Secondary Towns Integrated Urban Environmental Improvement Project (RRP NEP 36188-02)

ECONOMIC ANALYSIS

The proposed loan will finance the municipal subprojects, which will help (i) prevent waterlogging and introduce wastewater collection and treatment system in core areas of two municipalities; (ii) achieve 90% municipal waste collection and disposal in two municipalities; and (iii) supply piped drinking water through the regional system to 85% of the municipal population in the Kavre valley. Project economic analyses were carried out for each subproject, and assessment results are summarized here by sector.

A. Sewerage and Municipal Waste Management Subprojects

Assessment Item Assessment Subprojects in The urban population is growing rapidly. The Central Bureau of Statistics projected macroeconomic in 2003 that urban population would increase by around 5% per year, while the context valley population would grow by around 2.5%. This means that the population in urban areas outside Kathmandu valley will increase faster. The towns of Biratnagar (Eastern region), Birgunj (Central region), and Butwal (Western region) were considered as possible regional economic centers under the National Urban Policy (2007). The manufacturing industry has declined in Kathmandu but has grown in Butwal and Biratnagar. The majority of ’s international trade is through Birgunj and Biratnagar. Therefore, the economic efficiency of the three municipalities will have a significant impact on Nepal’s economic growth. Subprojects in The National Water Plan (2005) has set the target of achieving total population sector context coverage of basic drinking water supply and sanitation services by 2017. The Nepal Environment Policy and Action Plan (1993) suggested that municipal solid waste collection and disposal should be organized and managed at the ward level, but set no specific target. In practice, municipalities aim for 100% collection and disposal in the urban areas. In recent years, the expansion of infrastructure networks has failed to keep pace with the growth of the urban population. The most recent official living standards survey in 2003 showed that in urban areas outside the Kathmandu Valley: (i) 39.3% of households have access to piped water supply; (ii) 30.4% of households have access to sanitary facilities; and (iii) 24.1% of households have access to waste collection and disposal services. Demand analysis As the earlier access figures show, access to urban services is limited. During the focus group discussion in each municipality, the respondents expressed the view that inadequate sewerage and municipal waste management may have caused health problems, and called for improvements. There was a general consensus in each municipality that residents were willing to pay for services if fees were to be levied, and were even willing to make in-kind contributions in case of cash shortage. The projects in the three municipalities will cater to the following target populations by the design year: (i) Britnagar sewerage system: 370,000 by 2034 (ii) Birgunj sewerage and drainage system: 254,000 by 2033 (iii) Birgunj municipal waste management: increase collection coverage in the urban area from 80% to 90%. 2

Assessment Item Assessment (iv) Butwal municipal waste management: maintain at least 90% collection in the urban area. Subproject rationale Urban services, such as water supply and sanitation, are the responsibility of the municipalities. The Local Self Governance Act (1999) and the Local Self Governance Regulations (1999) provide the legal basis for the devolution of responsibilities and authority for social, economic, institutional, and physical infrastructure to municipalities. The rationale of the subprojects is, therefore, mainly the failure of the public institutions to deliver public goods and services. Least-cost Alternative designs for each subproject were assessed from the standpoint of comparison cost-effectiveness and the operation and maintenance capacity of the municipalities. The subproject design takes the following factors into consideration: (i) selected technologies must meet geographic restrictions and can be operated and maintained by the municipalities, and (ii) materials and equipment must be locally available and involve least cost during construction and maintenance, but must be internationally accepted as health hazard–free. Identification and Economic benefit was estimated with the following assumptions: valuation of (i) As it is impractical to segregate the benefit from improved sewerage from economic cost and that derived from municipal waste management, these benefits are benefit assessed together where the investment in the two sectors is concurrent. (ii) Private health cost saved as a result of environmental improvements: 12% ($5.2) in Biratnagar, 17% ($7.3) in Birgunj, and 3% ($1.3) in Butwal per year per person. a (iii) Increase in disability-adjusted life yearb (DALY) per 1,000 population: 8.5 in Britnagar, 12.1 in Birgunj, and 2.1 in Butwal, multiplied by the per capita gross national income of $815. (iv) Value of compostc is estimated at NRs 400 per cubic meter, for subprojects that include solid waste management. Economic cost includes: (i) Land cost in terms of economic value,d to estimate the best alternative use and its scarcity value. (ii) Investment costs, adjusted for economic price using shadow exchange rate factore at 1.1 and shadow wage factor at 0.7. (iii) Annual operation and maintenance cost at 1.0%–1.5% of the investment cost.f Economic efficiency The economic internal rate of return for the base scenarios is higher than the of the investment, economic opportunity cost of capital of about 12.0%. However, these figures are and sensitivity underestimated because of unquantifiable economic benefits, such as the impact analysis of reduced waterlogging on mobility and commercial activities, and the educational benefits from the hygiene campaign, which will be passed on to succeeding generations. Sensitivity analyses were also undertaken under various assumptions. Most cases are robust except for the reduction in benefit from municipal waste management in Butwal. Such reduction will be mitigated through various educational campaigns, which will ensure the participation of the people and the planned coverage. The hiring of design and supervision consultants for the municipalities will minimize potential delays and ensure the use of the least-cost design.

