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DRAFT THE WORLD BANK URP-771! DEVELOPMENT ECONOMICS DEPARTMENT URBAN AND REGIONAL ECONOMICS DIVISION Public Disclosure Authorized URBAN AND REGIONAL REPORT No. 77-13 AVERAGE INCREMENTAL COSTS OF WATER SUPPLY AND Public Disclosure Authorized SEWERAGE SERVICES: NAIROBI, KENYA CHARLES E. McLURE, JR. (Consultant) Public Disclosure Authorized April 1977 These materials are for internal use only and are circulated to stimulate discussion Public Disclosure Authorized and critical comment. Views are those of the author and should not be interpreted as reflecting the views of the World Bank. References in publications to Reports should bG cleared with the author to protect the tentative character of these papers. DRAFT AVERAGE INCREMENTAL COSTS OF WATER SUPPLY AND SEWERAGE SERVICES: NAIROBI, KENYA April 1977 Prepared by: Charles E. McLure, Jr. (Consultant) Urban and -Regional Economics Division Development Economics Department (In the context of Research Project 671-18: "Pricing and Financing of Urban Public Services") TABLE OF CONTENTS Page No. I. INTRODUCTION I1... II. THE WATER SUPPLY SYSTEM ....................................... 3 A. The Present System ..................................... B. Plans for Expansion 3 ...................................... -n7 C. Capital Costs for Expansion .............................. 10 III. THE CALCUIATION OF AIC ............................. ..... 13 A. Methodology .............................................. B. t.........Basic 13 Data ................................... 1 1. Demand Patterns .......... ........................ 15 2. Production Costs: Capital ......................... 17 3. Production Costs: Maintenance 4. ........... 22 Production Costs: Operation ...................... 5. Distribution Costs: 23 Capital ......................... 29 6. Distribution Costs: Operating 31 7. Summary: AIC ....................... 32 IV. AVERAGE INCREMENTAL COST OF SEWERAGE SERVICES ................. 35 A. Introduction ............................................ B. Capital Costs: Trunk Sewers 3 and Sewage Treatment ........ 36 V. SUM ARY AND CONCLUSIONS ....................................... 48 AVERAGE INCREMENTAL COSTS OF WATER SUPPLY AND SEWERAGE SERVICES: NAIROBI, KENYA Charles E. McLure, Jr. Rice University I. INTRODUCTION Among the many cost concepts that have been suggested as being appropriate bases for the pricing of public utility services are short-run 1/ marginal costs (SMC) and average incremental costs (AIC). The purpose of this paper is to.describe calculations of the average incremental costs . of supplying water and sewerage services to Nairobi, Kenya over the period beginning in 1974. One (generally) separable component of AIC is, of course, short-run marginal costs. The analysis is complicated by what can be described as movements in the objective reality with which we are dealing. That is, over the course of the time during which the research reported here was conducted, estimates * of future demands for water have been revised several times.- Similarly, the The author is Professor of Economics at Rice University in Houston, Texas, - U.S.A., and a consultant to the Urban and Regional Economics Division of the World Bank. He wishes to thank many officials of the Water and Sewerage Department of the Nairobi City Council (including Colin Thomdpson, Loten'.andRichard Webb) and the NCC's consultant for water supply HowardfHumphreys, for the data they supplied, and many persons at the World Bank (including Peter Callejas, Nichel Cramer, Johannes Linn, Robert Saunders, and Jeremy Warford) and Professor Stanley Besen for the data and economic or technical advise they provided. Nonetheless, any errors of interpretation data or remain solely the responsibility of the author. The opinions expressed here do not, of course, constitute positions of the World Bank. 1/ For a more detailed discussion of these and other costs concepts, most notably long-run incremental costs and present worth of incremental systems cost, see Saunders, Warford, and Mann, 1976. As Saunders et al-note AIC is.a more (p. 53) satisfactory approximation to what they call "Textbook Marginal Cost" in fields were investment is "lumpy" such as water supply, whereas the two alternative concepts mentioned in this footnote are more useful where investment streams are more continuous and less lumpy, as power. in electric -2 construction of a key component of the future water supply system, the Chania II project, has been postponed by at least two years and estimates of costs--beyond timing--have been altered. Thus the average incremental cost of water in a given year might be quite different, depending upon whether it were calculated on the basis of the best information available in 1975, when our research began, or on the basis of information available in 1977, when the .research was completed. We might therefore have attempted to calculate average incremental costs on both basea. The 1975 