Water, Sanitation and Economy

(Adapted from WHO 2004)

All over the world, mainly in developing countries, diseases associated with poor water and sanitation still have considerable public significance. In the year 2003, it was estimated that 4% of the global burden of disease and 1.6 million deaths per year are related to unsafe water supply and sanitation, including lack of hygiene. By the end of 2011, still 2.5 billion people were without access to improved sanitation, and 768 million without access to improved drinking water sources. While access in Asia and Latin America has improved significantly over the past decades, many countries in Africa are far off track to meet the Millennium Development Goals (WHO/UNICEF 2013).

In order to increase the rate of access to improved water and sanitation, further advocacy is needed at international and national levels to increase resource allocations to this process. In the existing climate where poverty reduction strategies dominate the development agenda, the potential productivity and income effects of improved access are a significant argument to support further resource allocations to water and sanitation infrastructure.

(Adapted from GWP 2008 and HANEMANN 2006)

Most people assume that the economic value of a resource, product or service is measured by market price. Even economists sometimes make this statement: “In a market system, economic values of water, defined by its price, serve as a guide to allocate water among alternative uses, potentially directing water and its complementary resources into uses in which they yield the greatest economic return” (WARD & MICHELSEN 2002). Yet, it is easy to understand that this is not the case: For instance, “it is often those who can least afford it that pay higher prices for drinking water. On average, those on low incomes spend a significantly greater proportion of their income on water than do the wealthy, thereby affecting their ability to provide for other basic needs such as food, shelter, clothing, housing, health and education. The absolute price they pay to water vendors can be ten times or more the price per litre supplied through the pipes” (COHRE et al. 2008).

If it were true that economic value is measured by market price, this would imply that only marketed commodities could have an economic value. Consequently, items that are not sold in a market, including the natural environment, and public goods generally would have no economic value. But in fact, the economic value does not equal the price of a resource. Price does not in general measure economic value, and items with no market price can still have a significant economic value.

Is water therefore an economic commodity and can it be analysed using the conceptual framework of economics in the same way as any other commodity? One of the four Dublin Principles, adopted at the 1992 International Conference on Water and the Environment in Dublin, says that “water has an economic value in all its competing uses and should be recognised as an economic good”.

It is essential to recognise the basic right of all human beings to have access to clean water and sanitation at an affordable price. Past failure of recognising the economic value of water has led to wasteful and environmentally damaging uses of the resource. Managing water as an economic good is an important way of achieving efficient and equitable applications, and of encouraging conservation and protection of water resources (see also IWRM).

Furthermore, also value and charges are two different things. The value of water in alternative uses is important for the rational allocation of water as a scarce resource, whether by regulatory or economic means. Charging (or not charging) for water and sanitation is applying an economic instrument to support disadvantaged groups, affect behaviour towards conservation and efficient water usage, provide incentives for demand management, ensure cost recovery and signal consumers’ willingness to pay for additional investments in water and sanitation services (see also water tariffs).

(Adapted from TEARFUND 2008 and WHITTINGTON & HANEMANN 2006)

It is economically wise to invest in water and sanitation? Quantifying the costs averted and benefits gained from improvements in water and sanitation is difficult, but best estimates show that the benefits far outweigh the costs of such investments. The United Nations (UN) reports that for every $1 invested in water and sanitation, there are around $8 gained through averted costs (for healthcare, illness etc.) and increased productivity. In 2004, the World Health Organisation (WHO) found that investing $1 in water, sanitation and hygiene education would bring health and other benefits of between $3 and $34, depending on the technology used.

Research done for the 2006 UN Human Development Report estimated that the total cost of the current deficit in investment in water and sanitation is $170 billion, what means 2.6 % of all developing countries’ GDP.

Achieving the millennium development goals (MDG) on water and sanitation in sub-Saharan Africa would require an additional investment of around $10 billion a year by delivering the most low-cost, sustainable technology. Universal access to water and sanitation would require $20–30 billion, depending on the technology (TEARFUND 2008).

The economic costs of providing a household with modern water and sanitation services are the sum of seven main components:

• Opportunity costs of diverting raw water from alternative uses to the household.
• Storage and transmission of untreated water to the urban area.
• Treatment of raw water to drinking water standards.
• Distribution of treated water within the urban area to the household.
• Collection of wastewater from the household (sewerage collection).
• Treatment of wastewater (sewage treatment).
• Any remaining costs or damages imposed on others by the discharge of treated wastewater (negative externalities).

(Adapted from TEARFUND 2008 and UN-WATER 2008)

Investing in sanitation and water improvements leads to various direct and indirect economic benefits:

• By reducing direct and indirect health costs: Hygiene and sanitation are among the most cost-effective public health interventions. Almost half of the people living in the developing countries are suffering from one or more of the main diseases associated with inadequate provision of water and sanitation (such as diarrhoea, guinea worm, or trachoma which can lead to blindness). Children in households with no toilet are twice as likely to get diarrhoea as those who have one. Increasing access to water and sanitation is likely to lead to significant health benefits and therefore reducing the financial burden on health systems in the developing world. It is estimated that universal access to even the most basic facilities would reduce the health related costs by around $1.7 billion, annually – including $610 million in sub-Saharan Africa, which represents around 7 % of the region’s health budget (TEARFUND 2008 and UN-WATER 2008) (see also health and hygiene issues).

