Economics of Water Supply

8/8/2019 Economics of Water Supply

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TRIBHUVANUNIVERSITY

INSTITUTEOFENGINEERING

DEPARTMENTOFARCHITECTUREANDURBANPLANNING

PULCHOWKCAMPUS

MODULE:ECONOMICS

SUBMITTEDTO:

DR.JIBGARJOSHI

SUBMITTEDBY:

KIRANMANJOSHI|066MUP205

MONICAMANANDHAR|066MUP207

SACHEENMAHARJAN|066MUP214

SAMIRBYANJANKAR|066MUP215

SUCHITABAJRACHARYA|066MUP

218

ASEMINARON

EECCOONNOOMMIICCSS

OOFF

WWAATTEERRAALLLLOOCCAATTIIOONN


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EconomicsofWaterAllocation

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CHAPTER1|INTRODUCTION

1.1Background

Water israpidlybecomingscarce inalmostallcountriesandcitiesoftheworldwithgrowingpopulationon

onehandandfastgrowingeconomics,commercial,industrialanddevelopmentalactivitiesontheother.This

scarcity makes water both social & economic commodity. Being an essential component of life, the use of

waterisindependentofeconomicconditionoroccupationofthepeoplealthoughitmayaffectitsdemand.

Tremendous socioeconomic, political, commercial, educational and other activities are going on every

moment.Forallsuchactivities,water isessential.Buttherateof increaseofsupplyofwater isvery lowas

compared to the rate of population growth and urban expansion coupled with hectic social, industrial,

commercialandotheractivities.Morethanthat,itisheartbreakingtoknowthatthetotalamountofwater

that

can

be

harnessed

insidethe

Kathmandu

Valley

in

no

way

will

be

able

to

meet

the

future

demand

of

Kathmandu.Insufficiencyinwatersupplymeantfurtherdeteriorationoftheproblemofwastewater.So,any

delay in finding a solution for the water supply and waste water treatment could lead to a serious

environmentaldisasterinKathmandu.

1.2Introduction - Wateraseconomiccommodity

Inadditiontobeingabasicneedandanonhomogeneousgood,watercouldbe excludable, nonexcludable,

rival or nonrival, depending on the way in which it ispackaged. For example, rainwater is a non

rival

and

non

excludable

good;

a

private

metered

connection

is

rival

and

excludable.

A

non

rival

good

is

onewhoseconsumptionbyonepersondoesnotreducetheconsumptionbyothers. Agoodisnonexcludable

if it is prohibitively costly to exclude someone from receiving the benefits of the good after it has become

available. Apublicgoodischaracterizedbynorivalryinconsumption.

Therearebothexcludableandnonexcludablepublicgoods. Anonexcludablepublicgoodisagoodthatis

non rival in consumption and that cannot be denied to a person who does not pay for it. Therefore, the

benefit derived from improved water supply is a non excludable. Water has public good characteristics

because improved water services to households translates to better health of the community,

improvement in theworkforce, and reduction in the demand for health care. Using water that is

belowstandard can lead to waterbased, waterborne, or other waterrelated diseases such asdiarrhea,

ring worm. In many developing countries, millions of dollars are spent every year to treat outbreaks of

disease most of which are waterrelated. Such expenditures are usually part of the budget of the

ministry of health which most times cannot afford these costs. To satisfy minimum health and safety

requirements,asufficientquantityofwaterforconsumptionpurposesmustbeatoraboveacertainquality

level,topreventwaterbasedillnesses. Waterforbathingmustbeofacertainqualitytopreventskinrelated

waterbornediseases. Otherhouseholdsinthecommunitymustsatisfytheseconstraintsaswellto prevent

negative externalities resulting from water borne disease spread within theneighborhood.

Health benefits clearly are a public good aspect of improved water quality.Reducingthetimewomen

and children spend fetching water allows them to engage in other economic activities that contribute to


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improvedfamilywellbeingandtheeconomyatlarge.Provision of adequate water supply will also reduce

the time girls spend infetchingwaterallowingthemmoretimeforschoolwork. Girlseducationyieldsa

higher rate of return than any other investment in developing countries. Educating girls has large social

benefits in terms of savings from improved hygiene and birth control, as educated women choose to have

fewer children. Bringing water closer to home and reducing the time girls have to spend fetching water

therefore

has

a

positive

externality

or

benefit

that

accrues

to

society

as

a

whole.

Arguments

of

whether

these

benefits are public or private are issues of concern in the literature. But the fact that improved water

supply and sanitation provide health benefits to society as awholeisapparentandundisputable.

1.3Objectives

ToknowabouteconomicsfactorinvolvedinwaterSupplyanditsproperdisposal Tounderstandthecostfactor,economicandfinancialbenefitsinvolvedinawatersupplyprojects

1.4Scopeandlimitation

The study is an attempt to understand the economic principles behind public water supply systemtakingthereferenceofMelamchiWaterSupplyProject

Thestudyisconductedwithinaveryshortperiodoftimedependinguponreadymadedata. The study of MWSP project has been done taking the reference of financial and economic analysis

carriedoutattimeofADBsfundingoftheproject.Theprojecthasgonethroughseveralchanges in

policies,budgetandstrategywithinthatperiod.

1.5Methodologies

Theadoptedmethodologiesareasfollows:

A.SelectionoftheTopic:

Throughtherigorousgroupdiscussion,thetopicEconomicsofwatersupplyprojectsfortheseminarwasselected.

B.Literature

Review:

Referencebooksand relatedpaperswerestudiedandplanningwasdone for the interpretation of the raw

data.

C.Datacollection:

TheSecondarydatawascollectedfromtheinternetsources.

D.Analysis:

Analysisofdataintermsofeconomicsaspects

E.DataPresentation:


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The raw data was analyzed and developed in a form of graphical representation. Conclusion and

recommendationareextractedfromcasestudy.

CHAPTER2|WATERANDWATERSUPPLY

2.1Water

sources

2.1.1Surfacewater

Theseareopensourcesofwaterwhichincludesriver,ponds,streamsetc.Theyareusuallythemainsources

ofwater forwater supply system.Since theyareexposed toair, they aregenerallypollutedandshouldbe

firstly purified, collected before distributing. The main sources of water in Nepals Context are rivers. The

presenceofHimalayasmakesNepalrichinwaterresources.Theriversarefedthroughmeltingofsnowinthe

Himalayas.Riversarerenewablesourceofwater.Water isavailablefromtheseriversalltheyearroundbut

duringrainyseasonswaterlevelishigher.Thismakesthesurfacewatermostfeasibleforuseinwatersupply

watersystem.

2.1.2GroundWater

Groundwatercanbeacheapandreliablesourceofwaterwhereitisavailable.Groundwatercanbeobtained

thoughwellordeepboring(byhandpumps).Groundwaterisusuallycleanfromimpuritiesbutitmaycontain

dissolved salts, mineralsand sometimes harmful metals likearsenic. Ingeneral,groundwater is safer from

pollutionwhen the aquifer isdeepand confined; even then it isadvisable touseground water forgeneral

purposeotherthandrinking.i.e.nonpotableuse.Onedrawbackofgroundwater isthat it isnotrenewable

naturallyinashortperiodandextremerelianceanduseofgroundwatercancausegeologicaldisorder.One

waytotacklethisproblemisbyrecharginggroundwaterduringrainyseasonsbyrainwater.

