Water and. Sanitation Program. Water and. Sewerage Systems

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3 Water and Sanitation Program Water and Sewerage Systems

4 Report written by: Vivien Foster The Word Bank. Primariy thanks to the peer reviewers that have contributed with vita comments and suggestions to this report: Caroine van den Berg, Barbara Evans, Agnieska Grudzinska and Carmen Arévao from the Water and Sanitation Program; and Kaus Neder from CAESB, Brazi. Aso thanks to the E Ato Piot Project team: Luiz Lobo, Regina Arakaki, Mery Quitón, speciay to Neba Cannei and Adea Martínez; and the WSP-AND team: Joseph Narkevic, Louise Herrmann and Ann-Katrin Petersen. A specia mention to Isabee Vincent and Luis Curridor from the concessionaire Aguas de Iimani and Pedro Arrioa and Caudio Parra from Caja Los Andes. Besides this, the WSP-AND pubication coud not have been done without the coaboration from the Vice Ministry of Basic Services in Boivia, Water Superintendence in Boivia and Prefecture of La Paz. Lasty, and perhaps most importanty, thanks to the Swedish Internationa Deveopment Cooperation Agency, SIDA, main financia contributor to the E Ato Piot Project. For information contact: Water and Sanitation Program (WSP) Word Bank Office, Lima Ávarez Caderón 185, 9th foor San Isidro, Lima-Perú Phone: (511) Fax: (511) E-mai: wspandean@wordbank.org Website: Design: Fabioa Pérez Abea Edition: Santiana S.A. Printed in Peru ISBN-Nr.:

5 Water and Sanitation Program EL ALTO - BOLIVIA / PILOT PROJECT Water and Sewerage Systems Costs of Impementation of the Mode Viceministerio de Servicios Básicos Agencia Sueca para e Desarroo Internaciona ECONOMIC AND FINANCIAL EVALUATION

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7 EL ALTO - BOLIVIA / PILOT PROJECT CONTENTS Executive Summary 6 1. Introduction Description of the E Ato Piot Project 12 Project Setting Timing of the Piot Project Services Provided Condominia Approach 3. Evauation Methodoogy 18 Condominia versus Conventiona Different Anaytica Perspectives 4. Cost Differentias 24 Financia Costs Economic Costs 5. Consumption Differentias 38 Estimating the Consumption Differentia Vauing the Consumption Differentia 6. Evauation 46 Socia Perspective Utiitiy s Perspective Consumer s Perspective 7. Concusions 50 Cost Annex 58

8 WATER AND SANITATION PROGRAM Executive Summary This paper undertakes the economic and financia evauation of the E Ato Piot Project (EAPP), a piot project aimed at transferring the condominia water and sewerage system from Brazi to Boivia and testing its appicabiity in the context of private sector participation in service provision. Since its inception in 1998, the EAPP has provided condominia water connections to 1,977 househods in eight neighborhoods of E Ato, and condominia sewerage connections to 4,050 househods in nine neighborhoods of E Ato. According to recent statistics, about 60% of these househods ive beow the poverty ine with an average daiy income per capita of US$0.80. To what extent are the resuts of the E Ato piot reevant beyond Boivia? The pecuiar cutura, geographica and socia circumstances of E Ato make it if anything an acid test for the condominia approach. In particuar, a number of factors which have served to imit the benefits of the condominia system in Boivia woud not necessariy be present in other contexts to the same degree. Exampes incude the exceptionay ow eves of consumption of househods, and the difficuties experienced in inducing them to switch to modern hygiene practices for a variety of cutura reasons. Consequenty, the resuts of the evauation shoud be regarded as specific to the E Ato context, even though in quaitative terms they are indicative of what can generay be achieved through the condominia approach. The piot project experimented with a number of different components incuding: - innovative engineering design of networks; - community participation in network construction and maintenance; - hygiene education to support the instaation of househod faciities; - micro-credit ines to finance the construction of bathrooms. Many of these components are mutuay reinforcing and formed part of an integrated concept in the E Ato project. Nonetheess, both in principe as in practice, it is possibe to appy these components independenty of each other. Hence, for anaytica purposes it proves convenient to provide an independent evauation of each. Engineering design The purpose of the innovative engineering design is to reduce the ength, diameter and depth of the network required by routing the distribution pipes across pavements and/or backyards. Anaysis of the EAPP experience suggests that savings in the ength and diameter of pipes are of the order of 10%-20%, whie savings in the voume of soi excavation as a resut of shaower trenches are of the order of 45%-75%. These 6

