4. Economic Cost-Benefit Analysis

Photo: SIWI 4. Economic Cost-Beneﬁ t Analysis

Key Points productivity and production within both • Actions of improved water supply and sanita- households and economic sectors is found in tion imply signifi cant economic gains. An ad- terms of the total time saving: water collection ditional annual investment of USD 11.3 billion and sanitation convenience amounts to USD 64 is required to meet the MDG on water supply billion. The greatest proportion of time gain is and sanitation. But compare this fi gure with the from sanitation interventions, that is closer prox- total annual accrued economic benefi ts – USD imity of toilets or less waiting time for public 84 billion – of reaching the MDG. It is more facilities. than a seven-fold return. The economic returns • Actions to improve water resources manage- depend on region and technology choice and ment bring considerable economic gains – a range between USD 3 and USD 34 for every USD 15–30 billion investment in improved USD 1 invested. water resources management in developing • The achievement of the MDG on water sup- countries can have direct annual income re- ply and sanitation will contribute 322 million turns in the range of USD 60 billion. Every USD working days globally, and the annual global 1 invested in watershed protection can save value of adult working days gained as a result anywhere from USD 7.50 to nearly USD 200 of less illness would be almost USD 750 mil- in costs for new water treatment and fi ltration lion. The biggest potential gain for increased facilities.

Evaluating the economic costs of interventions and the site for poverty alleviation. However, the benefi ts and resulting benefi ts is critically important for effective re- the costs of different interventions vary considerably source allocation. While many criteria help determine depending on the type of technology selected. In- where resources should be targeted, such as social formed and rational decision making requires sound and environmental considerations, a sound economic economic evaluation of the various options available cost-benefi t analysis is a vital and useful tool for deci- and appropriate to different contexts. This chapter sions makers. presents some of the different approaches that have Poverty reduction strategies dominate the current been taken using a cost-benefi t approach ranging development agenda. This report argues that invest- from reaching the MDG targets to universal coverage ments in improved access to water and sanitation and from the global level to the local level. services are one of the most effective ways of promot- It is important to note that the analyses present- ing the equitable economic growth that is a prerequi- ed here consider some, but not all, of the costs and

Making Water a Part of Economic Development  benefi ts that have been covered in the report thus far. It is simply not possible to include all of the factors in such an analysis. The costs of im- plementing and the benefi ts derived from fl ood or drought mitigation, maintenance of fi sheries or wetlands, and long-term benefits accrued through improved health and education are diffi cult, maybe impossible, to price on a global level. The approach taken here is to consider those factors that are measurable; namely the direct benefi ts through savings in time, health care and so forth derived from a well-defi ned and costed set of interventions.

4.1 Water and Sanitation

WHO cost estimates are the most sophisticated currently available as they take into account existing levels of service and incremental improvements87. Their evaluation estimates the costs and benefi ts of a range of interventions including achieving the MDG target using basic technologies to providing universal access to in-house piped water and sewer connection. The costs of providing access to safe water and adequate sanitation will vary from relatively “expensive” when high standards are applied and sophisticated technology is used, to substantially “cheaper” when simple technology that demands low maintenance is used. In this analysis, “improved” water supply and sanitation refers to low technology improvements such as better access and protected water sources (e.g. stand post, borehole, protected spring or well or collected rainwater). “Improved” sanitation in- volves better access and safer disposal of excreta (e.g. septic tank, simple pit latrine or ventilated improved pit-latrine). Costs of water improvement vary from USD 0.33 per person served per year in Africa for household water treatment using chlorine, to USD 12.75 for household water connection, including both hardware and software components. For sanitation the costs range from a cheap small pit latrine at USD 4.88 to a more expensive option with household sewer connection and partial treatment of wastewaters at USD 10.03 per year per person served88. The WHO report identifi es a number of economic benefi ts associated with improved water supply and sanitation. These are

