Economics paper study

The previous chapter set out the background to, and objectives of this publication. It pointed out that even if access to clean water is a constitutional human right as it is in many countries, it is likely that such improvements will only be provided if they are shown to be a good use of public funds in comparison with the whole cross-sector range of possible interventions.The primary purpose of this publication is to help policy makers and experts from a range of disciplines involved with drinking-water interventions understand the role economic assessments (see Box 2. 1) can play in arriving at an informed Judgment whether or not water supply improvements are a good use of public funds. 20 21 24 25 26 27 28 29 31 32 33 35 37 39 41 42 45 47 49 BOX 2. 1 : Forms of Economic Assessment For the purposes of this publication, we have adopted a convention in terms of describing economic techniques used at different stages n the project cycle.Economic assessment is used as an umbrella term when no specific stage in the project cycle is implied.

Economic appraisal refers to economic assessment carried out when possible interventions are being compared with to the objective of proportioning them for implementation. Economic evaluation takes place after interventions and usually attempts to capture their total impact with a view to learning lessons and guiding future priorities for public sector investment.As we will see, there are three forms of economic assessment that can be usefully applied to estimate whether the public sector should finance (completely or in part) improvements in access to safe drinking water. The simplest is costing the proposed interventions designed to achieve a well specified improvement (a given improvement in quality for a particular population) and finding the Least Cost intervention (LLC).The second is acquisitiveness analysis (ACE) which is more ambitious in its aims of seeking to compare costs of differing health interventions for different populations against some standard of physical improvement (in this publication we emphasis the WHO standard of savings in Disability-Adjusted Life Years (Dally), but any physical measure of improvement (e. .

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Reduced episodes of diarrhea) would be a candidate. The third approach is Social Cost Benefit Analysis (SCAB) which seeks to compare across all possible uses of public funds in terms of net benefits to society. Table 2. 1 summarizes the three forms of economic assessment.Table 2.

1: Forms of economic assessment Form of economic assessment Characteristics Least Cost Analysis (LLC) Estimates the total costs of an intervention including initial capital investment plus operating and maintenance (O&M) costs (it may also make risk estimates of impact of varying the engineering life of the intervention as sensitivity tests). Costs should be discounted back to their present value to allow comparisons of different forms of intervention to produce a given improvement in water Cost-effective analysis (ACE) Social (SCAB) 50 51 52 53 54 55 56 57 58 Cost Benefit Analysis quantity/quality given population.Takes the costing and divides it by an estimate of a physical benefit to arrive at a cost per unit benefit. The physical benefit may be in terms of a simple directly observable indicator (such as number of episodes of an easily diagnosable illness or symptom prevented). Or it may be a more employ composite indicator such as the WHO’s DALLY (Distastefulness Life Years).

May Just convert the physical measure in a ACE into a monetary value (e. G. Putting a value of time on a DALY such as annual National Income per capita.But it will usually extend the assessment to include indirect and non-health costs and benefits (e. G. Monetary value of time saved in collecting water now used for other purposes).

Shadow pricing of costs and benefits where market prices are absent or suspect may be done and sensitivity tests used to assess robustness of estimates of net benefits or internal rates of return. In principle, SCAB allows all forms of dewatering interventions to be compared with ANY other intervention in any sector that claims to improve human well-being for any scale of population.Before looking at these three forms in more detail in chapters 8, 9, 10 and 11, it is worthwhile answering the following questions, namely: why does the public sector have to be involved? Why can the financing of water improvements not be left to the households themselves to finance? A simple but wrong answer to these questions might be: 59 62 65 67 69 70 72 73 74 75 76 78 79 82 85 87 89 91 92 93 95 97 8 101 the public sector does have to be involved because water facilities are public goods and as such should be financed by the public sector in order to ensure sufficient provision.This answer is analytically flawed as water improvements are not public goods in a strict economic sense. For a rigorous economist, public goods are those goods which, even if consumed by one person, can still be consumed by others.

An example of a public good is a lighthouse on a dangerous coast. If the light is shining then ‘consumption’ of that service by one ship does not reduce the consumption available o another ship. This non-rivalry of consumption means that it is impossible to exclude anyone from consumption except at a prohibitive cost.

As a result, for the economist public goods are characterizes by non-rivalry and non-calculability in consumption. By contrast, water services are usually (but not always) private goods even if not supplied right into the household. If water is provided to a village standpipe, one household’s consumption is likely to reduce the amount available to other households – while one container is filling, another cannot be filled.