2.1.3RainWater

Rainwater istheultimatesourceofwaterwhich feedstheentiresecondarysource includingSurfacewater

and Ground water. Even though it is primary source of water, practical implementation of rain water

harvestingwasnotseenuntilrecently.Directcollectionanduseofrainwaterishowever,widelypracticedat

aninformallevelbyhouseholders.Althoughitcannotbeconsideredasreliablesourceofwater,thefactthat

itisrenewableandfreesourceofwatermakesitimportantsourceofwater.

2.2Watersupplysystem

2.2.1Stateownedsystem

Sincewatersupplysystemisextremelycapitalintensive,andthefinancialbenefitsachievedarealsolowbut

theeconomicalbenefitsthatthewatersupplyprojectsprovideareofmajorimportance.Itisthemainreason

whymostwatersupplyprojectsaremainlycarriedoutbythegovernment.

The main goal of the state owned system is to provide service to general public. It is however usually

inefficient,nonflexibleandnonresponsive.


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2.2.2Privatesystem

Beingaprofitbasedsystem,itisefficient,responsiveandfeasible.Howeverprivatesystemmaynotlookafter

environmentalandsustainabilityfactorbecausethemainaimisprofit.

ExampleofPrivatesystemisGroundwatersupplyinapartmentsthroughdeepboringandothermeans.Since

profit is main factor, environmental issues such as making retention pond , ground water recharging are

usuallynot

covered

2.2.3PublicPrivatePartnershipsystem

PPPisthenewmodelforimplementingpublicprojects.ThemainideaofPPPmodelisthattheprivatesector,

community organizations and non government and government organizations should be partners in

development.TheMillenniumDevelopmentGoal (MDG)AssessmentStudy forNepalestimated that33per

cent of the expenditure necessary to achieve the MDGs will have to come from nongovernment sources.

Publicprivate

partnerships

are

one

of

the

means

of

achieving

this.

A.DefinitionofPublicPrivatePartnerships

There isnoclearagreementonwhatdoesandwhatdoesnotconstituteapublicprivatepartnership (PPP).

UnderatypicalPPPscheme,thegovernmentspecifiestheservicesitwantstheprivatesectortodeliver,and

then the private partner designs and builds an asset for that purpose, finances its construction, and

subsequently operates the asset and provides the services deriving from it. This contrasts with traditional

public investmentwherethegovernmentdesignsandfinancesanassetandthencontractswiththeprivate

sectortobuildit.

In most cases, the government then operates the asset once it is built. The difference between these two

approaches reflects a belief that giving the private sector combined responsibility for designing, building,

financing,andoperatinganassetisasourceoftheincreasedefficiencyinservicedeliverythatjustifiesPPPs.

B.StakeholdersofPublicPrivatePartnership

The Partnership generics evolve from the possible linkages among the stakeholders involved in the UWM

System.

In

general,

there

are

three

major

groups

of

stakeholders

and

three

categories

of

partnerships

linkages.ThePPP isparticularlyknownaspartnershipbetweentheGovernmentandthePrivateSector.This

categoryofpartnershipisthepartofconcernandwillbediscussedmoreindepth.

TheothertwoformsofpartnershipbetweentheGovernmentandtheCommunities,andpartnershipbetween

the Private Sector and the communities or Civil Society are not discussed. The partnership between the

GovernmentandtheCivilSocieties isbasedonthepolicyoftheGovernmentonparticularsectorto include

andempowertheCivilSocietieswhenrequired.


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The partnership between Business and Civil Societies is based on the Social and Corporate Responsibility

policyadoptedbytheBusinesshousesandbecomestheir internalmatter.However,the latesttwoformsof

partnership are more conveniently understood based on the modalities discussed for Public Private

Partnership.

C.PublicPrivatePartnershipStructure

The stakeholder under the Government category included the Central and Local Government Bodies as

Ministries, Departments, Municipalities, DDC and VDC. The Donor Agencies and other Government Owned

Agenciesalsofallunderthiscategory.ThesecondcategoryofstakeholderistheFormalandInformalPrivate

Sector comprising of profit making and nonprofit making organizations as business houses, industries,

companies,enterprises,serviceproviders,NGO,CBO,andindividuals.Thethirdcategoryofstakeholdersisthe

consumers comprising of service users from Government to citizens who are responsible for generation of

waste.

D.PartnershipDevelopmentApproach

Theapproaches

of

Partnership

Development

are

TopDownApproachwheretheGovernmenttakesinitiativesandcallforPartnership.

SuchinitiativesarealmostrareunlessitismediatedandpressurizedbytheCivilSocieties.

Bottom Up Approach This requires influenceonPolicy, PlansandPrograms of the Governmentand very

difficulttoachieve.

Lateral Approach This approach is not dependent on Government Policy. Mostly it is carried out by the

CommunitiesandPrivateSectoratgrassrootlevelfollowingtheirCorporateandIdealisticResponsibility.The

LateralPartnership

has

very

strong

effect

on

Government

Policy

depending

upon

the

strength

and

extends

of

spatialcoverageofmembershipof thepartnership.The recentpoliticalchanges inNepalcouldattribute to

this form of partnership where the communities and individual informal partners united for achieving a

particulargoalofpoliticalchange.


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CHAPTER3.0|ECONOMYBEHINDWATERSUPPLY

3.1FactorsinvolvedinwaterSupply

Followingfactorsaretobeanalyzedbeforemakingeconomicalanalysisofwatersupplysystem

A. Water supply and Sanitary are interconnected with each other. Once water is delivered to household,itisboundtogeneratewastewater.Thewatersupplycostshouldincludetheprovisionandcost

ofremovalandtreatmentofwastewatergenerated.

B. Watersupplyandsanitationservicesarebroadlyconceivedashugesocietalenterprise.Itsdaytodayneedanditsrequirementforlotsofdaytodayactivitiesforallsectorsofsocietymakesitaimportant

partofurbanecology.Reliableandefficientwatersupplyisgoodmeasureofadevelopedandhealthy

society.

ForanexampleifwecomparethewatersupplyandsanitationsystemofEuropeancitiesandcitiesof

developingnationslikeKathmanduwecanseehugedifferenceinqualityofservicewhichreflectsthe

developmentconditionofsociety.

C. Theprovisionofwaterandsanitationservicesisverycapitalintensive.Moreover,inmanycasesthereare significant economies of scale, and the physical capital tends to be longlived. This has several

important implications. It iscritical togetthe investmentplanningdecisions rightbecauseonecan

makebigmistakesbyoverbuilding,bybuildingtoofarinadvanceofdemand,bybuildingfacilitiesthat

noonewants,orbyfailingtomaintainandoperatesuchcapitalintensivefacilitiesefficiently.

Foranexample,inKathmanduValley,wherewatersupplyisintermittent,majorcauseforinefficient

distributionofwaterislackofeffectivevalvesystem.Duetothesehouseholdsnearthereservoirare

always getting excess water while those away from it are getting none at all. Although initial

investmentmaybeonhigherend,usingvalveandtwopipesystemsmaybeabetterchoicehere.

D. Household demand for very small quantities of drinking water is extremely price inelastic becausepeople must have water to live. If there are no other sources of water, the amount of money

someone will pay for 34 liters of water per day is limited only by his/her income. This extremely

inelasticdemandforsmallquantitiescoupledwithshortagesofwatersupplycancombinetocreate

situationsinthedevelopingworldthatarebeyondtheexperienceofpeopleinrichercountries.