• By saving time: People without toilets or taps at home spend a lot of time each day queuing up for public toilets or seeking secluded spots for open defecation, or for collecting water. Improved sanitation would give every such household an additional 1’000 hours in a year to work, study, care for children, engage in collective efforts, and rest. This time has an estimated annual economic value of well over US$ 100 billion each year. Furthermore, research has shown that households in rural Africa typically spend one fourth of their day fetching water. Some 40 billion working hours are spent carrying water each year in sub-Saharan Africa (TEARFUND 2008 and UN-WATER 2008).

• By increasing the return on investments in education: Various developing countries are raising education spending to meet the MDG targets for school enrolment. That spending will have a greater impact if some of the money goes to providing toilets for students and teachers, with separate facilities for girls. Healthy children learn more than children suffering from worm infections, which sap nutrients and calories and lead to listlessness and trouble concentrating. For example, up to two thirds of all schoolchildren in some African countries are infected with parasitic worms (UN-Water 2008) (see also invalid link).

• By gaining productivity: Improved access to water and sanitation could lead to a large increase in productivity in developing countries, with potential for rising household incomes and economic growth. This includes benefits from reduced diarrhoea which is estimated that 3.2 billion working days would be gained for people aged 15–59 from creating universal access to water and sanitation. Annual time savings from more convenient water supplies would amount to another 20 billion working days – most of them gained by women (TEARFUND 2008) (see also water sanitation and gender).

• By protecting investments in improved water supply: Poor sanitation can limit the impact of drinking water quality improvements. The risks of water contamination during household storage and handling sharply increase in environments that lack toilets. Contamination of local water resources used to supply drinking water can lead to unnecessary investment in more distant and expensive sources (UN-Water 2008).

• By safeguarding water resources: Water resources are an important productive asset. Agriculture, fish production, energy production, large-scale industrial processes, small-scale industry, transport, and recreation all suffer economic harm from the increased treatment and other costs due to water pollution by faecal contamination or other pollution sources (UN-WATER 2008) (see e.g. water safety plans).

• By boosting tourism revenues: In the year 2006, tourism produced over US$ 6,000 billion-worth of economic activity, accounting for 10 % of global GDP and almost 9 % of total global employment. Because health, safety, and aesthetic considerations heavily influence people’s choice of a holiday destination, good sanitation and water supply is a pre-requisite for a thriving tourism sector (UN-WATER 2008).

See also p. 59ff. of the “Sick Water Report” mentioned further below for a chapter on understanding the costs and benefits of wastewater management.

(Adapted from SUSANA 2009)

For economic analysis regarding water and sanitation, input data will include not only the financial cash flows, but also in-kind or external costs and benefits. Health and environmental outcomes are assessed in some form most commonly in these economical analyses. For example the prevention of pollution of water bodies can be measured in terms of cost per kg of biochemical oxygen demand (BOD) removal. This approach is helpful if some costs and benefits (e.g. own labour for investment, time savings during use) can be valued easily, while there are no reliable data for other important benefits (e.g. health or environment). If monetary valuation of all major economic costs and benefits seems possible, a cost-benefit analysis may include the following outputs:

• Costs and benefits as share of household income: The economic analysis on household level will include all costs and benefits of households. This allows for example to better assess whether the total economic costs are affordable or whether benefits are high enough to be perceived as such. Ratios can also be determined for responsible institutions.

• The cost-benefit ratio: The cost-benefit ratio is calculated by dividing the discounted benefits by the discounted costs of the sanitation and water intervention, and can be used to compare a sanitation or water option with ‘doing-nothing’.

• The internal rate of return: The internal rate of return measures the equivalent return on investment in percentage terms, taking into account monetary cash flows as well as non-monetary costs and benefits over the lifetime of the sanitation and water improvement.

• The cost-effectiveness ratio: The cost-effectiveness ratio is a more specific tool that compares costs with a single outcome of sanitation and water improvement, expressed in physical (non-monetary) units such as inhabitants better served, health gain or reduction in pollution. This tool is generally used in public sector planning.

(Adapted from HANEMAN 2006)

It is commonly said that the problem of water is not one of economics but politics, not one of physical shortage but governance. This is partly correct but not entirely. The generic problem of water and sanitation is one of matching demand with supply, ensuring that there is water of a suitable quality at the right location and the right time, and at a cost that people can afford and are willing to pay (see also creating an enabling environment).

The difficulty in accomplishing this is partly institutional and certainly includes problems of governance. However, some of the problems of governance themselves have an economic explanation.

The omnipresence of fixed costs in surface water supply creates a classic economic problem of cost allocation which has no satisfactory technical solution. The extraordinary capital intensity and longevity of surface water supply infrastructure, and predominance of economic scale, creates a need of collective action in the provision and financing of water supply that simply does not arise with most other commodities.