calculation of AIC for various years could be seen as an attempt to determine how expected AIC would vary over time (comparing 1978 AIC with AIC for 1975 and 1981, all estimated in 1975), while the 1977 calculation would indicate how revision of demand estimates, postponement of construction, and revision of cost estimates have affected the calculated value of AIC and would be more relevant to those responsible for setting water rates in 1977. Unfortunately, the most recent estimates of costs and their phasing that are available as this is being written are not adequate to allow reliable calculations of the AIC of water supply. Thus we present only the estimates based on cost information available in 1975, though we do indicate how the results are affected by recent revisions of demand estimates. We begin in Section II, with a short description of (a) Nairobi's present water supply system, (b) extensions that may occur between now and 1991, and (c) capital costs of these extensions. Of crucial importance for what follows, besides issues discussed in the previous paragraph,.are the differences in the elevations of various parts of the city that necessitate pumping from the so-called low zone to the high and central zones. -3- In Section III, we outline the methodology used to calculate AIC, present the data on production costs, distribution costs, etc. employed in the calculations, ahd calculate the AIC of water in each zone. Among the important issues discussed are the appropriate dates at which to conduct the analysis, the time horizon over which the analysis extends, and the choice of discount rates. Section IV, presents the analogous descriptions and calculations of AIC for the provision of sewerage services. Section V brings together the results of sections III and IV to provide estimates of the AIC of providing .both water and sewerage services to each of the three zones and compares them with present charges. II. THE WATER SUPPLY SYSTEM A. The Present System Nairobi is currently supplied with water from four sources, comprising three subsystems, 1/ one of which was completed only in 1974. (See Figure 1 and Table 1). The oldest (1921) and least important source of water is Kiyuku Springs. It produces one million gallons per day (m.g.d.) of water that needs only chlorination before being ready to use. Most of this water is piped directly to Dagoretti, in the high-lying part of the city, the residual flowing by gramvity to the water treatment plant at Kabete, in the central zone. 1/ This summary is based on Humphreys, 1974, pp. 5-7, SWECO, 1974a, Vol. pp. 33-34 and Humphreys, 1, 1974, p. 6 and 1975a, pp. 5, 21-22, 41-43, as modified in the light of subsequent interviews. Figures in the text exclude water from private wells (boreholes) in the area. Because the high fluoride content of the water constitutes a menace to dental and general health (because of deterioration of teeth and.bones), the NCC is planning gradually to take over most of these wells and phase them out as a source of supply. Figure 1 GENERAL LAYOUT OF NAIROBI WATER SUPPLY SYSTEM sAsumu DAM AND I REATMENT PLANT NGn L!Z TRE ATMECN PL ANT LIT 05 DOUNDARY 10 15 km -- XAaETE GIGIRI RE:SERVOIR TREATMENT sm4 .Ne s ȈtaarNAIROBI High Zoncc Central Zone Low Zone -5- The second component of the Kabete subsystem, completed in 1950, is the Ruiru Dam. Untreated water flows by gravity from the dam for treatment at the Kabete treatment plant. With a design capacity of 4.7 m.g.d., this adds an annual average daily demand capacity of 4.2 m.g.d. Thus the Kabete subsystem accounts for 5.2 m.g.d. of capacity. The Sasumua Dam and Treatment Works complei.ed over the period 1956-69, has a design capacity of 14.0 m.g.d., or capacity to supply an annual average daily demand of 12.5 m.g.d. The treated water flows (by gravity) into the service reservoir at Kabete (but is not treated there). Until 1974, only the Kabete and Sasumua subsystems were supplying water to Nairobi, so only 17.7 m.g.d. were available (on an average demand basis) at that time. The Chania I Project, consisting of an intake weir, rising main) pumping station, and treatment plant at Ngethu, a transmission main from Ngethu to Gigiri, and a service reservoir at Gigiri, in the low zone, was placed in operation in 1974. Though the design capacity of the treatment works is 7.2 m.g.d. (annual average daily demand), Humphreys and Sons, the consultant to the Nairobi City Council, has estimated that this capacity could be raised to 9.0 m.g.d. by overloading the plant by 25 percent. Thus the rated capacity of the Nairobi water system was 24.9 m.g.d. in 1974, or 26.7 m.g.d allowing for overloading. Improvements to the Kikuyu Springs--Ruiru--Sasumua-- Kabete subsystems are estimated to raise the total capacity of those components from 17.7 m.g.d. to 19.0 m.g.d. by early 1978 and the total design capacity of the entire system to 26.2 m.g.d. These figures are summarized in Table 1. 1/ In consultant's reports by Howard Humphreys, it is assumed that peak.