Forexample,insomeplacesinruralTanzaniaa20literbucketofwatercancostadayswagesofan

unskilled laborer. Youcantakeyourchoice:walkalldayforwater,orworkallday inthefieldsand

buyabucketofwater.

E. Thefactthatthepriceinelasticityforsmallquantitiesofwaterissolow,andtheprovisionofservicesis very capital intensive, the water supply system provides large opportunities for bribery and

kickbacksonconstructioncontractsandequipmentpurchases. Theseproblemsgreatly increasethe

transactioncostsofdoingbusiness,andthusthetotalcostofprovidingimprovedwaterandsanitation

servicesinmanydevelopingcountries.


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ForExample,oneofthecauses forcost increaseandsubsequentdelay inconstructionofMelamchi

WaterSupplyProjectisduetocorruptionduringvariousphasesofconstruction.

F. Water isverydifferent than electricpowerwhen itcomes tostorageand transport.Thestorageofwaterisrelativelyeasy,whiletransportingwaterlongdistancestourbancentersisexpensivebecause

waterissovoluminous. Withelectricity,bycontrast,storageisexpensiveandtransportationiseasy.

Becausewater

is

typically

expensive

to

transport

long

distances,

it

can

be

prohibitively

expensive

to

providecustomerswithveryhighlevelsofservicereliability.

3.2FinancialandEconomicAnalysis

3.2.1WithandWithoutProjectCases

Afterchoosingthebestamongalternatives,thenextstepistotestthefinancial and economic viability of

the project, which is the chosen, leastcost alternative. The initial step in testing the financial and

economicviabilityofaprojectistoidentifyandquantifythecostsandbenefits.

To identify project costs and benefits and to compare the net benefit flows, the withoutproject

situationshouldbecomparedwiththewithprojectsituation.Thewithoutprojectsituation isdifferentfrom

thebeforeprojectsituation. Thewithoutproject situation is that one which would prevail without the

project visvisfactors likepopulation increase.Aswater isgettingscarcer,thewaterusepatternandthe

costarealsolikelytochange.

3.2.2FinancialVsEconomicAnalysis

Financial

and

economic

analyses

have

similar

features.

Both

estimate

the

net

benefits

of

an

investment

projectbasedonthedifferencebetweenthewithprojectandthewithoutprojectsituations.

However, the concept of financial net benefit is not the same aseconomicnetbenefit. Whilefinancial

netbenefitprovidesameasureofthecommercial(financial)viabilityoftheprojectontheprojectoperating

entity,economicnetbenefitindicatestherealworthofaprojecttothecountry.

Financialandeconomicanalysesarealsocomplementary. Foraprojecttobeeconomicallyviable,itmustbe

financially sustainable. If a project is not financially sustainable, there will be no adequate funds to

properly operate, maintain and replace assets; thus the quality of the water service will deteriorate,

eventuallyaffecting

demand

and

the

realization

of

financial

revenues

and

economic

benefits.

It has sometimes been suggested that financial viability not be made aconcernbecauseas longasa

projectiseconomicallysound,itcanbesupportedthroughgovernment subsidies. However, in most cases,

governments face severe budgetaryconstraints and consequently, the affected project entity may run

into severe liquidityproblems,therebyjeopardizingevenitseconomicviability.

The basic difference between the financial and economic benefitcostanalysesoftheprojectisthatthe

former compares benefits and costs to the enterprise in constant financial prices, while the latter

compares the benefits and costs to the whole economy measured in constant economic prices.

Financial prices are market prices of goods and services that include the effects of government

intervention anddistortions inthemarketstructure. Economicpricesreflectthetruecostandvaluetothe


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economy of goods and services after adjustment for the effects of government intervention and

distortions in the market structure through shadow pricing of the financialprices. Insuchanalyses,

depreciationcharges,sunkcostsandexpectedchangesinthegeneralpriceshouldnotbeincluded.

In financial analysis, the taxes and subsidies included in the price ofgoodsandservicesareintegralparts

offinancialprices,buttheyaretreateddifferently ineconomic analysis. Financialandeconomicanalyses

alsodiffer

in

their

treatment

of

external

effects

(benefits

and

costs),

favorable

effects

on

health

and

the

UFW

ofaWSP.

Economicanalysisattemptstovaluesuchexternalities,healtheffectsandnontechnicallosses.

3.2.3Financialvs.EconomicViability

Thestepsindeterminingthefinancialviabilityoftheproposedprojectinclude:

(i) Identifyingandquantifyingthecostsandrevenues;

(ii) Calculatingtheprojectnetbenefits;

(iii) Estimatingtheaverageincrementalfinancialcost,financialnetpresentvalueandfinancialinternalrate

ofreturn(FIRR).

TheFIRR istherateofreturnatwhichthepresentvalueofthestreamof incrementalnetflows infinancial

prices iszero. If the FIRR isequal toor greater than the financial opportunitycostofcapital, theproject is

consideredfinanciallyviable. Thus,financialbenefitcostanalysiscoverstheprofitabilityaspectoftheproject.

Thestepsindeterminingtheeconomicviabilityofaprojectincludethefollowing:

(i) Identifyingandquantifying(inphysicalterms)thecostsandbenefits;

(ii) Valuingthecostsandbenefits,totheextentfeasible,inmonetaryterms;and

(iii) Estimating the EIRR or economic net present value (NPV) discounted at EOCC = 12% by comparing

benefitswiththecosts.

The EIRR is the rate of return for which the present value of the netbenefit stream becomes zero, or

at which the present value of thebenefit stream is equal to the present value of the cost stream. For

aprojecttobeacceptable,theEIRRshouldbegreaterthantheeconomicopportunitycostofcapital.TheBank

uses12%

as

the

minimum

rate

of

return

for

projects;

but

for

projects

with

considerable

no

quantifiablebenefits,10%maybeacceptable.

3.2.4ProceduresforEconomicAnalysis

The economic analysis of a Water Supply Projects (urban or rural) has to follow a sequence of

interrelated steps:

A. DefiningtheprojectobjectivesandeconomicrationaleUnderthiswillbedefiningthemaingoaloftheproject,whyitisneededandhowitwillbeachieved.

To acquire theknowledgeabout the physical features,present situation regarding existing facilities


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andtheiruseconstraints(ifany)againsttheiroptimaluse,thecommunitiesandtheirsocioeconomic

conditions,surveysandfieldvisitsneedtobedone.

Foranexample if thearea is ruralorbasedoneconomiccondition of thehousehold in thearea,a

community taps serving few household may be more beneficial socioeconomically than providing

individualtaps

B. Demandanalysisandforecastingeffectivedemandforprojectoutputs.This is to be based on either secondary information sources or socioeconomic and other

surveysintheprojectarea.Demandofwaterisdependedonthetariffrateofwater.Thedemandof

water also fluctuates withseasonand on the timeofa day. The project needs to access the peak

demand.

C. Establishing the gap between future demand and supply from existing facilities after ensuring theiroptimum

use.

Forexampleifthefuturedemandofwaterofanarea(ascalculatedfromthesurvey)isexpectedtobe

16mlpd and existing facilities provides around 5mlpd with their optimum use then water supply

systemwhichcanprovideadditional11mlpdwillberequired.

The optimal use of facilities (if applicable) here need to be achieved through physical and policy

related measures. The physical measures are like leakage control, replacing faulty valves and

adequatemaintenanceandoperation, (unlessnewnetworksystemsareproposed forwatersupply)

etc; policy measurescan be charging an economically efficient tariffand implementing institutional

reforms.

