metadata: authors: 0: author: Lovei,Laszlo
count: World
docna: 0: docna: An approach to the economic analysis of
            water supply projects
docty: Policy Research Working Paper
subtopic: Health Care Services Industry,Water and Food Supply,Water and Human Health,Hydrology,Water Supply and Sanitation Economics,Small Private Water Supply Providers,Town Water Supply and Sanitation
teratopic: Water Resources
abstracts: cdata!: Development economists are increasingly
            concerned about the correct approach to economic analysis of
            projects. By looking for a compromise between theory (which
            identifies ideals) and practice (which deals within the
            bounds of time and resource constraints), Lovei focuses on
            potential guidelines for economic appraisals of water supply
            projects. He summarizes theory and the current World Bank
            guidelines on the economic analysis of water supply
            projects; reviews the method of economic analysis applied in
            21 recently approved Bank projects; and describes a
            simplified method that was tested in practice and found to
            improve substantially the quality of economic analysis in
            the sector. This new method relies on standardized and
            rigorous use of information that is routinely available
            during the preparation of water supply projects.
repnme: repnme: An approach to the economic analysis of
            water supply projects
display_title: An approach to the economic analysis
            of water supply projects
listing_relative_url: /research/1992/10/699560/approach-economic-analysis-water-supply-projects
topicv3: Water m1326522 137,Water Demand Management m1326746 1064,Water Supply m1326961 138,Water Supply and Sanitation m1327240 1199,Health m1504661 3480
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Water Resources
origu: Transportation, Water and Urban Development Department
no_of_pages: 41
author_keys: 0: author_key: 92895
model_extractions: <!-- Start of picture text --> Policy Resa_rdc|<br>Water and Sanltato<br><!-- End of picture text -->

WPS 1005 This paper- a product of the Infrastructure, Energy, and Environment Division, Europe and Central Asia - Country Departnent III is part of a larger effort in the Bank to improve operational practice and raise the quality of projects in the water and sanitation sector. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Mari Dhokai, room S12-005, extension 33970 (October 1992, 37 pages).

Development economists are increasingly concemed about the correct approach to economic analysis of projects. By looking for a compromise between theory (which identifies ideals) and practice (which deals within the bounds of time and resource constraints), Lovei focuses on potential guidelines for economic appraisals of water supply projects.

He summarizes theory and the current World Bank guidelines on the econumic analysis of water supply projects; reviews the method of economic analysis applied in 21 recently approved Bank projects; and describes a simplified method that was tested in practice and found to improve substantially the quality of economic analysis in the sector.

This new method relies on standardized and rigorous use of information that is routinely available during the preparation of water supply projects.

ThePolicy ResearchWorking PaperSeriesdisseminates the fndings of work under way in theBank. Anobjectiveof the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy.

Produced by the Policy Research Dissemnination Center
# An Approach to the Economic Analysis of Water Supply Projects

by

## **Laszlo Lovei**

Laszlo Lovei is an economist in the Infrastructure, Energy and Environment Division of Country Department EC3 of the World Bank. The author would<sup>like to thank Ian</sup> Bartlett, Colin Gannon, Christian Gomez, Luis Gutierrez, Lars Jeurling,<sup>Mike Garn,</sup> Chris Shugart, and Dale Whittington for their comments on earlier versions of the paper and the ECOWAT programs.
# **Table of** Contents

|1.|Summary .......................<br>3|
|---|---|
|2.|Theory and Guidelines .......................<br>3|
|3.|Current Practice at the World Bank .......................<br>4|
|4.|A Proposal for Improvement .......................<br>7|
|Refe|rences ................................<br>14|
|Ann|ex 1: Staff Appraisal Reports Reviewed_.15_|
|Ann|ex 2: Numerical Example .16|
|Ann|ex 3: Introduction to ECOWATI .17<br>|
||Mathematical Formulas of ECOWAT.<br>25|
|Anne|x 4: Introduction to ECOWAT2 .28|
# 1. Summary

foracompromisebetween theory (which identifiesideals) and practice (which deals within the bounds of time and discussion should stimulate further efforts to develop a responsive approach.

practice and found to improve substantially the quality of economic analysis in the sector. This method relies on standardized and rigorous use of information that is projects.

# 2. Theory and Guidelines

and, in certain circumstances, value from external benefits for those who do not consume it. In theory, the nonexcludable.<sup>2</sup> (1989).

2 Sandler (1986).

The economic analysis (or cost-benefit analysis; comparison of costs and benefits (over time, with uncertainty). While project costs are estimated in the same way for water supply as for other sectors, estimating the tify and intangible.<sup>3</sup> Moreover, willingness to pay provides a good estimate of project benefits only when consumers fully understand therelationship between water In economicanalysis, both costs and benefits are defined as the difference between results with the project and without it. The analyst develops these two scenarios in sufficient detail to estimate the difference for the period That paperanalyzes the effects ofan outbreak ofwaterbome disease and estimates nine categories of economic losses: medication, time and travel losses associated with medileisure time loss.

3
World Bank guidelines on economic analysis do not separately discuss water supply projects.<sup>4</sup> The guidelines present a general description of cost-benefit analysis but not a blueprint for the sector practitioner. Various central concepts are briefly addressed, such as "with" and "without" scenarios, willingness to pay, external benefits, non-quantification ofbenefits. Yet there is noguidanceon how to estimate consumer willingness to pay. However, detailed entries cover other problems, such as the selection of a numeraire, valuation of traded and nontraded goods, conversion factors, shadow wage, and interest rates.

Operational Manual Statement (OMS) 3.72 on the preparation of "Energy, Water Supply and Sanitation, and Telecommunications" (EWT) projects contains six paragraphs on the subject of "economic justification." Three steps are mentioned: (1) estimation of demand; (2) selection of the least cost supply option; (3) comparison of costs and benefits. However, the last step is considered quite difficult' in practice; therefore, the calculation of the financial internal rate of return (FIRR; adjusted for transfer payments) is proposed since it "usually represents at least a minimum estimate of the economic rate of return." There is no guidance on the procedures to be followed if the financial rate of return is below the opportunity cost of capital.<sup>6</sup>

# **3.** Current Practice at the World Bank

To assess the existing Bank practice, Staff Appraisal Reports (SAR) of 21 recently approved water supply projects were reviewed.' Fourdifferent approaches to economic analysis can be identified. One SAR demonstrated that the project was the least-cost solution to meet assumed demand but did not go further. Let's call this a type A analysis. Fourteen SARs calculated the financial internal rate of return of the project and briefly mentioned other, non-quantified benefits. That is type B analysis.

4 See World Bank Operational Manual Statement 2.21. 5 Operational Manual Statement 3.72, para. 34 states, "In most cases it will not be possible toquantify the economic benefits by consumers in excess of amounts they actually pay, and therefore the estimation of the social value of the project is precluded."

> 6 "A low return may simply indicate that tariffs are too low, rather than that the project is not justified." OMS 3.72, para. 34.

' For a list of the SARs reviewed, see Annex 1.

Three SARs calculated the FIRR and also provided an estimate for the consumer surplus--Lype C analysis. Only three SARs attempted to carry out an independent economic analysis without relying on the projected financial revenue stream--type D analysis.

Generally, type A analysis is justified when the majority of project benefits are considered non-quantifiable and the benefits of different supply options are thought tobe thesame. In practice, thereare twoproblems with this approach. First, while the relative importance of expected health benefits may change from one water supply project to another, non-health-related benefits are seldom negligible and should be accounted for. Second, in cases where benefits are intangible but quantifiable, cost effectiveness analysis is more appropriate to determine the correct level of supply to achieve health improvements. Such analysis should consider whether the incremental health benefit due to the last unit of water supplied might be achievable at lower cost.

Type A, or least-cost analysis, has to be performed during the preparation ofany watersupply project, for example, to select the best water source.<sup>8</sup> IL should come before the calculation of project costs. However, if the analyst only wants to ensure the economicviability of the project and is not interested in the net present value or the economic rate of return, then, assuming certain conditions are met, the estimation of benefits can be considered unnecessary. If the average incremental cost (AIC) of water' is equal to or less than the water tariff, and the demand at that tariff is estimated with reasonable certainty, it can be said without further analysis that the economic rate of return of the project is not less than the opportunitycostofcapital. However, not allwaterprojects in developing countries meet these conditions. In the case of the SAR that simply conducted a least-cost analysis,<sup>10</sup> the existing tariff was only 70 percent of the AIC and even the projected tariff (six years later) was less than the AIC.

S See OMS 3.72, para. 32.

> 9 AIC is defined as C/Q, where C and Q are the discounted present value of incremental costs and incremental water quantity supplied, respectively. The discount rate is equal to the opportunity cost of capital, and incremental means the difference between the "with" and "without" project scenarios.

10As a matterof fact, the SAR presented an economic rate of return calculation based on the com parison between the least cost and the second least-cost solution to the problem of providing the watersource for the piped supply system. There was no comparison with the "without" project scenario.

