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close this bookA Guide to the Development of on-site Sanitation (WHO; 1992; 246 pages)
View the documentPreface
open this folder and view contentsPart I. Foundations of sanitary practice
open this folder and view contentsPart II. Detailed design, construction, operation and maintenance
close this folderPart III. Planning and development of on-site sanitation projects
open this folder and view contentsChapter 9. Planning
close this folderChapter 10. Institutional, economic and financial factors
View the documentInstitutional responsibilities
View the documentHuman resources development
View the documentEconomic factors
View the documentFinancial factors
View the documentExamples
open this folder and view contentsChapter 11. Development
View the documentReferences
View the documentSelected further reading
View the documentGlossary of terms used in this book
View the documentAnnex 1. Reuse of excreta
View the documentAnnex 2. Sullage
View the documentAnnex 3. Reviewers
View the documentSelected WHO publications of related interest
View the documentBack Cover
 

Economic factors

Choosing between alternatives

Different sanitation techniques may be equally acceptable from the health, social, technical and institutional points of view. The final choice between different techniques is therefore often made on the grounds of cost.

Financial costs, that is, in general terms, what a householder or agency has to pay in cash for a sanitation facility, are discussed in the next pages. Economic costs represent the total resource cost to the national economy, that is, what the country as a whole has to pay in terms of labour, materials, health, environment and imports.

Economic comparative costing aims to assign a cost to all the elements that go to make up a system, thus enabling comparisons to be made between competing technologies. It is important for planners and project staff to consider all the alternatives in order to recommend the most economic systems for demonstration and promotion. This then allows the householders to make the final decision on grounds of affordability, convenience and attractiveness.

It should be noted that detailed economic analysis is normally undertaken only for large projects in high-density urban and periurban areas. Because of uncertainties in the basic economic data in many countries, it is inadvisable to make final decisions regarding sanitation technology on the basis of economic analysis alone. However, the discipline of thought required to carry out an analysis of the full life-cycle costs of any system can be of great benefit to the planning team by leading to a fuller understanding of all the issues involved.

Least-cost analysis of alternatives

It is difficult to quantify the benefits obtained from improvements in sanitation. Where there is a choice of technology available to achieve the objective of safe disposal of excreta in an acceptable manner, the benefits obtained from the different options may be presumed to be equivalent. Economic comparison of the alternatives may then be restricted to a "least-cost analysis", which focuses solely on the costs of providing sanitation. There may be variations in the convenience with which this is achieved. For example, a flyless, odourless improved latrine may be far preferable to a flush toilet and septic tank where the water supply is intermittent. However, such situations are so site-specific that it may be generally assumed that the systems outlined in this book (unless specified differently in Chapter 4) have similar benefits with regard to excreta disposal.

Each alternative should be considered according to consistent factors using economic analysis. Non-monetary contributions by householders, for example digging their own pits, should be quantified. Similarly, imported fittings for a pedestal toilet and septic tank should be recorded at their true cost to the national economy, taking into account "real" exchange rates. The values thus assigned may not directly reflect the financial cost involved.

Detailed information on economic analysis and methods of determining "real" values is given in the Guide to practical project appraisal (UNIDO, 1978). The main areas that need to be considered are outlined below.

Economic costs of sanitation systems

Labour

Where a householder is to contribute labour, e.g., by digging the pit or building the superstructure, this work should be costed at the shadow wage rate. This is the rate at which people would be hired to work if there were no artificially controlled wage rates. In a country with high unemployment, the shadow labour rate is likely to be between 40% and 70% of the government minimum wage. Similarly, where agency staff or direct labour is to be used for construction, the costs should be charged at the shadow rate rather than the amount actually to be paid to them. If a labour-only subcontractor is to be employed, the amount to be paid less profit to the subcontractor should be used. Profit represents a "transfer payment" and does not reflect any real transfer of wealth within the economy.

Building materials

The costs of both the superstructure and the substructure must be considered. Where a toilet is to be installed in part of a house, the proportion of the house value represented by the toilet (in terms of the proportion of the floor area) should be included in the calculation.