Photo: Mats Lannerstad Mats Photo: provided in Table 4.1

Making Water a Part of Economic Development  BENEFICIARY Direct economic benefi ts Indirect economic benefi ts Non-health benefi ts of avoiding diarrhoeal related to health improve- related to water and disease ment sanitation improvement Health sector • Less expenditure on • Value of less health • More carefully managed treatment of diarrhoeal workers falling sick with water environment and disease diarrhoea effect on vectors Patients • Less expenditure on • Value of avoided days • More carefully managed treatment of diarrhoeal lost at work or at school water environment and disease & related costs • Value of avoided time effect on vectors • Less expenditure on trans- loss of carer for sick port in seeking treatment babies • Less time loss due to • Value of loss of death treatment seeking avoided Consumers • Time savings related to water collection or ac- cessing sanitary facilities • Labour-saving devices in household • Switch away from more expensive water sources • Property value rise • Leisure activities and non-use value Agricultural and • Less expenditure on treat- • Less productivity impact • Benefi ts to agriculture industrial sectors ment of employees with of workers being off sick and industry of improved diarrhoeal disease water supply – time-saving or income-generating technologies and land use changes

Table 4.1 Economic beneﬁ ts arising from water and sanitation improvements.

Beyond reducing water-related diseases, provid- • Meeting the MDG target implies an annual ing better access to improved water and sanitation health sector cost saving of USD 7 billion. An confers other diverse benefi ts, ranging from the eas- additional USD 340 million is saved due to ily identifi able and quantifi able (costs avoided, time avoidance of costs incurred by seeking treat- saved) to the more intangible and diffi cult to measure ment, including expenditures on care, drugs and (convenience, well-being, education, etc.). Actions to transport and the opportunity costs of time spent reach the MDG target on water supply and sanitation on seeking care. have considerable economic benefi ts and the ben- • Meeting the MDG target will gain 322 million efi ts outweigh costs substantially89: working days and the annual global value • The biggest potential gain for increased productiv- of adult working days gained as a result of ity and production within both households and less illness would be almost USD 750 million. economic sectors is found in the total convenience Another set of benefi ts related to reduced illness time saving – water collection and sanitation are the avoided “days lost” in terms of formal access time saved due to improved access – that or informal employment, productive activities in amounts to USD 64 billion. For example, the the household or school attendance. The WHO relocation of a well or borehole to a site closer to analysis assumes that time spent ill represents The annual global value user communities, the installation of piped water an opportunity cost that is valued conservatively of adult working days supply in house and closer access to latrines can at a rate linked to minimum wage. The school gained as a result of save hours each day, translating into increased attendance days gained reaches a staggering less illness would be production and higher school attendance. 270 million days. It implies enormous long-term almost USD 750 million.

Making Water a Part of Economic Development  four interventions 4.2Table Cost-bene tries within: tries Select coun- Paci Western Asia East South ranean Mediter- E. Europe America Africa Region Total world Rest the of benefi ts for economic develop- fi c ment. • Table 4.2 presents the total annual – all costs and all bene all and costs all economic value for selected sub- fi t ratios and total economic bene economic total and t ratios Meeting the MDG Target. MDG the Meeting andwater improved supply sanitation. without improved to both access Halving the proportion of people e Cost/Ben-

fi regions and compares four levels t of intervention. The total global 49 0 554.02182 14 5 55 44 2547431 3275 14.49 15355 250 61.47 8523 201 42.50 3505 100 34.95 02 5 671.93533 37 6 0438 309007 2320 3.88 5074 368 13.77 3334 315 10.59 1607 157 10.21 1 3202 0. 4.2 2244.39247291 41 4 8 10 9 2 7 4 2 9 3 . 4 214 62 0 6 3 4 9 26 . 14 6 3 0 4 4 3 4 0 4 9 .8 10 8 0 9 2 2 21 0 2 33 11. .07 4 .5139458 6 5112 265337 4206 1.27 1551 266 5.82 934 143 6.55 242 71 3.40 .638 11 .366 38 .965 48 .321954426 28129 1.93 54885 6957 7.89 43487 6563 6.63 11013 3282 3.36 .50 5 7. .632 15 .875 75 .170 27 .0304101643 35074 2.90 72478 7704 9.41 57155 7257 7.88 11457 3628 3.16 economic benefi ts for reaching the MDG accrue to USD 84 billion. Costs in in Costs Annual USD millions USD fi ts included. ts Access for all will accrue USD

1 5 0 113 263 billion in economic benefi ts. 2046 The economic benefi ts would fi ts for for ts be greater in regions where the

USD millions USD Bene Annual number of unserved is high and 84400 33668 where the diarrhoeal disease bur- fi ts in ts A complete listingA complete countries the of are that each of i included countries The inNote: region included each are with those the The regionThe den is signifi cant. Table 4.2 shows that the African region will accrue improved sanitation services forAccess all to improved water and e Cost/Ben- the greatest absolute economic fi t benefi ts at a cost-benefi t ratio of “ Africa 1 609 0 26 2 3 6 11. Cost-bene 11.3.