D. Identifying project alternatives to meet the above gap in terms oftechnology,process,scaleandlocationthroughaleastcostand/orcostEffectivenessanalysisusingeconomicpricesforallinputs.

This includesshort listingand identifyingthe leastcostalternativeofachievingtherequiredoutput.

Allthelifecyclecosts(marketandnonmarket)associatedwitheachalternativearetobetakeninto

account.

Thealternativesarenottobeconfinedtotechnicalorphysicalelementsonly,e.g.,groundwateror

surface water, gravity or pumping, large or small scale, etc. They can also include activities due to

policy measures, e.g. leakage detection and control, institutional reforms and managerial

reorganization.

Foranexample,weassumethatcitiesneartheseascaneasilyaddress itswaterneed.Butmostof

thetimeitisactuallycheapertouseothersourcesofwaterthantopurifyandremovesaltfromthe

sea water (the process known as desalination) and distribute the desalinated water to higher level

(sincesealevel liebelownormalland level).Theleastcostanalysisofdifferentprojectswillreveal if

thewatersupplyprojectisfeasibleenoughtoimplementornot.

E. Identifying benefits, both quantifiable and nonquantifiable, and determining whethereconomicbenefitsexceedeconomiccosts.


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Foranexample,whenthedamwasproposedforconstruction intheNarayaniRiver inChitwan,the

financialstudyrevealedthattheprojectwouldreallytakealongtimetoattainthefinancialbreakeven

state.Buttheprojectwasconsideredeconomicallyfeasibleduetofollowingreason

Withthenewirrigationnetwork,thefarmerswillbeabletoproducemorecrops,whichwillresultinincrease ineconomicactivityand farmersenduppayingmore taxes.Alsoasasocialbenefitnation

willget

more

food

yield.

These

non

market,

economic

and

social

benefits

cannot

be

easily

quantified

butthesefactorsareconsideredforanalyzingofeconomicbenefitsoftheprojects.

Generally,iftheaverageincomeofthefarmersintheareabeforetheprojectis5000permonthandifduetotheprojecttheycould increasetheircropyieldandearn incomeofaround15000permonth

then10000 isconsideredaseconomicbenefitoftheproject. Intheabovecase ifthefarmerearns

10000 more it is assumed that certain% (say 1020% i.e. 1000 to 2000) of the earned income will

returntogovernmentintheformoftaxpaidwhichisconsideredasfinancialgaininthecaseofstate

projects

F. Assessing whether the projects net benefits will be sustainablethroughout the life of theproject

through

cost

recovery,

tariff

and

subsidy

(if

any)

based

on

financial

(liquidity)

analysis

and financialbenefitcostanalysis.

Thebenefitsofthewatersupplyprojectsaremoreeconomicalandsocialthanfinancialbutgiventhat

it isthestatewhichgenerally invests inwatersupplyprojectswhich lowpriorityof financialreturn.

But for water supply projects to be sustainable, the operation and maintenance cost and future

upgrading cost has to be provided by the end users. Failing to achieve this will make the project

unfeasibleevenatcostofitssocialbenefits.

In case of above example of water supply for irrigation in Chitwan thorough Narayani river, the

farmershas

to

pay

the

charges

for

using

water

for

irrigation.

Prices

are

charged

as

per

unit

of

land

irrigated.ThiscostcollectedshouldcovertheO&Mcostoftheprojectsotheproject is financially

sustainablethroughoutthelifeofproject.

G. Testingforrisksassociatedwiththeprojectthroughsensitivityandriskanalyses.IncalculatingtheEIRRorENPVforWSPs,themost likelyvaluesofthevariablesare incorporated in

the cost and benefit streams. Future values are difficult to predict and there will always be some

uncertaintyabouttheprojectresults. Sensitivity analysis is therefore undertaken to identify those

benefit and costparametersthatarebothuncertainandtowhichEIRRandFIRRaresensitive.

AsensitivityindicatorshowsthepercentagechangeinNPV(or EIRR) to the percentagechange in a

selectedvariable.Ahighvaluefortheindicatorindicatesprojectsensitivitytothevariable.Measures

minimizing against major sources of uncertainty are incorporated into the project design, thus

improvingit.

For an example some of the variable that may affect the water supply projects includes long term

reliabilityofwatersource,WTP(Willingnesstopay)factorsoftheconsumer,thegovernmentpolicies

andeconomicabilityofthegovernment,politicalstabilityofthecountrywhichshouldbetaken into

account.


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3.3CostinvolvedinWaterSupplySystem

Assaidearlier,developmentofwatersupplysystemisextremelycapitalintensive.Thetreatmentanddelivery

ofwatertothehouseholdsandremovalandtreatmentofthewastewatergeneratedcostseriousmoney.The

financialbenefitsachievedarealsolowbuttheeconomicalbenefitsthatthewatersupplyprojectsprovideare

of major importance. It is the main reason why water supply projects are mainly carried out by the

government.The

private

sectors

(whose

main

goal

is

profit)

hence

generally

refrain

for

water

supply

projects

unlesslowinterestdonationsandgrantsareinvolvedintheproject.

3.3.1MarketCosts

Theeconomiccostsofprovidingahouseholdwithmodernwaterandsanitationservicesarethesumofseven

principalcomponents:

A. Opportunitycostsofdivertingrawwaterfromalternativeusestothehousehold (orresourcerents)If,forexample,adrinkingwaterprojectuses raw water diverted from agriculture, theuseofthis

water

for

drinking

will

result

in

a

loss

for

farmers.

These

costs

are

measured

as

the

opportunity

cost

of water which, in this example, equals the benefits foregone of the use of that water in

agriculture.

B. StorageandtransmissionofuntreatedwatertotheurbanareaThis includes cost in construction and operation of infrastructure used for trapping and storing

(pumps,dams)thewatersourceandtransmissionofthewatertotheareaofdistribution.

C. TreatmentofrawwatertodrinkingwaterstandardsThemostcommonlyadoptedandcheapmethodhereissandfiltrationandchlorination.

D. DistributionoftreatedwaterwithintheurbanareatothehouseholdMakingSupplyNetworkandprovidinghouseholdconnectionsofthetreatedwatercompriseamajor

costcomponent.

E. Collectionofwastewaterfromthehousehold(seweragecollection)F. Treatmentofwastewater(sewagetreatment)G. Anyremainingcostsordamagesimposedonothersbythedischargeoftreatedwastewater(negative

externalities).


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Table1.Costestimates:improvedwaterandsanitationservices

No. Costcomponent US$perm3 %oftotal

1 Opportunitycostofrawwatersupply 0.05 2%

2 Storageandtransmissiontotreatmentplant 0.15 6%

3 Treatmenttodrinkingwaterstandards 0.15 6%

4 Distribution of water to households (including

houseconnections)

0.75 30%

5 Collection of waste water from home and

conveyancetowastewatertreatmentplant

1.00 40%

6

Wastewatertreatment

0.35

14%

7 Damages associated with discharge of treated

wastewater

0.05 2%

Total 2.50 100%

Table1presentssome illustrativeaverageunitcostsforeachofthesesevencostcomponents,expressed in

U.S.dollarspercubicmeter. Thecostestimates inTable1 includebothcapitalexpensesandoperationand

maintenanceexpenses. Thecalculationofannualcapitalcostsusesacapitalrecoveryfactorof0.12,assuming

adiscountrateof10%andanaveragelifeofcapitalequipmentandfacilitiesof20years.