4
Type B analysis has two potentiil problems. The multiplying that with the projected tariff is highly questionable (unless the pri.-e elasticity of water demand is calculated into the estimates of incremental revenues.

opportunity cost of capital, the project is justified." forthe sake of simplicity). Foradditionaljustification, the benefits.<sup>12</sup> quantified, those benefits would have made the projects only. economically viable. In these cases, without additional information, the FIRR calculations did not give enough the non-quantified benefits need to be.

function"3 were determined and then connected by a linear Accuracyof thewholeproceduredependsonthe households use piped water for drinking, cooking, bathing, washing, and sometimes even for gardening. Water (1/c/d). Bathing, washing, and other water demand is from vendors, other than the price and quantity, consisThe third type C analysis tried to place both calculation of consumer surplus to the first 15 VIc/d of piped water."<sup>4</sup> However, that may actually have underesThe three type C analyses tried to come up with timated the benefits of piped water supply. When piped the additional information by estimating the value of water costs less than other nonpiped sources, consumers consumer surplus. To do that, the water demand function will enjoy a surplus on their water for other use also. had to be estimated in the relevant range. The same Despite this discrepancy, such a conservative approach procedure was followed in all three cases: the coordinates might be useful when the FIRR (based on existing tariff) of two points on the ordinary (uncompensated) demand is close to the opportunity cost of capital.

1 See OMS 3.72, para. 34.

12 One SAR, without presenting a demand analysis, used the assumed tariffasa proxy forbenefitsofproposed small "Additional" benefits were mentioned without quantifiefits are usually the reason why consumers might be double counting.

If a second point on the demand curve represents the full quantity of piped water consumption, the first 13 For the definition of ordinary and compensated demand

**14** While the method of estimating part of the consumer onatariff increaseof morethan 500 percent (in realterms) effect on water consumption.

5
point mus' he based on observations of water use from all and prices. Several water supply schemes were analyzed available sources. Otherwise,' as in two of the type C that way in the SAR. The calculated ERRs were between analyses, consumer surplus can be grossly overestimated. 5-27 percen,. There was not any cut-off level applied, and Both analyses aimed to determine only the average value all schemes were accepted, based on additional, of consumer surplus based r c ubic meters of water nonspecified, "unquafitifiable" health benefits. consumed. To do that, each calculated the area of the triangle under the demand curve between the quantity sold The third type D analysis divided the consumers by vendors and the quantity provided by the piped water into two groups, existing consumers (already served by system and therefore implicitly assumed that the "without the water sJvtem) and new consumers. Water demand project" consumption was not more than the amount of curves were estimated separately for each group. At first water pt rchased from vendors. As a result, the two two points on each demand curve were identified. One analysesurrivedatsimilarconclusions: theaveragevalue point was based on drinking/cooking water demand, of consumer surplus is about equal to the water tariff; pricedattheratechargedbywatervendors,whiletheother therefore, total benefits should approximate two times the point was based on projected per capita piped water use, sales revenue."<sup>5</sup> The third type D analysis divided the consumers point was based on projected per capita piped water use, priced at the expected average tariff under the project. Again, uiless vendors were the only water source used by the nonconnected consumers, these two points are not on One of the three type D analyses provided an However, since piped water consumption (per consumer) and (-0.8). was projected to be higher than existing water use, and since consumers generally assign a decreasing value to overestimated the true economic rate of return.

After estimating the demand curves, the average estimated for each group of consumers. Existing consumers' average willingness to pay was estimated at the higher than the projected tariff. If these consumers had been using other water sources in addition to vendors, then

**IS** that the project, as a result of a type B analysis, appears justified), the analysis ended with an ERR of 34 percent. surplus."

Altogether, only three type B and one type D 17 projects are not economically viable. Some of them could be justified on the basis of information in the SARs, information and analysis. However, rather that assessing the viability of these projects, this review aims to 6 To be exact, two additional assumptions are needed. It among the costs of existing water supply and that there is no producer surplus.

6
> 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
AnotherWorld hnik paperon ruralwatersupply different service levels and to assess the consequences of served behavior (quantities of water used from different sources, time spent collecting water, money spent on theory, inferhow muchconsumerswould bewilling topay for improved water supply.

analysis would result in better design and selection of projects and would potentially increase the reliability of revenue projections.

paper does not deal with water source selection despite its importance for the economic and financial viability of sumers who select water from the piped system. Therefore, estimated project benefits indicate potential benefits ers should be integral to any economic analysis, the proposed methodology does not cover it.

21 Briscoe and de Ferranti (1988) p. 25.

_n_ (1988).

_Shortcut method._ This method assumes that the whether the present value of net benefits is likely to be _lower bound_ for If the existing tariff is adequate to meet financing FIRR calculation based on existing tariff and projected demand can be carried out. The demand estimate should not bea simple extrapolation of past trends but should take towards higher or lower income customers will affect water consumption. Even if there is not enough data to compare income and water consumption, the income elasticity of water demand should be taken into account **2aFIRR,** _6_ If a real tariff increase is expected, projection of certainconsumerswhowillnotbeconnectedtothesystem and relyon thesamewatersources as the project), thecost stream has tobecorrected before the internal rateof return calculations are carried out. 24 This test is exactly the same as described in OMS 3.72 for the validity of the test).

8
most efficient way to determine the price elasticity of projectcanbedividedintotwoparts:onepartreplacesthe water demand. Based on econometric studies, the short- previous sources and quantity of water use, the other part and medium-run price elasticity of w'ater demand is is a 'iet _gncrease_ in water consumption. In this context, usually in the -0.2 to -0.8 range.' Price elasticity changes benefit of the first part is equal to the savings of economic ns one moves along the demand curve. Arc elasticity over costs of consumers who do not need to use t:.e former the assumed range of price change is more relevant for watersourcesanylonger(thearearepresentedbyOQlDlPI economic analysis than point elasticity. If known, the in Graph 1). Benefit of the second part is equal to the area effects of previous tariff increases can be analyzed to below the demand curve between the with-project and select a particularvalue for the price elasticity.' After the without-project water use of each consumer (the area price effect is taken into account, the same test as above QlQ2D2D1 in Graph 1). can be carried out to see whether the project is justified.

Before beneflits can be estimated, a survey of These demand projections assume that the ob- existing water consumption patterns must be undertaken served quantity of piped water consumption with the to determine the quantity of water used from each source corresponding price providesa point on the demrand curve. If supply is intermittent or consumption is not metered and a flat monthly fee is charged, that assumption will be 2$ For example, Al-Qunaibet and Johnston (1985). unfounded. Also, if the number of existing customers is 26 If these effects are not documented, one could, as a last small compared to the planned expansion, extrapolation resort, rely on Martin and Thomas (1986), who found that of observed piped water consumption patterns Is highly the long-run price elasticity for residential water was uncertain. about -0.5 over a wide range of price changes and across several countries. With respect to industrial water deWhen the FIRR is below the opportunity cost of mand, Renzetti (1988) found that the price elasticity was capital, the "shortcut" method cannot be applied. Adding in the -0.1 to -0.6 range, with the demand of water consumer surplus to the revenues might raise the calcu- intensive industries being generally more elastic. lated internal rate of return; however, _the consumer_ I The without project consumption of these customers _surplus of new customers cannot be estimated without_ would be zero unless nonpiped water use is also taken into _taking into account their existing, nonpiped water con-_ account.

_sumption.27_ The indirect method described below can be I Whether this actually happens depends on the quality applied in all these cases as wellaswhensa completely new and price of piped water compared to water from other system is to be constructed. sources.