9 EXECUTIVE SUMMARY physica savings transate into overa financia savings of the order of 24% for the sewerage service and 40% for the water service when the condominia engineering design is impemented using conventiona contractors. This is consistent with recent experience from Brasiia which suggests savings of 20% for condominia sewerage systems without community participation (Neder, 2001). Community participation Community participation brings a number of advantages, among them is a further reduction in connection costs as a resut of training oca residents to construct and maintain their own condominia branches. Community participation reduced the network costs by a further 26% for the sewerage service and 10% for the water service. Thus, the overa savings achievabe by impementing the condominia engineering design with community abor come to around 50% for each of the two services. However, community participation aso introduces costs of socia intermediation for the water company of around US$8 per connection, and requires each participating househod to give-up about a week of its time vaued at around US$20. When these costs are taken into account, the overa cost advantage of the condominia design with community participation fas sighty from 50% to 40% for both services. Considering the baance between margina costs and benefits, community participation has a benefit cost ratio of 2.2 for the sewerage service suggesting that it is very worthwhie. However, in the case of the water service the benefit cost ratio is ony 1.0, since in this case the cost savings come primariy from the engineering design. There is aso some evidence suggesting that community participation increases the proportion of househods that connect to the sewerage network once it is buit from 66% to 75%. The effect of this is to increase the overa cost saving of the approach from around 40% to 45%. Hygiene education The purpose of the hygiene education component was to provide mora and technica support for househods to adopt modern hygiene practices, in particuar by heping them to construct their own bathrooms and associated faciities. Without such investments within the home, a sewerage connection brings itte or no benefit to househods, and has been shown to have virtuay no impact on water consumption. In neighborhoods where hygiene education activities had been performed the probabiity that any given househod had constructed a bathroom increased from 38% to 73%, and the range of water-using instaations in the househod (showers, kitchen sinks, etc.) increased markedy. Househods with bathrooms were found to consume, on average, two cubic meters more per month than househods without bathrooms, which is to say an increase of 30% on average consumption in househods without bathrooms of 5.4 cubic meters per month. Househods receiving hygiene education were aso found to significanty reduce insanitary practices (Canei, 2001). After the project, the percentage of househods throwing out used water into the streets fe from 77% to 58%. Househods recycing water within the home fe from 36% to 25%. The cost of hygiene education to the utiity works out at around US$13 per househod, whie the cost of bathroom construction to the househod was estimated at US$443. Given the reativey sma absoute vaue of the consumption increase, and the ow eve of tariffs for ow voume consumers, hygiene education is not at present a commerciay attractive proposition for a private utiity in E Ato. The estimated consumer surpus increase from the additiona consumption ranges from US$253-US$470 depending on the discount rate used. This suggests that bathroom construction is ony marginay attractive to househods. However, it is important to stress that these modest benefits for hygiene education are argey an artifact of the exceptionay ow eves of water consumption in E Ato. With the much arger consumption increases that coud easiy be anticipated in other ocations, the proposition woud start to ook much more attractive both from the utiity s and the customer s perspectives. EL ALTO - BOLIVIA / PILOT PROJECT 7

10 WATER AND SANITATION PROGRAM Micro-credit ine The purpose of the micro-credit ine was to hep househods finance the US$400 worth of materias required to construct a fuy-equipped bathroom. Overa, 25% of househods appied for credit, and 19% had their appications approved. The avaiabe evidence suggests that those househods appying for credit tended to have above average incomes. Whie the provision of credit undoubtedy eased the payment of the costs for beneficiary househods, statisticay there is no evidence to suggest that bathroom construction rates were significanty higher in neighborhoods were micro-credit had been offered. The microcredit ine was dropped at an eary stage of the project. Overa, these resuts suggest the foowing concusion. The engineering design component aone produced significant savings of 24% for sewerage and 40% for water. The community participation component further increased the savings avaiabe for the sewerage service to 40%, but did not have any net effect on the cost reductions avaiabe for the water service. The hygiene education component had a very substantia effect on househod behavior, but the size of the benefits was more modest than might be expected owing to very abstemious water consumption practices pecuiar to E Ato. Evidence on the micro-credit faciity suggests that it probaby was not a that effective in reaching the poorest househods. The resuts reported above are given from the perspective of an enightened poicy maker who takes a financia and economic costs fuy into account. However, the considerabe divergence between tariff structure and underying cost structures in the AISA concession contract appears to distort the way in which the utiity and its consumers perceive the advantages of the condominia system. From the utiity s perspective, it is difficut to make categorica statements about the profitabiity of making condominia as opposed to conventiona connections. Athough current connection charges mandated by the concession contract are substantiay ower than the estimated average cost of making a connection, it is not known to what extent part of the costs of network expansion have in fact been buit into the use of service tariff. However, one point that is cear is that there does not appear to be any incentive for the utiity to engage in hygiene education since the additiona costs are not recouped through the connection charge, and the resuting increases in water consumption though significant are not arge enough to take consumers out of the oss-making ow voume tariff band. If charges were fuy cost-refective the utiity woud be indifferent between conventiona and condominia systems, but woud sti ony have an incentive to undertake hygiene education as ong as the consumption increase was arge enough to justify the cost of the initia investment. From the consumer s perspective, househods receiving water and sewerage services by the condominia method saved US$19 and US$80 respectivey in terms of connection charges, an aggregate vaue equivaent to 80% of monthy househod income. However, when the opportunity cost of the househod s time is fuy accounted for, the saving disappears for the water service and for the sewerage service is reduced to US$58 (or about 50% of monthy househod income). If connection charges were more cosey aigned with underying cost, househods woud spend more on obtaining a condominia connection than they do at present, but the savings reative to the conventiona system woud aso be arger. They woud increase to US$109 for water and US$126 for sewerage (together equivaent to neary 200% of monthy househod income). As before, when the opportunity costs of time are taken into account, the savings are somewhat reduced to US$90 for water and US$104 for sewerage (in tota equivaent to 160% of househod income). 8

