12. Estimating benefits from water resources investments

The traditional approach to estimating the benefits of the various types of water and wastewater projects is to regard the financial revenue from the sale of services as a minimum proxy of benefits. This is now regarded as unsatisfactory, since water is often underpriced and subsidised, and financial revenue may greatly understate the real benefit of the service. The problem is compounded in the case of wastewater services because of their implications for public health and environmental protection. The consequence is that it is often difficult to demonstrate the true economic benefits of water resources projects.

The broad choice is between asking water consumers what they would be willing to pay for improved services, and to try to estimate these benefits directly by other means. In theory, WTP provides a more comprehensive answer, because only consumers themselves know the full benefits they can expect, and what these are worth to them. However, WTP answers may not be reliable, for various reasons. WTP exercises take time and absorb resources, and are not always feasible. More fundamentally, individual statements of WTP for benefits will omit the social benefits (externalities) of improved services, notably public health and amenity.

For these reasons, it is sometimes preferable to break down the various benefits, and estimate them directly. Care should be taken to avoid double counting, e.g. including both individual WTP and savings of consumers' resources and time. Likewise, benefit estimates relying on enhanced local property values are likely to duplicate benefits derived by other routes.

The main types of benefit, for both fresh water and wastewater services, are as follows:

Resource cost savings

These arise as consumers' savings in cash or kind from improved water services. They can be further divided into time savings, financial outlays, and production gains.

Time savings and convenience

These consist of reduced time spent (especially by women and children) in queuing for water at public outlets, and carrying it back from distant sources. Alternatively, it may apply to the use of sanitation in the residence rather than in public areas. Convenience is partly a matter of time savings, partly a lessening of worry and effort.

Financial outlays

Use of the improved service may reduce private outlays on substitutes or fall-backs, e.g. purchase from water vendors, cost of private water treatment (filtering, boiling, etc.) or the use of private wells. Sewerage connections will remove the need for septic tanks. The benefit may accrue to public authorities, as where improved wastewater treatment reduces the cost of freshwater treatment, where it is drawn from the same source.

Production gains

A greater volume and more reliable supply of clean water may reduce costs for farmers and industrial/commercial operators for whom water is a major input. For some enterprises, a water supply may be the key factor in viability.

Health benefits

A greater volume of water can help to change household habits, with potential gains to health - e.g. more frequent and more thorough washing, more careful cleaning of utensils and clothes. More reliable supplies can have similar effects, and may remove the need for storage, which itself can carry health risks. Improved water quality can reduce the risk of ingesting contaminated fluid. These benefits are partly private, partly public. The latter consist of reducing the incidence of diseases transmitted from one person to another. In practice, the main health gains are likely to come from improved sanitation and waste disposal, especially the avoidance of faecal contamination.

Amenity

A neighbourhood with good water and wastewater services will, other things being equal, have a higher property value than one without. The reduction of pollution and local flooding from proper sewerage will also improve local amenity. The cumulative impact of all the individual and social benefits from improved water services will be a better neighbourhood, from which all benefit.

The above types of benefit can be converted to economic values, using various methods:

· Contingent valuation and willingness-to-pay surveys, applicable to the various kinds of private benefits, and to some aspects of public health and amenity;

· (Hedonic) property method, in which increases in property values are regarded as capturing household, health and amenity benefits;

· Avertive behaviour and defensive expenditure, in which peoples' spending on alternative sources and safety procedures is used to illustrate what they would save by using improved services;

· Loss of production method, or the market valuation of physical effects. This approach measures the likely impact of improved water services on output (e.g. irrigated crops, fisheries, laundry services), or on the use of marketed inputs and services (e.g. health facilities, cost of private water treatment). The valuation of time saving is a special case: where the time in question is 'productive' it can be measured by prevailing wage rates, but this is more problematic where the beneficiaries are not in the wage-earning labour force (e.g. children, old persons, unpaid women).

Further information: Measuring economic benefits for water investments and policies, World Bank, 1996. The Economic Benefits of Potable Water Supply Projects to Households in Developing Countries, Asian Development Bank, 1994.