_Indirect method._ Residential consumers use water for drinking,cooking,bathing,washing, and so forth. The water quality required depends on the purposeor use. Brackish watermight be acceptable for washing but not for drinking. When piped water is not available, people usually rely on a variety of water sources: vendors, wells, rivers, ponds, springs, rainwater. Both the quality and the price of water from these sources are different, and each water source serves different needs. Whet; piped water becomes available, it is a potential substitute for water from all other sources.28 The incremental quantity of piped water supplied by a <!-- Start of picture text --> Graph 1: Benefit of Piped Water<br>maWgifnWi<br>Dl<br>P1iD<br>I<br>- - - -<br>- - ,<br>\ mn<br>curve<br>GI 02 quantwI<br>a1 Waow UNoutproJea<br>02 Wate use WMU am projeof<br>P1 Marghd cosOko of watV without prole<br>P2 MagI9 ooaVpro d waWer wt do pro<br><!-- End of picture text --> 9
and the amounts spent on water sold by vendors," on the mand curve (PW) is the aggregate of these curves since construction and repair of wells, h3ndpumps, water stor- piped watercan serve all these needs. However, thepoints age tanks, and on theopetation ofdiesel orelectricpumps, obtained from the survey cannot be aggregated because and time spent collecting and carrying water and operat- their coordinates on the vertical axis (that is, prices **P.** and ing nandpumps. While the value of consumers' time is not directly available from the water use survey, recent research suggests that it is close to the market wage rate for unskilled labor.30 29 When vendors are active in the project area, information unskilled labor.30 29 When vendors are active in the project area, information obtained from the water use survey about the cost and Unless there are indications to the contrary, it can quantity of water purchased from vendors will be substanbe assumed that actual payments represent economic **'** Iy more reliable than informationdescribingconsunipcosts--that is, the production and operation of wells, t,%n ofwater from other sources. However, water vending storage tanks, and pumps is a competitive industry with a isnotanecessaryconditionforusingthe?roposedmethod. flat cost curve. It is also assumed that no element of 30 Whittington, Mu, and Roche (1989). monopolistic rent distorts the price of water sold by 3' If a project is expected to replace a substantial amount vendors, and that vendors who lose their jobs due to the of water purchased from vendors, a water-vending survey piped water project can find alternative occupations with- to validate these assumptions is warranted. The survey out incurring any costs.3 should provide information about the cost and price of water at each phase of the vending system: at the water Usually it can be assumed that all nonpiped water source, at the retail outlets (hydrants or ki> ks), and, after use will be replaced by piped water in households that distribution, at the point of delivery to the households. choose to connect to the piped system.<sup>3</sup> " This assumption<sup>32</sup> The problem of determininghow many householdswant should not apply to households that will be served by to connect to the system is not analyzed in this paper. public taps; the amount of water use replaced will depend 33 Sunk costs cannot be saved, therefore only those costsSunk costs cannot be saved, therefore only those costs on the price of waterand the location of the taps compared should be taken into account which would not be incurred to the cost and convenience of presently used water if the project was implemented. While the cost of an sources. After the amount and cost of replaced water are already existing well or water pump cannot be avoided Usually it can be assumed that all nonpiped water source, at the retail outlets (hydrants or ki> ks), and, after use will be replaced by piped water in households that distribution, at the point of delivery to the households. choose to connect to the piped system.<sup>3</sup> " This assumption<sup>32</sup> The problem of determininghow many householdswant should not apply to households that will be served by to connect to the system is not analyzed in this paper. public taps; the amount of water use replaced will depend 33 Sunk costs cannot be saved, therefore only those costsSunk costs cannot be saved, therefore only those costs on the price of waterand the location of the taps compared should be taken into account which would not be incurred to the cost and convenience of presently used water if the project was implemented. While the cost of an sources. After the amount and cost of replaced water are already existing well or water pump cannot be avoided estimated, the calculation of cost savings resulting from (that is, it is sunk except for salvage value, if any), future the first part of water supplied by the project is relatively replacement costs or the cost of new wells snould still be straightforward (area OQ,DP, = Q, x P,, see Graph **1).33** considered.

<!-- Start of picture text --> The demand curve for<br>piped water is needed to estimate<br>benefits due to the second part. If<br>therewereonlyonewatersource, Graph 2: Aggregation of Water Demand Curves<br>the quantity and marginal cost of<br>water used from the source would prloe<br>determine a point on the piped<br>water demand curve. Frequently<br>there is more than one water Pd - \<br>source used, and water from dif-<br>ferent sources serves different ? -<br>needs. Theoretically, there is a . -n I I PWI _<br>separate water demand curve for w' N<br>each need (DW and ND in Graph<br>2). Observations obtained from- Qd qnd Ot quatIty<br>the water use survey describe the<br>consumption of water from these ND NondnIdng w dmand owe<br>sources. The marginal cost of PW Plpedwawdmandaurv<br>water from various sources is dif- Ond n-ddnQn wdar ommpaon<br>ferent; therefore, the points on the Ot Total wbroonsunmpton<br>Pd Magl cospr o doltkdng water<br>demand curves obtained from the Pnd Margirhk wotpr d non-drng water<br>water use survey belong to differ-<br>ent prices. The piped water de-<br><!-- End of picture text --> 10
P.) are different.<sup>341</sup> notherwords, we do not know exactly what price belongs on the aggregated demand curve to the total consumed quantity of water (Q,).

The method proposed here assumes that this price (P,, see Graph 3) is tqual to the weighted average of the prices/ costs of water from the varous sources (the weights are the consumed quantities). It is further assumed that the segment of the piped water demand curve that belongs to prices lower than this weighted average price is linear.<sup>3</sup> B3ut one more point is needed--on the low end of the water demand curve (point H in Graph 3)--and its coordinates can be based on previous observations of piped water consumption under similar income levels, low prices, and unconstrained supply.' <!-- Start of picture text --> Graph 3. Estimation of a segment<br>of the pi,3ed water demand curve<br>Pd - - -<br>Pt - T<br>Pnd --<br>' H<br>I i<br>I I I<br>Qd Ond Ot quanfity<br>f QraZtpd oP w m &W<br>Pt - "d x Od + Prld x Q0<br>h prim pont an th piwet d am<br><!-- End of picture text --> Graph 4. Calculaton of the benefit **of** the **net Increase** In **water use** <!-- Start of picture text --> plce<br>Pt - T<br>e<br>Ptm I<br>P12 - - -<br>Qt1 qu2<br>quaty<br>Qt2 Total water use without the project<br>Pt1 Marginal cosVpdoe oa weer w/out projed<br>P12 Marginal cotlprlco f water wih the projec<br><!-- End of picture text --> After the segment [T,H] of the piped water demand curve is determined, the benefit of the second part of incremental water supplied (namely, thebenefittdueto the net increase in water use) can easilybeestimated. Sincethe 34 The aggregation problem is related only to the observations in the survey, not to the water demand curves themselves. If we Pt1 knew the curves already, their aggregation would not present any difficulties. **3s** Selection of the form of the demand curve will influence the estimation of consumer benefits (it affects the benefits obtained from the net increase in water consumption--tha. is, area Q,Q2D2D, in Graph 1). Howe,ver, the difference was found to be marginalinmostpracticalexamples.Theproposedmethod works with linear curves because they're simpler to estimate. Gomez (1987) provides a good description of experience with a similar method used in the InterAmerican Development Bank wita linearand logarithmic functional forms in theestimation of waterdemand curves.

> 36 If estimated with reasonable certainty, the point determined by the tariff projection and the correspondingwater sales under the project can substitute for this high quantity--low price point. Hlowever, if that estimate is uncertain, it is better to follow the procedure proposed above. The results are not sensitive to the selection of the high quantity--low price point and the proposed procedure at least ensures that the benefit calculation is not implicitly based on an upward sloping demand curve.

11
demand curve is assumed to be linear between the pres- is completed. It was designed for medium-sized projects ently consumed quantity of water (Q,,, see Graph 4 below) and allows the user to incorporate dynamic effects on both and the new, increased consumption quantity (Q.), the the demand and supply sides." average ec 'nomic value of one unit of incremental water is equal to the price (PJ on the demand curve that belongs Although relying on aggregated demand curves to the midpoint between these two quantities--that is, Pt, can lead to a downward bias in estimating benefits, they = (P, + P,2)/2. The benefit (B) due to the net increase in are used in ECOWATI and 2 based on the following waterconsumption isequal to theaverageeconomicvalue co. siderations. The data needed to estimate two (drinking calculated accordingly, multiplied by the total net in- and nondrinking) or more water demand curves would crease in water use, or B = P,t x (Q, - Q,). (Q, - Q,). - Q,). require a more detailed survey. Such a survey would is equal to the price (PJ on the demand curve that belongs Although relying on aggregated demand curves to the midpoint between these two quantities--that is, Pt, can lead to a downward bias in estimating benefits, they = (P, + P,2)/2. The benefit (B) due to the net increase in are used in ECOWATI and 2 based on the following waterconsumption isequal to theaverageeconomicvalue co. siderations. The data needed to estimate two (drinking calculated accordingly, multiplied by the total net in- and nondrinking) or more water demand curves would crease in water use, or B = P,t x (Q, - Q,). (Q, - Q,). - Q,). require a more detailed survey. Such a survey would assess not only the quantity, source, and cost of existing Sincetheproposed methodworkswith theaggre- water use but also the purpose of water consumption. The gated demand curve, It implicitly assumes that the con- numberofsurveyquestionswouldbesubstantially higher, sumers' "without project" condition (or, without the net increasing the cost of economic analysis. Experience with increase in water use) is equivalent to the situation when the computer programs indicates that the advantage of only piped water is consumed at the weighted average using multiple water demand functions would be modest, price (point T on the demand curve in Graph 3). The since benefits due to incremental water consumption are benefit of the incremental water calculated accordingly usually not very large (the incrementalwaterconsumption will equal the true benefit if the incremental consumption in the numerical example in Annex 2 is quite substantial, ratio for any two kinds of water use is the same as their 45 percent).' Also, ECOWAT could be run twice (sepaexisting consumption ratio.<sup>3</sup> ' However, the (relative) in- rately for drinking and nondrinking water), if the data cremental consumption of water for basic needs is usually were available. In such a case, the fixed cost of piped water higher.? That makes the benefit of incremental piped could be arbitrarily divided between drinking and water somewhat underestimated (for a numerical ex- nondrinking water. The net present values (NPVs) of the ample, see Annex 2). two runs should be combined to arrive at the true NPV of two runs should be combined to arrive at the true NPV of the project.<sup>4</sup> ' Two simple Lotus-based computer programs, OECOWAT1 and ECOWAT2 were developed to carry out these calculations for small and medium-sized water supply projects (Annexes 3 and 4 present the input and I Large projects, however, should not be analyzed with output tables of the programs). ECOWAT1, the simpler these standardized programs. While the principles of a version, needs data input only for the project implemen- method analyzing a large project should basically be the tation period plus the first year after project completion. same, more detailed analysis is warranted. It is advisable It was designed for small projects (less than US$0.5 to divide consumers into three to five income groups. million total investment cost). ECOWAT2, the multi- Also, unless the availability of altemative (nonpiped) period version, needs input for the project completion water sources is the same for the whole area, the future period plus every fifth year for 25 years after the project service area should be divided into regions with similar "without project" conditions. Specific guidelines for the appraisal of large urban water supply projects were developed in the Inter-American Development Bank in 1977, see Powers (1977). These guidelines were later incorporated into a computer model, see Powers and Valencia _37_ More precisely, assuming there is only two kinds of water use, this condition is met if (Qd2 - **Qdl)/(Qad2** - Q.d,) = **Qd/Qnd,** where Qd 2and Q,l (Q.,2 and Qad,) are the quantity (1980). of drinking (and nondrinking) water used with and without the project, respectively.