” • The results of this analysis point includes both category E and category D African countries as i E and category category includes both Costs in Annual USD millions USD out that achieving the MDG target ﬁ , Total and bene t ratios economic for both water supply and sanita- 07151 74124 88 229616 38782 132549 4744 105410 4087 tion would bring substantial economic beneﬁ ts. USD 1 invested

USD millions USD Bene Annual would bring an economic return

262879 of between USD 3 and USD 34, fi ts in ts depending on the region and the level of intervention. water treatment at point use of sanitation services plus household forAccess all to improved water and e Cost/Ben- fi t 39 24649 13.96 fi USD millions USD Costs in Annual ts by tsintervention n each of these categories is these of providedn each (2004 & Haller in Hutton highest rates. adult and child mortality USD millions USD Bene Annual 344106 fi ts in ts denti piped water piped an sewerage connection forAccess all to regulated in-house e Cost/Ben- fi (2004). & Haller by Hutton ed fi t .7136515 4.07 Costs in Annual USD millions USD USD millions USD Bene Annual 555901 fi ts in ts ). Photo: Mats Lannerstad Mats Photo:

Making Water a Part of Economic Development  The considerable economic benefi ts are confi rmed rhoeal episodes of around 70% 93. But this type of inter- The NPV of the meeting by others. OECD90 has prepared a cost-benefi t analy- vention is also the most expensive; achieving universal the MDG sanitation sis looking specifi cally at what is needed in order to access to in house piped water and sewer connection target is USD 400 at meet the MDG sanitation target alone. The analysis would cost every year more than USD 130 billion. 5 % level, to USD 312 provides fi gures in terms of net present value (NPV). The burden of disease associated with lack of ac- billion, at 10 % level With a discount rate of 5% and 10%, the NPV of the cess to safe water supply, adequate sanitation and respectively. meeting the MDG sanitation target is USD 400 to USD lack of hygiene is concentrated on children under fi ve 312 billion, respectively. The results confi rm again that in developing countries. Accordingly, emphasis should the benefi ts far outweigh the costs91. Similar economic be placed on interventions likely to yield an acceler- benefi ts also appear if we look at local water supply ated, affordable and sustainable health gain among and sanitation interventions, see box 8. this group. The present analysis points to household Universal improved access to water and sanitation water treatment and safe storage as one option of services, including additional improvements such as particular potential as a good short-term approach to point-of-use disinfection, would lead to an economic rapidly and effi ciently reducing diarrhoea illness, as- benefi t ranging from USD 5 to USD 60 per dollar invest- suming that this is followed with longer-term improve- ed92. Choosing more advanced types of technologies ments to water and sanitation services. In terms of such as provision of regulated in-house piped water convenience time saved, improved sanitation has the and sewer connection would lead to massive overall biggest gain. gains, including an average global reduction of diar-

Box 8 Senegal provides another example of the costs Net Present Value of Water Supply and and the benefi ts that water services projects can Sanitation Interventions bring. A World Bank project set out to improve Over the last two decades, India has implemented water management and increase access to safe major investment programmes in rural water supply potable water and adequate and more affordable and sanitation. Karnataka was the site of a USD 200 sanitation for the urban poor. USD 185 million went million project that was completed in 2001, providing towards two water mains that tap groundwater re- direct benefi ts to approximately 5.5 million people. sources through to its the distribution through over The economic and social benefi ts were enormous. 80,000 social connections and 400 standpipes to For one, it is the women who are in charge of provid- the poorer residence of Dakar. USD 24 million went ing water for home use, household cleanliness and towards improving sanitation services, with approxi- sanitation. It was therefore the women whose quality mately 13,000 new connections installed, sewerage of life benefi ted the most from the improved services. treatment plants and drainage works. Overall, it is Ranges of different technologies were implemented, estimated that more than 1 million urban and peri- including pit latrines, and hand pumps/open wells urban poor benefi ted from the project. The total cost or roof water harvesting schemes. Up to 50% of the was USD 290 million, the Economic Internal Rate of households opted for private household systems. The Return was 13.7 percent and the Net Present Value NPV of the project is estimated at USD 85 million, and at 10% was USD 46.6 million95. the economic internal rate of return is over 20%94.

