits the costs of environ-mental and safety measures because, it argues, the benefits from these measures are not included either. If theneed for the measures arose directly from project activities, however, their cost should have been included.Conversely, if the measures were adopted on their own merits, then that decision should have been the subjectof its own cost-benefit or cost-effectiveness analysis. In this case, however, omitting the cost of mitigatingenvironmental damage can be justified on more practical grounds: the cost of these measures is only about 1percent of total project costs, and so it likely has little impact on the analysis. In contrast, the Yemen IrrigationImprovement Project excludes more than 50 percent of the total project costs from the economic analysis. Giventhat the estimated rate of return for the overall project is just below 12 percent, the exclusion of more than halfof the project’s costs is certainly a reason for concern. In contrast to these two projects, many projects do notindicate very clearly which costs are included in the economic analysis.


Overall Results

environmental impacts of project activities inthe overall costs subjected to the CBA.However, these costs are not always explicitlyidentified in the discussion of project costs, sothat their magnitude—or even whether they areincluded in the CBA at all—is difficult todetermine.13 Box 3 discusses some of the issuesrelated to determining which costs should beincluded the CBA of a project.

The number of projects valuing environmentalimpacts in Table 3, therefore, refers almostexclusively to instances where environmentalbenefits were valued. Projects are counted asexplicitly valuing environmental benefits if theresults are shown, either by indicating the valueof environmental benefits in dollar terms or as apercentage of total benefits, or by giving theNPV or rate of return for the project with andwithout the inclusion of environmental benefits.In some cases, although environmental impactsare not explicitly valued, the analysis clearlyrests on the assumption that the project’spositive environmental impacts would generatebenefits, such as increases in yields,productivity, or conservation of naturalresources. In such cases, the valuation ofenvironmental benefits is implicit in thebroader analysis. Projects are counted asvaluing environmental impacts even if they donot value all impacts, or only value the impactsfor some of the project’s components. Finally,some projects value some environmentalbenefits, but decide not to include theseestimates in the CBA, either because of theuncertainty regarding how these values werecalculated or because of the global nature of theenvironmental benefits generated (see Chapter 9).

Table 3 also indicates the reasons given, if any,by projects that do not value environmentalbenefits. Most frequently, no reason is given for

not valuing environmental benefits. Someprojects argue that environmental benefits areeither too difficult to value or that they lack thedata necessary to do so. As lack of data may beone reason why some projects thoughtenvironmental benefits were too difficult tovalue, these two categories overlap to someextent.14 In some cases, such as biodiversityconservation, there are undoubtedly significantmethodological difficulties involved in trying toquantify and value environmental impacts. It isinteresting to note that the sectors with thelargest number of projects valuingenvironmental impacts—energy and water—are also the sectors with the largest number ofprojects stating that such impacts are toodifficult to value. In both sectors, there areexamples of projects that value the sameenvironmental benefits that other projects claimare too difficult to value or “un-quantifiable.” Inthe energy sector, several projects go as far asquantifying emissions reduction, but then donot take the additional step of valuing theseenvironmental benefits. In the water sector,many projects that consider environmentalbenefits too difficult to value chose to do a costeffectiveness analysis (CEA). Whether this is anappropriate strategy is discussed in Box 4.

In most cases, projects with primaryenvironmental objectives value at least some ofthe expected environmental benefits, or at leastprovide a reason for not doing so. Even amongprojects with primary environmental objectives,however, there are several that do not value anyenvironmental impacts.

Although no PAD explicitly says so, it seemslikely that one reason for not attempting tovalue environmental benefits is that the projectmay be already justified without them. Why goto the trouble of undertaking valuation when it



would not change the conclusion that theproject should be approved? From the narrowperspective of getting the project through, it ishard to argue with this logic. Nevertheless, thisdoes represent a significant missed opportunity.First, in terms of the project itself, it means amissed opportunity to adjust the design so as tomaximize benefits (Box 5). If environmentalbenefits are valued, their magnitude relative toother costs and benefits may lead to a re-evaluation of the effort devoted to variouscomponents. Components which are found toprovide particularly large environmentalbenefits may be expanded, for example.Conversely, components that are targetedprimarily at generating environmental benefitsmay be reduced in scope or dropped entirely ifthe value of those benefits proves low. Second,

there is also a significant missed opportunity interms of improving overall understanding ofthe problem. Given the very significant effortand expense that already needs to go intoproject preparation and appraisal, theadditional effort needed to undertakeenvironmental valuation is often small. Thisrelatively small marginal cost could providevaluable information to future projects. As thenumber of observations increase, it would alsobecome simpler and less risky to baseevaluation on cheaper techniques such asbenefits transfer.

It is interesting—and surprising—that someprojects in the sample do not carry out anyeconomic analysis of the benefits generated bythe project, environmental or otherwise. This is

Box 4.Selecting the Appropriate Type of Economic Analysis

Several projects, particularly in the water sector, opt to undertake a CEA rather than a full CBA, citing difficul-ties in valuing environmental benefits. In some cases, projects actually carry out a CBA, but because the rate ofreturn without environmental and health benefits proves to be too low or with those benefits too uncertain, aCEA is chosen instead. A CEA is appropriate when, for example, the goal is to meet a predetermined targetand the relevant question is how to achieve this standard at the lowest possible cost (Dixon and others, 1994).This is the case for the Hungary Municipal Wastewater Project, for example. The project aims to reduce waterpollution emissions to levels acceptable by the European Union’s (EU) environmental standards, as the coun-try progresses to fulfill the requirements for EU membership. The amount of pollution reduction has beendecided and for the purposes of the project, valuing these benefits is not necessary.

However, for most of the other water projects carrying out a CEA, the primary justification for wastewatertreatment investment are specific outcomes, such as the protection of existing water supply sources, a reduc-tion in the incidence and costs associated with water borne diseases, the protection of downstream watersources, improved agricultural yields, the protection of tourism and amenity values, and so on. Given thatmultiple objectives are desired and the difficulties in measuring the impact of the project on each of theseobjectives, the target chosen is often input based (for example, the quantity of wastewater to be treated) ratherthan outcome based.

While the desired environmental benefits would be generated by setting a fixed target for the quantity ofwastewater to be treated, the CEA cannot help in the decision of what the target should be. Also, the environ-mental impacts of the adopted measures will depend largely on not just the quantity of wastewater treated,but also the level of treatment chosen. A CEA based on the quantity of wastewater to be treated may reject aslightly more expensive treatment option which could generate substantial additional benefits relative to theadditional costs. Alternatively, a CBA might have shown that most benefits could have been achieved with alower-cost option, and that the last increment in benefits is disproportionately expensive.


Overall Results

despite the fact that projects in sectors thattraditionally do not require an economicanalysis were excluded from the review.

Use of valuation techniquesTable 4 shows the valuation techniques used inthe projects reviewed, where the specific

Box 5.Using Environmental Benefits Estimates to Revise Project Design

In many instances, economic analysis is used solely to determine whether an already-designed project shouldbe undertaken or not. This misses an important opportunity to use the results of the analysis to improve theproject design. This is equally true in the case of environmental benefits.

The figure below shows the estimated costs and benefits of proposed reforestation activities in the CroatiaCoastal Forest Reconstruction and Protection Project (which was not in the reviewed sample), by site. The overallanalysis, shown in the last column, indicates that this component, as designed, is beneficial, with a NPV of$790/ha, and an internal rate of return (IRR) of 17 percent. However, this overall result masks the fact that thecosts and benefits of reforestation vary substantially from site to site—even within the same county, benefitscan vary by several orders of magnitude. If only the sites with positive net benefits are included, the averagebenefits almost double to US$1,570/ha, and the overall IRR rises to 24 percent. As a result of this analysis, thecomponent was restructured to drop all the proposed sites that were found to have negative net benefits, andguidelines were developed, based on the characteristics of the high-benefit sites, to select additional sites tomeet the original reforestation target.

Source: Based on data in Croatia Coastal Forest Reconstruction and Protection Project. Staff Appraisal Report No.15518-HR.

technique used is stated or can be deduced (inmost cases, no information is provided onwhich teschniques are used).

The change in productivity approach is usedmostly in irrigation projects, to estimate thebenefits of improved water supplies on

-2,000

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3,000

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Costs Landscape Hunting Wood production Erosion protection

NPV ($/ha)

IRR (%)

860

19

-300 1,370

18

-1,190 1,750

25

1,420

23

-390 -450 1,440

22

1,380

23

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34

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17

Costs

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agricultural yields. Avoided cost methods areused frequently in projects that aim to improveair and water quality. CV is used mostly in thewater supply and sanitation sector, althoughthe WTP studies are often aimed primarily atdetermining the affordability of water tariffsand ensure the financial sustainability of theproject. rather than at estimating consumerwelfare increases. Hedonic analysis is used inestimating the benefits of flood control, bycomparing property values in areas under floodrisk to those in safe areas, although the analysisfalls short of a full hedonic analysis by notcontrolling for other factors.

It may appear surprising that benefitstransfer—in which estimates obtainedelsewhere, by whatever method, are applied tothe case of interest—is used to such a limitedextent. With its low cost, benefits transfer isoften an appealing approach. The appearance ispartly misleading, in that some of the otherapproaches also use benefits transfer to adegree. Thus the CV studies cited in several ofthe projects that rely on them were actuallyconducted for other purposes (three of theprojects reviewed conduct CV surveysspecifically for valuation purposes). Projectsthat use avoided cost methods also rely onbenefit transfer to a certain extent. For example,air pollution valuation studies often take doseresponse functions from US studies and applythem to the target countries, with adjustments.

The limited use of benefits transfer is goodnews, as this approach can often provide verymisleading results. The data in Box 5 illustratethis well: even within a narrowly definedcategory of problems (here, reforestation incoastal forests in Croatia), benefits can differ byseveral orders of magnitude. Taking the netresult obtained at a particular site, or even theaverage result at all sites, and applying itelsewhere would be quite risky. Taking part ofthe result and applying it, with adjustments,may be a better approach. Thus taking thetourist WTP for forested landscapes used in theCroatia study and using it to estimate thebenefits of forest landscape in tourist areaselsewhere may be justified, if tourists in Croatiaand the site of interest are drawn from the samepool. As noted, several of the air quality studiesrely on transferring dose-response functionsestimated in one site to another. This approachmay seem a priori plausible, in that it transfersa medical relationship, but it does not allow forthe many other factors that can affect thatrelationship—such as lifestyle factors that affectexposure (for example, time spent outdoors) orvulnerability (for example, through additionalrisk factors such as malnutrition or smoking).The transferability of dose-response functionshas thus been the subject of considerablecontroversy. For example, Chestnut and others(1997) found that the value of averting illness,as a share of income, is similar in Bangkok andthe USA, but in the same issue of the journal,

Frequency used Environmental benefits valued

Change in productivity 5 Water quality (impact on agricultural output)

Avoided costs 11 Water and air quality improvements

Contingent valuation (CV) 6 Water quality

Benefit transfer 4 CO2 reduction, ‘watershed’ benefits

Hedonics 2 Flood protection

Table 4. Valuation techniques employed in projects reviewed

Notes: Projects may use multiple valuation techniques.


Overall Results

Alberini and Krupnick (1997) found that illnessin Taiwan is poorly predicted by the LosAngeles dose-response function, and call intoquestion the transfer of dose-responsefunctions. Barton and Mourato (2003) comparethe transfer of WTP for water quality asestimated with benefits transfer from a CVsurvey in Portugal to the results of a CV surveyin Costa Rica, and find errors of as much as 100percent, which are not reduced by adjusting forincome levels.

It is useful to compare estimates to the resultsobtained in other studies, as a check. Theestimates obtained in a given project area maywell fall above or below the range of resultsobtained elsewhere without necessarily beingwrong, but such a check would at least trigger acaution light and justify a close re-examinationof data and assumptions.

Additional details on how these valuationtechniques were used is provided in the sector-specific sections below.