I This also explains why the selection of different functional forms for the water demand curve has only a marginal impact on the estimated benefit stream.

38 The assumption that one kind of water (piped) with the marginal impact on the estimated benefit stream. same price will satisfy all needs frequently leads to that 41 However, the aggregation problem cannot be comresult. Basic needs require higher quality and costlier pletely avoided; it is there from the beginning, when the water, and relative incremental consumption is usually water consumption of several households are added topositively correlated with the marginal cost of the existing gether to estimate their combined water demand. Differsupply, such that the higher the marginal cost of water ent households usually face different water costs when currently serving a particular need, the higher the incre- they rely on nonpiped water sources, which again raises mental consumption (for that need) will be after piped the problem of estimating the price on an aggregated water becomes available. demand curve.

12
The computerprograms were tested in Indonesia train its staff in the use of the programs. Currently the in 1988 and soon became widely used by both expatriate programs are used to test the economic viability of and local consultants preparing water supply projects. proposed projects and also to identify areas where the Government departments built the programs into their economic benefits of piped water service expansion are project appraisal guidelines. Recently one department, in expected to be the highest. the context of a project appraisal workshop, has begun to 13
# References

- Al-Qunaibet, M. H. and R. S. Johnston (1985) "Municipal Demand for Water in Kuwait: Methodological Issues and Empirical Results," _Water Resources Research._ Vol. 21, No. 4.

- Anderson, J. (1989) "Forecasting, Uncertainty, and Public Project Appraisal." World Bank PPR Working Paper 154. International Economics Department. Washington, D.C.: The World Bank.

- Briscoe, J. and D. de Ferranti (1988) _Waterfor Rural Communities._ Washington, D.C.: The World Bank.

- Churchill, A. A. (1987) "Rural Water Supply and Sanitation--Time for a Change." World Bank Discussion Paper No. 18, Washington, D.C.: The World Bank.

- Comes, R. and T. Sandler (1986) _The Theory of Externalities, Public Goods, and Club Goods._ Cambridge, MA: Cambridge University Press.

- Gomez, C. (1987) "Experiencesin Predicting WilingnesstoPay for WaterProjects in LatinAmerica."TechnicalNotes No. 2. Washington, D.C.: Inter-American Development Bank.

- Harrington, W., A. J. Krupnick, and W. 0. Spofford, Jr (1989) "The Economic Losses of a Waterbome Disease Outbreak." _Journal of Urban Economics._ Vol. 25, No. 1.

- Johansson, P. (1987) _TheEconomic Theory andMeasurementofEnvironmentalBenefits._ Cambridge, UK: Cambridge University Press.

- Little, I. M. D. and J. A. Mirrlees (1990) "Project Appraisal and Planning Twenty Years On." Proceedings of the World Bank Annual Conference on Development Economics, 1990. Washington, D.C.: The World Bank.

- Martin, W. E. and J. F. Thomas (1986) "Policy Relevance in Studies of Urban Residential Water Demand." _Water Resources Research._ Vol. 22, No. 13.

- Powers, T. (1977) "Guide forAppraisingUrban WaterSupply Projects." Papers in ProjectAnalysis No.4. Washington, D.C.: Inter-American Development Bank.

- Powers, T. and Valencia, C. (1980) "SIMOP Urban Water Model. User Manual. A Model for the Appraisal of Water Projects in Urban Areas." Papers in Project Analysis No.5. Washington, D.C.: Inter-American Development Bank.

- Renzetti, S. (1988) "An Econometric Study of Industrial Water Demands in British Columbia, Canada," _Water Resources Research._ Vol. 24, No. 10.

- Whittington, D., J. Briscoe, and X. Mu (1987) "Willingness to Pay for Water in Rural Areas: Methodological Approaches and an Application in Haiti." WASH Project, Field Report No.213. Washington, D.C.: USAID.

- Whittington, D. (1988) "Guidelines for Conducting Willingness to Pay Studies for Improved Water Services in Developing Countries." WASH Technical Report no. 56. Washington, D.C.: USAID.

- Whittington, D., X. Mu, and R. Roche (1989) "The Value of Time Spent on Collecting Water: Some Estimates for Ukunda, Kenya." INU Report no. 40. Washington, D.C.: The World Bank.

- World Bank (1990) "FY90 Sector Review: Water Supply and Sanitation." Infrastructur. and Urban Development Department, PRE. Washington, D.C.: The World Bank.

14
# Annex 1: StaffAppraisal Reports Reviewed

1. Uruguay: Water Supply Rehabilitation Project (6790-UR), March 1, 1988.

2. Nigeria: Lagos Water Supply (6375-UNI), April 25~ 1988.

3. Colombia: Water Supply and Sanitation Project (7120-CO), May 26, 1988.

4. Zaire: Third Water Supply Project (7204-ZR), June 2, 1988.

5. Brazil: Water Project for Municipalities (7083-BR), June 10, 1988.

6. Yemen: Al Mukalla Water Supply Project (6995-YDR), June 22, 1988.

7. Pakistan: Second Karachi Water Supply and Sanitation (7355-PAK), December 30, 1988.

8. Gumea: Second Water Supply Project (7304-GUI), January 9, 1989.

9. Haiti: Port-Au-Prince Water Supply Project (7613-HA), April 4, 1989.

10. Yugoslavia: Istria and Slovenia Water Supply and Sanitation Project (7479-YU), May 1, 1989.

11. Brazil: Water Sector Project in the State of Sao Paulo (7650-BR), May 17, 1989.

12. Ghana: Water Sector Rehabilitation Project (7598-GH), May 18, 1989.

13. Mexico: Water, Women and Development Project (7726-ME), May 24, 1989.

14. Kenya: Third Nairobi Water Supply Project (7500-KE), July 6, 1989.

_15._ Philippines: Anggat Water Supply Optimization Project (7801-PH), August 23, 1989.

16. India: Hyderabad Water Supply and Sanitation Project (7501-IN), January 4, 1990.

17. Korea: Juam Regional Water Supply Project (8083-KO), February 16, 1990.

18. St. Lucia: Water Supply Project (8244-SLU), March 8, 1990.

19. Uganda: Second Water Supply Project (8254-UG), March 22, 1990.

20. Yemen: Tarim Water Supply Project (8362-YDR), May 29, 1990.

21. Philippines: First Water Supply Sewerage and Sanitation Sector Project (8143-PH, May 31, 1990.

15
Annex 2: Numerical Example

# Estimate of the benefit of incremental water:

# Without **Project**

1. drinking water demand qd = -0.25 * price + 3 2. nondrinking water demand q. = -price + 6 3. drinking water price/cost = 6 4. nondrinking water price/cost = 3 5. drinking water consumption = 1.5 6. nondrinking water consumption = 3 7. weighted average price/cost = (6 * **_1.5_** + 3 * 3)/4.5 _=4_

# **With Project**

1. piped water demand q= **qd** + . 2. piped water price = 2 3. piped water consumption = 2.5 + **4 =** 6.5

2. piped water price 3. piped water consumption

# **Estimated Benefit of Incremental Water**

1. incremental water quantity = 6.5 - **_4.5_** = 2 2. average value of incr. water = (4 + 2)/2 =3 3. estimated benefit = 2 * 3 =6

# **True Beneflt of Incremental Water**

1. incr. drinking water quantity = 2.5 - **_1.5_** = 1 2. average value of incr. dr. water = (6 **+** 2)/2 = 4 3. benefit of incr. dr. water = 1 * 4 4 4. incr. nondrinking w. quantity = 4 **-** 3= 1 5. average value of incr. n-d water = (3 + 2)/2 = 2.5 6. benefit of incr. n-d water = 1 * 2.5 = 2.5

5. average value of incr. n-d water = (3 + 2)/2 = 2.5

# **Error**

1. estimated benefit = 6 2. true benefit = 6.5 3. difference = -0.5 (-7.7 percent)

**16**
**Annex** 3: **Introduction to** ECOWAT1

The following section shows a printed version of ECOWATI, a program designed to carry out economic analysis of small water supply projects in Indonesia. ECOWAT1 is a Lotus 123 working file, which contains subroutines--so-called macros--making the calculations convenient and helping you to print the results in a standard format.

