The Economics of Sanitation Initiative

Phase 2: Economic Evaluation

Guy Hutton

Senior Economist, Consultant

Water and Sanitation Program

Compares both the costs and benefits of at least two alternative policy options, in this case sanitation interventions

Enables decision makers to make an informed choice based on objective and explicit comparison• Advocacy: Is the investment worthwhile?• Selection: Which option performs ‘better’?• Budgeting: What are initial & running costs?• Financing: Who pays, who could pay?• Programming: How to improve performance?

Ideally, economic evaluation feeds into a formal decision making process such as multi-criteria analysis

Why Economic Evaluation?

Decision makers:• Line Ministries• Decentralized

government• Communities• Households• Commercial operators

Types of analysis:• Cost-benefit• Cost-effectiveness• Cost-utility• Cost-minimization

Other benefits• School performance• Broader water impacts• Property value• Public toilet fee

What Variables Make Up the Cost-Benefit Analysis?Cost breakdowns

• Investment/recurrent• Hardware/software• On-site/program costs• Household/external agent• Ingredients • Cash payment/in-kind

contribution

National Benefits• Tourism• Businesses• Water quality

Benefit $ Non-$

Health ✔ ✔Water (house) ✔ ✔Access time ✔ ✔Reuse ✔ ✔Intangibles ✔Environment ✔

Community Benefits

• Benefit-cost ratios (BCR) Benefit per currency unit invested

• Internal rate of return (IRR) Annual rate of return on investment

• Payback period Years to recover costs (break even)

• Net present value (NPV) Discounted future benefits – costs

• Cost-effectiveness ratios Cost to avoid 1 death or disease case or Cost of reducing 1 polluting unit

• Benefit-cost incidence Population groups the Cs and Bs fall on

How Can Efficiency Measures Enable Better Decision Making?

Options versus OD:Efficiency of raising households out of OD, or of preventing those with sanitation from falling back to OD

Options versus each other:Efficiency of moving from one option to another before the end of life of existing option (e.g. upgrade)

Economic = full, social impacts

Financial = monetary impact

… Relative Performance Varies Among Options

Indonesia - rural

Dry pit outperforms wet pit

Public Shared Dry pit Wet pit Septic / WWM

0

1

2

3

4

5

6

7

8

Access time

Water treatment

Water access

Health mortality

Health productivity

Health care

Be

ne

fit-

Co

st

Ra

tio

SELECTED FINDINGS FROM 40 SITES in ASIA

Higher Ladder Options – Higher Benefits…

China - rural

Pit latrine UDDT Septic tank0

50

100

150

200

250

300

Reuse

Access time

Water access

Health mortality

Health productivity

Health care

An

nu

al

ec

on

om

ic b

en

efi

t p

er

ho

us

eh

old

SELECTED FINDINGS

…but at What Cost?

China - rural

Philippines - rural

Shared Pit UDDT Biogas Septic tank 0

10

20

30

40

50

60

70

Program Maintenance Operation Investment US$

(2009)

Dry pit EcoSan Septic tank Septic tank with STF0

20

40

60

80

100

120

140

SELECTED FINDINGS

Annualized Cost per Household

Impact on Resources/Environment Undervalued

With and without wastewater management

Wet pit Septic WWM

Septic Septic WWM

Septic Septic WWM

Wet pit Septic WWM

Indonesia Philippines Vietnam China (Yunnan)

0

1

2

3

4

5

6

Access timeWater treatmentWater accessHealth mortalityHealth productivityHealth care

If environmental benefits are not monetized, the cost-benefit performance of WWM is lower than other options

SELECTED FINDINGS

Use What is There More Efficiently

Percentage loss in efficiency under actual program conditions

CAM

dry

pit

CAM

dry

pit

CAM

wet

pit

CAM

wet

pit

IND p

ublic

IND d

ry p

it

IND w

et p

it

IND s

eptic

WW

M

IND s

eptic

PH s

hare

PH d

ry p

it

PH U

DDT

PH w

etlan

d

PH s

eptic

VTN U

DDT

VTN p

it

VTN b

iogas

VTN s

eptic

WW

M

VTN s

eptic

CHN p

ublic

CHN p

it

CHN U

DDT

CHN b

iogas

CHN s

eptic

WW

M

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

SELECTED FINDINGS

China: Average satisfaction with current toilet option

Don’t Forget Non-Quantified Benefits!

0

0.5

1

1.5

2

2.5

3

3.5

4

Improved

Unimproved

SELECTED FINDINGS

• Sanitation is a socially profitable investment

• Economic performance varies substantially between technology options

• You can’t copy and paste – significant inter-country differences of costs and benefits

• Choices must be made on level of benefits required - higher benefits usually cost more: what is the willingness to pay?

• Use what is there better - optimal versus actual economic performance

• Non-quantified and environmental benefits of sanitation require better understanding as they are crucial to consider in decision making

Key Messages

• What overall evidence gaps remain – which once filled – would make you more comfortable in selecting sanitation interventions?

• Which costs and benefits would you specifically like to know more about in your decision making context?

• What is the need to conduct economic research in all African countries? How do you feel about using research results from a neighboring country?

• What rural and urban sanitation options need the greatest focus for the next five years of policy making?

• How can messaging of the results be better refined to have the desired impacts?

• What links need to be made to financing evidence and the private sector communities, and how?

What Next for Africa?

AcknowledgementsWith special thanks to funding agencies, staff of WSP, consultant teams and their institutes:

- Cambodia: Sok Heng Sam, EIC- Indonesia: Asep Winara, MLD - Philippines: U-Primo Rodriguez, UP- Vietnam: Viet Anh Nguyen, IESE- Yunnan: Liang Chuan, YASS

www.wsp.org