Making Water a Part of Economic Development  Photo: SIWI 4.2 Water Resources Management

An expert workshop convened by the United Nations magnitude of global foreign aid transfers (which cur- on water economics and fi nancing in 1998 concluded rently stand at USD 60 to 70 billion). However, this that “the economics of water resources rarely infl uence estimate of the losses might even be low, since one water policy, even in water-short regions. As a result, the runs into the challenge of setting a monetary price to principal asset of the water resource base remains highly things that are uncertain and intangible. At the same undervalued and readily used without much concern for time, they argue that measures that could prevent its value to others, the structural role of water in the econ- such damages would cost no more than 25–50% omy and its in situ value as an environmental asset96”. of the annual losses. This means that a USD 15–30 This quotation indicates that decision makers typically billion investment in improved water resources man- need to enhance their awareness of the value and eco- agement have direct economic returns in the range nomic benefi ts of water resources and its management. of USD 60 billion. For example, poor water resourc- Improved water resources management implies consider- es development and management approaches in able costs, but these are signifi cantly outweighed by the Kenya costs the country more than USD 48 million economic benefi ts. For example, in Portland, Oregon, per year, about 0.6% of GDP98. There is however a Portland, Maine and Seattle, Washington it has been need to also take into account that improved water found that every USD 1 invested in watershed protec- resources management is benefi cial for better health tion can save anywhere from USD 7.50 to nearly USD and economy. Box 9 points out that there are con- 200 in costs for new water treatment and fi ltration facili- siderable health improvements and economic gains Every USD 1 invested ties. Through conserving upstream forests in the Catskills that can be made by improved management of wa- in watershed protection range, New York City hopes to have avoided investing ter resources and related infra-structure. can save anywhere from an extra USD 4–6 billion on infrastructure to maintain the Another example of the benefi ts of improved wa- USD 7.50 to nearly USD quality of urban water supplies97. ter resources management at the local level concerns 200 in costs for new Hansen and Bhatia (2004) venture to estimate a biological control program of water hyacinth. The water treatment and that direct annual income lost due to land and wa- project was undertaken in Southern Benin between fi ltration facilities. ter mismanagement in developing countries is in the 1991 and 1993 99. According to estimates, water hya-