Determining the economic viability of a project requires affirmative answers to two questions. Is the present value of net benefits (NPV) of the project positive?, and Is the present value of net benefits at least as high as the NPV of any mutually exclusive project alternative? Looking at a new piped water supply system or at the extension of an already existing system, the supplied quantity of water as a result of the implemented project can be divided into two parts: one part replaces the previous source and quantity of water use (wells, springs, rivers) and the other part is a net increase in water consumption. Benefit from the replacement part is equal to the cost savings (actual payments plus own labor) of consumers who no longer need to use other sources of water supply. Benefit from the incremental water use is equal to the consumers' willingness to pay, which can be determined by estimating the area under the consumers' water demand curve. When both parts of the benefits are quantified, the netbenefitsof theprojectcan be calculated by adding them together and subtracting the cost of new water supply. This answers the first question. An affirmative answer to the second question should result from carefulprojectdesign, which requires twoimportant components: to select a least-cost solution for raw water intake, storage and treatment, and to extend the distribution system towards those consumers who, without the project, would have the highest-cost water supply (including the costs of their own labor in carrying the water) from alternative sources.

With few exceptions, ECOWATI only requires data that describe the water supply/demand situation<sup>in</sup> oneparticularyear: thefirstyearafterprojectcompletion. Data input is divided into twoparts: the first part refers<sup>to</sup> the 'WITH' project, the second to the 'WITHOUT' project alternatives. Calculations are based on constant prices and a 10% (real) social rate of interest. ECOWATI is most useful if applied at an early stage of project design. Sensitivity analysis of different design alternatives will help to choose a design that maximizes the expected net economic benefits.

The following pages show what appears on the computer screen when working with ECOWATI. They are not a substitute for the program itself but demonstrate the nature of information required to carry out the analysis. A survey of water use in the project implementation area is the most important requirement before using the program.

As a result of its simplicity, ECOWATI can be used to analyze only small projects (less than two billion rupiah investment cost). Medium-sized or large water supply projects require a more detailed description of water use in the years after implementation.

To **run** the program.

*Load LOTUS 123

"Type _/"_ oSelect FILE, RETRIEVE, ECOWATI.WKI.

Comments are welcome. Please contact Laszlo Lovei at (202) 473-2772.

17
ECONOMIC ANALYSIS OF SMALL WATER SUPPLY PROJECTS -- INDONESIA All data refer to the first year --year(1)--after project completion, except where Indicated otherwise. Input data in the highlightedlcoloured areas. To reach a paragraph directly, press F5 and type PARAx , when x is the number you want. To see the results, press F5 and type RESULT. Arrow keys move the cell pointer.

A. 'WITH' project situation:

1. Population served and piped water delivered by the project:

||house|yard|public|non-||total(pres|s F9)|
|---|---|---|---|---|---|---|---|
||connec|<br>tion|<br>standpipe|residenti|al|||
|no. of<br>persons|0|<br>0|<br>0|n/a||0||
|cubic<br>meter/yea|0<br>r|<br>0|<br>0|0||0||
|2.|Investrme|ntcost(conn|ection exclu|ded) on con|stant prices:|||
||year(-4)|year(-3)|year(-2)|year(-1)|year(O)|total va<br>(in ear|lue<br>1))|
|million<br>ruplah|0|<br>0|0|0|0|y|<br>0.00|
|3.|Connectio|n cost (inclu|ding house|hold storage|tank):|||
|MRp|year(-4)|year(-3)|year(-2)|year(-1)|year(0)|year(1)|total<br>(rv)|
|house|0|<br>0|0|0|0|0|p.<br>0.00|
|yard|0|<br>0|0|0|0|0|0.00|
|standpipe|0|0|0|0|0|0|0.00|
|non-res.|0|0|0|0|0|0|0.00|

4. Operation and maintenance cost of supply system (including company overhead cost) on a cubic meter delivered basis: rupiah/ cub.met. 0 5. Do water vendors or the consumers themselves carry the watef from standpipes to the place of consumption ? (if answer is consumers, change Indicator to "1", if vendors, leave as f0 ) vendor indic. 0 18
||Are there -- or are there going to be -- public standpipe/|
|---|---|
||hydrant operators ? (if the answerisno, change the indicator<br>to "I',otherwise leave as**v0n)**<br>|
|concess.<br>indic.|0|
||Estimated delivery rate of vendors (if no information,<br>use 2 cum/day/vendor):<br>|
|cum/day/||
|vendor|0<br>|
||Opportunity cost of vendor labour (may be different from their<br>net income as a result of monopoly or restricted entry -- if no<br>information, use Rp 2500/day/vendor):|
|Rp/day/||
|vendor|0|
|cum/day/|Average delivery rate of standpipes:<br>|
|tdi|<br>0|
|sanpp|<br>|
||Opportunity cost of standpipe/hydrant<br>operator services (may<br>be different from their net income as a result of a monopoly<br>-<br>if no information, use Rp 2500/day/concessionaire):|
|Rp/day/||
|conc.|0|
||Average time required to get 1 cubic meter water from standpipe<br>(hauling excluded):|
|hour|0|
||Average distance from standpipes to those households which rely<br>on water from standpipes:|
|meter|0|
||Value of private time (if no information, Rpl 50/hour in<br>Java/Bali, Rp200/hour In the Outer islands is proposed):|
|Rp/hour|0|
|6.|Did local people boil the drinking/cooking<br>water before project<br>implementation<br>?(if the answer is yes, change the indicator tof1I,no<br>a1 jIfno write f0')|
|boiling<br>indic.|0|
||Do you assume project will make a difference in boiling habits|

19
over time ? (if answer Is yes, change Indicator to "1 ", if no write '0') boiling indic.

0 What percentage of population served by piped water will drink the water without boiling as a result of the project after implementation Is completed /year(O)1?

year(5) year(l0) % 0 0 Average quantity boiled daily before project implementation (if no information use 2 liter/capita/day): liter/ capita/ 0 day Price of kerosene sold by street vendors: Rp/liter 0 THIS IS THE END OF DATA INPUT FOR THE 'WITH' PROJECT CASE. PLEASE PRESS CALC (F9) AND REVIEW THE RESULTS BELOW. THE ONLY PROPER WAY TO MODIFY RESULTS IS TO MODIFY THE INPUT DATA. IF FINISHED, PROCEED TO THE 'WITHOUT' CASE (PARA8).

# 7. Economic cost of piped water:

|Rp/cum|house|yard|public|non-|
|---|---|---|---|---|
||connec|tion|standpip|e resid.|
|capital|0|0|<br>0|<br>0|
|<br>connect.|0|0|0|0|
|O&M|0|0|0|0|
|hauling|0|0|0|0|
|<br>boiling|0|0|0|0|
|total|0|0|0|0|

- B. 'WITHOUT' project situation:

8. Water use of the consumers (project beneficiaries defined in para. 1.) to be replaced by the project: <!-- Start of picture text --> electric handpump bucket other vendors non-resl- total<br>shallow well source dential (pressF9)<br>no.of 0 0 0 0 0 n/a 0<br><!-- End of picture text --> 20
persons cubic 0 0 0 0 0 0 0 meterlyear (Allocate no. of persons according to drinking water source. Be sure the total number of persons is tho same as In para 1. To check, press F9, then 'HOME', if the total Is 'ERR'.) 9. One-time investment cost of these (private) water sources to supply demand given above:

- electric handpump bucket other non-resid. shallow well source

- million Rp 0 0 0 0 0 Percentage of these facilities already installed (before project implementation begins):

- % 0 0 0 0 0 10. Operation and maintenance cost of residential electric pump shallow wells and non-residential water sources (wells or other private supply) on a cubic meter consumed basis:

electric pump non-residential shallow wells Rplcum 0 0

# Time required to get one cubic mete **r** esidential water (hauling excluded) from:

- handpump bucket other sources of shallow wells resid. water

- hour 0 0 0

Maintenance cost on a cubic meter consumed basis:

||handpump<br>|bucket<br>other sources of|
|---|---|---|
||shallow wells|resid. water|
|Rp/cum|<br>0|0<br>0|

11. What share of water use within each type of source (excluding vendors) comes from sources located outside own yard/household?

handpump bucket other sources of 21
shallow wells resid. water 0 0 9S0 Average distance of these water sources (outside yard/household) but used by the consumers themselves) from place of consumption: handpump bucket other sources of shallow wells resid. water meter 0 0 0 Average price of water sold by vendors (carriers): Rp/cum 0 Do you consider this price an acceptable indicator of the cost of water (considerlng hauling cost and the cost at the source of the water)? If answer Is yes, change Indicator to 1" and go to paragraph 12, If no write 10" and continue here.