Theunitcostsofthesedifferentcostcomponentscouldvarywidely indifferent locations.Forexample, ina

locationwithabundantfreshwatersupplies,item1(theopportunitycostofdivertingwaterfromexistingor

future users to the potential target group) and item 7 (the damages imposed by the discharge of treated

wastewater) may, in fact, be very low or even zero. However, in more and more places these opportunity

costsassociatedwithwaterdiversionandtheexternalitiesfromwastewaterdischargearebeginningtoloom

large.

Some

cost

components

are

subject

to

significant

economies

of

scale,

particularly

storage

and

transmission

(item2),thetreatmentofrawwatertodrinkingwaterstandards(item3),andthetreatmentofsewage(item

6).Thismeansthatthelargerthequantityofwaterorwastewatertreated,thelowertheperunitcost.Onthe

other hand, some cost components are experiencing diseconomies of scale. As large cities go farther and

fartherawayinsearchofadditionalfreshwatersupplies,andgoodreservoirsitesbecomehardertofind,the

unitcostofstoringandtransportingrawwatertoacommunity increases.Therearealsotradeoffsbetween

differentcostcomponents:onecanbereduced,butonlyattheexpenseofanother.Forexample,wastewater

canreceiveonlyprimarytreatment,whichismuchcheaperthansecondarytreatment;butthenthenegative

externalitiesassociatedwithwastewaterdischargewillincrease.


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14|P a g e

Theopportunitycostsofrawwatersupplies(item1)arestillquitelowinmostplaces,ontheorderofafew

centspercubicmeter.Even inplaceswhereurbanwatersuppliesarediverted from irrigatedagricultureor

valuableenvironmentalassets,theunitcostswillrarelybeaboveUS$0.25percubicmeter.

Rawwaterstorageandtransmissionandsubsequenttreatment(items2and3)willtypicallycostUS$0.30per

cubic meter. Within a city, the water distribution, collection and conveyance of sewage to a wastewater

treatmentplant

(item

5)

is

even

more

expensive

than

the

water

distribution;

this

will

cost

about

US$1.00

per

cubic meter, 40% of the total cost. Secondary wastewater treatment (item 6) will cost about US$ 0.35 per

cubic meter. Damages resulting from the discharge of treated wastewater are very sitespecific, but

environmentalistscorrectlyremindusthatthattheycanbesignificant.

Asshown,totaleconomiccostscomestoaboutUS$2.50percubicmeterinmostlocation.Howeverthisvalue

isboundtochangedependingonvariousfactors.Forexample,insmallcommunitiesinthemountainousareas

ofUpperNepal,costofWaterandSanitaryservicescaneasilybedoubleor tripletheseamountspercubic

meter.(Source:DesigningOptimalWaterSupplySystemforDevelopingcountries)

Otherfactors

which

affect

the

economic

cost

of

water

includes

the

following:

3.3.2NonMarketCosts

Subsidies

Generally inDevelopingCountries,thesubsidiesprovidedtoconsumersofwaterandsanitationservicesare

not only huge, but also regressive. It is often not politically desirable for the majority of people to

understand that middle and upperincome households, who generally use more water, are thus actually

receivingthemostbenefitfromsubsidies.Mostfundamentally,poorhouseholdsareoftennotconnectedto

theW&S

network

at

all

and

hence

cannot

receive

the

subsidized

services.

Even

ifthey

do

have

connections,

thepooruselesswaterthanricherhouseholds,thusreceivinglowerabsoluteamountsofsubsidy.

For an example, the tariff rate of water for Nepal is among lowest in Asia due to subsidy provided by

GovernmentwhichstandasRs80forunmeteredtapsandmaximumof250(Rs50forsewerage)formetered

taps.ThepeopleofKathmanduareunwillingtopaymoretariffsforwatersupplyduetounreliabilityofthe

service.Thiscoupledwithhighratiooflossduetoexistinguseofoldpipeisleadingtofailureofexistingwater

supplysysteminitssocialgoalandfinancially.

SustainabilityCost

Itcanbereferredcostadded toensurethe futureavailabilityof resourceandensure itssustainability.This

specially applies to ground water whose excessive use can decrease the ground water table, making the

groundwaterdifficulttoobtainornotavailableatallinthefuture.Hence,tocopewithsuchsituation,special

costcalledScarcityPremiumisaddedtotheresources.

EnvironmentalCost

Thisincludesthecosttocompensatefortheenvironmentalimpact(ifany)resultingduetouseofwaterfrom

thesourceandduetowastewaterdischarge.

Foran

example,

using

water

from

the

wetland

for

irrigation

may

disturb

the

ecosystem

of

the

wetlands.

The

environmentalcosthelpstocompensateforsuchimpacts


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15|P a g e

3.4CostRecovery

In general, the cost of the water supply project is expected to be recovered by increasing the tariff rate.

Whereas there is cost recovery in most of the countries (Capital, O & M, Debt services etc), in developing

countries

it

is

not

always

so.

The

greater

gap

between

cost

and

prices

leads

to

lower

service

reliability

and

sustainability.

Most of the time, in developing countries, the cost of the project is not expected ot be recovered. The

government invests itsowncapital for the project,and the cost collected is used to cover thepresent and

future operation and maintenance goals only. The goal here is to achieve economic feasibility rather than

financial.

CHAPTER4|WATERSUPPLYSYSTEMINKATHMANDU

4.1WaterSupply

In KMC, water is supplied by Nepal Water and Sewerage Corporation (NWSC) and private tanker services.

Besides these there are few community based supply system for specific towns and villages. For example

Siddhipur Water Supply project carried out by combined effort of NGOs, Community and Local level

Governemnt. Inadditiontothat,many industries,hotels,hospitalsanda largenumberofhouseholdsusea

hugeamountofgroundwaterextractedbypumping.

The

existing

water

pricing

policy

in

the

Kathmandu

is

partly

based

on

block

rate

tariff(BRT)

mechanism,

althoughtheusersschargefailstocoverthecostofservicesortogeneraterevenueforevvectivetreatment

of available water supply and augment new water sources. In KMC, the tariff rate charged by NWSC is as

follows

4.2Currentdrinkingwatertariffs

Pipe

size

(in

inch)

Minimum

consumption

(ltr)

MinimumtariffinNRs Effective from 17th

September 2004 as per volume

ofwater(priceper1000Liters)

Household

Government,Institutional&

public

Commercial&

industrial

Household Government,institutional&

public

Commercial&

industrial

10,000 50 50 50 15 15 15

27,000 810 810 810 30 30 30

1 56,000 1,680 1,680 1,680 30 30 30

1.5 155,000 4,650 4,650 4,650 30 30 30

2 320,000 9,600 9,600 9,600 30 30 30

3 881,000 26,430 26,430 26,430 30 30 30

4 1,810,000 54,300 54,300 54,300 30 30 30

ForthosehouseholdwhodoesntowemeterhavetopayminimumRs552.00/month.


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WatersuppliedbyNSWCorprivatetankersorextractedandusedbyvarious institutionsorhouseholdsare

neither controlled by a uniform law nor well managed by the existing institutions. It was nationally and

internationallyacceptedthattheproblemofwatersupplybothinquantityandqualityarebasicallyduetothe

organizational and functional weakness of the major supplier of water, namely, Nepal Water Supply and

Sewerage Board which was reorganized as Nepal Water Supply Corporation in 1989 (NWSC). In order to

improve

the

situation,

donors

expressed

the

opinion

that

HMG/Nepal

should

bring

in

a

private

operator

(PO)

to manage the water system assets and made this a condition for loans and grants. Taking this fact into

consideration,HisMajestyofGovernmentofNepal(HMG/N)thenproposedthreemajorreformsanddecided

Tobringinprivatecompanytomanagethewatersupplystaffandequipment Torepair,upgradeandexpandthepresentwatersupplynetwork;and ToconstructatunnelfromtheMelamchivalleytobringinmorewater.