Making Water a Part of Economic Development  cinth at the peak of the infestation had reduced the economy, with a multiplier of 3, the total net benefi ts The direct total net ben- yearly income of this population of about 200,000 by (NPV) can increase to USD 300–600 billion. efi ts of promoting these approximately USD 84 million. Lost revenues for men The potential benefi ts of investment in water re- technologies have been were mostly in fi shing, while women experienced lost sources management is illustrated by a small-scale estimated to be USD revenues in trade, primarily food crops and fishes. water resources development project in Bangladesh. 100–200 billion for the The reduction of water hyacinth cover through biologi- The Asian Development Bank and the International estimated 100 million cal control was credited with an increase in income of Fund for Agricultural Development helped finance farmers that could adopt USD 30.5 million per year. The total cost of the control the USD 51 million project which focused on increas- these tools. program is estimated at a present value of USD 2.09 ing agricultural production and farmer incomes. The million. Assuming the benefi ts stay constant over the Project includes several components including: devel- next 20 years, a most conservative assumption, the opment of infrastructure for fl ood control, drainage accumulated present value would be USD 260 million, improvement, water conservation measures, introduc- yielding a respectable benefi t cost ratio of 124:1100. tion of integrated pest management, and mitigating Small changes in technology have the potential to measures to reduce loss of fl oodplain fi sheries. The provide massive productivity gains. There has been Project is spread over 37 districts of the western re- an upsurge in the adoption of water technologies for gion of Bangladesh covering 164,735 ha. As a result poor farmers such as low-cost bucket and drip lines, of the project, some areas saw agricultural yield in- sustainable land management practices such as low creased by 60%. The overall internal rate of return of or zero-till agriculture, supplemental irrigation, ground- the project is estimated at around 30%105. water recharge and water harvesting systems. The ev- Though systematic empirical evidence on the ben- idence suggests that the promotion and adoption of efi ts is scant, the statistics to be found on the subject these simple technologies has the potential to improve present a convincing case that the potential benefi ts the livelihoods of the poorest farmers. Consider drip of investment in improved water resources manage- irrigation. The advantages of drip systems are that ment are real and considerable. they minimise water losses and increase yields. Drip irrigation technology seeks to deliver the right quantity of water at the right time, increasing yields between Box 9 Better Water Resources Management 20% to 70%, while using less water than traditional Benefi ts Health and Economy methods101. A farmer in Nepal for example, buys a Improved management of water resources would kit for about USD 13 a piece. The total net benefi ts, reduce the transmission of malaria and other vec- subtracting all costs except labour, obtained by each tor-borne diseases. There are currently 396 million farm household were USD 210 per thousand square episodes of malaria every year, mostly in Sub-Sa- metres and the total NPV for 3 years (10% discounting haran Africa. At the global scale 1.3 million people rate) would be USD 570 per farmer102. die of malaria every year. Children under the age Another example is the foot-operated “treadle of 5 account for 90% of these deaths. Intensifi ed pump”, a device that uses bamboo or fl exible pipe irrigation, dams and other water-related projects to pump water. The treadle pump is cheap and af- contribute importantly to this disease burden106. fordable, costs between USD 12–30, is easy to install, The economic gains to reduce malaria and other operate and maintain and has no fuel costs. The total vector-borne diseases are considerable. For exam- NPV of a treadle pump to a farmer is approximately ple, consider the effect of Malaria on Sub-Saharan USD 900 to 1,90 0 (discounted at 10 and 5%, respec- Africa’s economy. GDP would be up to 32% higher tively). For the 1.5 million treadle pump users today, today if malaria had been eliminated 35 years ago. the total NPV then is USD 1.4 to 2.8 billion. If markets This would represent up to USD 100 billion added in Eastern India and the Nepal Terai are developed, to Sub-Saharan Africa’s current GDP of USD 300 the potential NPV amounts to USD 9–19 billion103. billion. Malaria slows economic growth in Africa The drip irrigation and treadle pump are but two by up to 1.3% each year. This slowdown in eco- examples of the benefi ts of providing access to small- nomic growth is over and above the more readily scale water technology to poor farmers. There are observed short-run costs of the disease. The short- in fact a wide variety of technologies available. The term benefi ts of malaria control, through for example direct total net benefi ts of promoting these technolo- more effective water management, have been esti- gies have been estimated to be USD 100–200 billion mated at between USD 3 billion and USD 12 billion for the estimated 100 million farmers that could adopt per year for Sub-Saharan Africa107. these tools104. When including indirect benefi ts in the

Making Water a Part of Economic Development  4.3 Unproductive Costs – The Burden of Corruption

More than USD 1 trillion Previous sections have demonstrated that improved • 30% of the customer respondents had made dollars (USD 1,000 management of water resources and improved water more than one small payment (median payment billion) is paid in bribes supply and sanitation implies considerable economic USD 1.90) in the past 6 months to expedite each year worldwide benefi ts. The importance of institutional quality and repair work: in both rich and proper management of organisations thus implies con- • 12% of the customer respondents had made developing countries, siderable gains in terms of water resource and water payment (median payment USD 22) to expedite according to estimates services quality as well as effects on water produc- new water and sanitation connections. by the World Bank tivity and production. Take corruption for example. Institute (WBI). Corruption undermines economic development and The study also indicated the frequency of side pay- makes it harder to attain development targets. More ments from contractors to public offi cials. In total, 50% than USD 1 trillion dollars (USD 1,000 billion) is paid of the public offi cial respondents said that it takes place in bribes each year worldwide in both rich and devel- every time (17%) or that it was quite common (33%). oping countries, according to estimates by the World The value of the kick-backs to public offi cials normally Bank Institute (WBI). This is approximately equal to ranged from 6% to 11% of the contract value108. the combined GDP of all low-income countries. The Aggregated empirical evidence is still insuffi cient estimation of global corruption costs does not take to make generalisations on the magnitude of the prob- into account indirect costs in the form alternative uses lem and the extent to which it is blocking water devel- of funds to improve, for example, water services provi- opment efforts. But it is clear that corruption and other sion, health and education. types of improper management misdirect consider- A growing body of case studies indicate that cor- able fi nancial resources that could have strengthened ruption is a mounting problem within the water sector, budgets and improved water, sanitation and other costing the water sector millions of dollars every year. services. Consequently, the effective resolution of cor- A study of the water supply and sanitation sector in a ruption and other mismanagement practices bolsters number of Indian cities indicated that: performance and effectiveness of both public and pri- • 41% of the customer respondents had made vate sectors and contributes to a country’s prospects more than one small payment (median payment for economic development and social stability. USD 0.45) in the past 6 months to falsify metre reading to lower bills; Photo: SIWI