Indic. 0 Average quantity supplied by those water sources which the vendors use to purchase the water they distribute: cum/day/ source 0 Cost of that water at the source (different from price -- exclude remunerationlnet income of concessionalres/owners): Rp/cum 0 Average delivery rate of vendors: cumLday/ vendor 0 THIS IS THE END OF DATA INPUT FOR THE 'WITHOUT' PROJECT CASE. PLEASE PRESS CALC (F9) AND REVIEW THE RESULTS BELOW. THE ONLY PROPER WAY TO MODIFY RESULTS IS TO MODIFY THE INPUT DATA. IF FINISHED, PROCEED TO SECTION C (PARA13). 12. Economic cost of water to be replaced:

|Rp/cum|electric<br>tandp<br>shallow well|ump bucket<br>other<br>source||vendors|non-resid.|
|---|---|---|---|---|---|
|capital|0|0<br>0|0||0|
|O&M|0|0<br>0|0|0|<br>0|
|hauling|0|0<br>0|0||0|

22
boiling 0 0 0 0 0 0 total 0 0 0 0 0 0 C. Benefit from Incremental water consumption: 13. Not incremental water use as a result of the project: residential non-residential cum/year 0 0 The following calculation assumes a linear relationship between water demand and price and is based on a so-called (high-quantity; low-price) reference point of the residential water demand function, estimated as (100 cumlyear/capita ; 300 rupiah/cum) If you wish to change the coordinates of this point, do it now: ( 100 ; 300 ) (AND PRESS CALC /F91)

# Average economic value of Incremental water:

# residential non-residential

Rp/cum 0 0 (includes consumer surplus) D. Results: 14. Net benefit of the project (in one year):

# mill.Rp 0

Net benefit/investment ratio (over the lifetime _I25yearsl_ of the project -- may be used for ranXing): % 0 Economic internal rate of return (should not be used to rank projects): 4%0 ERR (If the value above is 'ERR' or a large negative number press ALT and type E simultaneously.)

- E. IF YOU WISH TO PRINT THE RESULTS OF YOUR WORK, PLEASE SUPPLY THE FOLLOWING INFORMATION:

Project location: 23
Province: Kabupaten: Kocamatan: Desa: Number of variant tested (e.g. 1 st, 2nd,etc): Sensitivity of results was analyzed with respec **t** o: name of variable: value of variable in this variant: PRESS ALT AND TYPE P SIMULTANEOUSLY TO BEGIN PRINTING (IF YOU HAVE A PRINTER ON LINE AND CONNECTED TO THE COMPUTER).

THE END 24
**Annex 3: Mathematical Formulas of ECOWAT1**

1. In paragraph 7:

- Capital cost of piped water = INV*0.l/OUTP where INV is the present value (in year 1) of investments OUTP is the piped water delivered by project in year 1

- Connection cost of piped water = CONN*0.l/OUTP where CONN is the present value of connection costs

-Hauling cost of water from public standpipes =

- a) if vendors carry the water:

- -=VENT/VEND + CONT/COND

- b) if consumers carry the water:

- = (DISP/40 + STPD)*TIME

- where VENT is the opportunity cost of vendor services VEND delivery rate of vendors CONT is the opp. cost of standpipe operator services COND delivery rate of standpipes DISP distance of standpipes from place of consumption STPD time to get 1 cu. m. from standpipe TIME value of time

Boiling cost of water =

- a) if project has no impact on boiling: 0

- b) if project makes a differe,nce:

- 5*KERP/200*BQUA*365*PERS/OU I P*

- (0.812 - 3.48/1000*NBO5 - 2.16/1000*NB1O)

- where KERP is the kerosene price

- BQUA is the quantity boiled daily/capita PERS is the number of persons relying on piped water NB05 is the percentage of people giving up boiling in year 5 NBlO is the percentage of people giving up boiling in year 10

2. In paragraph 12:

- Capital cost of water to be replaced = 0.11 * INVN* (1 -INST/100)/WREP

- where INVN is the total investment cost of non-piped sources INST is the % already installed WREP is the water to be replaced (quantity)

- O&M cost of water from handpump, bucket systems and other sources = MAIN + HOUR*TIME

where MAIN is the maintenance cost/cu.m. HOUR is the time required to get 1 cu.m. water 25
- Hauling cost of water from handpumps, bucket systems and other sources = SHWU/100*DISR/40*TIME

- where SHWU is the share of water use coming from outside the yard DISR is the distance from place of consumption

- Capital & O&M & hauling cost of water from vendors =

- a) if vendor price is accepted = VPR

- b) if vendor price is not accepted =

COST + CONT/SOUD + VENT/VENDR where COST is the cost of water at the source SOUD is the delivery rate of the water source

- VENDR is the delivery rate of vendors carrying water to be replaced VPR is the vendor price

-

- Boiling cost of water to be replaced =

- a) if project has an impact on boiling

- = 5*KERP/200*BQUA*365*PERSRPIWREP

- b) otherwise n

where PERSR is the number of persons relying on the water source.

# 3. In paragraph 13:

- incremental non-residential water use = OUTN-WRN whereOUTN is the water delivered to non-residential customers by the project. WRN is the water use of non-residential customers replaced by the project

- incremental residential water use = (OUTP-OUTN)-(WREP-WRN)

-

- -average economic value of incremental residential water = (MGW+MGWO)/2

- where MGW is the marginal value of water, with project MWGO is the marginal value of water, without project

- and MGWO = sum,(MGWO, * WREP,)

- whereMGWO, is the marginal value of water from ith source, defined as O&M + handling + boiling cost

- or vendor price (in the case of vendors) + boiling cost and MGW = (MGWO * (REFQ-WCWO-WCWI) + REFP * WCWI)/(REFQ-WCWO) where(REFQ, REFP) are the coordinates of the (high quantity; low price) reference point on the demand

curve; WCWO is the water consumption per capita, without project WCWI is the incremental water consumption per capita, with project

- average economic value of incremental non-residential water =

- a) if the net incremental water use is positive = (CNRP+CNRR)/2

- whereCNRP is the economic cost of non-residential piped water defined in para. 7. CNRR is the total cost of non-residential water, without project, includes sunk capital cost

- b)if the net incremental water use is zero or negative: = CNRR

26
# 4. In paragraph 14:

- -net benefit of the project = INCR * VALR + INCN * VALN + sum,(CWWO * WRQ,) - sum,(CPW1I OUTPI)

where INCR is the net incremental water use of residential customers VALR is the value of incremental residential water defined in para. 13.

INCN is the net incremental water use of non-residential customers VALN is the value of incremental non-residential water defined in para. 13. CWWO, is the economic cost of the ith source of water defined in para. 12. WRQ, is the quantity of the ith source of water to L'e replaced CPW1 is the economic cost of the 7th type of piped water defined in para. 7. OUTPJ is the quantity of the jth type of piped water delivered

- -net benefit/investment ratio = 100 * 10 * NB/ (INV + CONN - 1.1 e (1-INST/100) * INVN)

- -economic internal rate of return is calculated on the basis of a

- time series of data describing the impact of the project from year (-4) to year (25). The first five numbers describe the annual net investment costs, the sixth number (year 1) is equal to the recalculated annual benefits (to avoid double counting, capital costs are eliminated) minus the scheduled connection costs, the next 24 numbers are all equal to the recalculated annual net benefits.

27
Annex 4: **Introduction to** ECOWAT2 The following section shows a printed version of analysis of water supply projects in Indonesia. If the ECOWATI--should be used, since it requires substantially less input from the user. ECOWAT2 is a Lotus 123 ros--that calculate conveniently and prints the results in a standard format.

intake, storage, and treatment; and to extend the distribuproject, would have the highest-cost water supply (includECOWAT2 requires data that describe the water efter project completion. Data input is divided into two parts: the first part refers to the "WITH" project, the second to the "WITHOUT" project alternatives. CalcuSensitivity analysis of different design altematives will tive?, and Is the present value of net benefits at least as the extension of an already existing system, the supplied quantity of water as a result of the implemented project consumers who no longer need to use other sources of program. water supply. Benefit from the incremental water use is equal to the consumers' willingness to pay, which can be determined by estimating the area under the consumers' water demand curve. When both parts of the benefits are quantified, the net benefits of the project can be calcualted by adding themr together and subtracting the cost of new water supply. This answers the first question. An affirmative answer to the second question should result components: to select a least-cost solution for raw water The following pages show what appears on the To **run** the **program.**

-Load LOTUS 123

*Type _"/"_

*Select FILE, RETRIEVE, ECOWAT2.WK1.

Comments are welcome. Please contact Laszlo 28
ECONOMIC ANALYSIS OF WATER SUPPLY PROJECTS -- INDONESIA Year(O) refers to the year of project completion -- everything, with the possible exception of connections, is installed. Input data in the highlighted/coloured areas. To reach a paragraph directly, press F5 and type PARAx, when x is the number you want. To see the results, press F5 and type RESULT. Arrow keys move the cell pointer.

