> demonstrate that currently used approaches to the eco- 4. A Proposal for Improvement nomic analysis of water supply projects need substantial improvement.

"Time for a change" --that is the subtitle of a Similar conclusions appear in a number of an- World Bank discussion paper on rural water supply and nual reviews prepared by the sector policy and research sanitation issued in 1987.18 Although primarily policy staff of the World Bank. According to the 1990 water oriented, the paper adao .sses many of tLe problems desector review, "the economicanalysis of projectsdoes not scribed here. Regarding health effects, it argues that "the follow a consistent approach and the reported rates of existence of substantial, health-related extemalities is in return seem, in several cases, to be subject to substantial doubt, given the evidence.""9 On this basis, the paper upward bias due either to the approach used or the data recommends that analysts should concentrate on the employed in its calculation."17 Thesame review observed assessment ofeconom ic benefits of watersupply projects, that, "water demand continues to be projected as a com- especially on time savings. However, not relying on pletely inelastic consumption trend with an assumed external health benefits tojustify a project does not mean growth in perconnection consumption, unrelated toprices that all health benefits are unaccountable. Health benefits assumed in financial forecasts and in revenue projections known to users are reflected in theirwillingness to pay for used in the economic justification." Obviously, specific good quality water, and willingness to pay can be derived guidelines on the economic analysis of water supply from the demand function. This leaves only two kinds of projects are needed to rectify these problems. The guide- benefits that cannot be captured: (1) those unknown to lines should be based on a methodology that is flexible and users and (2) benefits to others through reduced disease structured according to the complexity of the projects to transmission. Experience suggests that health benefits be analyzed--namely, it should be kept simple and the will not materialize unless consumers understand the critical assumptions of any particular case application relationship between water and health and use water should be clear and well understood. Furthermore, the properly.' Also, the people most affected by disease methodology should be user friendly and usable also to transmission are those living in the same household and borrowers.

probably their benefits are reflected in consumers' willingness to pay.

**17** World Bank (1990) pp. 14-15.

<!-- Start of picture text --> 18Churchill (1987).<br>19ibid. p. 32.<br>2 ibid. pp. 10-11.<br><!-- End of picture text -->

# **Tablel** Review of Twenty-One SARs

||<br>|Type of Eco<br>|nomic Analys<br>|is<br>|
|---|---|---|---|---|
||A<br>(leastCost)|B<br>FIRR|C<br>(FIRR+CS)|D<br>(truecoon.analysis)|
|Problems**_in_**the Analysis|||||
|AIC > tariff|1||||
|Tariff has no effect on demand||_5_|1||
|FIRR < 10%||6|||
|Misspecified "without project"|||2|1|
|Constant marginal utility of water||||1|
|Subtotal|1|11|3|2|
|Correct Analysis|0|3|0|1|
|Total|1|14|3|3|

7