Impact of Environmental Valuation

How important are these environmentalbenefits relative to the other benefits generatedby these projects? The answer variesconsiderably from project to project. Table 5shows the effect of including environmentalbenefits on the NPV and IRR of projects thatprovide enough information for this impact tobe computed. Other projects provide estimatesof environmental benefits in ways that can notbe directly compared to total benefits. Forexample, the health benefits generated by theSenegal Water Sector Project are estimated to beabout US$10 million in the early years of theproject, reaching as high as US$114 million inthe project’s final years. However, no

information on the total health benefits areprovided. In the China Water ConservationProject, water savings benefits could be as muchas US$100 million, but are not included in theCBA. In the Chongqing Urban EnvironmentProject, reduced health costs, protection oftourism, and amenity values are estimated to beworth as much as US$482 million. While thisproject undertakes a CEA, these benefits are notfar from the total project costs of US$535million. As this table shows, environmentalbenefits can at times be very substantial, andtheir inclusion in the analysis can raiseestimated project returns significantly. Theresults shown are probably un-representative,however. It seems likely that many projects thatprovide no explicit information on themagnitude of environmental benefits do not doso because these benefits were found to besmall.

The remainder of the review examines theanalysis in those projects which carried out anyvaluation of environmental benefits. Theevaluation of how this valuation was donefocuses on the appropriateness of themethodologies chosen and how they wereapplied. The assumptions underlying thecalculations and the source of values used arealso discussed, where applicable. Evaluating thequality of the analysis proved difficult,however, as PADs often provide only verylimited information on how the valuation wasdone. The discussion is organized according tothe broad sector classifications presented inTable 2. A general description of the types ofprojects financed in the sector is followed by adiscussion of the kinds of environmentalimpacts that arise, and how those impacts havebeen valued in the existing economic literature.This provides a context to evaluate how theenvironmental impacts were valued.



Project Change in NPV (%)

Change in IRR

(% points) Comments

Poland Geothermal 4 Estimated health benefits range from US$20-23 million and represent 95% of total environmental benefits

Krakow Energy Efficiency 60 Not clear whether global benefits are included

China Hubei Hydropower 49 1.9 Additional global environmental benefits of US$13.6 million not included in NPV and IRR

Beijing Environment (Energy Component)

67 Environmental benefits include reduced health costs and land savings (see project discussion in section 5)

Uruguay OSE Modernization 10 Without the environmental benefits, the project’s sewage treatment component is not justified

Cartagena Water Supply 41 IRR with environmental benefits is 16%

Tehran Sewerage 153 8 Higher benefits estimates based on WTP for sanitation and avoided costs. Lower estimates based only on avoided costs benefits

Azerbaijan Irrigation 6 Water supply benefits important in sensitivity analysis

Armenia NRM 130 4 Environmental benefits include both local and global environmental benefits

Mumbai Urban Transport 36

Table 5. Effect of including environmental benefits on estimated project returns


Energy

Twenty five projects, relating primarily toprovision of energy and reform of the powersector, are reviewed for this analysis. Regionaldifferences in the focus of projects in this sectorare fairly pronounced. Fifteen of these projectsconcern improving the efficiency oftransmission and distribution of energy supplyand/or conversion of cleaner energy supplysources (that is, switching from coal to gasboilers). These are primarily in the ECAregion.15 All three of the large scalehydroelectric power (HEP) projects reviewedare in China. Four of the energy projectsreviewed focus on the development ofrenewable energy or small scale HEP, primarilyin context of expanding access to electricity inrural areas. Three projects concern thedevelopment of new energy supply sources inthe oil, gas, and mining sector. The total cost ofthe reviewed projects amounts to US$6 billion—not including the Chad/Cameroon Oil PipelineProject, which by itself amounts to US$3.7billion.

Environmental impacts can often be substantialin this sector, given the scope and nature ofinvestments. However, there seems to be littleconnection between the environmental impactsidentified and discussed in the EA and the CBA.This is true even when the environmentalimpacts are positive. For example, whilereduced emissions of air pollutants arehighlighted in the EA of a majority of the

projects, only four projects incorporate thesebenefits into the analysis. Environmental costs,on the other hand, are evaluated in only oneproject, the Chad/Cameroon Oil Pipeline Project.

Air Quality Impacts of Energy Projects

The burning of fossil fuels is a major cause of airpollution in urban areas. Energy productionfrom coal fired power plants, large boilers, andfurnaces are certainly a main contributor to airpollution in urban areas, as are emissions frommotor vehicles. Many studies have investigatedthe impacts of air pollution, particularly onhealth, and how to value those impacts.16

A detailed study of fossil fuel combustion in sixdeveloping country cities (Lvovsky and others,2000) finds that local health impacts account forapproximately two thirds of the environmentaldamages from fuel combustion. Particulateemissions alone contribute to almost three-quarters of the local health costs. Globaldamages due to the effects of carbon emissionson climate change are the second major sourceof environmental damage, accounting for a fifthof total environmental damages. Based on theseresults, Lvovsky and others propose amethodology for the rapid assessment of urbanair pollution health costs. The methodologyrequires information on annual averageexposure, demographics of the populationexposed, and average annual income (and the

5



associated relevant income elasticities) tocalculate health damages due to air pollution.The study provides a particularly usefulreference point for the health costs ofparticulate matter, which is known to be themajor contributor to health damages associatedwith air pollution.

In rural areas, it is primarily the use of biomassfuels for heating and cooking that is often asignificant source of air pollution. It is estimatedthat as many as 90 percent of rural householdsstill rely on biomass fuels, the use of which canlead to levels of indoor air pollution many timeshigher than international ambient air qualitystandards (Bruce and others, 2000). The burningof biomass fuels produces many substances thatare damaging to human health, such asparticulates, carbon monoxide, nitrous oxides,sulfur oxides (from coal), formaldehyde, andother carcinogenic substances. Women andchildren, in particular, may be exposed to veryhigh levels of these pollutants for 3-7 hoursdaily for many years. In mountainous areas andduring the winter, exposure is even longer.Consistent evidence suggests exposure tobiomass smoke increases the risk of childhoodacute lower respiratory infections, chronicobstructive pulmonary disease, and lungcancer. Recent studies have also foundassociations between biomass smoke exposureand upper respiratory infections, asthma,tuberculosis, low birth weight and prenatalmortality, and eye irritation and cataract (vonSchirnding and others, 2002). A smaller numberof studies quantifying the impacts of exposureto indoor air pollution exist compared tooutdoor air pollution.

The projects examined cover a wide variety ofcontexts, but have in common the primaryobjective of providing additional energy. The

sources of additional energy include efficiencyimprovements in the distribution andtransmission of energy to reduce losses; thedevelopment of renewable energy sources; theconstruction of HEP facilities; and theexploration and development of oil and gasreserves. Quantifying the emission impacts ofalternative energy sources does not appear to bethe major obstacle in the valuation ofenvironmental impacts, at least in the context ofurban air pollution. In fact, several projects doprovide detailed estimates of the expectedreduction of emissions of different types ofpollutants. Few projects, however, take it onestep further and identify the health impacts ofthese emission reductions. Identifying theseimpacts is the crucial step in the valuationprocess, as the methodology to value thebenefits of air pollution reduction in monetaryterms is reasonably well developed. Thediscussion below is intended to illustrate howsome of the projects in the energy sectoridentify the health impacts of emissionsreductions and use this information in thevaluation of the environmental benefitsgenerated by the project.

Valuing Changes in Air Quality

Generally, the benefits of energy projects areestimated by calculating the consumer surplusgenerated by the consumption of the additionalenergy produced. The change in consumersurplus is often proxied by the incrementalrevenues generated by the project. A number ofthe projects examined entail energy efficiencyinvestments that will reduce the amount ofinputs necessary to produce a given amount ofenergy output. In such cases, project measuresalso generate benefits due to the resourcesavings incurred. These resource savings aretypically included in the estimates of the project


Energy

benefits when applicable. If a more efficientproduction process, or the switch to analternative production process (for example, theswitch from a coal to a gas boiler), also resultsin lower emission of pollutants, the avoidedhealth costs can be viewed as just another typeof cost savings that should be considered in theevaluation. While the EA of fourteen projectsemphasize the air quality improvements thatwill result from the project’s measures, only 4projects actually value these benefits.17 Theseare the Poland Geothermal District Heating andEnvironment Project, the Krakow Energy EfficiencyProject, the Beijing Environment Project, and theChina Hubei Hydropower Project.

Outdoor air pollution

The Poland Geothermal District Heating andEnvironment Project provides an interestingexample where the valuation of air qualitybenefits proved significant, as the heat costsavings alone would not have yielded asatisfactory rate of return for the project.18 Thevaluation of the air quality benefits also seemsmotivated by the supplemental fundingprovided by the GEF, which requires that suchfunds finance only the additional costs incurredto reduce carbon emissions which are notjustified by the local benefits incurred. Theprimary objective of the project is to reduce airpollution in a ski resort area in southern Polandthat experiences considerably higher levels ofair pollution during the heating season. This isto be achieved by replacing coal-fired spaceheating boilers with cleaner energy sourcessuch as geothermal heat and natural gas boilers.

The local health benefits resulting from theestimated reduction in the emission of totalsuspended particles (TSP) and sulfur dioxide(SO2) are calculated using a dose-response

model developed by the World Bank (Hughesand Lvovsky, 1998). To value the expectedreductions in mortality and morbidity thatresult from the project’s emission reductions,the analysis uses estimates developed in theUnited States based on the costs of health care,wage rates, and the WTP to reduce the risk ofdeath. These values are adjusted to reflect thedifferences in income levels between Polandand the United States. In addition to the healthimpacts, the benefits from reduced air pollutionin improving the attractiveness of the area forboth visitors and residents are also included.The estimated health benefits, however,represent over 95 percent of the totalenvironmental benefits, which amount tobetween US$20-23 million in NPV terms. Itwould have been of interest to know how theseenvironmental benefits compared to the heatcost savings benefits, but this information is notpresented anywhere in the PAD.19

Two other projects, similar in spirit to thePoland project discussed above, replace coal-fired boilers with oil and gas boilers. One is theKrakow Energy Efficiency Project, also in Poland.While no information is provided on how theenvironmental benefits were valued, they aresaid to amount to US$9 million, or about 15percent of the discounted net benefits generatedby the project. The environmental benefits willresult from annual energy savings equivalent to73,000 tons of coal, an amount equivalent to 10percent of total fuel consumption in 2000. Itappears the environmental benefits calculatedinclude both the local benefits of improved airquality and the global benefits of reducedgreenhouse emissions.20 The BeijingEnvironment Project also values the healthbenefits from reduced air pollution from boilerconversion to natural gas. The air quality modeluses predicted emissions reduction for TSP and



SO2, since no reliable estimates of ultra fine

particulate matter (PM10) reduction could be

made. The project acknowledges that since

PM10 are the most damaging to human health,

the health damages are underestimated.21

The China Hubei Hydropower Project entails the

construction of four small or medium HEP

stations to replace 226 MW of energy being

produced from coal fired units and gas turbines

units. This would result in an average annual

reduction of 4,400 tons of SO2, 1,000 tons of

TSP, 2,200 tons of nitrogen oxide (NOx), and

704,900 tons of CO2 emissions. These emissions

reductions are estimated to generate US$21.9

million of local environmental benefits and

$13.6 million of global environmental benefits,

in NPV terms (but no details are given on how

these estimates were made).22 The presentation

of the project’s rate of return with and without

the inclusion of environmental benefits is

particularly helpful.

It could be argued that when the projectbenefits, the additional consumer surplus andresource savings incurred, are enough to justifythe project costs, there is no need to estimate theenvironmental benefits for the analysis.However, different project alternatives underconsideration may have different impacts onthe amount of pollutants emitted. Nearly allprojects reviewed provide evidence of carryingout a least cost analysis to justify the chosenproject alternative, as it is standard practice inthe energy sector to consider both investmentand operating costs of alternatives to meet thesame energy requirements. However, there isno evidence to suggest that this comparisontakes into account the environmental impact ofdifferent alternatives. Examining the pollutionemission impacts of alternative energy solutionsshould clearly receive more emphasis in theevaluation of energy projects. Whenappropriate, the choice between alternativesmay necessitate the consideration of theassociated health impacts due to differentemission scenarios.