Making Water a Part of Economic Development  Photo: SIWI 5. Conclusions: Investing in Water is Good Business

The greatest economic benefi ts of improved water business, better adaptive capacities to climate vari- Investing in improved supply and sanitation and water resources manage- ability and improved ecosystem services. water and sanitation ment will be felt in those countries with the greatest The overwhelming economic benefi ts of improved and water resources water challenges. water supply and sanitation and water resources management is good Investing in improved water and sanitation and management provide a compelling case for decision business for national water resources management is good business for na- makers to take immediate action to resolve water economies and poor tional economies and poor people. Poor people are challenges. At the national and global levels there is people. disproportionately dependent on natural resources for considerable momentum towards making signifi cant their livelihood and hardest hit by low water and sani- progress that will benefi t poor people. The momen- tation service access. Actions that target poor people tum should grow in light of the fact that the investments have the highest marginal benefi t. required are within reach for most countries. Investing in the health of people, ecosystems and The report concludes with 5 urgent investment more effi cient water use is an investment that not only messages to decision makers in public and private provides immediate economic benefi ts, but it also sectors: safeguards future economic gains. It leads to more

Making Water a Part of Economic Development  Message 1 MDG target would defi nitely bring direct and indirect economic benefi ts to the health sector, individuals Improved water supply and sanitation and water and households, and agricultural and industrial sec- resources management boosts countries’ eco- tors, ranging from USD 3 to USD 34 per USD 1 in- nomic growth and contributes greatly to poverty vested, depending on the region. eradication. To meet the MDG for water and sanitation implies total economic benefi ts of USD 84 billion. For exam- Poor countries with There is a causal relationship between access to water ple, the health-sector related costs avoided reach USD improved access to clean supply and higher income levels. Improved access to 7. 3 billion per year, and the annual global value of water and sanitation water and basic sanitation services in poor countries adult working days gained as a result of less illness services enjoyed annual drives higher economic growth. Poor countries with would be almost USD 750 million per year. The big- average growth of 3.7%. improved access to clean water and sanitation serv- gest potential gain is found in the total convenience Similarly poor countries ices enjoyed annual average growth of 3.7%. Similarly time saving – water collection and sanitation access (i.e. with the same per poor countries (i.e. with the same per capita income) time saved due to improved access – it amounts to capita income) but but without improved access had average annual per USD 64 billion. Improvement in sanitation, hygiene without improved access capita GDP growth of only 0.1%. and water access contributes to improved health, had average annual per Lower GDP growth due to rainfall variability and ex- generates savings for households and national health capita GDP growth of treme weather events, such as fl oods and droughts, is budgets and contributes to poor households’ econo- only 0.1%. used as a proxy to illustrate the benefi ts. The Zimbabwe- mies through reduced costs and losses of time. Saving an drought of the early 1990s resulted in a 45% decline time may enable productive activity and school at- in agricultural production, an 11% decline in GDP and tendance, especially for girls. Investment in water and a 60% decline in stock markets. Incomes and labour in sanitation — whether through development assistance developing countries rely heavily on agriculture, which at the national or community levels or by poor house- thus make them more susceptible to rainfall variability. holds themselves — makes sound economic policy. Also in the case of Zimbabwe, the fl uctuations in GDP Estimates indicate that sanitation interventions often are positively correlated to rainfall variability. have a higher economic impact per dollar invested As seen below in messages 2 and 3, the economic than water supply interventions, but it is the combina- benefi ts of improved water supply and sanitation and tion of improved water supply, sanitation and hygiene water resources management are massive. Targeting that has the biggest economic impact. poor people who have the most to gain implies provid- Based on the WHO fi gures, the OECD has pre- ing the highest marginal benefi t of interventions. pared a cost benefi t analysis looking specifi cally at what is needed in order to meet the MDG sanitation target alone. The analysis provides fi gures in terms of Message 2 net present value (NPV). With a discount rate of 5% and The economic benefi ts of improved water sup- 10%, the NPV of the meeting the MDG sanitation target ply and – in particular – sanitation far outweigh is USD 400 to USD 312 billion respectively. The results the investment costs, surprisingly good news for confi rm again that the benefi ts far outweigh the costs. Northern and Southern decision makers who While economic cost-benefi t comparisons attempt often view investments as mere costs. to make realistic assumptions about the economic value of potential savings, it is clear that social and The evaluation of health and socio-economic benefi ts environmental benefi ts are not fully refl ected and that of safe water and adequate sanitation results in a many of the accrued benefi ts are not immediate. For strong argument in support of further investments to example, the economic growth benefi ts derived from improve access for poor people. Based on present improved education may not be realised until a dec- WHO analysis, achieving the water and sanitation ade later, once students have become part of the la-

