The Challenge ofWater and SanitationDale Whittington

Department of Environmental Sciences & Engineering and City & Regional Planning, University of North Carolina

Summary

This paper was produced for the Copenhagen Consensus 2008 project.

The fi nal version of this paper can be found in the book, ‘Global Crises, Global Solutions: Second Edition’,

edited by Bjørn Lomborg

(Cambridge University Press, 2009)

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Water and Sanitation challenge paper Dale Whittington, W. Michael Hanemann, Claudia Sadoff and Marc Jeuland

PART I – ASSESSING THE COSTS AND BENEFITS OF INVESTMENTS IN WATER AND SANITATION INFRASTRUCTURE Introduction At the turn of the 21st century, about 1.1 billion people lacked improved water supplies, and more than 2.7 billion had no sanitation service. One of the Millennium Development Goals is to halve the proportion of people without access to water or sanitation by 2015. However, this may be difficult to achieve, partly because the need to ensure the benefits of improved access are large enough to cover the costs of those who bear them is often overlooked. A second problem is also surprising but no less real. The incremental benefit of improved water supply may simply not cover the large cost of providing it, since by definition everyone has some access to water in order to live, and the willingness to pay for an improvement may be low. Background There are six observations to be made. First, provision of water and sanitation infrastructure is a huge social enterprise, and one of the largest sectors in most industrialized economies. Second, provision of the infrastructure is very capital intensive and the networks long-lived, so it is important to get investment decisions right. Third, household demand for essential drinking water is extremely price inelastic. This provides opportunities for monopolistic rent extraction when governance is poor. Fourth, in contrast to electricity, water is relatively easy to store but expensive to transport long distances, thus making high levels of service reliability prohibitively expensive in some cases. Fifth, W&S network infrastructure access is strongly associated with rising household income, however many people in developing countries choose to have access to electricity before they choose network water and sanitation. Finally, many believe that water should not be considered an economic commodity and that access to water and sanitation should be a human right. Cost of Municipal Water and Sanitation Networked Infrastructure Although it would be rare for a community to incur the full cost of a complete piped water and sanitation system in one go, we estimate the average unit costs of providing modern services to an urban household, as a point of reference. Costs assume a discount rate of 6% and an average 20 year lifespan for capital equipment and facilities. The total cost is the sum of a number of elements. Opportunity costs for water will rarely be above $0.25 per cubic meter, and often much lower (typically $0.05/m3). Raw water storage, transmission and subsequent treatment typically cost $0.20/m3 , while the local distribution network and household connections contribute of the order of $0.60/ m3. Collection and conveyance of sewage to the treatment plant will cost around $0.80 /m3 , or 40% of the

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total. Secondary wastewater treatment will cost about $0.30/m3 and damages resulting from the discharge of treated waste we assume to be of the same order of magnitude as the opportunity cost of raw water supplies, say $0.05/m3 . Total economic costs are about $2.0/m3 in many locations, although for small communities in arid areas of the western USA, costs can be two or three times higher. A lower bound figure for a simple system with minimal storage and wastewater treatment is about $0.80/m3. Water usage will depend on many factors, but for an in-house water supply indoor water usage typically is in the range 110-220 liters per capita per day, which amounts to 20 to 40 cubic meters for a household of six for a month. Assuming average unit costs of $2.0/ m3 , the full economic cost would be $40-80 per month, which is more than most households pay in industrialized countries and far beyond the means of most developing country citizens. If poor households were to reduce their water use in the face of higher prices, the total monthly use could be only 10 cubic meters which, provided via the lost cost system, would cost just $8. This we can regard as the lower bound of full economic costs. In practice, most people are unaware of the full cost, since subsidies are applied and externalities are uncompensated. The subsidies are also regressive, since poor people use less water and may not even be on a piped water supply. Economic Benefits of Improved Water and Sanitation Services Although industrial and public sector consumers also benefit from improved water supply, the majority of benefits in most cities accrue to households, and we consider only these below. Market Data: Water Vending Millions of households in developing countries are buying relatively small quantities of drinking and cooking water from vendors, often at higher prices than the cost of improved water and sanitation services. However, the great majority of households do not buy from vendors, since the perceived benefits are outweighed by the costs. Nevertheless, piped water is not always unambiguously better than buying from vendors, since households have tighter control of expenditure in the latter case. Avertive Expenditures: Coping Costs Coping with unreliable or poor water supplies carries costs for temporary storage, decontamination or time and expense in fetching supplies. Together, these should represent something close to a lower bound of benefits from improved supplies. Estimates from Kathmandu, typical of many Asian cities, put the coping cost at about $4 per month per household.

