Here's an extract on this topic from a fantastic book called 'Poor Economics':

Most experts agree that access to piped water and sanitation can have a dramatic impact on health. A study concluded that the introduction of piped water, better sanitation, and chlorination of water sources was responsible for something like three-fourths of the decline in infant mortality between 1900 and 1946 and nearly half the overall reduction in mortality over the same period. Moreover, repeated bouts of diarrhea during childhood permanently impair both physical and cognitive development. It is estimated that by piping uncontaminated, chlorinated water to households, it is possible to reduce diarrhea by up to 95 percent. Poor water quality and pools of stagnant water are also a cause of other major illnesses, including malaria, schistosorniasis, and trachoma, any of which can kill children or make them less productive adults.

Nevertheless, the conventional wisdom is that today, at $20 per household per month, providing piped water and sanitation is too expensive for the budget of most developing countries. The experience of Gram Vikas, an NGO that works in Orissa, India, shows, however, that it is possible to do it much more cheaply. Its CEO, Joe Madiath, a man with a self-deprecating sense of humor who attends the annual meeting of the world’s rich and powerful at the World Economic Forum in Davos, Switzerland, in outfits made from homespun cotton, is used to doing things differently. Madiath’s career as an activist started early: He was twelve when he first got into trouble—for organizing the labor on the plantation that his father owned. He came to Orissa in the early 1970s with a group of left-wing students to help out after a devastating cyclone. After the immediate relief work was over, he decided to stay and see if he could find some more permanent ways to help the poor Oriya villagers. He eventually settled on water and sanitation. What attracted him to the issue was that it was simultaneously a daily challenge and an opportunity to initiate long-term social change. He explained to us that in Orissa, water and sanitation are social issues. Madiath insists that every single household in the villages where Gram Vikas operates should be connected to the same water mains: Water is piped to each house, which contains a toilet, a tap, and a bathing room, all connected to the same system. For the high-caste households, this means sharing water with low-caste households, which, for many in Orissa, was unacceptable when first proposed. It takes the NGO a while to get the agreement of the whole village and some villages eventually refuse, but it has always stuck to the principle that it would not start its work in a village until everyone there agreed to participate. When agreement is finally reached, it is often the first time that some of the upper-caste households participate in a project that involves the rest of the community.

Once a village agrees to work with Gram Vikas, the building work starts and continues for one to two years. Only after every single house has received its tap and toilet is the system turned on. In the meantime, Gram Vikas collects data every month on who has gone to the health center to get treated for malaria or diarrhea. We can thus directly observe what happens in a village as soon as the water starts flowing. The effects are remarkable: Almost overnight, and for years into the future, the number of severe diarrhea cases falls by one-half, and the number of malaria cases falls by one-third. The monthly cost of the system for each household, including maintenance, is 190 rupees, or $4 per household (in current USD), only 20 percent of what is conventionally assumed to be the cost of such a system.