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Assessment Item Assessment EIRR NPV Item (%) (NRs million) Britnagar sewerage system Base case 16.0 350.7 Capital cost increased by 10% 14.8 260.8 Benefit reduced by 10% 12.5 53.4 1-year delay in implementation 14.4 175.2 Birgunj sewerage-drainage system, and municipal waste management Base case 14.1 176.1 Capital cost increased by 10% 12.6 55.9 Benefit reduced by 10% 12.0 0.0 1-year delay in implementation 12.4 36.2 Butwal municipal waste management Base case 13.9 20.3 Capital cost increased by 10% 12.2 2.1 Benefit reduced by 10% 11.7 -3.2 1-year delay in implementation 12.0 0.1 EIRR = economic internal rate of return, NPV = net present value. Source: Consultant's report of TA 7182-NEP: Preparing The Secondary Towns Integrated Urban Environmental Improvement Project, adjusted by staff. a The annual per capita health expenditure was estimated at $43 per capita in 2014, on the basis of historical trends in the Nepal Living Standards surveys. The percentage represents the targets for reducing the incidence of disease from deterioration in the living environment, calculated in the consultant's report of TA 7182-NEP: Preparing The Secondary Towns Integrated Urban Environmental Improvement Project. b A DALY is an indicator of life expectancy combining mortality and morbidity into one summary measure of population health to account for the number of years lived in less than optimum health. The World Health Organization has taken the annual economic value of a DALY to be equivalent to gross national income per capita in Commission on Macroeconomics and Health. 2001. Macroeconomics and Health: Investing in Health for Economic Development. Report of the Commission on Macroeconomics and Health, chaired by Jeffrey D. Sachs. Presented to Gro Harlem Brundtland, Director-General of the World Health Organization, on 20 December 2001. c A willingness-to-pay study in Kathmandu (Andreas Frömelt Dübendorf. 2007. Marketing Compost in Nepal: Field Testing of Sandec’s Compost Marketing Handbook. Kathmandu: ENPHO) estimated values at NRs10–NRs15 per kg, equivalent to NRs1,600–NRs2,400 per m3. In the absence of well-recognized waste-generated fertilizer in Nepal, the consultant's report of TA 7182-NEP has taken an extremely conservative value at NRs2.5 per kg, equivalent to NRs400 per m3. d The economic cost of land in Birgunj was estimated at NRs3.4 million per year, equivalent to the revenue of households engaged in agriculture; and the economic cost in Butwal was estimated at NRs0.2 million, equivalent to the annual maximum sustainable yield from the production of timber. e The standard conversion factors (SCF) used in the past for Asian Development Bank (ADB)–financed projects are within the range of 0.88–0.94 for 2000–2010, but the basis of these figures is unclear. Following the methodology suggested in ERD Technical Note No. 11 (2004), a proxy was estimated using export and import values and taxes. The results show that the SCF was constant at about 0.9 in 2005–2008. The reverse of the SCF value was used for the shadow exchange rate factor. f The figures are based on the engineers’ estimates in volumes 2 and 3 of the consultant's report of TA 7182-NEP: Preparing the Secondary Towns Integrated Urban Environmental Improvement Project. Source: Asian Development Bank assessment.