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12 WATER AND SANITATION PROGRAM 1. Introduction The purpose of this report is to conduct an economic and financia evauation of the E Ato Piot Project (EAPP) for condominia water and sewerage systems in Boivia. The report does not however directy consider the technica performance of the systems, or the socia impacts of the projects which are being treated in parae evauations. Condominia water and sewerage systems were pioneered in Brazi during the 1980s as a way of bringing piped sanitation services within the economic reach of poor househods (Watson, 1995). The condominia approach has two defining features. The first is the use of innovative engineering techniques. By routing water and sewerage networks across pavements and yards instead of down the center of streets, the condominia approach eads to substantia economies in the ength, depth and diameter of the pipes. The second is the integration of socia and engineering work. By invoving communities in the construction and maintenance of the condominia networks, further cost reductions are achieved. Moreover, the interaction with the community during the execution of the works provides opportunities to impart hygiene education and to infuence water consumption habits in a variety of ways. In Juy 1997, the Government of Boivia granted a 30 year concession contract for the provision of water and sewerage services to the adjacent cities of La Paz and E Ato. The concession contract was awarded to Aguas de Iimani (AISA), a consortium ed by Lyonnaise des Eaux. A major objective of the concession contract was to improve access to water and sewerage services in E Ato. The expansion targets for the first four years of the concession in E Ato incuded reaching 100% water coverage and making 38,000 new sewerage connections. However, the very high eves of poverty in E Ato raised concerns about the affordabiity of the new water and sewerage services. This prompted a search for ways to reduce the cost of serving ow income househods, and ed the Boivian authorities to consider the potentia use of the condominia approach. Shorty after the award of the concession contract in Juy 1997 a tripartite agreement was reached between the Government of Boivia (GoB), the private utiity (AISA) and the Water and Sanitation Program (WSP). 10

13 1. INTRODUCTION - The GoB agreed to reax its technica standard which, as currenty written, woud egay precude the use of the condominia approach. - With the endorsement of the reguatory agency, AISA agreed to use the condominia approach to meet a proportion of its expansion targets in E Ato. - Whie the WSP thanks to support from the Swedish Internationa Deveopment Cooperation Agency (SIDA) agreed to finance the research and training activities required to transfer and adapt the condominia system from Brazi to Boivia. Athough condominia systems have been successfuy depoyed in a number of cities around Brazi, the EAPP is beieved to represent the first attempt to export the approach to another country with very different socioeconomic and sectora conditions. Furthermore, the Braziian experience of condominia systems has aways been in the context of pubic sector service provision. The EAPP appies the mode, for the first time, in the context of private sector participation. It therefore provides an opportunity to estabish whether the socia work component of the methodoogy is compatibe with the modus operandi of a private utiity. For both of these reasons, the experience is of interest not ony in Boivia, but to other countries who may wish to experiment with the condominia system. This report is organized as foows. - Section 2 provides a more compete description of the EAPP. - Section 3 describes the methodoogica framework for the evauation. - Section 4 estimates the cost differences between conventiona and condominia systems. - Section 5 examines how the condominia approach affects househod water consumption. - Section 6 draws out the main concusions of the evauation. EL ALTO - BOLIVIA / PILOT PROJECT 11

