Economic Analysis
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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 Kathmandu 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 Nepal’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. 3 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