Box 6.Valuing Environmental Costs in the Chad/Cameroon Oil Pipeline Project

The Chad/Cameroon Petroleum Development and Oil Pipeline Project supports the construction of drilling produc-tion wells and other infrastructure in Chad and an oil pipeline to transport the oil to the coast of Cameroon tobe exported. The financing for the project includes US$92.9 in IBRD and US$400 million IFC loans. Adding theUS$2.2 billion from private oil companies and other sources of financing, the total cost of the project stands atUS$3.7 billion. The massive scale of activities supported by this project has certainly been one of the factorscontributing to concerns regarding its potential negative environmental impact.

The project is expected to generate substantial benefits, in terms of oil revenues, for both countries. The devel-opment of the oil exploration capacity in Chad and the pipeline to transport it in Cameroon are expected togenerate revenues worth US$463 million for Chad and US$144 million for Cameroon, in present value terms.By comparison, the present value of incremental environmental and social costs are estimated at less thanUS$10 million for both countries. The implementation of environmental management plans cost an additionalUS$15 million to each country. However, even with these environmental management plans, additional neg-ative impacts could impose a cost to the countries of Chad and Cameroon. The costs identified and valued inthe CBA of the project include: oil spill costs, agriculture production losses, livestock fodder losses, and forestand bush product losses. These costs amount to approximately US$13.5 million and some would be compen-sated under the agreements with the oil producing consortium (for example, the clean up costs in the event ofan oil spill).


Energy

Indoor air pollution

Three of the projects reviewed focus onincreasing access to electricity in rural areas: theVietnam Rural Energy Project, the BangladeshRural Electrification and Renewable EnergyDevelopment Project and the Sri Lanka RenewableEnergy for Rural Economic Development Project.All three projects partly support thedevelopment of some form of renewable energysource (hydropower and/or solar), in additionto providing access to electricity from theconventional main grid lines. It is expected thatthese energy sources will replace less efficientand more expensive sources, such as kerosene(for lighting), diesel, and batteries. The potential

impact of this switch in energy sources onindoor air pollution is only briefly mentioned.The rate at which households will switchenergy sources is a frequent source ofuncertainty in such projects. Clearly theenvironmental benefits generated, if any, willdepend on the extent to which householdscontinue to use biomass fuel for cooking andheating. Only if electricity service becomesreliable and affordable enough could it beexpected to replace the use of biomass andmake significant contributions to reducingindoor air pollution. Therefore, it may be thatthe impact of these projects on reducing indoorair pollution is very difficult to predict.


Transportation

Most of the projects in this sector consist ofconstruction, rehabilitation, and/ormaintenance of roads, rails, and ports. Whensubstantial construction is involved, theenvironmental screening process classifies suchprojects as requiring a full EA. Of the 16transportation projects reviewed for thisanalysis, 13 require a full EA and only 3 arecategorized as only requiring a partial EA. Thetotal cost of the 16 transportation projectsreviewed amounts to US$5.7 billion, or aboutUS$354 million per project.

Despite the magnitude of the investmentsinvolved and the EA status of a majority of theprojects, the EA of only 6 of the projectsreviewed concludes that there are significantenvironmental impacts and raise specificconcerns. Some of the environmental impactslisted are the possible negative impact of projectmeasures on air pollution and on sensitiveecological areas. Construction related impactsare generally addressed by establishingenvironmental management plans, if they aretemporary, localized, and amenable tomitigation through appropriate measures. Therelevant costs incurred are part of the overallbudgeted project costs (see Box 2), but may notnecessarily be subjected to the CBA carried outby the project. The EA explicitly foreseespositive environmental impacts, in the form ofreduced air pollution, in only two of theprojects.

Environmental Impacts of TransportationProjects

The major environmental impacts oftransportation projects are related to land usechanges and air pollution. The impact on landuse changes will depend to a large extent onwhether the project under considerationinvolves new construction or just rehabilitationand maintenance of existing infrastructure. If aproject involves new construction, the potentialenvironmental impacts would ideally beidentified during the design phase of the projectand some procedure to minimize adverseimpacts chosen. Even so, some direct impacts ofconstruction and the choice of site may occur.To the extent that land acquisition andcompensation for resettlement takes place,some of these costs are reflected in the projectcosts incurred. In addition to the directenvironmental impacts, new infrastructure,particularly roads, may also cause indirectenvironmental impacts by providing access toareas previously undeveloped. These indirectimpacts may be even more damaging than thedirect impacts of the project. Efforts to identifyand mitigate such indirect impacts are thereforejust as important. But as mitigation ofenvironmental impacts is costly, the costs andbenefits of such measures should be assessed aswell (Belli and others, 2001).

For transportation projects where theinfrastructure already exists, most direct and

6



indirect environmental impacts are likely tohave already occurred. The majorenvironmental impact of rehabilitation andmaintenance of existing transportationinfrastructure is therefore related to the impactof traffic volumes on air pollution, noise, andvibration. For road improvements, however, theimpact of higher traffic volumes on airpollution is difficult to predict a priori. Roadimprovements may reduce congestion and soreduce emissions per vehicle, as less time isspent idling or at low speeds. However, thesesame improvements are likely to divert trafficfrom other modes of transportation and togenerate additional traffic. Most models used tovalue the benefits of transportation investmentswere developed primarily to estimate vehicleoperating costs savings and passenger timesavings. However, most models can nowprovide some estimate of emission impactsbased on predictions of vehicle miles traveledby different types of vehicle as a result ofspecific transportation investments. Theinformation on the emissions impact of projectmeasures can then be used with other data,such as air quality and respiratory illness data,to quantify the environmental impacts of theproject. The Senegal Urban Mobility ImprovementProject, discussed below, provides one exampleof how this can be done.

The importance of valuing the air pollutionimpacts of transportation projects is highlightedin a World Bank study of air pollution in sixmetropolitan developing country cities. In thatstudy, motor vehicles are identified as thesecond largest source of pollution damages. Incities where the mix of fuel use ispredominantly petroleum based, vehiclesaccount for about half of the totalenvironmental costs estimated. Health impacts

account for the largest share of these damagesacross all cities (Lvovsky and others, 2000).

Valuing the Environmental Impacts ofTransportation Project

The main benefits valued in transportationprojects are resource savings—generallyreduced operating costs and passenger timesavings, using for the economic analysisstandard traffic management models such asthe World Bank’s Highway Design andMaintenance standards model (HDM III), orsimilar models.23 In a few cases, the benefits ofincreased safety and reduced emissions are alsovalued. The three projects which value reducedemission benefits are the Senegal Urban MobilityImprovement Project, the Mumbai Urban TransportProject, and the São Paulo Metroline 4 Project.

Air quality impacts

The Senegal Urban Mobility Improvement Projectis the only project that explains how thebenefits of reduced air pollution are estimated.It is also the only project that values air qualitybenefits of road rehabilitation investments. Toestimate the associated health benefits fromreduced air pollution, data on Dakar’semissions and air quality are used inconjunction with data on the incidence ofrespiratory illnesses. Emissions estimates from atransportation model used to evaluate theimpact of the project’s impacts establish that thepublic transport sector contributes up to a thirdof the air pollution in the city. The Dakar areaaveraged 25,150 yearly respiratory relatedillnesses. Health benefit calculations are usuallybased on dose-response functions, whichprovide estimates of how changes in pollutionlevels change the risk of specific respiratorydiseases. As precise data on the average level of


Transportation

pollution in Dakar are not available, the benefitcalculations are based on the assumption thatproject measures will lead to a five percentreduction in the prevalence of respiratoryillnesses due to transport. Presumably, theaverage cost of treatment for the reducednumber of respiratory illnesses is used to arriveat a NPV of about US$6,240 for the healthbenefits generated by the road andrehabilitation component of the project.Compared to the other benefits generate, the airquality benefits are small and amount to onlyone percent of the total benefits estimate for thiscomponent of the project.

Both the Mumbai Urban Transport Project and theSão Paulo Metroline 4 Project estimate thebenefits of reduced air pollution associated withproject investments in railway transportation.The Mumbai project also has a roadrehabilitation component, for which estimatesof reduced vehicle emission are obtained.However, the benefits of reduced emissionsfrom the road component are not quantifiedand therefore not included into the CBA of theproject. Neither project provides anyinformation regarding how the reducedemission benefits are estimated.24 For theMumbai Project, the benefits of reduced airpollution are the second largest source ofbenefits, amounting to 17 percent of the totalbenefits from the rail component. Thesignificance of these benefits to the project’soverall benefits certainly warrant moreinformation on how they are calculated. In theSão Paulo project, the benefits of reduced airpollution are a result of a reduction in totalkilometers of bus travel and are considered“minor” benefits. We can only conclude fromthe available information that those benefitsamount to less than 10 percent of the project’stotal benefits.25

Land use impacts

In three of the projects reviewed, the Goias StateHighway Management Project, the Grand TrunkRoad Improvement Project, and the Gujarat StateHighway Project, concerns regarding the directand indirect environmental costs of projectmeasures are raised in the EA report. Projectmeasures to mitigate these impacts are requiredfor compliance with operational safeguardpolicies instituted by the Bank. However, evenwith mitigation measures in place, someadverse impacts may still occur as a result ofthe project. An attempt to measure themagnitude of the potential environmentaldamages in question would be informative toassess the appropriate level of measures tomitigate these impacts.

For example, in the Goias project, the EA findsthat paving one particular road could facilitateaccess to an area of rare natural beauty, thusincreasing the risks of degradation in the area.To mitigate these impacts, the projectestablishes a protected area to limit access to thearea and, with appropriate installations, protectits natural stone bridges, waterfalls, andinteresting geological formations. A CV studyto estimate the level of visitors to the area andhow much they would be willing to pay to visitthe protected areas could help determine howmuch should be spent in protecting this area.The concerns raised in the other two projectsmentioned relate to the proximity of the projectroads to existing protected areas. Some of themitigation measures adopted in these projectsinclude a 10 meter thick band of roadsideplantation on either side of the highway (to actas a buffer for noise and air pollutiongenerated), physical barriers to prevent thedumping of wastes alongside the highway, andthe establishment of a contingent fund for



further impact studies or further mitigationmeasures.

It is important to incorporate these indirectenvironmental impacts in the evaluation oftransportation projects. Indeed, an earlierassessment of the impacts of road maintenanceon the environment concludes that the“environment is seldom taken into account in

the design and implementation of roadmaintenance” (Lantran, 1994). The assessmentargues that the marginal costs of maintenanceworks that generate significant environmentalbenefits are often low. Economic analysis canhelp determine when that is indeed the caseand therefore such work should become a partof a project.


Agriculture, Fishing, and Forestry

A wide variety of issues are addressed byprojects in this sector, such as irrigation anddrainage, crop and livestock production, landtitling, research and extension, and forest andother natural resources management. Theprimary objective of most projects in this sectoris to increase agricultural production. The valueof the additional agricultural output is generallythe only benefit valued and often used as aproxy for the overall benefits generated byproject measures. The increase in agricultureproduction may be a result of direct measures,such as rehabilitating or expanding irrigationinfrastructure, or indirect conservationmeasures that may increase productivity oravoid future losses.

Most of the project measures in this sector arelikely to produce significant external impacts.The financing of irrigation infrastructure, forexample, may lead to increased use of fertilizersand pesticides, thereby polluting waterresources for downstream users. If drainagesystems are not properly designed ormaintained, increased use of irrigated watermay lead to salinization and waterlogging. Onthe other hand, increased productivity can leadto less pressure to convert other land toagricultural cultivation (Shively and Pagiola,forthcoming). Reforestation and otherconservation activities may generatedownstream benefits, such as reduced siltationand regular water flows, as well as global

benefits in the form of carbon sequestration andbiodiversity conservation. In irrigation projects,most of the benefits generated accrue to thelandowner, while most of the resultingenvironmental impacts are externalities. Incontrast, in forestry and NRM projects, most ofthe costs are incurred by the landowner, whilethe benefits generated are externalities.