14 WATER AND SANITATION PROGRAM 2. Description of the E Ato Piot Project This section provides a more detaied description of the EAPP project, describing the setting in which it takes pace, the nature and phasing of the neighborhoods affected by the project and the scope of the associated interventions. It concudes by providing a more nuanced definition of what is meant by the condominia approach. Project setting The setting for the EAPP is the city of E Ato ocated at 4,100 meters above sea eve on the Boivian atipano 1, adjacent to La Paz and home to 600,000 peope. The city has been described as the Aymara capita of the word, in recognition of the fact that 80% of its popuation beong to the Aymara ethnic group, and that Aymara beiefs and customs are strongy observed. The city has grown-up from nothing during the ast 30 years (and more especiay during the ast 10 years) as a resut of arge scae urbanrura migration. However, many of the inhabitants retain strong inks with the countryside, spending a proportion of each year back in their viages where they continue to take part in agricutura activities. For a considerabe proportion of the popuation, E Ato thus represents a way of combining urban and rura iveihoods. Whie in the city, most peope earn their iving by street vending or informa micro-enterprises, as there is very itte organized arge scae industry. Many inhabitants of E Ato spend most of their waking hours in La Paz where most of the economic opportunities are, hence E Ato is something of a dormitory city. The recent creation and rapid growth of the city has created a coverage deficit, particuar for sanitation. Sewerage coverage in E Ato, estimated at 30% - 45%, ags significanty behind that in La Paz, estimated at 66%. However, the high eves of poverty make expansion of services particuary chaenging: average income in E Ato is ess than haf of that in La Paz, with 60% of the popuation iving under the poverty ine (Tabe 2-1). Tabe 2-1 Poverty statistics for La Paz and E Ato La Paz E Ato Income (US$/month) Per capita Per househod Poverty ines (US$/per capita/month) Extreme poverty Poverty Poverty rates (%) Extreme poverty Poverty

15 2. DESCRIPTION OF THE EL ALTO PILOT PROJECT A of these characteristics combine to make E Ato a unique ocation, and raise a number of critica issues for the expansion of water and sanitation services (Tabe 2-2). Tabe 2-2 Aspect Loca idiosyncrasies of reevance to the project Loca characteristics Impications for water and sanitation services First, the reigious beiefs of the Aymara peope precude certain forms of modern hygiene. For exampe, atrines and septic tanks woud be regarded as unacceptabe to many because they invove the buria of feces in the ground, which is considered both dangerous and sacriegious. However, piped sewerage does not create confict with traditiona beiefs, basicay because it returns feces to surface water courses. Second, the geographic ocation means that temperatures are unusuay cod for a tropica ocation. This means that water use, in particuar for persona washing, is exceptionay ow; on average just under six cubic meters per househod per month or about 40 iters per capita per day. Furthermore, the cimate, ow oxygen eves and high eves of utravioet radiation create an unusuay sterie environment, so that the inks between hygiene and heath are not as strong as they usuay are in tropica ocations. Third, the argey rura origins of the popuation and the continued inks with the countryside, make many peope reuctant to adapt to modern urban ifestyes. Peope are accustomed to obtaining their water directy from nature, and returning their feces directy to nature. They are not used to iving with piped water and sewerage, and the oder peope in particuar are not aways attracted to doing so. Cutura Geographic Socia 80% of the popuation of E Ato beongs to the Aymara ethnic group, with strong traditiona reigious beiefs: - The earth mother (pachamama) is venerated as an important deity. - Evi spirits reside in the depths of the earth and can escape through hoes in the ground. - Possession of another person s feces gives power of witchcraft over them. E Ato is ocated at an atitude of 4,100m above sea eve, which means that: - Overnight temperatures fa to freezing year round. - Low temperatures, ow oxygen eves, and high eves of utravioet radiation combine to reduce bacteria activity in the oca environment. E Ato is a city that has been created in the ast 10 years as a resut of rura-urban migration, hence: - Latrines and septic tanks are not a cuturay viabe option for sanitation. - Buria of feces in the earth is regarded as sacriegious. - Creation of hoes in the ground for the disposa of feces is regarded as dangerous. - There is a preference for anonymous disposa of feces in scattered ocations. - Hot water is needed for showering. - Heath outcomes are ess sensitive to hygiene practices than they woud be in a warmer cimate. - Genera water use tends to be ower than in warmer cimates. The pecuiar cutura, geographica and socia circumstances of E Ato make it if anything an acid test for the condominia approach. In particuar, a number of factors which have served to imit the benefits of the condominia system in Boivia woud not necessariy be present in other contexts to the same degree. Exampes incude the exceptionay ow eves of consumption by househods, and the difficuties experienced in - Most of the residents are recent arrivas from rura areas. - Many of the residents maintain strong inks with the rura areas, dividing their time between agricutura activities in the countryside and commercia activities in the city. - Peope have imited experience of modern sanitation practices. - Difficuty of coordinating projects requiring agreement between neighbors, given seasona migrations and many absentee andords.