A. 'WITH' project situation: 1. Population served and piped water delivered by the project:

|Year(1)|house|yard|public|non-||total (press F9)|
|---|---|---|---|---|---|---|
||connection||standpipe|resid.|||
|no. of<br>persons|0|0|0|n/a||0|
|cubic<br>meter/year|0|0|0||0|0|
|Year(6)|house<br>connection|yard<br>|public<br>standpipe|non-<br>resid.||total (press F9)|
|no. of<br>persons|0|0|0|n/a||0|
|cubic<br>meter/year|0|0|0||0|0|
|Year(1 1)|house<br>connection|yard<br>|public<br>standpipe|non-<br>resid.||total (press F9)|
|no. of<br>persons|0|0|0|n/a||0|
|cubic<br>meter/year|0|0|0||0|0|
|Year(16)|house<br>connection|yard<br>|public<br>standpipe|non-<br>resid.||total (press F9)|
|no. of<br>persons|0|0|<br>0|<br>n/a||0|
|cubic<br>meterlyear|0|0|0||0|0|
|Year(21)|house<br>connection|yard<br>|public<br>standpipe|non-<br>resid.||total (press F9)|
|no. of<br>persons|0|0|0|n/a||0|

29
0 0 0 0 0 cubic

|meter/ye<br>Year(26)|ar<br> <br>house<br>yard|public|non-|total (press F9)|
|---|---|---|---|---|
||nntin|standi|e resid||
||coeco|p|.||
|no. of<br>persons|0<br>0|<br>0|<br>n/a|0|
|cubic|0<br>0|<br>0|<br>0|<br>0|
|meterlyea|r||||
|2.|Investment cost (conn<br> <br>|ection excl<br>|uded) on co<br>|nstant prices:<br>total<br> <br>|
||year(-5)<br>year(-4)|year(-3)|year(-2)|year(-1) year(O)<br>value<br>|
|||||In year(O)|
|million|0<br>0|<br>0|<br>0|<br>0<br>0<br>0|
|rupiah|||||
|3.|Connection cost (incl|uding house|hold storag|e tank):<br>total|
|MRp|year(-4)|year(-3)|year(-2)|year(-1)<br>year(O)<br>value|
|||||in year(O)|
|house|0|<br>0|<br>0|<br> <br>0<br>0<br>0|
|yard|0|<br>0|<br>0|<br>0<br>0<br>0|
|standpipe|<br>0|<br>0|<br>0|<br>0<br>0<br>0|
|non-res.|<br>0|<br>0|<br>0|<br>0<br>0<br>0|
|MRp|year(1)<br>year(6)|year(11)|year(16)|total<br>year(21) year(26) value<br>|
|||||in year(O)|
|house|0<br>0|<br>0|<br>0|<br>0<br>0<br>0|
|yard|0<br>0|<br>0|<br>0|<br>0<br>0<br>0|
|standpipe|<br>0<br>0|<br>0|<br>0|<br>0<br>0<br>0|
|non-res.|0<br>0|<br>0|<br>0|<br>0<br>0<br>0|
|4.<br>rupiah/<br>cub.met.|Operation and mainte<br>company overhead co<br>0|nance cost<br>st) on a cub|of supply sy<br>ic meter del|stem (including<br>ivered basis:|
|5.|Do water vendors or th<br>from standpipes to the<br>consumers, change in|e consum<br>place of co<br>dicator to '1|ers themsel<br>nsumption ?<br>, if vendo|ves carry the water<br>(if answer is<br>rs, leave as**'0**<br>**)**|

30
vendor Indic.

0 Are there -- or are there going to be -- public standpipe/ hydrant operators ? (if the answer Is no, change the indicator to "1I,otherwise leave as 0") concess. Indic. 0 Estimated delivery rate of vendors (if no information, use 2 cum/day/vendor): cum/day/ vendor 0 Opportunity cost of vendor labour (may be different from their net Income as a result of monopoly or restricted entry -- if no Information, use Rp 2500/day/vendor): Rptday/ vendor 0 Average delivery rate of standpipes: cum/day/ standpipe 0 Opportunity cost of standpipe/hydrant operator services (may be different from their net income as a result of a monopoly -- if no Information, use Rp 2500/day/concessionaire): Rplday/ conc. 0 Average time required to get 1 cubic meter water from standpipe (hauling excluded): hour 0 Average distance from standpipes to those households which rely on water from standpipes: meter 0 Value of private time (if no information, Rpl50/hour in Java/Bali, Rp200/hour in the Outer islands is proposed): Rpthour 0 6. Did local people boll the drinking/cooking water before project implementation ?(if the answer is yes, change the indicator to l, no I f1', if no write 110"f) boiling indic. 0 31
Do you assume project will make a difference in boiling habits over time ? (if answer Is yes, change indicator to 111 f, if no write "0s) boiling indic.

0 What percentage of population served by piped water will drink the water without boiling as a result of the project after implementation is completed Iyear(O)1?

year(1) year(6) year(11) )year(16) )year(21) )year(26) 0 0 0 0 0 0 Average quantity boiled daily before project implementation (if no information use 2 literlcapita/day): liter/ capita/ day 0 Price of kerosene sold by street vendors: Rp/liter 0 THIS IS THE END OF DATA INPUT FOR THE 'WITH' PROJECT CASE. PLEASE PRESS CALC (F9) AND REVIEW THE RESULTS BELOW. THE ONLY PROPER WAY TO MODIFY RESULTS IS TO MODIFY THE INPUT DATA. IF FINISHED, PROCEED TO THE 'WITHOUT' CASE (PARA8).

7. Variable cost of piped water in year(1):

|Rp/cum|house|yard||public|non-|
|---|---|---|---|---|---|
||connec|tion||standpip|e resid.|
|O&M|0||0|0|0|
|hauling|0||0|0|0|
|<br>boiling|0||0|0|0|
|total|0||0|0|0|

# Capital cost of piped water (connection cost excluded):

Rp/cum 0

# Connection cost of piped water (average over time):

house yard public nonconnection standpipe resid. Rp/cum 0 0 0 0 32
# B. 'WITHOUT' project situation:

8. Water use of the consumers (project beneficiaries defined In para.1.) to be replaced by the project: (allocate no. of parsons according to drinking water source)

|year(1)|electric<br>handpum<br>shallow well|p bucket|other<br>sources|vendors<br>|non-resi-<br>dentlal|<br>total<br>(pressF9)|
|---|---|---|---|---|---|---|
|no. of<br>persons|0<br>0|0|<br>0|<br>0|<br>n/a|0|
|cubic|||||||
|meter/yea|r<br>0<br>0|0|0|<br>0|<br>0|<br>0|
|year(6)|electric<br>handpu, p<br>|bucket|other|vendors|non-resi-|total|
||shallow well||sources||dential|(pressF9)|
|no.of<br>persons|0<br>0|0|0|<br>0|<br>n/a|0|
|cubic|||||||
|meter/year|<br>0<br>0|0|0|<br>0|<br>0|<br>0|
|year(1 1)|electric<br>handpump|bucket|other|vendors|non-resi-|total|
||shallow well||sources||dential|(pressF9)|
|no.of<br>persons|0<br>0|0|0|0|<br>n/a|0|
|cubic|||||||
|meter/year|<br>0<br>0|0|0|0|<br>0|<br>0|
|year(1 6)|electric<br>handpump<br>|bucket|other|vendors|non-resi-|total|
||shallow well||sources||dential|(pressF9)|
|no.of|0<br>0|0|0|0|<br>n/a|0|
|persons|||||||
|cubic|||||||
|meter/year|<br>0<br>0|0|0|0|0|0|
|year(21)|electric<br>handpump|bucket|other|vendors|non-resi-|total|
||shallow well||sources||dential|(pressF9)|
|no.of<br>persons|0<br>0|0|0|0|n/a|0|
|cubic|||||||
|meter/year|<br>0<br>0|0|0|0|0|0|
|year(26)|electric<br>handpump|bucket|other|vendors|non-resi-|total|

33
||shallow well|sources<br>dential|(pressF9)|
|---|---|---|---|
|no.of<br>persons|0<br>0<br>0|0<br>0<br>n/a|0|
|cubic||||
|meter/year|0<br>0<br>0<br>(Be sure the total number of perso<br>To check, press F9, then 'HOME'|0<br>0<br>0<br>ns Is the same as in para 1.<br>, if the total is 'ERR'.)|<br>0|
|9.<br>Rp/cum/d|One-time investment cost of thes<br>divided by the daily average rate of<br>electric<br>handpump bucket<br>a y<br>shallow well|e (private) water sources<br>utilization:<br>other<br>vendors non-resi-<br>sources<br>dential||
|average<br>utilization|0<br>0<br>0<br>Percentage of these facilities alrea<br>project implementation<br>begins) to s|0<br>n/a<br>0<br>dy installed (before<br>erve demand in year(1):||
|%|0<br>0<br>0|0<br>n/a<br>0||
|10.|Operation and maintenance cost o<br>shallow wells and non-residential w<br>other private supply) on a cubic me|f residential electric pump<br>ater sources (deep wells or<br>ter consumed basis:||

electric pump non-residential shallow wells Rp/cum 0 0 Time required to get one cubic meter residential water (hauling excluded) from:

||handpump|bucket<br>other sources of|
|---|---|---|
||shallow wells|resid. water|
|hour|0|0<br>0|

# Maintenance cost on a cubic meter consumed basis:

handpump bucket other sources of shallow wells resid. water Rp/cum 0 0 0 11. What share of water use within each type of source (excluding vendors) comes from sources located outside own yard/household? handpump bucket other sources of 34
shallow wells resid. water 9% 0 0 0 Average distance of these water sources (outside yard/household but used by the consumers themselves) from place of consumption: meter handpump bucket other sources of shallow wells resid. water 0 0 0 Average price of water sold by vendors (carriers): Rp/cum 0 Do you consider this price an acceptable indicator of the cost of water (considering hauling cost and the cost at the source of the water)? If answer Is yes, change indicator to 1' and go to paragraph 12, If no write "0" and continue here.

indic.