Sixteen of the agriculture projects reviewedinvolve irrigation and drainage infrastructureinvestment. The total cost of these projectsamounts to US$1.6 billion. About half of theother 16 projects concern forestry issues, whilethe rest are relate to general land managementissues, such as agriculture research andextension, community or productivepartnerships, and land access/titling. Theseprojects amount to US$1 billion.

Irrigation and Drainage

Irrigated agriculture accounts for 60 to 80percent of total water use (Tiwari and Dinar,2002). The amount of irrigated land worldwidehas tripled over the last five decades,amounting to more than 275 million hectares in2000. The development of irrigation hascontributed to a substantial increase in foodproduction. It has also generated a polarizeddebate concerning the social and environmentalimpacts of irrigation developments. As onestudy concludes, the “inadequate information

7



on estimates of the full range of costs andbenefits and the overall impacts of irrigationhas been a major constraint in resolving thiscontroversy”(Hussain and Bhattarai, 2002). Theirrigation projects reviewed involve therehabilitation of existing irrigation and drainagesystems rather than the construction of newirrigation infrastructure. Therefore, most of theenvironmental impacts of the infrastructureitself, such as conversion of land intoagriculture and disturbance of natural habitats,have already occurred. The focus here is onwater use decisions and the environmentalimpacts of water used for irrigation.

Water is difficult to value. Water use generatesboth commodity and environmental values, andthese values tend to be site-specific. Marketprices for water as a commodity, for privateconsumption or as an intermediary good, areoften non-existent or subject to pricingdistortions. Water’s environmental values andexternal impacts are rarely priced (Young,1996). Estimating these values is becomingincreasingly important as demand for waterincreases. Increasing demand for water has alsogenerated significant debate on the appropriatepricing of water to encourage its efficientallocation (Tiwari and Dinar, 2002).

The concept of water’s ‘full economic costs’ isuseful in the discussion of efficient waterallocation. These costs include the use,opportunity, and environmental costs ofallocating water for a particular purpose.26

Water should be priced so as to reflect its fulleconomic costs. In the case of irrigation, the usecosts are the costs associated with theconstruction, maintenance, and operation ofany infrastructure for storing, treating, anddistributing the water (Briscoe, 1996). Therecovery of use costs have become a central

focus of the design of most pricing schemes forirrigation projects.27 In general, these are theonly costs included in the CBA of irrigationprojects.

There is no doubt that estimating theopportunity and the environmental costs ofwater is a difficult task. However, ignoringthese costs is “a matter of huge practicalsignificance when it comes to irrigation”(Briscoe, 1996:17). The opportunity cost of waterused for irrigation is generally high because thesector uses large volumes of water. In contrast,water for domestic consumption is a high-value, low-volume use. The opportunity costs ofwater in supporting natural ecosystem’sfunctioning will depend on the specific set ofcircumstances, but can be potentially large—asin the case of the decline of the Aral Sea, forexample. The exclusion of the opportunity andenvironmental costs of water in the CBA ofirrigation and drainage projects could lead to asignificant overestimation of the benefits ofsuch projects where water scarcity is an issue.

Irrigation and drainage investments may affectsoil and water quality, both positively andnegatively. Some of these impacts, such assalinization and waterlogging, can have a directimpact on agricultural productivity. Otherimpacts may affect other water users, forexample, when groundwater levels and theinflow of water to surface water bodiesdecrease, and water quality deteriorates due toincreased use of agrochemicals. In many cases,projects in this sector are addressingenvironmental problems caused by the existingirrigation systems, such as salinization orwaterlogging, due to improper design or lack ofmaintenance of drainage infrastructure. Ifimplemented judiciously, these projects aregenerally expected to have a positive impact on



the environment. That is not to say that thereare no environmental risks associated withthese projects. Quite often the EA conclusion isthat the environmental benefits expectedoutweigh any negative impacts that may resultfrom the project.

Most projects value irrigation benefits based onthe estimated net value of agricultural outputwith and without irrigation water. Theavailability of irrigation water may allowincreased use of fertilizer and improved seedvarieties, leading to higher yields on a givenparcel of land; cultivation of additional land;and a switch to higher value crops. Thedifference in revenues between the twoscenarios, after all input costs other than waterare taken into account, is the value of irrigationwater. Most models employ a crop budgetapproach, although more advancedmathematical programming techniques aresometimes used. The crop budget approach,sometimes also called the “residual imputation”approach (Southgate, 2000), is used in nearly allprojects reviewed.

The residual imputation approach provides anestimate of the benefits of irrigation to society aslong as the full economic costs of water aretaken into account. In practice, however, mostprojects only consider the direct costs(investment and operation and maintenance) ofproviding the water (that is, the user costs). Thepotential impact of a project on the availabilityof water for other uses is sometimes discussed,but not quantified and incorporated into theanalysis.28 One exception is the AzerbaijanRehabilitation and Completion of Irrigation andDrainage Infrastructure Project, which values thewater supplied by the project to the city ofBaku. The project’s rehabilitation of theirrigation canals will ensure that water

continues to be delivered to the city’s mainreservoir, which serves 40 percent of thepopulation. Without the benefits of the watersupply, the rate of return for the specific projectcomponent falls by 6 percentage points to 17.3percent. In some instances, however, theimpacts of irrigation projects would be toreduce the amount of water available for otheruses. Several projects, for example, raiseconcerns about the possible negative impact ofirrigation on groundwater level. Since suchimpacts are generally difficult to quantify,projects generally just require that theseimpacts be monitored during implementation.

Project measures that enhance the efficiencywith which water is delivered to an irrigationdistribution system and distributed in the fieldreduce the amount of water that is not usedproductively, thus increasing the supply ofwater available for irrigation without reducingthe supply of water for other purposes. This isthe primary objective of several of the irrigationprojects reviewed. For example, the YemenIrrigation Improvement Project estimates that theamount of water saved due to project measureswould allow the area irrigated to increase by 10to 35 percent. The project analysis argues thenet value of the additional agricultural outputproduced in those areas reflects the value of thesaved water. If this is the highest value use ofthe water, then it is correct to say that theopportunity cost of the water used has beentaken into account. In the China WaterConservation Project the value of the water savedis estimated from the avoided costs to obtainthe same amount of water from an alternativesource. However, because of the uncertainty inthe prediction of the amount of annual watersavings due to project measures, these benefitsare not included in the CBA of the project.



The impact of pricing mechanisms in increasingthe efficiency with which irrigation water isused is discussed in only one project, theTajikistan Rural Infrastructure RehabilitationProject. The project incorporates into theanalysis the impact of fees and managementpractices in reducing the per hectare waterrequirements of different crops.29 Whether thegradual increase in irrigation fees generates theexpected reduction in water consumption willof course depend on reforms being fullyimplemented and on collection of these feestaking place.30 While a few other projects alsoincorporate gradual increases in irrigationwater charges, it is not clear whether these arevolumetric based charges which would lead toanticipate reductions in water use. Theestablishment or increase of fees to cover theoperation and maintenance costs of irrigationand drainage infrastructure are important toensure the financial sustainability of a project’sinvestments. The potential of pricingmechanisms in mitigating some of the negativeenvironmental impacts due to water overuse isalso important to consider in the analysis ofirrigation and drainage investments. Box 7

discusses the importance of fees in the amountof water used and as a source of revenue tomaintain irrigation systems.

A reduction in water use can have significantenvironmental implications—particularly inareas that are prone to salinization andwaterlogging due to poorly drained soils.Maintenance of appropriate drainageinfrastructure is also an important element tomitigate the problems associated withsalinization and waterlogging caused orexacerbated by excessive irrigation. Since bothof these problems directly affect crop yields,project benefits are estimated by the differencein the value of the agricultural output producedwith and without drainage improvements. TheEgypt National Drainage Project, for example,assumes that the benefits of subsurfacedrainage improvements would immediatelyreduce waterlogging (and therefore increasecrop yield within 2 or 3 months), while theeffects of the reduction of salinity would beginto take effect on crop yields two years after theinstallation of subsurface drainage. Theestimated increase in crop yields varies from 5

Box 7.Irrigation in Central Asia

Substantial investments in irrigation during the Soviet era have led to a massive dependence on irrigatedagriculture in the Central Asian republics in the Aral Sea Basin. Agriculture, almost all of which is irrigated,provides 20–40 percent of GDP and employs some 28 million people. None of these irrigation systems chargedmore than nominal water fees, resulting in extremely high levels of water use, with water applications perhectare 50 percent higher than comparable countries such as Pakistan. The environmental consequences ofthis system have been well documented. They include, most spectacularly, the drying up of the Aral Sea, butalso substantial salinization problems that affect downstream agriculture and the health of riparian popula-tions. Over the last decade, lack of funding has resulted in plummeting investment in irrigation and drainagesystems, and near-collapse of maintenance. As a result, as much as 70 percent of water abstracted for irrigationis wasted before it reaches the fields, and many drainage systems are almost inoperable. Unreliable or scarcewater supply have reduced the area irrigated substantially, usually affecting poorer households dispropor-tionately.

Source: Pagiola and others 2002.



to 20 percent, depending on the type of cropand the location where it is planted. Mostprojects, however, are not explicit on thespecific causes of the expected increases in cropyields. The impact of better drainage inreducing salinization and waterlogging, as wellas other factors influencing crop yields, such asthe total area irrigated, cropping intensity, andtypes of crops grown, are jointly evaluated.

Forestry

The loss of forest cover over the last fewdecades has been a cause of concern (FAO,2001). Forests provide many valuableenvironmental services at the watershed level(reduced sedimentation, stream flowregulation), at the national level (ecotourism,scenic values), and at the global level (carbonsequestration, biodiversity conservation).Valuing these benefits is difficult because mostof these services have not been traded in amarket and because of the limitedunderstanding of the biophysical relationshipsinvolved (Chomitz and others, 1998; Bishop,1999). Forests and other natural ecosystems alsoprovide benefits by supporting the growingnature-based tourism industry. These benefitscan be valued using the travel cost or CVmethods—but again the benefits generated arevery site specific. Forests also provide manyglobal benefits, as discussed in chapter 9.

Some of the environmental benefits of naturalresources management and watershedprotection measures are site specific anddepend not just on physical characteristics, suchas rainfall pattern and soil types, but also on thenumber of downstream users affected and howthey are affected. Several studies have tried toestimate these values and emphasize that thevalues derived are highly dependent on the

specific conditions of the site under question(Chomitz and Kumari, 1998; Pattanayak andKramer, 2001).

Generating these environmental benefits areamong the objectives of most of the forestry andNRM projects reviewed. Measures supportedby projects to achieve these goals vary andinclude, for example, providing secure landaccess to poor farmers, developing/demonstrating sustainable farming activities,restricting activities in protective buffer zones,and improving environmental regulations andmanagement practices to reduce forest fires.Still, it is possible that some of the activitiespursued by the projects will createenvironmental risks. The EAs of about half ofthe projects reviewed acknowledge and listsuch risks.

Natural Resources Conservation

Like the irrigation projects discussed above,most forestry and NRM projects use farmmodels to value the benefits of project measuresby the changes in income with and without theproject. Several factors contribute to thepredicted changes in productivity. The analysisdoes not usually separate these effects. Forexample, in the Karnataka Watershed DevelopmentProject, the impact of conservation activities areexpected to increase moisture retention in soils,reduce soil erosion and the loss of nutrients,and increase groundwater tables. Along withmeasures to encourage improved croppingsystems, including appropriate tillage, the useof improved seed varieties, and balanced use offertilizers and pesticides, yields are expected toincrease by 10 percent for rainfed crops and 15percent for irrigated crops. Thus the effect ofimproved NRM is embedded in the estimatedimpact of a broader package of interventions.