16 WATER AND SANITATION PROGRAM inducing them to switch to modern hygiene practices for a variety of cutura reasons. It is particuary important to bear these oca idiosyncrasies in mind when drawing inferences about the reevance of the E Ato experience to other ocations in Boivia, Latin America or beyond, where many of these conditions are unikey to appy. Timing of the Piot Project The EAPP encompasses a number of different neighborhoods of E Ato, as we as some of the poorer neighborhoods of La Paz (Caja Ferroviaria, E Rosa Loreta, and Kupini). The impementation of the project can be divided into two partiay overapping phases (Tabe 2-3). Phase One, which was the piot proper, ran from November 1998 to February 2000 and encompassed six different neighborhoods: Huayna Potosí, Via Ingenio, Caja Ferroviaria, San Juan de Río Seco, Oro Negro, Jichusirca. During this phase, a team of WSP consutants had overa responsibiity for the project sites. The team, which combined Braziian condominia experts with Boivian counterparts, undertook the design of the condominia networks, and the training of oca socia workers and AISA engineers, as we as supervision of the overa process. The Phase One sites were covered in two waves. The two projects covered in the first wave, Huayna Potosí and Via Ingenio, provided the basic earning experience. This is refected in the reativey ong duration of these projects, which took on average about eight months from start to finish. The four neighborhoods covered in the second wave, on the other hand, were executed much more rapidy, taking on average just under four months to compete. Phase Two, which ran from October 1999 to November 2000, was the first stage of scae-up. A key change between Phase One and Phase Two was that AISA began to take overa responsibiity for impementing the condominia methodoogy, whie the WSP team payed a much more imited advisory roe. Five further neighborhoods have been added under this phase: Via Ingenio (a different part of the origina Phase One neighborhood), E Ingenio, Germán Busch, E Rosa Loreta, and Kupini. These projects have taken, on average, just over five months each to compete. Services provided The nature of the services provided differs by piot neighborhood (Tabe 2-4), depending on their origina service endowment. Some of the piot neighborhoods Huayna Potosí, Oro Negro and Tabe 2-3 Phasing of piots by neighborhood o n d j f m a m j j a s o n d j f m a m j j a s o n d Phase One Huayna Potosí Via Ingenio (D-II) Caja Ferroviaria San Juan de Río Seco Oro Negro Jichusirca 199 days 279 days 168 days 105 days 119 days 74 days Phase Two Via Ingenio (UV-4) E Ingenio Germán Busch E Rosa Loreta Kupini II 113 days 203 days 160 days 175 days 130 days 14

17 2. DESCRIPTION OF THE EL ALTO PILOT PROJECT Kupini aready had a conventiona water suppy. Hence, the piot was imited to adding a condominia sewerage service. Esewhere, condominia water and sewerage systems were simutaneousy provided. The ony exception is Jichusirca, where ony water was provided. reasons, it may not aways be feasibe to confine the networks to the sidewaks. To the extent that the network has to cross through private yards, community participation becomes indispensabe because of the probems of access. Condominia approach The EAPP incorporated a number of different innovative components. Many of these components are mutuay reinforcing and formed part of an integrated concept in the E Ato project. Nonetheess, both in principe as in practice, it is possibe to appy these components independenty of each other. Hence, for anaytica purposes it proves convenient to provide an independent evauation of each. Engineering design component: This refers to a modification of conventiona design so that networks are routed aong sidewaks or private yards, rather than down the midde of roads. This aows for savings to be made in the ength, depth and diameter of pipes. If this approach is impemented directy by the utiity, without the community participation component, then networks must generay be confined to sidewaks to faciitate access during construction and subsequent access for maintenance. However, for topographica Community participation component: This means that the responsibiity for constructing and maintaining the branches ( ramaes ) of the condominia network is entirey deegated to the community. The operator empoys a team of socia workers to engage with the community and to train them for these activities. Community invovement heps to improve the acceptabiity of the infrastructure, promoting network connections, and provides an entry point for imparting hygiene education. Moreover, since the abor is provided free of charge, the financia costs of doing the works is reduced. However, against this must be set the additiona cost of the socia workers required to faciitate this process. Within topographica constraints, the community are aowed to choose whether the condominia network shoud pass aong the sidewak or through their private yards. It is important to note that, community participation does not necessariy entai routing through private yards, however routing Tabe 2-4 Characteristics of piot by neighborhoods Water Service Sewerage Service Before After Before After Phase One Huayna Potosí Conventiona Nothing Condominia Via Ingenio (D-II) Nothing Condominia Nothing Condominia Caja Ferroviaria Nothing Condominia Nothing Condominia San Juan de Río Seco Mixed* Mixed** Nothing Condominia Oro Negro Conventiona Nothing Condominia Jichusirca Nothing Condominia Nothing Phase Two Via Ingenio (UV-4) Nothing Condominia Nothing Condominia E Ingenio Nothing Condominia Nothing Condominia Germán Busch Nothing Condominia Nothing Condominia E Rosa Loejeta Nothing Condominia Nothing Condominia Kupini II Conventiona Nothing Condominia EL ALTO - BOLIVIA / PILOT PROJECT *Some househods had no water and others had conventiona water connections. ** Those with conventiona connections retained them and the others obtained condominia connections. 15