Making Water a Part of Economic Development  bour force. Consequently, estimates of the economic Improved water resource management and water Investments in water benefi ts of investments in water supply and sanitation storage capacity makes the economy more resilient to supply and sanitation services are likely on the low side. external shocks, such as rainfall variability, and thus are perceived as hav- Investments in water supply and sanitation are per- provide a stable and sustainable base for increased ing lower returns than ceived as having lower returns than in other sectors (for food and industrial productivity and production to in other sectors (for example, on roads or energy). Over the years it has maintain economic growth and development. The example, on roads or become clear that raising the profi le of sanitation and case of Kenya illustrates that frequent floods and energy). hygiene is diffi cult in part due to the fact that it is a sub- droughts take a heavy toll on the economy, imped- ject shrouded in cultural taboo. In industrialised nations ing poverty eradication efforts. These floods and and amongst those in positions of power, this plays out droughts translate to a direct long-term fi scal liability as a reluctance to discuss the looming, ever present of about 2.4% Kenya’s GDP per annum. This implies sanitary crisis. Lacking the facts, many people have that GDP would have to grow at an annual rate of at assumed other development issues dwarf the sanitation least 5–6% in order to start reducing poverty. In 1996, crisis – there is a lack of public awareness and support a good year in Kenya, real GDP growth was 4.1%. for sanitation as a core development concern. Another Structural shifts away from water-intensive agricul- part of the story is also that technical specialists, civil ture and industries could decrease economic vulner- society actors and others have largely not been able ability to water shocks. Equally and sometimes even to make a compelling case to decision makers con- more important is the shifts towards sectors where the cerning the economic and social benefi ts of access to country or a community has a comparative advan- water supply and sanitation services. tage in terms of water use effi ciency. Relying on trade in virtual water to meet a country’s power supply and food needs could drastically reduce unsustainable Message 3 water use. Furthermore, it could also mitigate the need National economies are more resilient to rainfall for diverting national resources as well as foreign di- variability, and economic growth is boosted when rect investment and aid towards costly water supply water storage capacity is improved. projects to support water intensive activity in areas that do not have the necessary water resources. In many countries there is great scope for continued development of water resources management for large and small-scale water infrastructure to meet food re- Message 4 quirements, mitigate natural hazards and promote en- Investing in water is good business – improved ergy and industry development. The difference in water water resources management and water sup- storage per capita, a measure of water security, clearly ply and sanitation contributes signifi cantly to demonstrates the need for investment and thus also the increased production and productivity within unexploited development potential through creating economic sectors. resilience to rainfall variability. For example, Australia and Ethiopia have similar degrees of climate variability, The need for reliable access to water and related but whereas Australia has over 4,700 cubic meters of services is well recognised among businesses. Of- water storage capacity per person, Ethiopia has 43 ten less obvious, but equally important to business cubic meters. It has also been suggested that annual development, is the role water and related services income lost due to land and water mismanagement play in health, employment and economic develop- stands at around USD 60 to 70 billion a year when ment. Some of the economic benefi ts that arise from preventive, corrective and rehabilitative measures that improved water supply and sanitation include less ex- could prevent such damages would cost no more than penditure on treatment of employees with diarrhoeal 25–50% of the annual losses. disease; increased productivity due to less workers