Allthesereformsrequiredahugeamountofmoney.Thetotalcostofthereformwasestimatedtobearound

US$

468

million

and

is

expected

to

be

financed

by

loans

(59%),

grants

(11%)

and

HMG/N

(30%)

to

be

spent

between2002and2007.Thisappearstobeaveryexpensiveproject(US$300perpersoninthevalley).The

rolesofpublicandprivatesectorsintheabovereformprocesscanbeunderstoodclearlyfromthefollowing

allocationsoffunds:

ForprivatecompanyUS$4milliontobespentundercertaincondition ForsystemupgradingUS$136million ForMelamchitunnelUS$328million

CHAPTER5.0|MELAMCHIWATERSUPPLYPROJECT

5.1Background

In 1988, the Government of Nepal decided that a tunnel should be built from the Melamchi Valley to the

Kathmandu Valley to improve the water supply in Kathmandu, Nepals capital city. The Melamchi Water

SupplyProject(MWSP)wasinitiallyfundedbya$71millionloanfromtheWorldBank.However,sevenyears

latertheprojectstalledwhenitwasrevealedthatafractionofthisamounthadactuallybeenspent.

TheWorldBankdemandedthatanoperatorfromtheprivatesectorbebroughtinbeforefurtherfundingwas

offered. This condition remained when the World Bank withdrew and the Asian Development Bank (ADB)

becamethemaindonor.By2006,SevernTrentWater Internationalwastheonlycompanytohavemadea

validbidfortheproject.

TheMWSPwasanexpensiveprojectfundedbyanextensiveforeignloan,whichthegovernmentwouldhave

to repay. The tunnel was taking years to happen and there was concern that the ordinary people of

Kathmandu,especiallythe40,000poorcitizens livingwithoutawaterconnection,wouldhavenosay inthe

designandplanningoftheprojectandnoshareinitspotentialbenefits.


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Since1973,thegovernmentofNepalhasdoneseveralstudiesandimplementedtheschemestofindoutthe

bestsolutiontomeetthewatersupplydemandfortherapidgrowthofpopulationintheKatmanduvalley.In

1988,morespecificpre feasibilitystudieswerecarriedoutforthewatersupplysourcesforthevalley.Based

onthesestudies,theMelamchischemewas identifiedas thebest longtermsolution tosolve theconstant

watershortageinthevalley.Subsequently,in1997,thegovernmentestablishedtheMelamchiwaterLimited

to

seek

funding

for

and

implement

the

Melamchi

Water

Supply

Project.

In

1998,

it

was

replaced

by

the

MelamchiWaterSupply Development Board (MWSDB)while somekeydonors,suchasAsianDevelopment

Bank, Governments of Japan and Norway took interest in funding the project. Currently the government,

throughMWSDBisimplementingtheproject.

5.2Introduction

MelamchiWaterSupplyProject ismuchdebated

megaproject.Theprojectwasvisualizedin1973.

It is an alternative to address acute water

problems of Capital Kathmandu. The Project is

located in Sindhupalchok District, but covers

Kavrepalanchok, Kathmandu, Lalitpur and

Bhaktapur.5100MillionLitterswaterperdaywill

bedivertedfromsnowfedMelamchi, Larkeand

YangririverstoKTM.InKathmandu,perday180

MillionLiterswaterisnecessary.

The Melamchi Water Supply Project and

institutional reformswerecarried forward in the period inaccordancewith thegovernments twopronged

strategytoachievesustainableandconsumerorientedwatersupplyandsanitationservicesintheKathmandu

Valley.

TheMelamchiWaterSupplyProjectwillbeimplementedwithhighprioritytoprovidealongtermsustainable

bulk water supply in the Kathmandu Valley. The tunnel excavation works will be carried forward and

remaining road works are also being completed. Preparatory works will also be undertaken towards the

constructionofa170MLDWaterTreatmentPlant inKathmanduValley.Theoperationsofthewatersupply

andsanitation

services

will

be

handed

over

to

the

Kathmandu

Upatyaka

Khanepani

Limited

(KUKL).

A

major

program for repair, replacement,rehabilitationandexpansionof theageolddistributionsystem isplanned

andbeingworkedouttocontrolleaks.Institutionalefficiencywillalsobeincreased.

5.3ProjectAimsandObjectives

Withthestartingoftheproject,ithadfollowingobjectives:

SolvethechronicwatersupplyshortageandimprovethewatersupplyinKathmandu(KTM) Valley Rehabilitateand/orreplaceexistingwatersupplynetworkandassociatedequipment


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18|P a g e

Provideaccesstocleanandsafewatersupplyensuringgoodhealthsanitation Establishefficientwatersupplynetworkingsystemonasustainablebasis Reducewaterpollutionthroughestablishmentofsewer andwastewatertreatmentplants To improveriverecology,religioussites,andculturalGhats locatedatriverbanksbyaugmentingwater

flowat

Bagmati

and

its

tributaries

ToexpandthedepletinggroundwatersourcesofKTM5.4MWSP:CostEstimation

The total project cost was originally estimated at US$464 million; JBIC,Norway and Sweden agreed toco

financetheproject.Tunnelconstructionwouldcover32%ofthetotalcost,rehabilitationofthenetwork,46%,

and the management contract plus institutional reforms, 4%. The World Bank earlier agreed to provide

financialsupporttothePSPprocessbutpulledout inmid2002;ADBthencame intohelppreparea5year

managementcontract.

Themaincostitems(basecosts)aretheMDS($74.29million),WTP($39.33million),BDS($48.47million),and

thedistributionnetworkimprovements($65.95million).Thefollowingtablegivesasummaryoftheestimated

costs:

ItemForeign

Exchange

Local

CurrencyTotalcost

A. Base

1.InfrastructureImprovements 193.03 83.36 276.39

2.SocialandEnvironmentalSupport 2.10 10.34 12.44

3.Institutionalreforms 1.80 0.76 2.56

4.ProjectImplementationSupport 24.89 7.74 32.63

Subtotal(A) 221.82 102.2 324.02

B. Contingencies

1.Physical 22.20 10.20 32.40

2.Price 21.40 9.40 30.80

Subtotal(B) 43.6 19.6 63.2

C.

Interestduring

Construction

and

Fees

7.60

33.20

40.80

D. Taxesandduties 0.00 36.00 36.00

Total 273.00 191.00 464.00

Percent 58.80 41.20 100

FullcostrecoveryforurbanwatersuppliesisamongthereformsinstitutedthroughtheMelamchiproject.In

2004, the government decided to increase prices annually by 15%. For the past two years the tariff has

remainedthesame,whichmeansthenext increasewouldbeawhopping30%.ConsumerspayingRs50for

10,000liters,

for

instance,

would

have

to

pay

Rs

66.