18 WATER AND SANITATION PROGRAM Tabe 2-5 Possibe permutations through private yards necessariy entais community participation (Tabe 2-5). In the case of EAPP ony the neighborhoods of Huayna Potosí and Via Ingenio (and partiay Caja Ferroviaria) have used yard routings of the condominia branches. In a other neighborhoods, the branches were routed across the sidewaks. Hygiene education component: The process of community engagement needed for the construction of condominia networks can aso be used to enter into a wider diaogue about water use. The nature of this diaogue is ikey to vary with the context. In the case of E Ato, a key issue was the very ow awareness of hygiene issues and imited exposure to modern sanitation faciities. Hence, considerabe emphasis was paced on teaching househods about the connection between water and heath, and providing them with mora and technica support for the With Community Without Community Network Routing Participation Participation Pubic sidewaks Possibe Possibe Private yards Possibe Impossibe Tabe 2-6 Permutations of the condominia approach by neighborhood Engineering Participation Education Credit Phase One Huayna Potosí ü ü ü ü Via Ingenio (D-II) ü ü ü ü Caja Ferroviaria ü ü ü San Juan de Río Seco ü ü ü Oro Negro ü ü ü Jichusirca ü ü Phase Two Via Ingenio (UV-4) ü E Ingenio ü ü Germán Busch ü ü E Rosa Loreta ü Kupini II ü construction of their own bathrooms and other househod faciities such as kitchen and aundry sinks. The education aso attempted to discourage undesirabe practices, such as disposing of waste water into the streets, or recycing it within the househod. Micro-credit faciity: This refers to the incorporation of a micro-credit faciity for the construction of bathrooms. The micro-credit was seen as a vauabe compement to the hygiene education, since there is itte point in encouraging househods to buid bathrooms if they cannot afford to do so. These four components are conceptuay distinct and can be packaged in a variety of different ways. What is commony referred to in the iterature as the condominia mode combines the engineering component with the community participation component. However, it is aso possibe to appy the engineering approach in isoation of the other interventions, whie hygiene education and micro-credit faciities can readiy be incorporated into a program invoving community participation. Under the EAPP, different combinations of these four components were tried in different neighborhoods (Tabe 2-6). During Phase One, a comprehensive approach was taken. A project sites incuded a community participation component 2, and educationa activities in support of bathroom construction were conducted everywhere except Jichusirca, where they were not reevant owing to the absence of sewerage service. In addition, a micro-credit ine was provided for househods in the first two piot sites at Huayna Potosí and Via Ingenio. Since the inception of Phase Two, the approach has changed consideraby. Most of the Phase Two sites have imited themseves to the engineering component 3. Ony in E Ingenio and Germán Busch has community participation been appied. The educationa component has aso argey been cut back. The reason for this was that the government s own socia investment fund (FNDR) is introducing a program to provide free bathrooms to househods in E Ato, making the educationa component as conceived in Phase One somewhat redundant. 16

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20 WATER AND SANITATION PROGRAM 3. Evauation Methodoogy This section outines the evauation methodoogy that wi be used in this study. It begins by estabishing the conventiona system as the benchmark against which the reative costs and benefits of the condominia system wi be measured. The section goes on to define the various perspectives from which the evauation can be performed, and expains the reevance of each to the current exercise. Condominia versus conventiona In order to evauate an intervention such as the EAPP it is necessary to have a cear counterfactua, that is, to estabish what aternative system the condominia system is being compared against. In the context of E Ato, the reevant counterfactua is ceary the conventiona water and sewerage system, since AISA was contractuay obiged to connect the househods in the project area and woud have done so using conventiona technoogies had the EAPP not been undertaken. The evauation wi therefore concentrate on a comparison of the costs and benefits of condominia versus conventiona technoogies for water and sewerage provision. The impication of this is that it is ony necessary to focus on those costs and benefits that differ between the two systems. To this end, Tabe 3-1 highights those areas where differences arise between the two systems, and aso indicates how these differences vary according to the four components of the condominia approach identified in the preceding section. In many respects, the two systems are quite simiar. For exampe, the costs of water and sewage treatment, as we as the costs of biing and administration, are essentiay the same across the two systems and hence need not be considered in the evauation. Simiary, on the benefits side of the equation, the environmenta impact of the two systems is very simiar since this depends on the eve of sewage treatment appied which is not contingent on the nature of the upstream distribution network. However, key differences do arise in three areas: The first key difference is the cost of water and sewerage distribution networks. Reative to the conventiona approach, costs are reduced by appying the condominia engineering design to the distribution network. Further cost reductions are achieved by means of community participation, because the beneficiaries suppy their own abor for the construction of the condominia branches. Moreover, when it comes to operating costs of the distribution network, the condominia system reduces costs 18