Two of the 16 projects reviewed, however, dovalue the environmental benefits associatedwith reduced soil erosion and increased waterflow due to project activities directly. These arethe Armenia Natural Resource Management andPoverty Reduction Project and the Papua NewGuinea Forestry and Conservation Project.31

Valuing these benefits involves some judgmentas far as what values to use because impacts aresite specific and depend on the types ofdownstream uses affected. In the Armenia NRMProject the watersheds where project activitiestake place play an important role in providingwater for agricultural production and HEPgeneration in downstream areas. The projectuses a value of US$10 per hectare for thewatershed benefits of newly established forestsand US$5 per hectare for the benefits of newtree plantations and the rehabilitation andimproved management of pasture land. Thesevalues are based on a review of the literaturethat showed hydrological and ecosystem

services provided by forests ranging in valuefrom US$7 to $20 per hectare.32 This is anexample of the use of Benefits Transfer. Theestimated environmental benefits, includingcarbon sequestration benefits, amounts toUS$0.9 million, or about 10 percent of totalproject benefits.

The Papua New Guinea project, on the otherhand, involves moving from large scale loggingto sustainable forest management by smalllandowners. The value of improved soil andwater management under sustainable forestmanagement is assumed to be US$2 per hectareof forest area logged for a period of 8 years.After the 8 years, the benefits are assumed tofall to zero. There is no discussion on the basisfor the assumptions used. It is not possible tojudge how significant the environmentalbenefits are relative to other benefits generatedby the project.


Water, Sanitation, and FloodProtection

The analysis of the environmental impacts ofprojects in the water, sanitation, and floodprotection sector differs somewhat from that inmost other sectors, where environmental costsand benefits are often externalities caused byproject activities. The expected benefits of mostprojects in this sector are often directimprovements in environmental quality—improvements in water quality, or reducedpollution from wastewater discharge, forexample. Although valuing these benefits canbe complicated, it is essential to justify projectinvestments as they are the primary objective ofthese projects.

Of the 35 projects reviewed, 30 carry out a CBAand 5 a cost-effectiveness analysis. Twenty threeprojects have both a water supply and asanitation component, 6 have only a sanitationor sewerage component, and 6 deal primarilywith flood protection and waste disposal andmanagement. The total cost of these projectsamounts to US$4.8 billion, with about 95percent of that amount going to projects in theurban sector. More than in any other sector, avariety of valuation techniques are employed tovalue environmental impacts.

Water Supply and Sanitation

The valuation of water for domesticconsumption tends to focus on the benefits ofincreasing the availability, reliability, andquality of drinking water, even though the

irrigation and industrial sectors can also benefit.Increasing water scarcity has also highlightedthe importance of water’s environmentalvalues—its role in maintaining ecosystemfunctions and providing recreational benefits.The impact of water supply projects on wateravailability are generally not very significant,particularly when compared to irrigationprojects. Water supply investments are oftenaccompanied by sanitation and/or seweragetreatment investments, and the impacts of suchprojects on water quality can be verysignificant. While the disposal of householdwaste is only one of the sources of pollutionaffecting water quality, sanitation and sewagetreatment projects are often a key component toachieve reductions in the pollution levelsaffecting surface water bodies and groundwatersources.

The relative merits of different methodologiesto value improvements in environmentalquality have been the topic of considerabledebate in the environmental economicsliterature. This debate has led to substantialdevelopment in the non-market based valuationtechniques, such as CV, over the last twentyyears (Griffin and others, 1995). Several of thewater supply and sanitation projects carry outWTP studies, often as a part of the socialassessment to evaluate the distributional impactof proposed tariff changes or to assess theproject’s financial feasibility. In some cases, theWTP estimates are used to value the benefits of

8



improved water quality. The reliability of WTPestimates depends on the survey accuratelydescribing the exact nature of the service to beprovided. WTP values also depend on thespecific context, such as the availability ofalternatives and relative ranking of priorities.

For example, a CV study for the Philippinesfinds that households in Davao have a low WTPfor wastewater treatment to improve the waterquality of rivers and sea. The improvements inwater quality are aimed primarily at making apopular beach near the community safe forswimming and other recreational activities. Thelow WTP values may in part reflect the fact thathouseholds take private measures to avoidsuffering damages from polluted water and thepopulation’s greater concern for otherenvironmental problems, such as solid wastedisposal (Choe and others, 1996). The value ofimproved water quality at the popular localbeach in the Philippines study is also estimatedusing the TCM. Both methods produced similarresults, which is reassuring. However, that neednot always be the case. A study of theenvironmental costs of water pollution inChongqing, China, for example, finds that themethodology employed in valuation cansometimes produce very different results. Usingthe human capital approach (which calculatesthe discounted value of production lost when aperson dies prematurely) to estimate the cost ofpremature deaths, health damages areestimated to account for 18 percent of the totaldamage costs from water pollution. Damages toagriculture and fisheries account for a majorityof the costs. However, when the implied WTPto reduce the risk of death from wagedifferential studies is used, health damagesbecome 76 percent of the total damages, andagricultural damages fall to 18 percent of totaldamages (Yongguan and others, 2001). Whileprojects should always provide clear

information on what methodologies underlietheir calculation of benefits, this is particularlyimportant in cases where alternativemethodologies can produce dramaticallydifferent results. This can often happen with thevaluation of health benefits.

The choice of valuation methodology appliedoften depends on the specific context ofprojects. Of the 23 water supply and sanitationprojects, 7 are in rural areas. The projects inrural areas value the benefits of water supplyusing the avoided costs of obtaining water fromalternative sources. The time savings fromcollecting water are often the main source of thequantified benefits. The benefits of additionalconsumption are also calculated, but aregenerally of secondary importance. The benefitsof increased water quality, often one of themain motivations for most rural water supplyand sanitation projects, are rarely assessed.Only one of the 7 rural projects reviewed, theKarnataka Rural Water Supply and SanitationProject, values the benefits of improved waterquality by estimating the reduced health costsincurred.33 How these benefits are estimated isexplained in more detail in Box 8.

In urban settings, the valuation of water supplyand sanitation benefits tends to focus primarilyon estimating the incremental revenuesgenerated by the project. The calculation ofincremental revenues is mostly based on theestimated expansion of water supply andsanitation coverage with and without theproject.34 Improvements in water quality arelikely not captured if the analysis focuses solelyon incremental revenues,35 particularly whencurrent water and sanitation tariffs are used tocalculate incremental revenues. The ColombiaWater Sector Reform Assistance Project, however,uses data from a household survey conductedby the government’s statistics department to


Water, Sanitation, and Flood Protection

estimate a demand function for water supply.The estimated demand curve is then used topredict household consumption with theproposed tariffs. Although the project isexpected to improve water quality, the analysisassumes water quality would remainunchanged.

Because water supply and sanitation servicesare often bundled, particularly in urban areas,separately estimating the benefits of eachcomponent may not always be possible.Evaluating the project as a whole, as in case ofthe Colombia project, may be the onlyalternative. However, in instances where these

are distinct components, the analysis should tryto assess the economic feasibility of eachcomponent separately.36 Valuing the benefits ofwater supply generally does not present aproblem. However, the benefits of sanitation,particularly sewage treatment, are oftenregarded as being “too difficult” to value. Theprojects discussed below provide someexamples of how these environmental benefitshave been valued.

The Uruguay Modernization and SystemsRehabilitation Project provides perhaps theclearest example of how important a fulleconomic analysis can be. A ‘short-cut’

Box 8.Valuing the Health Benefits of Rural Water Supply and Sanitation

The Karnataka Rural Water Supply and Sanitation Project describes the typical benefits expected for rural watersupply and sanitation projects: the time savings in collecting water, the increased availability and convenienceof water to be supplied, and the health benefits from access to cleaner water. Most rural water supply projectsonly value the time savings and increases in availability of water. This project stands out not just because itvalues the associated health benefits of cleaner water, but because it presents very clearly how each type ofbenefit was calculated.

The health benefits estimates are based on information collected from a survey of 970 households. The surveydata is used to determine the time and treatment costs incurred due to diarrhea and gastroenteritis and theproportion of the population affected by these illnesses. The incidence of those diseases from the survey datais compared with information from other sources, such as health surveys, for validation. The informationcollected is then used to calculate of the morbidity and mortality costs incurred. The calculations of morbiditycosts are based on an incidence rate of 68 per 1000 population for both diseases, treatment costs between Rs 50(US$1.1) and Rs 350 (US$7.6) per episode, direct person days lost of between two and seven days, and indirectperson day losses between one and three days. The lower end of the estimated monetary and time costs are fordiarrhea, while the higher end of these estimated costs are for gastroenteritis. Based on experience from aprevious project, it is assumed the project would lead to a 25 percent reduction in the incidence of diarrhea anda 40 percent reduction of gastroenteritis. The valuation of mortality risk reduction is based on informationfrom a Health and Family Welfare study conducted by the Government of Karnataka during 1996-1998, whichestimated a 1.6 ratio of number of deaths to the number of cases of gastroenteritis. The value of a statistical life(VSL) approach is used to value the reduction of mortality risks for different sex-age groups.

The health benefits generated from improved water quality are likely known to users and their WTP for waterfrom improved sources may capture at least some portion of these benefits. However, since the Karnatakaproject values the incremental water consumed at the cost of provision, rather than household’s WTP, it isunlikely that adding the avoided health costs could lead to double counting. The health benefits are alsogenerated in part by the sanitation component of the project, which will expand access to individual house-hold latrines to 25 percent of the population. The estimated health benefits are therefore attributed to both thewater supply and sanitation components of the project.



economic analysis, which amounted to simplyadjusting financial prices to reflect taxes andsubsidies, was carried out, and led to theconclusion that the benefits of the sewagetreatment plants were not justified. The fulleconomic analysis, however, establishes that thesewage treatment facilities generate significantsocial benefits by reducing the level of pollutionaffecting water quality in the rivers and nearbybeaches.

To value improvements in water quality, theUruguay project conducts a detailed analysis ofwater and sewage tariffs and a householdsurvey. The tariff analysis establishes that thecurrent water tariffs being charged areappropriate to cover the costs of supplyingwater to households, but that the sewage tariffscover the cost of sewage collection but not oftreatment. To assess the benefits of sewagecollection and treatment, a sample of 900households are surveyed about their WTP forthese services. Households without sewagecollection services are asked, through areferendum method, about their WTP forsewage collection. Households with sewagecollection services are asked about their WTPfor sewage treatment. Econometric analysis ofthe survey results is used to derive the demandfor sewage collection and treatment. In eachcase, the mean WTP for these services isbetween 50 to 160 percent more than theaverage tariffs charged. The WTP valuesobtained for sewage collection are between 3.5to 4.5 percent of household income, andconsidered “quite acceptable” costs for theseservices. The WTP values for sewage treatmentare lower, between 1.0 and 1.8 percent ofincome, as might be expected since some of thebenefits generated from sewage treatment areexternalities. The value of these environmentalbenefits are likely still underestimated, as theywill also benefit other people, such as those not

connected to the sewage system or livingdownstream of the rivers. However, thevaluation of some of the environmental benefitsgenerated is enough to justify the inclusion ofthe sewage treatment component in the project.

The Cartagena Water Supply, Sewerage, andEnvironmental Management Project also conductsa similarly detailed WTP survey for sewagecollection and treatment. Approximately 500households are surveyed about their WTP forsewage collection and another 500 householdsare surveyed about their WTP for sewagetreatment. The results of the survey are verysimilar to the Uruguay project, with mosthouseholds willing to pay about 5 percent oftheir income for sewage collection and 1percent for sewage treatment. Theenvironmental impacts of the sewage treatmentwould contribute to the recovery of beaches andenhance tourism activities. A separate study isalso conducted to evaluate the benefits ofimproved water quality, using the TCM. Theresults of this study are not available, however,the analysis provides additional support for theinclusion of the sewage treatment component inthe project.

Several other projects reviewed also conductWTP assessments, but depending on how theinformation is collected, it may or may not beuseful for the economic analysis. The VietnamEnvironmental Sanitation Project, for example,surveys 1,000 households about their WTP forwastewater collection and treatment.37

However, the WTP values derived from thesurvey are not used in valuing the project’sbenefits, as the information elicited in thesurvey is thought likely to only be capturing theprivate benefits of improving the water qualityin the canal, and not the broader publicbenefits.38 An alternative approach to valuingthe project’s benefits is conducted, based on the



avoided cost of using septic tanks.39 However,this approach also provides only a partialassessment of the benefits generated, since itonly values the private savings from theavoided construction and maintenance of septictanks. These benefits, as the project states, “arelikely of only secondary importance in relationto improved public health benefits and generalenvironmental improvements.”