0 Average quantity supplied by those water sources which are used by vendors to purchase the water they distribute: cumlday/ source 0 Cost of that water at the source (different from price exclude remunerationl/net income of concessionaires/owners): Rp/cum 0 Average delivery rate of vendors: cum/day/ vendor 0 THIS IS THE END OF DATA INPUT FOR THE 'WITHOUT' PROJECT CASE. PLEASE PRESS CALC (F9) AND REVIEW THE RESULTS BELOW. THE ONLY PROPER WAY TO MODIFY RESULTS IS TO MODIFY THE INPUT DATA. IF FINISHED, PROCEED TO SECTION C (PARA13). 12. Variable cost of water to be replaced in year(1):

|Rp/cum|electric<br>handp|ump|bucket<br>other|vendors non-resi-|
|---|---|---|---|---|
||shallow well||sources|dential|
|O&M|0|0|0<br>0|0<br>0|
|hauling|0|0|0<br>0|0|
|<br>boiling|0|0|0<br>0|0<br>0|

35
total 0 0 0 0 0 0

- C. Benefit from incremental water consumption: e

13. Net Incremental water use as a result of the project in year(1): residential non-residential cum/year 0 0 The following calculation assumes alinear relationship between residential water demand and price and is based on a so-called (high-quantity; low-price) reference point of the residential water demand function, estimated in year(O) as (100 cum/year/capita; 300 rupiah/cum) If you wish to change the coordinates ofthis point, do it now: ( 100 ; 300 ) (AND PRESS CALC /F91) Water deman **d** epends on income, too. Even for the same price, households buy more water, if their Income Is higher. What is your estimate of the per capita real income, Ifyear(0)=100 ?

year(1) year(6) year( **1** ) year(1 6) year(21) year(26) % 100 100 100 100 100 100 (PRESS F9 AGAIN) Averag **e** conomic value of Incremental water: residential non-residential (year(1)) (same In every year) Rp/cum 0 0 (includes consumer surplus) D. Results: 14. Net present value of the project: mill.Rp 0 Net benefit/investment ratio (may be used for ranking): Yo 0 Economic internal rate of return (should not be used to rank projects): %/o ERR (If the value above is 'ERR' press ALT and type E simultaneously.) 36
# E. IF YOU WISH TO PRINT THE RESULTS OF YOUR WORK, PLEASE SUPPLY THE FOLLOWING INFORMATION:

# Project location:

Province: Kabupaten: Kecamatan: Desa: Number of variant tested (e.g. 1 st, 2nd,etc): Sensitivity of results was analyzed with respec **t** o: name of variable: value of varlable In this variant: PRESS ALT AND TYPE P SIMULTANEOUSLY TO BEGIN PRINTING (IF YOU HAVE A PRINTER ON LINE AND CONNECTED TO THE COMPUTER).

# THE END

37
**Pollcy Research Working Paper Series**

|**Title**|**Author**|**Date**|**Contact**<br>**for paper**|
|---|---|---|---|
|WPS977 Income Security for Old Age:<br>Conceptual<br>Background<br>and Major Is|Estelle James<br>sues|September<br>1992|D. Evans<br>37496|
|WPS978 How Restricting<br>Carbon Dioxide<br>and Methane Emissions<br>Would Affec<br>the Indian Economy|Charles R. Blitzer<br>t R. S. Eckaus<br>Supriya Lahiri<br>Alexander Meeraus|September<br>1992|WDR Office<br>31393|
|WPS979 Economic<br>Growth and the<br>Environment|Dennis Anderson|September<br>1992|WDR Office<br>31393|
|WPS980 The Environment:<br>A New Challenge<br>for GATT|Piritta Sorsa|September<br>1992|WDR Office<br>31393|
|WPS981 After Socialism and Dirigisme:<br>Which Way?|Andr6s Solimano|September<br>1992|S. Fallon<br>37947|
|WPS982 Microeconomics<br>**of**Transformation<br>in Poland: A Survey of State<br>Enterprise Responses|Brian Pinto<br>Marek Belka<br>Stefan Krajewski|September<br>1992|S. Husain<br>37139|
|WPS983 Legal Reform for Hungary's Private<br>Sector|Cheryl W. Gray<br>Rebecca J. Hanson<br>Michael Heller|October 1992|R. Martin<br>39065|
|WPS984 Barriers to Portfolio Investments<br>in Emerging<br>Stock Markets|Asli DemirgOg-Kunt<br>Harry Huizinga|October 1992|W. Patrawimolpon<br>37664|
|**WPS985**Regional Integration,<br>Old and<br>**New**|Jaime de Melo<br>Claudio Montenegro<br>Arvind Panagariya|October 1992|D. Ballantyne<br>37947|
|WPS986 The Administration<br>ofRoad User<br>Taxes in Developing<br>Countries|Roy Bahl|October 1992|J. Francis-O'Connor<br>35205|
|WPS987 How the Epidemiological<br>Transition<br>Affects Health Policy Issues in<br>**Three**Latin American Countries|Jose Luis Bobadilla<br>Cristina de A. Possas|October 1992|0. Nadora<br>31091|
|WPS988 Economic<br>Valuation and the<br>Natural Worla|David Pearce|October 1992|WDR Office<br>31393|
|WPS989 The Indian Trade Regime|M. Ataman Aksoy|October 1992|R. Matenda<br>35055|
|WPS990 Protection and industrial Structure<br>in India|M. Ataman Aksoy<br>Francois M. Ettori|October 1992|R. Matenda<br>35055|
|WPS991 Environmental<br>Costs of Natural<br>Resource Commodities:<br>Magnitude<br>and Incidence|Margaret E. Slade|October 1992|WDR Office<br>31393|
Policy Research Working Paper Series

|Title|Author|Date|Contact<br>for paper|
|---|---|---|---|
|WPS992 Regional Integration in Sub-Saharan<br>Africa: Experience and Prospects|Faezeh Foroutan|October 1992|S. Fallon<br>37947|
|WPS993 An Economic Analysis of Capital<br>Flight from Nigeria|S. lbi Ajayi|October 1992|N. Lopez<br>34555|
|WPS994 Textiles and Apparel in NAFTA:<br>A Case of Constrained Liberalization|Geoffrey Bannister<br>Patrick Low|October 1992|A. Daruwala<br>33713|
|WPS995 Recent Experience with Commercial<br>Bank Debt Reduction|Stijn Claessens<br>Ishac Diwan<br>Eduardo Fernandez-Arias|October 1992<br>|Rose Vo<br>33722|
|WPS996 Strategic Management of Population<br>Programs|Michael H. Bernhart|October 1992|0. Nadora<br>31091|
|WPS997 How Financial Liberalization in<br>Indonesia Affected Firms' Capital<br>Structure and Investment Decisions|John R. Harris<br>Fabio Schiantarelli<br>Miranda G. Siregar|October 1992|W. Pitayatonakarn<br>37664|
|WPS998 What Determines Demand for Freight<br>Transport?|Esra Bennathan<br>Julie Fraso'r<br>Louis S. Thompson|October 1992|B. Gregory<br>33744|
|WPS999 Stopping Three Big Intiations<br>(Argentina, Brazil, and Peru)|Miguel A. Kiguel<br>Nissan Liviatan|October 1992|R. Luz<br>34303|
|WPS1000 Why Structural Adjustment Has Not<br>Succeeded in Sub-Saharan Africa|lbrahiin A. Elbadawi<br>Dhaneshwar Ghura<br>Gilbert Uwujaren|October 1992|A. Maranon<br>39074|
|WPS1001 Have World Bank-Supported<br>Adjustment Programs Improved Econ<br>Performance in Sub-Saharan Africa?|Ibrahim A. Elbadawi<br>omic|October 1992|A. Maranon<br>39074|
|WPS1002 World Energy Subsidies and Global<br>Carbon Emissions|Bjorn Larsen<br>AnwarShah|October 1992|WDR Office<br>31393|
|WP.S1003 Rent-Sharing in the Multi-Fibre<br>Arrangement: Evidence from U.S.-<br>Hong Kong Trade in Apparel|Kala Krishna<br>Ling Hui Tan|October 1992|M. T. Sanchez<br>33731|
|WPS1004 Family Planning Programs in Sub-<br>Saharan Africa: Case Studies from<br>Ghana, Rwanda, and the Sudan|Regina McNamara<br>Therese McGinn<br>Donald Lauro<br>John Ross|October 1992|0. Nadora<br>31091|
|WPS1 005 An Arnproach to the Economic<br>Analysis of Water Supply Projects|Laszlo Lovei|October 1992|M. Dhokai<br>33970|