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Avoided Costs of Illness Reducing the incidence of water-borne illness produces a benefit expressed as direct costs avoided, although this is a lower bound estimate as it takes no account of reduced mortality, pain and suffering or other health benefits of improved supply. Improved water and sanitation typically only reduces diarrheal incidence by 30-40%. Consider the following example. Ex-ante costs of illness (COI) for typhoid in one of the poorest slums of New Delhi are only $0.65 per month for a household of five, and the WHO assumes that one quarter of all deaths from diarrheal disease in this location are due to typhoid. One crude estimate of the COI burden of diarrheal disease is then $2.70. Assuming that the incidence of these diseases would be reduced 35%, the total benefits from the reduction of COI would be about $0.90. The total benefit is probably less than $1 per month in most locations. Avoiding illness alone does not provide economic justification for improved W&S. Stated Preferences: Household Willingness to Pay for Improved Water and Sanitation Services A number of willingness to pay surveys have suggested that in many cases households value the benefits of improved W&S well below the full economic cost. In some cases, many households in a particular areas were willing to pay around $10 per month, but in no case was the majority of a city's population willing to pay substantially more than the full economic cost of supplying the improved services. Comparing Costs and Benefits Our illustrative calculations suggest that for some urban households the benefits of modern network water and sanitation services may not exceed the costs. The extent to which this conclusion can be generalized depends on several factors. First, some proponents of increased investment in W&S suggest it would be possible to provide a lower level of service at much lower cost; this may be true, but the question is whether the perceived benefits might also be much lower. Second, some proponents argue that households are not able to understand the extent of health benefits and thus undervalue W&S services. Neither, they suggest, do people properly value future welfare benefits compared to short term gains. This may be true but, by itself, it does not alleviate the financing bottleneck. Third, it is sometimes argued that there exist positive community-wide health and environmental benefits which are not captured by estimates for individual households. This, too, may be true, but it is difficult to ascertain the value of the specific environmental benefits being alluded to and, as we have seen, the balance of the empirical evidence so far suggests that improved sanitation makes only a limited contribution to reducing disease. Fourth, it is suggested that there may be wider benefits to business and industry which are not captured. Finally, it is suggested that W&S investments provide benefits in both good and bad economic times, whereas some other aid can only be beneficial when growth is strong. All these arguments may have merit in some cases: documentation and measurement are the key obstacles.

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We believe that economic benefit-cost analysis is essential information for allocating valuable development dollars wisely. We should also note that all our discussion so far assumes that projects will be successfully implemented, but unfortunately many W&S investments simply fail to deliver the projected benefits. Part I: Discussion We argue that the main limitation of the analysis is that the benefit stream is assumed to be static, whereas it may grow as the economy develops. Significant water investment could provide further incentives for additional economic investment, and there is strong evidence that more prosperous households want improved W&S services, and attach greater value to those services. These future benefits, however, must be discounted back to compare with current costs. The high capital cost and long lifetime of the infrastructure make assessment of the present value very sensitive to assumptions on discount rate and increases in willingness to pay as the economy grows. The complexity of calculating returns to water and sanitation investments often leads to decisions being made on the basis of intangible factors when an economic case cannot be made, and this in turn can raise the failure rate. This is not to say that all investments in municipal W&S networked infrastructure will fail rigorous economic tests. Many projects in cities in rapidly growing economies will have attractive benefit-cost ratios. However, in part II we look at three non-network interventions which will have higher economic returns in many situations. PART II – ANALYSIS OF SPECIFIC WATER AND SANITATION INTERVENTIONS Introduction Here we look at three interventions which do not carry the high capital costs of network infrastructure. In addition, we consider the option of large multipurpose dams in Africa, to address the broader issue of water resource management. Estimates of costs and benefits are based on data from specific cases which have then been generalized, so there is inevitable uncertainty attached. In our analysis, we specify ranges for all parameters in the benefit-cost model and derive distributions of feasible benefit-cost ratios using Monte Carlo simulations. Water and Sanitation Intervention No. 1 – A rural water supply program providing poor rural communities in Africa with deep boreholes and public hand pumps Description of the intervention Where deep groundwater is the best available water source, a borehole and communal hand pump is usually considered a low cost appropriate technology. Drilling equipment often has to be transported to remote locations, and the cost of dry boreholes has to be included. Following the failure of many rural water supply projects, a new and more successful planning model emerged in the 1990s. This is based on "demand-driven" community