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19|P a g e

Sector

AvailableBudget BudgetRequiredas

perThreeYear

InterimPlan

ResourceGap

FY 000

Waterand

Sanitation

Sector

2007/08 2316231 4270234 1954003

2008/09

2547854

6618883

4071029

2009/10 2802640 6618883 3816243

Total 7666725 17508000 9841275

The estimated project cost is US$ 465 million. The Donors for the project are ADB, JBIC (Japanese Bank of

International Cooperation), NORAD (Norwegian Agency for International Cooperation), SIDA (Swedish

InternationalDevelopmentCooperationAgency.AsianDevelopmentBank(ADB)iskeydonorandfundingon

followingcomponents:

A. ConstructionB. SocialandEnvironmentC. Consultant

ThemainloanfortheprojectwillbeprovidedbyAsianDevelopmentBank.TheloanofSpecialDrawingRight

(SDR) 93,253,000.00 ($120.0 million equivalent)willbeprovidedwith a termof30 years including agrace

period of 8 years, and an interest charge of 1% per annum during the grace period and 1.5% per annum

thereafter.TheADBfundsfortheProjectaswellasallotherfundswillbeprovidedtotheutilityinanequal

mixofloanandgrant.Interestfortheloanwillbeat8%perannumrepayableover20yearsincluding7years

ofgrace.

5.5FinancialAnalysis5.5.1CostRecoveryPolicyandAssumptions


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20|P a g e

Duringthepreprojectperiod,averagetariffsareexpectedtorise fromNRs6.9/m3 in2000toNRs12.8/m3 in

2006(in2000prices)tomeetcashO&Mcostsaswellas

private operator and regulatory costs. The financial

projectionsassume:

Improvedcollectionefficiency; Meteredstandpipeschargedatthelifelinerate; Usersmeetingpaymentobligations; Groundwater charges for nondomestic

consumers;

Wastewaterchargedasa50%surchargeonthewater tariff. Postproject, average tariffswill be

nrs23.0/m3 by 2008, adequate to cover O &M,

debt

servicing,regulatory,

and

private

operator

costs. All nondomestic use of groundwater is

assumedtoceaseby2008.

5.5.2FinancialInternalRateofReturn

The overall financial internal rate of return for the

Projectis

4.7%.

This

may

be

compared

with

aweighted

averagecostofcapitalfortheProjectof0%,wherethe

onlending rate is 8% and domestic inflation is 8%

resulting in a real interest rate of 0%. Similar to other

urbanwatersupplyprojects,thefinancialinternalrateof

return showed sensitivity to increases in capital costs

andrevenues.

5.5.3FinancialSustainability

Thereare

mainly

three

aspects

of

financial

sustainability

inconnectionwithMWSP:

(i) Project funding and fiscal impact on government

budget.WSPsarefrequentlyfundedbythegovernment

and full cost recovery especially from poor water users may not be possible even for their basic minimum

needs.

(ii)Fullorpartialcostrecoveryofprojectcostsfromprojectbeneficiaries.WSPs,likeprojectsinothersectors,

canhardlybesustainedongovernmentsubsidyalone,withouttherevenuegenerationfromthesectoritself.

Costrecoveryandproperdesignofwatertariffbasedonthecostsofsupplyarerequired.

WTPandCostrecovery

In1989,The town in Indonesiawasfacingwith

sameproblemascurrentlyfaced inKathmandu.

The water supply system was unreliable,

inefficient and owning to these facts people

were unwilling to pay more tariff for water

supply. Although water use was 38 m3 per

household,therewas largenoofhouseholdnot

getting water at all and those getting it ware

misusingitowningtolowtariff

The old water supply system was becoming a

failureinitssocialgoalandfinancialparttoo.

To improvethissituation, thegovernmentafter

heavy investment, introducedanewer,efficient

andreliablewatersupplysystemtothecity.The

tariff was increased by 115%for domestic use

and 170% for non domestic use. Given the

reliabilityandeffectivenessofnew services the

peoplewerewillingtopayforit.

Theincreaseintariffratemadetheconsumption

ofwaterperhousehold todropform38m3per

month to 27 m3per month. The water loss in

new systemwas significantly lesserandproject

was successful both economically and

financially.

Hence Willingness to Pay (WTP)factorplays a

major role incost recoveryofprojectandprice

increase with proper and reliable service

increasesthepeoplesWTPfactor

(Developing optimized water supply system for

developingcountriesbyGraceUkoliOnodipe)


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21|P a g e

(iii)Financialincentivesarenecessarytoensureparticipationintheprojectofallstakeholders.Inthecontext

ofaWSP,theparticipantsinclude:

lenderswholendmoneyforcapitalinvestment guarantors who guarantee the loan (In public projects like WSPs, the government is often the

guarantor)

suppliers

of

inputs

to

the

project

users of project output (households/industries); and the organization which sponsors and runs theproject(waterenterprise)

5.6EconomicAnalysis

5.6.1withandWithouttheProject

The withoutproject option offers a very miserable scenario for Kathmandu Valley. Since NWSC would be

unable tomeetdemand,pipedwaterdeliverywouldcontinue tobe limited to less than2hoursevery two

days, pressures and water quality would be poor, and inequality would persist for water distribution.

Therefore,theeconomicpriceofwaterwouldrisefromNRs40/m3currentlytoNRs110/m3in2012.

A number of alternative options, including invalley storages were considered, but were found to be

impractical because of various shortcomings, such as high financial and social costs, low yield, and other

problemsassociatedwithpopulationdensityand landuse.Theproposeddesign involvesa lowleveltunnel,

no

impoundment

storage,

and

no

hydropower,

and

was

considered

a

leastcost

and

least

environmentally

disruptiveoption.Furthermore,itretainstheoptionforlowcostgravityexpansionofsupplyfromtheYangri

andLarkeriversandinvalleystorageinthefuture.

5.6.2EconomicInternalRateofReturn

Theeconomicevaluationassumesbaseeconomiccostsof$322millionandincrementalO&Mcostsat1%of

totalcostsplus$0.04/m3ofwaterproduction.Astandardconversionfactorof0.9isassumed.Totalcostsare

highbecause

of

the

need

to

provide

asound

basis

for

future

expansion.

Benefits

are

estimated

at

NRs1,500

million/yearinitiallyandincreasetoaboutNRs6,000million/yearinsubsequentyears.

Theeconomicinternalrateofreturn(EIRR)fortheProject(with170MLDcapacity)is13.5%,whiletheEIRRfor

thefulldevelopmentis15.3%.TheEIRRwastestedforsensitivitytotarifflevels,waterlosses,incomegrowth,

nondomestictariffs,andcapitalcosts.TheEIRR isestimatedtobe10.1%atthecurrentwater loss figureof

40%,11.9%withrealincomegrowthreducedto1%peryear,12.9%witha50%decreaseinthenondomestic

tariffs,and12.6%witha10%increaseincapitalcosts.


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22|P a g e

5.7ProjectBenefit

TheProjectsprimarytargetpopulationisthe1.5millionpeople(180,000households)livingintheKathmandu

Valley. The urban inhabitants will benefit from improved water supply services with better water quality,

increasedquantity, improvedsupply,extendedserviceareas,moreequitablewaterdistribution,andbetter

customerservices.Thesebenefitswillgohandinhandwithraisedpublichealth,hygiene,andenvironmental

awareness,

and

improved

sanitation

facilities

and

maintenance.

The

Project

will

also

accumulate

positive

socioeconomicandpovertyreductionbenefitstotheMelamchiValleypopulation(40,000).Thesewillinclude

increased incomes from the expanded market and upgraded skills, reduced workload for women, better

educationforchildren,andreducedincidenceoftraffickingofgirls.