And the less the eater available, the more likely there is to be rivalry in consumption and the more likely it is to be a private good.Thus, water services are generally private goods, though they may have positive externalities in terms of preventing epidemics of infectious diseases, which may justify an element of subsidy. Similarly if adding additional households onto a scheme can be done at low incremental/marginal cost then again an element of subsidy for all households in the scheme may be economically Justified. But generally water can be basically bought and consumed exclusively by should, even if an element of public sector subsidy is offered.So the next question is; why, if water services are private goods, can households not finance their own facilities? To answer this, we need to ask two further questions; firstly, how much do poor rural households spend on water? , and secondly, is this enough to finance improved water supplies themselves? Whetting and Henchman 2006 showed that amounts (converted to IIS$ per month) paid by households to vendors for water in 1998 ranged from 4. 4 in Ghana to 6 in Nicaragua to 7. 5 in Pakistan to 13.

9 in Cote divorce. In 2007, prices this range would e equivalent to between US$6 and IIS$18 per month.Is this enough to finance improved supplies? As long ago as 1975, Skunk, an experienced water supply engineer, thought so, when he said that; “if daily expenditures made to a water carrier were invested in a proper piped supply, a 102 103 104 105 106 107 108 109 110 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 far more economical and better water service could be provided” (Skunk 1975). One objection to this is that poor people do not, in general, get the whole of their water from vendors. They cannot afford to.However there are indications that the poor do spend a significant proportion of their income on water. The Undue 2006 Human Development Report pointed out that; “The poorest 20% of households in El Salvador, Jamaica and Nicaragua spend on average more than 10% of their household income on water” .

The UNDO report was referring to 2004 figures. In that year, the average annual income per capita of the poorest 20% in these three countries was (according to official statistics) about IIS$4301 or about IIS$36 per month. This means that, in spending more than 10% of this on water, poor households spent about US$3 to US$4 re month on water.

Is this enough to finance water supply improvements? To answer this, we need to know the investment costs of water supply improvements. Unfortunately information on the investment costs of water facilities is not available for El Salvador, Jamaica and Nicaragua. For Eastern European and Central Asian countries, the capital cost of protected dug wells serving 100 people is given as about 4,000 Euro in 2005 (see EPA 2007, page 3-8) equivalent to about IIS$5,OHO or IIS$50 per capita. This compares with an estimate of IIS$48 per capita given in figure 41. 1 of Jameson et al. (Bibb).

The match is quite good considering that the estimate in Jameson et al. Is at year 2000 prices and some allowance needs to be made for price increases between 2000 and 2005. The annual income of a poor household of six people in El Salvador, Jamaica and Nicaragua is the per capita income of IIS$430 multiplied by six or about IIS$2,580 for the household. Therefore the capital cost of a dug well (at IIS$5,OHO) is equal to almost two years of total household income for the poorest 20% in El Salvador, Jamaica and Nicaragua and equivalent to almost 20 years of water expenditure (at 10% of total income).This is likely to be far too much for one poor household to finance even if the household manages to borrow the money. To see this, assume that the dug well lasts for five years without major maintenance. To repay the cost of IIS$5,OHO over 5 years at an interest rate of 5% per annum would mean an annual payment of IIS$I,1 55 per annum 2 , whereas at an interest rate of 20% per annum the 1 .

This compares with a per capita average income for the total population of the three countries in the same year of about IIS$2,OHO 2 . The amount repayable can be calculated using capital recovery tables.The capital covers factor is the annual payment that will repay a IIS$I loan over (in this case) five years with interest on the unpaid balance. The capital recovery factor for 5 years and at 5% pa is 0. 230975 (rounded in table 2. 1 to 0.

231). Therefore the amount 136 137 138 139 140 141 repayment (including interest) would be IIS$1,670 per annum. As Table 2. 2 below shows, both these payments are many times the household’s annual expenditure on water of about US$258.

And so the dug well is not affordable by one poor household alone. Table 2. 2 Can poor households afford improved water supplies? $ASS per $ASS perDug well capita household of six people Annual 430 2580 capital cost US 5000 income of of a dug poorest well of serving up households to 100 people or about 17 258 Repayment At 5% pa expenditure factor per 0. 231 on water at annum over 5 years income US at Repayment US 1155 Repayment $ASS at cost per costs for a annum dug well 1155 1670 Piped water repayment cost for a (see opposite) Repayment Capital cost US cost divided of piped 1600000 by water to 5000 expenditure: people (or 833 households) At pa 0. 334 us 1670 repayable each year is 0. 231 multiplied by IIS$5,OHO or IIS$I,1 55, as shown in the table.