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B. Regional Water Supply Subprojects in the Kavre Valley

Assessment Item Assessment Subprojects in The three municipalities in the Kavre valleya are close to the Kathmandu valley. macroeconomic They were included in Loan 1966-NEP: the Urban and Environmental Improvement context Project in 2002. In the report and recommendation of the President for that earlier loan project, the three municipalities were considered to be the future urban agglomeration, which would become the center for trade, market, tourism, and education. Subprojects in Under Loan 1966-NEP, the construction of an integrated water supply system for sector context the municipalities of Banepa, , and was envisaged. To implement the subproject, a neutral party, such as a government agency, a government- controlled corporation, or a joint venture among the three municipalities concerned, was to be identified. The subproject was, however, never implemented because the municipalities were unable to form a neutral party. In 2010, the municipalities reached consensus to form a consortium to implement the integrated water supply system. The subproject will contribute to achieving the National Water Plan (2005), which set the target of achieving total population coverage of basic drinking water supply by 2017. Demand analysis The total water needs in the Kavre valley in 2009 amounted to 58.0 liters per second (lps), estimated from population figures and the target consumption of 80 liters per capita per day (lpcd). However, the existing system could serve only 14 lps, 25% of what was required. The population in the Kavre Valley in 2024 will be more than 1.5 times the size of the population in 2009. Assuming that the consumption level will remain at 80 lpcd, the water requirements will also increase by 50%. In other words, there was acute shortage in water supply in 2009, and the existing system cannot sustain the larger population by 2024. The community survey indicated that about 65%–96% of households in the project municipalities were willing to pay the connection fees, and about 65%–99% of the households reported their willingness to pay additional money for monthly usage at not more than NRs250. This implies that it is highly likely that the water produced will be purchased for consumption. Subproject rationale Urban services, such as water supply and sanitation, are the responsibility of the municipalities. The Local Self Governance Act (1999) and the Local Self Governance Regulations (1999) provide the legal basis for the devolution of responsibilities and authority for social, economic, institutional, and physical infrastructure to the municipalities. The rationale of the subprojects is, therefore, mainly the failure of the public institutions to deliver public goods and services. Least-cost In the report and recommendation of the President for Loan 1966-NEP, it was comparison assessed that, since the municipalities of Banepa, Panauti, and Dhulikhel were adjacent to one another, constructing an integrated water supply system for all three municipalities would be more efficient than letting the three expand their existing water supply systems individually. This was confirmed through subsequent studies. Identification and The economic benefit was estimated on the basis of the following assumptions: valuation of (i) Household time saved by replacing the current water sources with the economic cost and piped water supply, estimated at 167 minutes per day (21 rounds of 5

Assessment Item Assessment benefit 8-minute trip a day) in the monsoon season and 159 minutes (18 rounds of 9-minute trip a day) in the dry season, at the shadow wage rate of NRs12.8 per hour. (ii) Benefit from incremental water received by the household was excluded, as the methodological accuracy of the willingness-to-pay survey was open to question. Economic cost includes: (i) Investment costs, adjusted for economic price using a shadow exchange rate factorb of 1.1 and a shadow wage factor of 0.7. (ii) Annual operations cost from electricity, personnel, and spare parts. Economic efficiency The economic internal rate of return for the base scenarios is higher than the of the investment, economic opportunity cost of capital estimated at 12.0%. and sensitivity Sensitivity analyses were also undertaken under various assumptions. Delay in analysis implementation was the most sensitive. Engagement of the design and supervision consultants for the municipality will minimize the potential delay. Item EIRR NPV (%) (NRs million) Kavre water supply system Base case 23.2 500.1 Capital cost increased by 10% 21.3 449.8 Benefit reduced by 10% 21.0 394.8 1-year delay in implementation 19.4 369.5 EIRR = economic internal rate of return, NPV = net present value. Source: Loan 1966-NEP: Urban and Environmental Improvement Project, detailed feasibility report on Kavre Valley Regional Water Supply System, adjusted by staff. a Kavre valley consists of the municipalities of Banepa, Panauti, and Dhulikhel. These municipalities intend to manage the investment and operations activities through a consortium as these municipalities share the same networks. Therefore, the investment in the three municipalities is considered as one project. b The standard conversion factors (SCF) used in the past for Asian Development Bank (ADB)–financed projects are within the range of 0.88–0.94 for 2000–2010. Following the methodology suggested in ERD Technical Note No. 11 (2004), a proxy was estimated using the export and import values and taxes. The results show that the SCF was constant at about 0.9 in 2005–2008. The reverse of the SCF value was used for the shadow exchange rate factor. Source: Asian Development Bank assessment.