In order to separate private and publicenvironmental benefits, a WTP study must becarefully structured to elicit the information ofinterest. In the Uruguay Modernization andSystems Rehabilitation and the CartagenaEnvironmental Management projects discussedabove, the studies are careful to distinguish thevaluation of the private benefits accruing to thehouseholds from sewage collection from themore public environmental benefit generatedby the sewage treatment component. Knowingwhat benefits a WTP study elicits values for isalso important to avoid double counting when

different methodologies are used to valueproject benefits. For example, the WTP forwater and sanitation services can in part reflectthe expected reduced health costs that resultfrom the provision of safer drinking water andproper sanitation. Therefore, estimating thebenefits of project measures by WTP for waterand sanitation services and the avoided healthcosts as a result of provision of these servicescould lead to double counting. The Senegal LongTerm Water Sector Project may have run into thisproblem, although this is difficult to determinewithout specific information on the exactquestions consumers were asked in the WTPsurvey.

Whereas in the above examples there was achoice between different methodologies tovalue the same benefits, oftentimes projectmeasures generate multiple benefits or benefitsto multiple users. In such cases, differentmethodologies may be used together to valuethese benefits. The Second Beijing Environment

Box 9.Willing to Pay but Unwilling to Charge — Do WTP Studies Make a Difference?

The water and sanitation program in South Asia recently conducted an evaluation of WTP studies in India andthe impact of such studies on the levels of tariffs charged. The study identified eight WTP studies conducted inthe water supply and sanitation sector. Field visits to the locations where four of the studies took place fol-lowed to evaluate the impact of these studies on policy reforms.

Besides generating additional government revenues, the study identifies two reasons why policy makers maywant to assess WTP for water and sanitation and increase those fees accordingly. First, knowledge of consum-ers’ WTP can guide future investments to provide the services that consumers want. Second, it can assist themove towards financial sustainability and independence for the agencies providing these services.

Despite such incentives, the results of the evaluation show a mixed outcome regarding the impact of WTPsurveys. In one instance where tariffs were increased, the increases cannot be attributed to the survey that tookplace, as the results of the survey were not presented to authorities setting water tariffs. Rather, the increase inwater charges was a condition for the city to receive a loan from the housing and urban development govern-ment agency. In the other three cases, tariffs were not increased for political reasons. The study also identifiesinstances where policy reform has taken place in the absence of WTP studies to support tariff increases. Byestimating the costs of alternative supply sources and health damages from existing water supply sources, aconvincing case for policy reform can also be made.

Source: DFID 1999.



Project, for example, uses CV to estimate thebenefits of improved water quality for drinkingpurposes, and avoided costs to estimate thebenefits of improved water quality foragricultural and industrial uses.40 The benefitsto agriculture are based on the expectedincreases in yield from using cleaner water.Yields are assumed to increase by 10 percent inthe areas immediately downstream from thewastewater treatment facility.41 The benefits ofimproved water quality for industry are basedon the avoided cost of treating polluted water toacceptable levels for different types of industrialuses. The costs of water treatment are expectedto increase without the project. 42

The Lebanon Water and Wastewater Project alsovalues the benefits of sanitation services inmultiple ways. First, it estimates the benefitsaccruing to households that will connect to thecentralized system. These consist of the avoidedexpenditures of maintaining on-site sanitationsystems and the higher quality of serviceshouseholds will enjoy by being connected to thecentralized system. Wastewater will be treated,thus improving the quality of water used forirrigation. The net value of the additionalagricultural output produced with treatedwastewater is the second source of benefitsestimated in the analysis of the sanitationcomponent.43 A similar approach is alsoadopted in the Tehran Sewerage Project. Whilethese projects do not value all theenvironmental benefits associated with projectmeasures, the valuation of some the benefitsgenerated is at least better than no valuation atall.

A variety of environmental valuationtechniques can be applied to value the benefitsof improved water quality. The discussionabove highlighted some of the issues inchoosing among alternative methodologies and

integrating different methodologies whenvaluing multiple benefits. These issues areimportant, particularly when CV methods areapplied. CV methods can potentially be veryuseful to value some of the perceived‘unquantifiable’ environmental benefitsgenerated by projects in this sector. Conductingthe surveys and analyzing the data, however,can be quite costly and time consuming. Table 6summarizes the findings of the projects thatvalue these benefits and other results from theavailable literature. The Uruguay ModernizationProject and the Cartagena EnvironmentalManagement Project’s findings are very similar,which is not surprising given that both projectsare estimating essentially the same type ofbenefits in a very similar context. These twoprojects’ results are also in line with estimatesof WTP from project analysis carried out by theInter-American Development Bank (IDB) forsimilar sewage projects (Russell and others,2001). However, country and project specificvariation in the IDB project sample is sosignificant that the report warns against usingthese simple WTP averages for benefit transfers.The WTP values reported for various EAPcountries in Table 6 further illustrate thepotential pitfalls of simple WTP value transfer.The WTP values are much lower, even whenadjusted for income. Comparison is alsodifficult because each project or study addressesdifferent situations. Great care must thereforebe taken when transferring WTP values fromone study or project to another. However, as thenumber of CV studies carried out increases,useful benchmarks may begin to be established.

Flood Protection

The projects with flood protection componentsreviewed consist primarily of drainageimprovements to prevent the loss of life andreduce the damages incurred in the event of a



flood. In addition to damages to physicalstructures and from the loss of livestock andagricultural output, all projects recognize thatfloods create significant environmental andhealth risk. These environmental and healthrisks are most severe when sewage networksreceive both wastewater and storm wateroverflow. The still waters after a flood can also

cause the spread of waterborne diseases byproviding a breeding ground for snails andmosquitoes.

Three flood protection projects value thebenefits of project measures by estimating theavoided costs incurred. Using loss-probabilitycurves for the baseline and project scenario, the

Table 6. Willingness to pay for water and sanitation

Notes: a. A similar project, the Colombia Water Sector Reform Project, uses household expenditure data to estimate that water and sanitation tariffs average 4 to 8% of household income.b. Average income information for households surveyed is not reported, but from the available income data it appears the mean WTP for both benefits amounts to 1 to 2 % of income for the lower income half of the sample, and less than 0.5% for higher income half of the sample.c. Sample standard deviation of $10.7 and 4.2 for the mean WTP values.

Sources: PADs of cited projects; other sources as cited.

Mean WTP per household

Benefits valued (US$/month) (% income)

World Bank projects

Uruguay Modernization Project

• Sewage collection 15 to 22 3.7 to 4.5a

• Sewage treatment 5 to 7 1 to 1.8a

Cartagena Environmental Management Project

• Sewage collection 8 to 12 4.8 to 5.7

• Sewage treatment 5.5 1

Vietnam Environmental Sanitation Project

• Sewage collection and treatment 0.85 ..b

• Improved water quality and canal appearance 0.76 ..b

Other sources

IDB’s average for similar sewage projects (Russell and others 2001) 20.5 3.3c

EEPSEA Bangkok Study (Tapvong and Kruavan 1999)

• Improving water quality in the Chao Phraya River and its canals from ‘boatable’ to ‘fishable’

2.3 <1

• Further improving water quality from ‘fishable’ to ‘swimmable’ 2.7 <1

Beijing Study (Swanson and others, 1999)

• Maintain water quality at 3 major rivers 1.8 1.3

Philippines Study (Choe and others 1996)

• Improved surface water quality aimed at making surface water bodies safe for swimming and other recreational uses

1.4 to 2.3 <1



expected annual flood losses are estimated fromthe difference in the probability and the severityof floods occurring under the two scenarios.Generally the avoided costs of damage toproperty or due to lost output are the mainsource of benefits. The avoided costs of floodmitigation measures are the second mostimportant benefits. These include the avoidedcost of private flood protection, as in theVietnam Ho Chi Minh Environmental SanitationProject, and of public health measures institutedin the event of a flood to control the spread ofvector diseases, as in the Yangtze DikeStrengthening Project. Both projects cite surveysconducted to assess the damage of previousfloods as the basis of the cost estimates adoptedin the analysis.44

The Belize Roads and Municipal Drainage Project,on the other hand, values the benefits ofdrainage improvements by estimating theincreased property values resulting from theproject’s investments. The discussion of theanalysis notes that property values in welldrained areas are 20 to 100 percent higher thanin poorly drained areas. It determines that an 18percent increase in property values would besufficient to justify the project’s investment inthe drainage component. The break-evenanalysis assumes that property values wouldincrease “modestly” in the initial yearsfollowing project completion, until householdsrealize the benefits of flood protection aretaking place and they no longer need to investin raising their plot level to avoid flooding.

Solid Waste Management

Solid waste disposal and management projectsare also primarily concerned withenvironmental health hazards created by thelack of waste collection services in poor areas orthe inappropriate handling of solid waste at

landfill sites. Only one of the three solid wasteprojects reviewed, the Liepaja Region Solid WasteManagement Project in Latvia, conducts a CBAand is therefore the focus of the discussionhere.45 Grants from international donorsaccount for 55 percent of project investments.This includes US$2 million from the PrototypeCarbon Fund (PCF) to extract methane gas fromthe existing landfill and use it in electricitygeneration. The alternatives examined by theproject include several options for expandingthe existing landfill or establishing a newlandfill at another location. The existing landfillfacility is located in an area with a number ofendangered species and leachate from the sitepolluted a nearby lake. The CBA withoutconsideration of environmental impactsidentifies expansion of the existing facility tomeet sanitary standards as the best alternative.Including the benefits of carbon sequestration,to be financed by the PCF grant, improves therate of return of all alternatives. The inclusionof carbon benefits, therefore, is not sufficient tomake the relocation options examinedpreferable to expanding the existing landfillsite. When the grants from other donors areincluded in the analysis, the relocation of thelandfill site becomes feasible. These grants canbe thought as payments for the internalizationof the environmental benefits relating to thereduction of pollution affecting regional surfacewater bodies. While the expansion of theexisting landfill remains the option with highestrate of return, the feasibility of the relocationalternative and the recognition that there aresome environmental impacts not included inthe CBA are enough to justify the selection ofrelocating the landfill site. The incorporation ofenvironmental values thus has a significantimpact on the choice to establish a new landfillrather than to expand the capacity of theexisting landfill.


Global Costs and Benefits

Global costs and benefits are a special case ofenvironmental benefits, as they accrue to theglobal community rather than to the countryundertaking the project. Because of this, OP10.04 specifies that these benefits, although theyshould be “identified in the Bank’s sector workor in the EA process” should only be“considered in the economic analysis when (a)payments related to the project are made underan international agreement, or (b) projects orproject components are financed by the GlobalEnvironment Facility.”

The most valued type of global environmentalbenefit are carbon sequestration benefits. Someprojects value these benefits and include themin the CBA. Other projects may value suchbenefits but do not include them in the analysis,as per OP 10.04.

Two approaches are generally used to valuecarbon sequestration benefits. The firstestimates the benefits of carbon sequestration byusing the estimates of climate change damagesin the environmental economics literature.While there are several uncertainties involvedin trying to estimate climate change impacts andthe resulting damages (see Watson and others,1996), estimates in the literature have convergedin the range of US$5 and $40 per ton of CO2equivalent (tCO2e). This approach has beenused primarily in forestry projects, such as theArmenia NRM and the Tanzania ForestConservation and Management projects, by

applying the estimates of climate changedamages to the amount of carbon sequesteredper hectare of forest land. These projects usevalues for damages in the range of US$5 to $20per tCO2e

A second approach takes the GEF or otherdonor’s WTP as a lower bound measure ofvalue for the environmental benefitsgenerated.46 Actual payments made underembryonic carbon emissions markets havetended to be at the low end of the range ofdamage estimates, however. The PCF, forexample, pays US$3-4 tCO2e equivalent (PCF,2002). This approach, which would seempreferable in light of OP 10.04, is used in thePoland Geothermal, the Liepaja Solid WasteManagement, and the Papua Guinea ForestryConservation projects, for example.