Building materials may be collected locally without financial charge. There is, however, a labour charge according to the time taken, based on the shadow labour rate. Where the materials to be collected are scarce and efforts are being made to renew them, for example through a reforestation programme, some costs should be assigned to these "free" materials.

For items manufactured in the country, the amount charged by the manufacturer, including transport to the site (less all profit margins), should be used. However, if the item is subsidized by the government, the subsidy should be added to the total cost. Where an item carries a sales tax, the amount of the tax should be subtracted to reflect the real value of the item to the economy.

Where imported items are to be used, the total cost, including freight charges and insurance, should be used, but not including customs duties, local taxes or traders' profits. In some countries, the foreign currency exchange rate may be kept artificially high in order to reduce the financial costs of imports. To reflect the real value of any imported materials, a shadow exchange rate should be used, which is likely to increase the apparent cost of imports. The shadow exchange factor is often in the range 1.2-1.8.

Water

Where water is to be used for flushing the sanitation system, the cost of this water has to be included. If it is to be obtained free of charge from an unimproved source, there is a labour charge for carrying the water to the latrine - calculated from the total time taken, costed at the shadow wage rate. If water is to be obtained from a standpipe or other improved source, the economic cost of delivering that water to the standpipe should be used, in addition to the labour cost of transfer to the latrine. Similarly, where a household has an individual water connection, the economic cost of delivering water to the house must be used. This economic or marginal cost of the extra water used for sanitation is normally higher than the actual tariff paid by the householder. The cost of any pipework and fittings to be used specifically to transfer the water to the toilet should also be considered.

Land use

Where land is scarce, particularly in urban areas, there is a cost associated with it, which should be included in the analysis.

Cost of money and the timing of costs

In economic terms, there is a cost involved in using money for one purpose, such as sanitation, as opposed to using it for an alternative purpose. This cost of using money is known as the opportunity cost of capital, and may be defined as the return on an investment in the best alternative use, that is, what could be earned by that money if it was used elsewhere. This cost influences the choice between alternatives with regard to the balance between initial capital investment costs and recurrent operation and maintenance costs. For example, some facilities are expensive to build but cheap to run, while others cost very little to construct but have to be rebuilt and/or emptied at regular intervals.

The influence of the opportunity cost of money on the timing of payments for a sanitation scheme is determined through the mechanism of discounting. This is a technique whereby all future payments made are given a current value by discounting in order to assess fairly the different streams of payments.

In economic analysis, the discount factor is the opportunity cost of capital. Where money invested increases in value over a period of time, the technique of discounting quantifies the money required at the present time in order to obtain a given amount at a set time in the future. Discount factors are normally obtained from tables, but may be calculated directly from the formula:

where

r = discount rate

 

t = period in years.

The example 10.1 demonstrates how the technique might be applied to the practical problems of judging alternative systems.

Design life of the system

As different facilities are designed to last for different periods, the principles of discounting may also be applied to differing design lives so as to give a fair comparison.

Emptying and disposal

Pits and tanks may be emptied by hand, for which there are shadow labour charges, or by vacuum tankers, for which there are hourly running costs, including labour, fuel and maintenance. In addition, replacement costs have to be considered, allowing for shadow exchange rates where the machine and spare parts are imported. There is also a cost relating to the disposal of the sludge, whether it is to be discharged to land or to a wastewater treatment plant.

Groundwater pollution

Wastes that drain through the soil may cause pollution, leading to the need for an alternative water source. If this possibility only applies to one alternative, the possible costs should be estimated and allowed for.

Sullage disposal

Some systems accept sullage water as well as excreta, thus obviating the need to invest further in sullage removal. This difference should be included where necessary.

Waste reuse

If the waste products can be reused, for example, sold to farmers as fertilizer or used in a biogas plant, the benefit to be gained should be offset against the costs.

Governmental and agency management

Most sanitation schemes bear some hidden costs of agency management and promotion. Where alternatives have markedly different charges associated with them, these should be included.

Analysis

The economic cost of each alternative is determined by calculating all the costs involved in the construction, operation, emptying and maintenance of a particular system over a specified period of time, modified by any appropriate shadow factors. All costs are then discounted by multiplying by a discount factor according to the year in which they will be incurred. This gives the present value of those costs. The present value represents the amount of money required now to be able to pay all expected costs in the future. The present values for each year are then summed to give a single figure of the total present value of the entire life-cycle cash flow, that is, the economic cost for each alternative.