Benefittothosepeopleresidingintheareabygettingadequatesupplyofwater Water supply within the context of comprehensive water resource management, institutional and

sectoradministrationresponsibilities,

Levelsofserviceincludingthosetotheurbanpoor Capitalinvestmentmechanismsanddevelopmentplans Privatesectorparticipation Subsidiesandcostrecoveryobjectives Humanresourcesdevelopment Publicawarenessandhygieneeducation Promotes the efficient use of potable water, with less ground water extraction, resulting in

environmentalbenefits

Withtheintroductionoftheprojectandthesystemupgrade,peoplewouldbewillingtopaymoreforthefacility,helpingineconomicfeasibility.

5.8Other

factors

5.8.1IssuesinMelamchiImplementation

Breakevenpointwilltakemanyyearstoachieve Expensiveconsume80%oftotalinvestmentonwater DiversionofMelamchirivereffectsthelivelihoodofpeopleandecologyofthearea

5.8.2Impactonpoverty

Socioeconomic surveys conducted during project preparation suggest that about 20% of households in

KathmanduValleyliveinpoverty,withincomeslessthanNRs6,000permonth.Themajorprojectbenefitsare

savingsandincrementalbenefitsaccumulatingtowaterusersandtotheeconomy,fromtheimprovedwater

supplyandmanagement.Anexaminationofthedemandcurves indicatesthatthenetbenefitaccruingtoa

poorhousehold (benefit lesstariffpaid) isaboutthesameasthataccruingtoanotsopoorhousehold,but

thecompositionofthebenefits isdifferent.Thepoorhouseholdhasasmallabsolutesavingsbenefitanda

large absolute incremental benefit. Assuming a single rate tariff, the distribution of the net benefits to

consumers isaboutequaltothedistributionofthepopulation.However,therelative impactonthepoor is

better,with impact ratios ofnetbenefit over incomeestimatedat1.6 for thepoorand0.4 for thenotso

poor.Assumingasteppedtariffstructure,theimpactratioforthepoorincreasesto1.8,whilethatforthenot

sopoor

decreases

to

0.3.


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23|P a g e

5.11Costestimates

Theprojectisestimatedtocost$464million includingcontingencies,interestduringconstruction,andtaxes

andduties.Foreignexchangecostsareestimatedat59%oftotalcosts,localcurrencycostsat41%.

CHAPTER6|CONCLUSION

The benefits achieved from water supply projects should be measured more in terms ofsocial andeconomicalfactorsratherthanfinancial

Subsidiesmayberequired forequity inwaterdistribution,butnottotheextentthatthispromotesmisuseandincreasesburdenonthesystem

Participation of local communities during both design and implementation is crucial for projectefficiency,sustainabilityandsuccess.

ProjectdesignshouldinstituteappropriateO&Mmechanismsandproperlydelineateresponsibilities. Good governance and anticorruption measures contribute to a more favorable project

implementationenvironment.

Private sector participation should be encouraged, especially in the marketing, distribution, andmaintenanceofprojectoutputs.


24/27

REFERENCES:

1. PlanningapproachesinNepal Dr.JibgarJoshi

2. HandbookfortheEconomicAnalysisofWaterSupplyProjects AsianDevelopmentBank

3.

Report

and

recommendation

of

the

president

to

the

board

of

directors

on

a

proposed

loan

to

the

kingdomofNepalfortheMelamchiwatersupplyproject AsianDevelopmentBank

4. Designingoptimalwatersupplysystems fordevelopingcountries GraceUkoliOnodipe,B.Sc.,M.S.

5. The Economic Costs and Benefits of Investments in Municipal Water and Sanitation Infrastructure: A

GlobalPerspective Dale WhittingtonandW.M.Hanemann

6. Lecturenotes ProvidedbyDr.JibgarJoshi


25/27

ACKNOWLEDGEMENT

Our sincere appreciation goes to Mr. Jibgar Joshi, course coordinator of Economics, for his

encouragement in preparing this seminar report. His valuable guidance, suggestions and

wholeheartedsupportishighlyappreciable.

Wehighlyappreciatetimelyassistanceprovidedbyguestlecturer,Mr.TopeBahadurBasnet for

hisvaluableguidanceandsuggestions.

We would also like to thank program coordinator Mr. Ajaya Chandra Lal, Mr. Sudarshan

Raghubanshi , Mr. Suresh G.C and Mrs. Leela Pandey for their valuable supports and

cooperation.

Last but not the least we would like to express our sincere gratitude to all our friends who

helpedustopreparethisreport.


26/27

LISTOFACRONYMS

ADB AsianDevelopmentBank

EIA EnvironmentalImpactAssessment

NWSC NepalWaterandSewerageCorporation

NWSC

NepalWater

Supply

Corporation

KMC KathmanduMetropolitanCity

HMG HisMajestyofGovernment

WSP WaterSupplyProject

IRR InternalRateofReturn

FIRR FinancialInternalRateofReturn

EIRR

EnvironmentalInternal

Rate

of

Return

NPV NetPresentValue

WTP WillingnessToPlay

MWSP MelamchiWaterSupplyProject

MWSDB MelamchiWaterSupplyDevelopmentProject

KUKL KathmanduUpatyakaKhanepaniLimited

JBIC JapaneseBankofInternationalCooperation

NORAD NorwegianAgencyforInternationalCooperation

SIDA SwedishInternationalDevelopmentCooperationAgency

O&M OperationandMaintenance

PPP PublicPrivatePartnership

BDS BulkDistributionSystem

MLPD MillionLitersPerDay

VDC

VillageDevelopment

Committee

PO PrivateOperator


27/27

TableOfContents

Chapter1|INTRODUCTION...................................................................................................................................2

1.1Background..................................................................................................................................................2

1.2Introduction Wateraseconomiccommodity............................................................................................2

1.3Objectives

.....................................................................................................................................................

3

1.4Scopeandlimitation.....................................................................................................................................3

1.5Methodologies.............................................................................................................................................3

Chapter2|WATERANDWATERSUPPLY..............................................................................................................4

2.1Watersources..............................................................................................................................................4

2.2Watersupplysystem....................................................................................................................................4

Chapter3.0|ECONOMYBEHINDWATERSUPPLY................................................................................................7

3.1FactorsinvolvedinwaterSupply.................................................................................................................7

3.2FinancialandEconomicAnalysis..................................................................................................................8

3.3CostinvolvedinWaterSupplySystem.......................................................................................................12

3.4CostRecovery.............................................................................................................................................15

Chapter4|WATERSUPPLYSYSTEMINKATHMANDU........................................................................................15

4.1WaterSupply..............................................................................................................................................15

4.2Currentdrinkingwatertariffs....................................................................................................................15

Chapter5.0|MELAMCHIWATERSUPPLYPROJECT............................................................................................16

5.1Background................................................................................................................................................16

5.2Introduction...............................................................................................................................................17

5.3ProjectAimsandObjectives.......................................................................................................................17

5.4MWSP:CostEstimation..............................................................................................................................18

5.5Financial

Analysis

.......................................................................................................................................

19

5.6EconomicAnalysis......................................................................................................................................21

5.7ProjectBenefit............................................................................................................................................22

5.8Otherfactors..............................................................................................................................................22

5.11Costestimates..........................................................................................................................................23

Chapter6|CONCLUSION....................................................................................................................................23

References:...........................................................................................................................................................24

Documents

Economics of Water Supply