21 3. EVALUATION METHODOLOGY Tabe 3-1 Comparison between conventiona projects and EAPP EAPP Engineering Participation Education Credit Conventiona Costs Capita expenditure (a) Water / sewage treatment No Difference (b) Water / sewerage distribution network Medium Low Low Low High Operating and maintenance costs (a) Biing and administration No Difference (b) Water / sewage treatment No Difference (c) Water / sewerage distribution network High Low Low Low High Socia intermediation Low Medium High High Low Benefits Consumption impact Low Low High High Low Environmenta impact No Difference to the extent that there is community participation in the maintenance of the condominia branches. The second area where the two systems differ is the cost of socia intermediation. Significant costs of socia intermediation ony begin to be incurred when community participation is introduced. These increase further if a component of hygiene education (and possiby micro-credit) is introduced. The important point to note is that the variations with the owest engineering costs aso tend to be those with the highest costs of socia intermediation. Hence, a trade-off is introduced and the key question becomes whether the additiona socia intermediation required to organize community participation is justified by the associated reduction in the costs of constructing and operating the network. The third key difference between the two systems is the impact on househod water consumption. Where hygiene education (and possiby micro-credit faciities) are introduced into the condominia package, it becomes possibe to have an impact on the construction of bathrooms and other househod water instaations, which in turn affects househod water consumption. This has both socia payoffs in the form of improved hygiene and financia payoffs in the form of higher utiity revenues. However, as before, the permutations with the highest consumption impact are aso those with the highest costs of socia intermediation. Once again, an important trade-off is introduced, namey whether the higher costs of socia intervention are justified in terms of the higher resuting eves of water consumption. The evauation exercise wi therefore focus on two aspects. - The cost differences that arise between the conventiona and condominia systems in terms of network expansion and socia intermediation. - The consumption differentia that exists between the conventiona and condominia systems as a resut of hygiene education activities. As far as possibe, the cost and consumption impacts of each of the four different components of the condominia approach engineering design, community participation, hygiene education and micro-credit wi be separatey identified. A costs and benefits wi be measured reative to the conventiona baseine. EL ALTO - BOLIVIA / PILOT PROJECT 19

22 WATER AND SANITATION PROGRAM Different anaytica perspectives The costs and benefits of the condominia system can be assessed from a variety of perspectives: that of the utiity, that of the water consumer, and finay the socia perspective. Utiity s perspective In order to simpify, it is assumed that the private operator is primariy concerned with profit maximization, or at the very east breaking even subject to the constraints paced by its contractua obigations. From this perspective, the key issue is the reative profitabiity of the conventiona and condominia systems, and hence the differing cost and revenue streams which they generate. In theory if the tariff structure perfecty refected the differing costs of service provision under the two systems the profit margin on water consumed from either type of connection woud be identica and the utiity woud be indifferent between the two technoogies, except in so far as the overa eve of water consumption was greater under one system than the other. The profit impact of seecting the condominia over the conventiona system woud then simpy be equa to the profit margin on each unit of water sod mutipied by the consumption differentia. Athough a definitive anaysis of the fu cost and tariff structure of the utiity ies beyond the scope of the present study, there are a number of reasons to think that current tariff structure may not be very cosey aigned with the structure of costs, even for conventiona systems. First, it is not cear how the current connection charges mandated by the concession contract reate to the actua cost of making connections The charges estabished in the concession contract of US$155 and US$180 for water and sewerage respectivey, fa substantiay short of the average connection costs of US$229 and US$276 reported by the utiity. However, this does not necessariy mean that the utiity is not covering the costs of network expansion since these may be partiay recovered from the genera use of service tariff. Second, the tariff structure does not incorporate a fixed charge to cover the administrative costs of meter reading and biing. According to AISA, these costs amount to approximatey US$1 per month. Given that the charge for the first cubic meters of water consumption is US$0.22, the impication is that househods which consume ess than five cubic meters per month do not even generate enough revenue to cover biing costs (Tabe 3-2). Third, the rising bock tariff structure is such that househods with ow eves of water consumption are not profitabe to serve. The exact breakeven eve of consumption depends on the true cost per cubic meter of water and sewerage services, a number that is not currenty known. However, there is itte doubt that it must be higher than the rate for the first band of domestic consumption which currenty stands at US$0.22. For exampe, the tariff study undertaken immediatey prior to privatization estimated an average cost for the water service of US$0.56 (Uzin, 1996). If this were the true average cost of water, a domestic customer woud have to consume more than 350 cubic meters of water per month before the revenue generated woud cover the cost of providing the service. Ceary, one woud expect the average cost of water (and hence the breakeven eve of water consumption) to have faen as a resut of the efficiency gains produced by the privatization process. However, the exact extent of these efficiency gains is not known at this point. Fourth, there is no separate tariff for the sewerage service. That is to say that there is a unified tariff that is supposed to cover the cost of both services, and which is paid by a customers regardess of whether they receive the sewerage service. The impication of this is that as the number of sewerage connections expands the utiity s costs increase without any concomitant growth in revenues. The average cost of water of US$0.56 reported above reates to the water service ony. If the (unknown) costs of the sewerage service were added in, the breakeven consumption eve woud increase further. 20