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management where households are involved in decision-making and pay for all of the costs of providing and maintaining the service plus at least some of the capital cost. Discussion of costs Not only is the community management model now contributing to improved delivery of water services in rural Africa, but costs of boreholes have now been halved to about $6,000 because of recently increased competition, for example from Chinese contractors active in the region. We estimate capital costs, including the pump, to be on average $6,500 and program overhead to be $3,500; a total of typically $10,000. Using a 6% interest rate for a project life of 15 years, the annual capital cost is $1,030. Adding the necessary costs for maintenance, labor and maintenance, the total annual cost is $1,630, or about $135 per month. We assume 300 people (60 households) will share the borehole, which gives a monthly cost of $2.26 per household. Economic benefits from the installation of the borehole and public hand pump Benefits come from time savings for water collection, the lifestyle value of increased use of higher quality water, and the monetary value of health improvements. We assume that the typical hand pump provides a closer and more convenient source of water – though our uncertainty analysis allows for cases with less convenient hand pumps as well – and that users could be charged a fixed monthly rate for use. Experience shows that water use in such instances will increase. We can compare the time taken to collect the normal amount of water once the pump is installed (although actual usage is expected to increase, so more time than we estimate here would actually be used). Assume that an average 5-person household was collecting 65 liters a day from traditional sources, with 20 liters taking one hour: a total of 3.25 hours a day. If the same quantity can be collected in an hour each day from the pump, this would save about 70 hours a month. The value of this time saving will depend on the labor demand, but at worst it translates to more leisure or cooking/childcare time. Assuming a daily unskilled labor rate of $1.25, with time saved valued at 30% of this, the monthly benefit is $3.28 per household. The lifestyle and aesthetic benefits from increased water use (mainly for personal and household cleaning and washing) are difficult to value. If they were 25% of the value of time savings, this would be $0.82 per month, but if we assume 25% of the benefit is health-related (to avoid double-counting), this reduces to $0.62. Health-related benefits are both controversial and uncertain. If we assume an average of 4.5 cases of diarrhea per household annually, this intervention should reduce the incidence by 30%, to 3. With a case fatality rate of 0.08% and a Value of a Statistical Life of $30,000, the value of mortality reduction is $2.70 per household per month. Reduction in morbidity, assuming each case costs $6, saves $0.68 per month.

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Comparison of Costs and Benefits Using these assumptions, the monthly benefit for a typical rural household would be $7.19, for a cost of $2.26, implying a benefit-cost ratio of about 3.2. There will be many similar situations where this would be a very attractive investment. However, we would emphasize that there will also be many situations where time savings from installing boreholes are low – say, if alternative water sources are plentiful and/or close by– or health benefits are low – for example in places where diarrheal disease incidence or case fatality rates are not as high as stated above. In addition, where density is low and very few households use the boreholes, the costs per household will be higher while benefits remain unchanged. The key point here is that there will be many locations where borehole projects are attractive, but there will also be many situations where they are not, and identification of these locations is important. Water and Sanitation Intervention No. 2 – Total Sanitation Campaigns to achieve open defecation-free communities in South Asia Description of the intervention There are a number of cost-effective ways to dispose of excreta, but these can only be effective if behavioral changes mean that they are used by everyone. In South Asia, a Community-Led Total Sanitation (CLTS) approach has been successful in many areas. Raising awareness of the health and social benefits of sanitation creates a demand which can then be fulfilled by choosing from a menu of low-cost options. In practice, uptake rates in communities are on average around 40%, and toilet usage rates in households which have built latrines is about 70%. Discussion of Costs Associated with Community-Led Total Sanitation Programs We assume a CLTS program that includes low-cost latrine building and community mobilization. Based on available figures, we assume a base cost of $8 to build a latrine (with a range of $4-12). For a 6-year life, with a 6% discount rate, and assuming an average uptake rate of 40%, the construction cost per household is $0.05 per month. If households who take part in the program and build latrines make an upfront time commitment of 10 days, with a further 10 days annually for cleaning and maintenance, and the remaining households have a 3-day commitment for exposure to the campaign, then the cost of the time per household per month is $0.05 (assuming labor rates of $1/day and household time valued at 30% of that). Estimating overhead costs for the campaign as 75% of the total costs, the overall monthly cost per household is $0.32. Economic Benefits Health benefits are subject to the same assumptions and provisos as the first intervention. Assuming a 30% reduction in diarrhea incidence, from a baseline of 7.5 cases per household annually, the monthly benefit in reduction of non-fatal cases is $0.19 per household. The value of averted mortality is $0.76. There is also a time saving, which we can base on a typical 15 minute round trip daily. For two adults, the time saving would be 15 hours monthly; using the assumptions already made,