Making Water a Part of Economic Development  Photo: SIWI

Improved water are off sick and; and benefi ts to industry and agricul- that an additional investment of USD 15 billion per resources management ture of time-saving. It has, for example, been calculat- year to reach the Millennium target on water and san- throughout produc- ed meeting the MDG on water supply and sanitation itation. There is no “absolute” cost fi gure, as much will tion and consumption will gain 322 million working days, and the annual depend upon the technologies adopted and country- cycles is good business global value of adult working days gained as a re- specifi c preferences and conditions. This is of course practice. sult of less illness would be almost USD 750 million. a considerable global investment challenge that must The biggest potential gain for both economic sectors be met. But broken down into country cost estimates and households is found in the total convenience time to reach the MDG on water supply and sanitation it saving – water collection and sanitation access time is clear that meeting such investment challenges by saved due to improved access – it amounts to USD 2015 is highly feasible. The annual per capita cost 64 billion. Studies in Africa indicate that households to meet the MDG on water supply and sanitation value their time spent collecting water at around the in Bangladesh, Cambodia, Ghana, Tanzania and average wage rate for unskilled labour. Uganda ranges from approximately USD 4 to USD 7 Improved water resources management throughout per capita on an annual basis. production and consumption cycles is good business What would it cost to improve water resources practice. Providing reliable and suffi cient water sup- management and infrastructure? Estimations suggest plies is critical for business development and reduces that there is a need for considerable investments to The annual per capita investment risk. For example, a study in China points at improve water resources management and expand cost to meet the MDG the considerable gains that can be made by improved country water storage capacity. The total estimated in- on water supply and water quality. The industrial income lost due to water vestment needs for 11 African countries tops USD 200 sanitation in Bang- pollution amounted in 1992 to USD 1.7 billion. What billion. Countries in Sub-Saharan Africa need to invest ladesh, Cambodia, is now becoming increasingly clear to many govern- between USD 150 and USD 700 per capita to reach Ghana, Tanzania and ments is to use reliable access to water resources as a a level of water storage infrastructure equivalent to Uganda ranges from competitive advantage to attract business opportunities. South Africa’s. Spread out over the ten years between approximately USD 4 to For example, the Malaysian Industrial Development Au- 2005 and 2015, these investments would amount to USD 7 per capita on an thority is marketing reliable access to water as a key USD 15 to USD 70 per capita on an annual basis. The annual basis. advantage of investing in the Malaysian economy. costs for improved water resources management and infrastructure depend on the technologies applied. It is clear that investing in water is good for busi- Message 5 ness and poverty eradication. The aggregated in- The overall public and private investment needs vestment requirements to improve water supply and for improved water supply and sanitation and sanitation and water resources management are chal- water resources management are considerable. lenging and will by no means be easy, particularly in However, at the country level, meeting such in- those poor countries plagued by social and political vestment challenges is highly feasible and within confl icts. But broken down into country estimates it is the reach of most nations. clear that it takes fairly moderate fi nancing to reach the MDG on water and sanitation. What would it cost to reach the MDG on water sup- But how can such improvements be realised? What ply and sanitation? WHO estimates that halving the are the next steps that are required? In the following proportion of people without sustainable access to section, it is proposed that the “call to action” outlined both improved water supply and improved sanitation by the United Nations Millennium Project Task Force (i.e. meeting the MDG target) would cost around USD on Water and Sanitation provides a platform for ad- 11.3 billion annually. Access for all to improved water vancing investments to make lasting improvements. and sanitation services would cost around USD 22.6 billion per year. The World Bank estimated in 2003

Making Water a Part of Economic Development 