Where alternative systems being compared are expected to last for different periods of time (that is, they have different design lives), it is necessary to take a standard duration in order to make a fair comparison. For on-site sanitation, periods of 10 or 15 years are appropriate. All the costs likely to be incurred during this period for each alternative should be calculated. If the time period is longer than the design life of a system, it is necessary to include rebuilding costs. For a fair comparison it is advisable to choose a standard time that best fits the design life or as nearly as possible a whole multiple of a design life of the alternatives.

Least-cost analysis may be used to compare on-site sanitation with a conventional sewerage system. The nature of the discounting technique, where future costs have a much lower economic impact, tends to favour systems with low initial investment and higher recurrent costs.

Total annual cost per household

An extension of the least-cost analysis approach is to consider the total annual cost per household (TACH) (Kalbermatten et al., 1982). The initial construction costs are calculated as described above. Because the maintenance costs of most on-site sanitation systems are dependent on the number of people using the system, an average household size appropriate to the area should be selected, usually in the range 6-10 people.

The TACH is calculated by considering the total present value (PV) of the life-cycle cash flow (as described above) as the equivalent of a loan which has to be paid back over the design life of the system at constant, non-inflated prices. The value of yearly repayments, including interest, is obtained by multiplying the present value by a capital recovery factor. This factor is taken from capital recovery factor tables which are based on the equation:

where

r = discount rate

 

t = design life in years

An example of a TACH calculation may be found at the end of this chapter (example 10.2).

Analysis by TACH may be used to compare on-site sanitation systems with conventional sewerage systems. Kalbermatten et al. (1982) calculated that the cost of on-site sanitation was between 5% and 10% of that of conventional waterborne sewerage systems.

Cost-benefit analysis

Having determined by least-cost analysis the present values of alternative systems, it is normal practice to compare the costs with the present values of the expected benefits. Investment appraisal requires that the present values of benefits should be greater than the present values of the costs. Where alternatives are being considered, the system with the highest margin of benefits over costs should be chosen.

Benefits to be considered include enhanced privacy and convenience for the users, and environmental protection, as well as the reduction and anticipated eventual elimination of excreta-related diseases. Multiple benefits from a single intervention are extremely difficult to isolate and determine, especially where benefits such as improvements in health are interrelated with other basic needs such as nutrition and water supply. Quantification of the benefits of sanitation therefore tends to focus on the more readily measurable reduction of disease and the subsequent increase in productive life expectancy, increase in work capacity, and the reduction of demand for medical facilities and drugs.

Quantification of perceived improvements in the quality of life (for example, not having to squat at the edge of the street before dawn) is based on the value attached to the improvement by the users. Logically this can only be measured by considering the amount people are prepared to pay for those elements of a sanitation system that are most closely related to comfort. However, in most cultures, the investment decisions will be made by men according to their priorities, whereas the greatest benefit is likely to be felt by women who may be unable to declare their preferences.

There are other sanitation benefits to be added, such as reuse of composted or digested excreta for agricultural purposes, or production of biogas for energy needs. However, the benefit to be obtained from this reuse is only occasionally significant.

Quantification of the benefits to be derived from sanitation is extremely difficult. Low-cost sanitation is usually considered as a basic human need, required for human dignity and development as a whole. Economic analysis is therefore best used to compare alternative techniques to determine the least-cost method. This approach is particularly necessary where many of the anticipated environmental or public health benefits will not be realized immediately owing to the necessarily slow pace of community involvement.

A suitable approach to economic analysis is described in the Guide to practical project appraisal (UNIDO, 1978) in which it is stated that the literature of project (economic) appraisal commonly gives the impression that the goal is to produce a set of numbers that show whether a project is good or bad but that in reality it is not the numbers themselves that are important, but rather the appreciation of the project's relative strengths and weaknesses that is gained. The numbers are simply an instrument that forces analysts to examine all relevant factors, and a means of communicating their conclusions to others.

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