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the benefit amounts to $0.20 per month. We do not take account of benefits such as privacy, security and aesthetics. Comparison of Costs and Benefits Total benefits amount to $1.14 per household per month, while costs come to $0.43. With these assumptions, the intervention is clearly economically sound, with a benefit-cost ratio of 2.7. A more complete analysis shows favorable BCRs for a wide variety of plausible developing country situations. However, the results are particularly sensitive to the degree to which diarrheal disease is reduced, and the key factor is clearly to induce a comprehensive behavioral change such that usage of improved sanitation facilities is high. Water and Sanitation Intervention No. 3 – Biosand Filters for “Point-of-use” Household Water Treatment Description of the intervention Point of use (POU) technologies can be used to remove contaminants in raw water supplies. Boiling is the most prevalent method used to treat household water, but has a number or disadvantages and is infrequently promoted. We analyze one particularly promising technology – the biosand filter – as an illustrative example. There are now close to 100,000 biosand filters in use by households in developing countries. They use commonly available materials, are inexpensive to install and convenient and simple to use. Sand and gravel is packed into a concrete or plastic chamber, and a length of PVC pipe allows collection of the filtered water. Pathogens are removed by physical filtration and a biologically active slime layer ("schmutzdecke") which forms at the top of the sand column, while suspended and some dissolved solids are removed by physical processes in the filter. A filter can easily produce hundreds of liters of clean water a day. While only a partial solution to the wider problem of improved water supply, biosand filters do help to provide clean water from traditional sources. They do however have disadvantages. They must be cleaned periodically, and while a new schmutzdecke is forming pathogen removal is less effective. They are also quite large, so are more appropriate for rural areas than urban slums. Discussion of Costs Associated with Programs for the Dissemination of Biosand Filters Although simple, scalable and cheap, the components are both heavy and bulky to transport. The training programs are again a significant cost, and the intervention is of course only successful if households continue to use and maintain the filter properly. We assume a base case of $75 for the filter manufacture and "software" costs, plus $25 for transport and delivery. The opportunity cost of training is 8 hours, plus an estimated 2 hours of community manager's time per household per year. We assume an average filter life of 8 years.

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Economic Benefits There are no time savings for this intervention, but health benefits from an assumed reduction of diarrhea incidence of 40%: greater than for the other two interventions. We also assume that usage declines by 2% a year, and that the health benefit is absent for five days each time the filter is cleaned (on average six times a year). Comparison of Costs and Benefits For the base case, total household benefits are $3.86 a month, and costs $1.40, giving a benefit-cost ratio of 2.7. A sensitivity analysis shows that there would be many plausible locations in developing countries for which biosand filters would be an attractive investment. Water and Sanitation Intervention No. 4 – Large multipurpose dams in Africa Description of the intervention Large dams have been controversial in both industrialized and developing countries in recent years, with critics suggesting that benefits are overstated and social and economic costs ignored. Nevertheless, there are good reasons why appropriately-sited dams should be considered. First, many African countries are desperately short of water storage capacity to mitigate droughts and support development. Second, while many of the best dam sites have already been used in some countries, this is not necessarily true for some places in Africa. Although we continue to use the 6% discount rates, we should note that dam building is highly capital-intensive and produces very long-term benefits, so that the results of an economic analysis of this project are particularly sensitive to the assumed discount rate. In general, even a 6% rate probably overstates citizens’ valuation of future benefits. Large dams can also often be the "anchor" investment for a transformational economic development plan, and a simple benefit-cost analysis can therefore give an incomplete picture. With these valuation challenges in mind, we consider the project-level costs and benefits of a hypothetical dam in an authentic context: the Blue Nile gorge in Ethiopia. A dam at this site has numerous attractive features both for Ethiopia and the downstream countries, Sudan and Egypt. Discussion of costs We assume construction costs of $2.5bn over eight years, plus a further $1bn for power transmission lines. The economic life is taken as 75 years, and annual operation and maintenance costs would be 0.5% of the annual capital cost. We include compensation for displaced families, and an allowance for the costs of possible failure (at a probability of 0.01% annually). Discussion of benefits Power generation (8,000 GW hours) is valued at $0.05 per kW-hr, initially exported to Egypt and Sudan, and increasing in real value with time at a rate of 0.5% per annum. Power generation is also expected to increase in Sudan as the river flow is regulated. The carbon offset value is assumed as $20 per tonne. Sudan would also benefit to the value of $150 million per year in terms of increased irrigation, and would benefit from better flood control.