In contrast to carbon sequestration benefits, thebenefits of biodiversity conservation are seldomvalued. This is despite the fact that some of thebenefits of biodiversity conservation canpotentially be captured by the host country, forexample, in the form of higher revenues fromnature based tourism or bioprospectingcontractual arrangements. The tourism benefitscan be estimated using the TCM or CV. Thedevelopment of the tourism industry is indeedone of the main motivations for the MozambiqueCoastal and Marine Biodiversity ManagementProject.47 The project does not, however,estimate the potential benefits from tourism

9



development of the coast. Instead, it just notesthat the potential development could equal theUS$500 million a year generated by tourismrevenues in Kenya. Whether this is a reasonableassumption upon which to base the assessmentof the tourism benefits from the project couldhave been investigated.

Attempts to value the benefits of biodiversityfor bioprospecting purposes have been thefocus of a number of biodiversity valuationstudies (Simpson and others, 1996; Ruitenbeekand Cartier, 1999; Rausser and Small, 2000).Costa Rica has been the leading developingcountry trying to capture the pharmaceuticalpotential of biodiversity conservation.

However, even with adequate compensation forthe collection of biotic samples and generationof taxonomic information bioprospectingrevenues alone may not be sufficient for theconservation of these resources (Barbier andAylward, 1996). The conservation of criticallyimportant biodiversity habitats will likely needother sources of funding. Two of the projectsreviewed, the Armenia NRM and the ChinaSustainable Forestry Development projects, receiveGEF support for forest conservation activities inbiodiversity rich areas. Whatever the actualbenefit to the global community, from theperspective of an individual country whatmatters is what it will be paid for theenvironmental benefits it provides.


Conclusion

Ten years ago, one project in 162 usedenvironmental valuation. The use ofenvironmental valuation has increasedsubstantially, so that in recent years as many asone third of the projects in the environmentalportfolio did so. Over the last 3 fiscal years, anaverage of 6 to 9 projects per year usedenvironmental valuation. While this representsa substantial improvement, there remainsconsiderable scope for growth.48

Many projects that did not use environmentalvaluation pleaded the difficulty of doing so.This review, however, included severalexamples of projects that valued the sameenvironmental benefits that other projects in thesame sector claimed were too difficult to valueor “un-quantifiable.” Given the substantialmethodological progress that has been made inthis field in the last decades, “un-quantifiable”can no longer be considered an acceptableexcuse in most cases. Lack of data can be moredifficult to overcome, but is also not insoluble inmost cases.

Among those projects that value environmentalimpacts, only one values environmental costsand all the others focus solely on valuingbenefits. This asymmetry can be partlyexplained by the fact that most projects seek toavoid or mitigate potential negative impacts

through project design or the implementation ofenvironmental management plans, although itstrains credibility that there would be noremaining damages.

The degree to which environmental benefits arevalued differs from sector to sector. In theenergy and transportation sectors, the valuationof changes in air quality benefits from a largebody of literature that has developed andapplied the existing valuation techniques.Quantifying the impacts of project measures onoutdoor air pollution does not appear to be asignificant obstacle, at least not in the energysector. However, not all projects which quantifyemissions reductions take it to the next stageand value these environmental benefits. In theagriculture and water supply and sanitationsectors, on the other hand, quantifying thephysical impacts of project measures aregenerally the major obstacle to valuation ofenvironmental impacts.

To ease the task of project teams, a series oftoolkits is being assembled for some of the morecommonly-occurring valuation problems. Thesetoolkits will describe the available valuationmethodologies from a problem-centricperspective and provide detailed examples ofhow to use these methodologies in a projectcontext.

10


Appendix — Projects Reviewed

Project ID Region Country Project Name

Total Cost

(US$ millions)

P051059 AFR Cameroon Chad/Cameroon Pipeline Project 70.00

P044305 AFR Chad Petroleum Development and Pipeline Project 85.00

P050623 AFR Ghana Road Sector Development Project 1191.00

P050616 AFR Ghana Community Water and Sanitation Project (02) 28.00

P052208 AFR Madagascar Transport Sector Reform and Rehabilitation Project 66.00

P041723 AFR Mali National Rural Infrastructure Project 139.27

P044711 AFR Mauritania Integrated Development Project for Irrigated Agriculture 46.03

P069095 AFR Mauritania Urban Development Project 99.06

P070305 AFR Mozambique Coastal and Marine Biodiversity Management Project 10.60

P072996 AFR Niger Private Irrigation Promotion Project 48.39

P045182 AFR Rwanda Rural Water and Sanitation Project 21.42

P055472 AFR Senegal Urban Mobility Improvement Project 103.00

P041528 AFR Senegal Long Term Water Sector Project 248.43

P058706 AFR Tanzania Forest Conservation and Management Project 32.80

P002797 AFR Tanzania Songo Songo Gas Development and Power Generation Project

296.00

P064064 AFR Zambia Mine Township Services Project 38.00

P056516 EAP China Water Conservation Project 185.67

P064729 EAP China Sustainable Forestry Development Project 214.58

P068049 EAP China Hubei Hydropower Development in Poor Areas Project 222.41

P056424 EAP China Tongbai Pumped Storage Project 904.10

P056199 EAP China Inland Waterways Project (03) 220.22

P056596 EAP China Shijiazhuang Urban Transport Project 286.20

P045915 EAP China Urumqi Urban Transport Improvement Project 270.00

P064730 EAP China Yangtze Dike Strengthening Project 545.51

P042109 EAP China Beijing Environment Project (02) 1255.00

P049436 EAP China Chongqing Urban Environment Project (CUEP) 535.90

P047345 EAP China Huai River Pollution Control Project 226.89

P051859 EAP China Liao River Basin Project 203.60

P045910 EAP China Hebei Urban Environmental Project 293.00

P040528 EAP Indonesia Western Java Environmental Management Project 20.13

P056200 EAP Mongolia Transport Development Project 49.54

P004398 EAP Papua New Guinea

Forestry and Conservation Project 22.29




Total Cost

(US$ millions)

P039019 EAP Philippines First National Roads Improvement and Management Project 305.42

P042568 EAP Vietnam Coastal Wetlands Protection and Development Project 65.60

P066396 EAP Vietnam System Efficiency Improvement, Equitization, and Renewables Project

347.90

P056452 EAP Vietnam Rural Energy Project 204.80

P052037 EAP Vietnam Ho Chi Minh City Environmental Sanitation Project (Nhieu Loc- Thi Nghe Basin)

199.96

P069479 ECA Albania Pilot Fishery Development Project 6.66

P074905 ECA Albania Power Sector Rehabilitation and Restructuring Project 35.06

P057847 ECA Armenia Natural Resources Management and Poverty Reduction Project

10.87

P008284 ECA Azerbaijan Rehabilitation and Completion of Irrigation and Drainage Infrastructure

46.86

P044748 ECA Belarus Social Infrastructure Retrofitting Project 40.43

P057950 ECA Bosnia-Herzegovina

Solid Waste Management Project 21.00

P055068 ECA Georgia Irrigation and Drainage Community Development Project 32.80

P008497 ECA Hungary Municipal Wastewater Project 88.90

P046045 ECA Kazakhstan Syr Darya Control and Northern Aral Sea Phase 1 85.79

P058476 ECA Latvia Liepaja Region Solid Waste Management Project 16.97

P070112 ECA Lithuania Education Improvement Project 45.41

P063656 ECA Lithuania Vilnius District Heating Project 54.52

P038395 ECA Macedonia Water Supply and Sewerage Project 42.37

P037339 ECA Poland Podhale Geothermal District Heating and Environment Project

91.30

P065059 ECA Poland Krakow Energy Efficiency Project 78.04

P056337 ECA Romania Mine Closure and Social Mitigation Project 59.50

P053830 ECA Russian Federation

Sustainable Forestry Pilot Project 74.50


Municipal Heating Project 127.88


Municipal Water and Wastewater Project 168.90

P058898 ECA Tajikistan Rural Infrastructure Rehabilitation Project 24.00

P055738 ECA Ukraine Sevastopol Heat Supply Improvement Project 35.70

P055739 ECA Ukraine Kiev Public Buildings Energy Efficient Project 30.20

P035786 ECA Ukraine Lviv Water and Wastewater Project 40.80

P040150 LCR Belize Roads and Municipal Drainage Project 18.40

P043869 LCR Brazil Natural Resources Management and Rural Poverty Reduction Project

107.50

P039200 LCR Brazil Energy Efficiency Project 125.50

P051696 LCR Brazil Sao Paulo Metro Line 4 Project 933.90

P055954 LCR Brazil Goias State Highway Management Project 130.00

P006449 LCR Brazil CEARA Integrated Water Resources Management Project 247.20

P041642 LCR Colombia Productive Partnerships Support Project 52.32


Appendix — Projects Reviewed

P044140 LCR Colombia Cartagena Water Supply, Sewage and Environmental Management Project

85.00

P065937 LCR Colombia Water Sector Reform Assistance Project 70.00

P052009 LCR Costa Rica Ecomarkets Project 49.20

P039437 LCR Ecuador Poverty Reduction and Local Rural Development Project 41.96

P049924 LCR Ecuador Rural and Small Towns Water Supply and Sanitation Project 50.25

P073035 LCR Honduras Access to Land Pilot Project 17.00

P057530 LCR Mexico Rural Development in Marginal Areas Project (02) 73.00

P056018 LCR Nicaragua Land Administration Project 38.50

P050595 LCR Panama Land Administration Project - APL 72.36

P070244 LCR St. Lucia Technical Assistance Water Sector Reform Project 8.36


Total Cost

(US$ millions)

P063383 LCR Uruguay OSE Modernization and Systems Rehabilitation Program 48.09

P045499 MNA Egypt National Drainage Project (02) 278.40

P069946 MNA Iran Tehran Sewerage Project Loan 340.00

P074042 MNA Lebanon Ba'albeck Water and Wastewater Project 49.63

P056978 MNA Morocco Irrigation-Based Community Development Project 42.40

P035707 MNA Tunisia Water Sector Investment Loan Project 258.00

P062714 MNA Yemen Irrigation Improvement Project 25.60

P070092 MNA Yemen Taiz Municipal Development and Flood Protection Project 50.00

P005906 MNA Yemen Rural Water Supply and Sanitation Project 29.40

P071794 SAR Bangladesh Rural Electrification and Renewable Energy Development Project

290.10

P057570 SAR Bhutan Urban Development Project 12.23

P071033 SAR India Karnataka Community Based Tank Management Project 124.97

P040610 SAR India Rajasthan Water Sector Restructuring Project 180.20

P050647 SAR India Uttar Pradesh Water Sector Restructuring Project 173.70

P067216 SAR India Karnataka Watershed Development Project 127.60

P035172 SAR India Uttar Pradesh Water Sector Restructuring Project 236.00

P035173 SAR India Powergrid System Development Project (02) 1314.00

P038334 SAR India Rajasthan Power Sector Restructuring Project 266.80

P049770 SAR India Renewable Energy (02) Project 300.00

P010566 SAR India Gujarat State Highway Project 533.00

P071244 SAR India Grand Trunk Road Improvement 756.00

P050668 SAR India Mumbai Urban Transport Project 945.00

P050653 SAR India Karnataka Rural Water Supply and Sanitation Project (02) 193.44

P055454 SAR India Kerala Rural Water Supply and Environmental Sanitation Project

89.80

P071092 SAR Pakistan NWFP On-Farm Water Management Project 32.05

P076702 SAR Sri Lanka Renewable Energy for Rural Economic Development Project 125.70


Notes

1. SARs have been replaced by Project AppraisalDocuments (PADs).

2. The review examined all projects approvedduring the 1993 calendar year and included 162projects in a wide variety of sectors. Of those162 projects, 112 were in sectors whichtraditionally require a cost benefit analysis,namely agriculture, energy, financial, power,telecommunications, transportation, urban, andwater supply and sanitation.

3. The negative of this can also be important: byshowing that an externality is much smallerthan had been supposed, valuation might leadto the conclusion that a project is not warrantedin a specific instance, and that efforts would bebetter applied elsewhere.

4. Under the new classification system, eachproject can have up to five sectoral assignmentsand five thematic objectives. The sectoral andthematic assignments represent differentdimensions of the same operation. The sectoralclassification is based on the sectors of theeconomy affected by the project, while thethematic classification relates to the statedobjectives of the project.

5. The project list for 2002 was based onpreliminary data at the end of FY2002.

6. Adjustment lending instruments and other non-project lending instruments are excluded fromour review.

7. The project costs reported in Table 1 reflect thenew sector code classification, which allocatesthe share of project costs to components indifferent sectors.

8. Category A projects are “likely to havesignificant adverse impacts that are sensitive,diverse, or unprecedented, or that affect an areabroader than the sites or facilities subject tophysical works.” They require a fullenvironmental assessment. Category B projectshave impacts that are “site-specific in nature

and do not significantly affect humanpopulations or alter environmentally importantareas, including wetlands, native forests,grasslands, and other major natural habitats.Few if any of the impacts are irreversible, and inmost cases mitigation measures can be designedmore readily than category A projects.” Theyalso require an environmental assessment, butof a more limited scope. Category C projects arethose “likely have no adverse impacts at all, orthe impacts would be negligible.”

9. We did not examine the full environmentalassessment report, but rather relied on thesummary information presented in the PAD.

10. The impression that the identification ofenvironmental benefits is considered to lieoutside the mandate of the EA process isreinforced by several instances whereenvironmental benefits were valued despitethere being no mention of such benefits in theEA summary.

11. For example, while the Mauritania IntegratedDevelopment Project for Irrigated Agriculture is acategory A project with both primary andsecondary environmental objectives, the firstphase of the projects has only a fewrehabilitation components and consistsprimarily of feasibility studies for futureinvestments. The project’s classification reflectsmostly its future rather than its current impacts.

12. Twenty-six percent of all projects reviewedvalue environmental impacts and include thosevalues in the economic analysis. If projects withno or only minor environmental impacts areexcluded, 32 percent of the projects value andinclude environmental impacts in the analysis.

13. It would be interesting if these costs could bemade explicit, as several valuation techniquesare based on such cost estimates.

14. “Lack of data” and “too difficult” are treated asmutually exclusive categories in Table 3—that



is, projects which list both reasons as obstaclesfor valuing environmental impacts are listedunder one category only.

15. Nine of the 15 such projects are in ECA. Threeothers are in India, two in China and one inVietnam.

16. For a brief review of these studies, particularlyin the context of developing countries, seeHegde (2001).

17. None of the projects reviewed explicitlyacknowledge situations where increased airpollution may result and therefore theenvironmental costs of energy production arenot valued.

18. This is the case when all investments costs(including those already incurred) areevaluated. However, if the investments whichalready took place are treated as sunk costs, asthey should, the heat cost savings are enough tojustify the incremental investments. The fullevaluation is carried out to establish thereplicability of such investments.

19. The value of CO2 emissions reductions is takento be the GEF’s willingness to pay for thealternative that produces additional emissionsreduction than the base case scenario (seechapter 9).

20. This is taken from the information discussed inan associated GEF project, also called the KrakowEnergy Efficiency Project The GEF project istechnically a separate project, but its mainobjective is to finance risk guarantees that willenable the private sector to invest in the energyefficiency measures supported by the IBRDfinanced project—in other words, the GEFfinancing is essential to remove the marketbarriers preventing these financially soundinvestments.

21. In addition to the health benefits estimated, theBeijing project also estimates the value of landthat has been used as ash yards for the coalboilers. About 2,000m2 of land are needed for atypical boiler house consisting of three or fourmedium size boilers. Given that these boilers arelocated in the center of urban districts, whereland values are high, these land savings turnout to be a significant source of benefitsgenerated by the project. Although thesebenefits are estimated on the basis of real estatevalues, they may well have an additionalenvironmental component, in terms of reducingenvironmental disamenities to neighboringproperties.

22. However, the alternative of hydropowergeneration also entails possible environmentalcosts. Indeed, the environmental assessment (sixvolumes) of the project is primarily devoted tothe potential environmental impacts of theconstruction of the dams. The EA argues thatsince these rivers have existing dams, most ofthe environmental damage to the aquaticenvironment of the rivers in question hasalready taken place. The new dams constructedfor the project will thus only have an smalladditional impact on the river’s aquaticenvironment. They will also affect water flowduring the dry season and to downstreamirrigation infrastructure in some locations.Relatively little inundation of valuable land isexpected, as the reservoirs will be long andnarrow due to the geographical characteristicsof the area. These environmental impacts havenot been valued. Measures are included in theproject’s environmental management plan tomitigate these impacts.

23. A simpler model, the roads economic decisionmodel (RED), has been devised to evaluate roadinvestments in rural areas where low trafficvolumes and uncertainty in the assessment oftraffic and road conditions are likely to becommon. RED also includes the additionalbenefits to local economic development and tonon-motorized road users (Archondo-Callao,1999). For more on those issues, see OED (1996)which examines the education and healthbenefits of road projects in rural areas inMorocco.

24. The Mumbai project classifies the environmentalbenefits into direct and indirect benefits fromreduced air pollution, but provides noinformation on what these direct and indirectbenefits might be. The indirect benefits accountfor 97 percent of the environmental benefits.

25. Vehicle operating cost savings and time savingsamount to 92 percent of benefits, other minorbenefits include the environmental benefits,safety benefits from reduced accidents, andoperations and maintenance (O&M) savings dueto reduce number of kilometers traveled bybuses.

26. The environmental costs and opportunity costsare not necessarily mutually exclusive. Thehighest valued alternative for water used forirrigation may be the loss of its use to maintainecosystem functions, in which case, theopportunity cost would be the environmental


Scope for Improvement

costs or damages incurred. The environmentalcost of water used for irrigation can also bethose associated with the external impacts ofwater on soil quality, for example, salinizationand waterlogging. Such environmental costswould be independent of the water’sopportunity cost.

27. A comprehensive review of World Bankfinanced irrigation projects carried out by theOED concludes that irrigation charges in mostdeveloping countries do not cover operationand maintenance costs (Briscoe, 1996).

28. For example, the Northern Aral Sea Project doesnot quantify the benefits of a dam in providingwater supply to downstream consumers and(strangely) of maintaining irrigated area—theonly benefits valued from the dam constructionare the power supply generated. Also thebenefits of a flood protection dike, whichaccording to the project would save an averageof 800 million m3 of water annually, are notvalued.

29. The amount of water to be supplied is actuallyexpected to decrease with the project. The watersavings, however, are not quantified or valued.

30. The irrigation service fees would be reviewedand adjusted annually by the project, taking intoaccount the willingness and ability of farmers topay, and the collection rate in project areasmonitored.

31. These projects and two other projects also valuethe environmental benefits of carbon emissionreduction. However, since these are globalenvironmental benefits we discuss theirvaluation separately, in Chapter 9.

32. One could potentially argue whether the lowervalue for the benefits from pasture lands isappropriate, particularly if the primary interestis to increase water flows rather than regulatethe timing of flows. A study of a watershed inLake Arenal, Costa Rica, suggests that if thetotal flow of water is of primary interest,pastures generate higher positive externalitiesthan forest cover (Aylward and others, 1998).

33. A survey carried out for the Ecuador Rural andSmall Towns Water Supply and Sanitation Projectfinds that expenditures related to water bornediseases are not significant. Therefore, healthbenefits are omitted from the analysis of thatproject. However, the survey does not assessdirect and indirect income losses due toillnesses, and so may underestimate health

impacts. Such costs may represent a significantshare of the health costs from water pollutionthan direct treatment costs, as in the case of theKarnataka Rural Water Supply and SanitationProject.

34. In some cases, incremental revenues are higherdue to increased efficiency or reduced O&Mcosts, such as in the Ukraine Water andWastewater Project. The project’s benefits arealmost entirely justified by reduced energycosts.

35. The Lebanon Water and Wastewater Project,discussed below, does factor in improvements inthe quality of the services provided, byassuming the demand curve for sanitation shiftsout to reflect the difference between an on-sitesanitation system and being connection to thepublic system.

36. The Russia Federation Municipal Water andWastewater Project, for example, has stand alonewater supply and sanitation components indifferent cities. Even though the project saysthat 54 percent of rehabilitation investmentshave been identified, very few are subjected toan economic analysis. The project only valuestwo water supply components (amounting to $3million of the $169 million cost of the project). Itdiscusses a water quality improvement and awastewater treatment component, but thebenefits of these components are not valued.Both are expected to produce significant healthand environmental benefits.

37. The survey asks households to volunteer howmuch they would be willing to pay for certainimprovements in water quality. Open endedquestions are usually not the recommended toelicit WTP values.

38. While the WTP values from the householdsurvey are not used to value the project’sbenefits, the information from the survey isuseful in designing the project by establishingthat biological treatment of sewage is notaffordable to area residents. The project isdesigned therefore to discharge screenedwastewater in the Saigon River instead ofdirectly into the canal., which is prone toflooding.

39. The project finances the construction of asewage interceptor which will make septic tanksno longer necessary.

40. The benefits of improved water quality tohouseholds amount to 55 percent of the total



benefits from the wastewater treatmentcomponent, those to agriculture amount to 38percent, and those to industry 7 percent.

41. The information presented in the PAD suggeststhat a 10 percent increase may be an optimisticassumption. The PAD cites a study finding thatagricultural production could increase by atleast 5 percent if the water quality level in theHai River basin was raised to the governmentmandated water quality level. The projectestimates that the amount of water treated in thewastewater plant will contribute to only about10 percent of the planned reduction in pollutionlevels in the whole Hai River basin.

42. Three other projects in China, the Huai RiverPollution Control Project, the Liao River BasinProject and the Chongqin Urban EnvironmentProject, are wastewater treatment projectssimilar to the Beijing project discussed above.These projects appear to have estimated some ofthe benefits generated by the project, but do notpresent their analysis, citing the uncertaintiesinvolved in these estimations as a reason.Instead these three projects opt for a costeffectiveness analysis.

43. The estimated IRR for the component based onthese two benefits is low, but other—unquantified—benefits are thought likely to besufficiently important to justify this component.These benefits include the conservation of scarcewater resources, the reduced health risks fromthe use of untreated sewage water inagriculture, and overall environmental qualityimprovements that benefit households notconnected to the sewage system. While efforts tovalue environmental benefits are important,data limitations or other problems may preventa full assessment from being made. In suchcases, it is important to exercise good judgmentin assessing whether the remaining un-quantified benefits are likely to result in adifferent conclusion, as was thought to be thecase here.

44. The Taiz Municipal Development and FloodProtection Project in Yemen does not provide

very many details of cost benefit analysiscarried out. The project states that annuallyavoided damage per structure is approximatelyUS$600. It does not mention other key factors orassumptions, such as the average flood/stormreturn period, the flood depth, or the conceptualmodel used, as the China and Vietnam projectdo.

45. The Western Java Environmental ManagementProject presents some results of the analysis of aprevious project. The Solid Waste ManagementProject in Bosnia-Herzegovina says it carried outa cost-effectiveness analysis, but only presents atable of per capita investment costs (whichranged from $12 to $30) in the three cities wherethe project is to be implemented.

46. Formally, the GEF is not paying for the benefits,but reimbursing for the incremental cost ofreceiving them. From the perspective of thecountry implementing the project, however, itdoes not matter whether the GEF grant isconsidered to be a reimbursement for cost or apayment for benefits, as the effect on theproject’s NPV is the same.

47. The conservation of coastal resources will alsobenefit the local population. Approximately 43percent of Mozambique’s population live on thecoast, and most of these 7 million peopledepend on the coast’s natural resources for theirlivelihoods.

48. To some degree, the limited extent to whichenvironmental valuation is used in the economicanalysis of projects reflects the decliningemphasis that is being placed on economicanalysis in general in Bank project preparation.Whereas a decade ago the NPV and IRR werethe be-all and end-all of project preparation,today it is not unusual for neither to be evenmentioned in a PAD review meeting. It was notthe objective of this review to assess the qualityof the economic analysis as a whole, but itseemed to be very uneven.


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