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Comparison of costs and benefits The base case shows a benefit-cost ratio of 1.8 at a discount rate of 6%. This ratio is most sensitive to changes in the discount rate, the value of hydropower, capital costs and the rate of price increase of hydropower. Without accounting for additional benefits such as reduced potential for conflict and improved trade and economic cooperation, such an investment is extremely attractive unless all aspects of the project go wrong. Summary of the Costs and Benefits of the Four Water and Sanitation Interventions All of the first three interventions are sensitive to the level of reduction in diarrheal disease, but the biosand filter intervention, based on empirical evidence, is likely to give a larger reduction. The rural water supply case would last longer (15 years) than the other two, but capital cost and annual operation and maintenance costs are significantly higher. Installation and use of biosand filters is entirely under the control of each household, while the rural water supply intervention requires collective action by the community, which has both advantages and disadvantages. All three interventions have comparable BCRs. However, only the rural water supply option gives significant benefits in terms of both time savings and disease reduction. This intervention has become significantly more attractive in recent years because of the presence of low-cost Chinese contractors in Africa. For all three interventions, reductions in mortality have a much greater value than reduced morbidity, but these figures take no account of pain and suffering reduction. For all three interventions, there will be situations where investment is unattractive economically. This provides a strong argument to maintain the demand-driven focus of the rural water supply intervention and to extend it to the other two. Sizable community and household cash contributions can also provide important demand filters. Both the rural water supply and biosand filter interventions appear to be scalable to large numbers of communities in developing countries. The CLTS intervention has been shown to be scalable in South Asia, and there is no reason why it should not also be so in Africa and Latin America. In summary, all three interventions hold considerable promise for improving the welfare of people in developing countries. But there is little doubt that continued economic growth will produce increased demand for large-scale piped network infrastructure. The fourth intervention is different from the others, but illustrates that large-scale water management projects can be very attractive economically. Each of these large projects must be evaluated on a case-by-case basis, since costs and benefits will vary widely based on local circumstances and site characteristics. Building of large-scale dams has become very controversial in recent years, but we believe there are good sites for such dams in Africa and that they should be seriously considered.

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Concluding Remarks Our findings in Part I suggest that the high costs and unique characteristics of network water and sanitation investments make them especially challenging projects. Some, but not all, water and sanitation network infrastructure projects will pass a rigorous economic test. In cities in rapidly growing economies, we expect the benefits of many projects to exceed the costs. In other cases, however, the economic reality will be more nuanced and the attractiveness of specific water and sanitation investments in network infrastructure less clear-cut. All four of the specific interventions discussed in Part II hold considerable promise for improving the economic livelihoods and health conditions of hundreds of millions of people. None of these interventions, however, is a panacea. The success of each intervention will depend on the specific context in which it is implemented. The social context matters, as well as the physical and economic contexts, particularly where behavioral change is required for positive outcomes. We believe that the first three, non-network interventions should be viewed as intermediate, not long-term, solutions in cases where network interventions prove difficult to justify. Governments and donors should let people themselves decide whether such non-network options are preferable to waiting for network solutions to their water and sanitation problems. The fourth intervention, large dams in Africa, deserves renewed attention. We have little doubt that households and firms will ultimately want the advantages of large-scale, piped network infrastructure for water and sanitation services, and they will struggle to finance these highly capital-intensive investments. With time, however, the benefits of these water and sanitation investments may grow. There is limited evidence that investments in municipal water and sanitation services actually cause economic growth, but the sequencing of significant water investments could possibly set in motion path dependent patterns of development that will lead to subsequent investments in other sectors of the economy, and to greater growth. Moreover, even in the absence of a causal relationship, the benefit stream of water and sanitation services becomes more valuable as economic growth proceeds. This paper demonstrates the extremely broad range of interventions that can be classified in the ‘water and sanitation’ sector. The breadth of these options, the range of their potential returns, and the strong dependence on the specific circumstances of each project’s design and implementation underscore the fact that there can be no single benefit-cost ratio for water and sanitation. No sectoral-level analysis can replace rigorous, project-level economic analysis. Each water and sanitation investment is unique and must be designed for its specific context, and judged on its specific merits.