23 3. EVALUATION METHODOLOGY Finay, since condominia systems were not contempated under the origina concession contract their existence is not refected in the origina tariff structure. A differentiated connection charge has now been introduced so that customers connected under the condominia system enjoy a price reduction to refect the ower costs of the system. However, there is at present no differentiation in the use of service tariff paid by condominia customers who take responsibiity for maintaining their own network branches. For a of these reasons, the profit margins on the two types of connections are not necessariy the same, and may not even be positive. Hence, in order to assess the profit impact of the technoogy choice it is necessary to take costs and revenues fuy into account. Tabe 3-2 Tariff structure for AISA Consumption category (m 3 /month) Tariff Domestic Commercia Industria (US$/m 3 ) >301 >21 > as noted above, the consumer s perception of these costs may differ from that of the utiity. Given the difficuties with the current tariff structure identified above, the evauation wi be conducted using two parae scenarios. The first wi refect current reaity and using the existing tariff structure. The second wi refect an idea case and assume that tariffs perfecty refect costs. To summarize, the net benefits to the utiity (NBU) of the condominia system (D) are equa to the difference in the profit margin of the two technoogies where the profit margin is defined as the difference between the connection charge (CC) and the corresponding costs of connection (C) pus the profit margin on the additiona revenues (P) generated as a resut of higher consumption under the condominia system. The exact costs and revenues generated by the condominia system wi, of course, depend on the exact variant of the approach that is used. In particuar, community participation and hygiene education components wi tend to have higher associated costs but coud be expected to ead to higher service revenues. NBU D = (CC D C D ) (CC V C V ) + (P D P V ) Consumer s perspective The consumer s perspective differs from that of the utiity in three key respects. First, the consumer perceives the financia cost of materias and abor through the utiity s service charges. To the extent that tariff structures may not be perfecty aigned with cost structures, Second, the condominia approach is intensive in the use of a househod s time. Househods contribute their time and abor not ony for the construction of the condominia branches, but aso through their attendance of the workshops and community gatherings that form part of the condominia process. No financia cost is incurred since the utiity does not pay househods for their participation. However, uness househod members are competey ide, there is ikey to be an opportunity cost to their time which shoud be taken into account from an economic perspective. The question of what rate to use to vaue househod time is a difficut and controversia one. One approach is to vaue the househod s time according to the market cost of hiring somebody to perform the same activity. For exampe, to vaue the cost of a househod s time in constructing the condominia branches at the wage that is paid to a construction aborer; a rate of US$6 per day. However, this is probaby not the correct approach in this context. The reason is that the rate used shoud refect the vaue of a househod s time to the househod itsef. Hence, this rate woud ony be appropriate if the househod woud have been abe to use the time dedicated to the condominia EL ALTO - BOLIVIA / PILOT PROJECT 21

24 WATER AND SANITATION PROGRAM Figure 3-1 project to undertake activities generating US$6 per day. For a number of reasons, it seems unikey that this woud be the case. First, the minimum wage in Boivia is US$2.50 per day. Second, the average per capita earnings for workers iving in E Ato is US$4.14 per day 4. Third, the househod members participating in the condominia project woud not necessariy be the income earners. Anecdota evidence gathered from site visits suggests that women payed an important roe in the construction works. A number of women remarked that this was because their husbands woud have had to sacrifice wages if they had taken time off work. The opportunity cost of time for those who are not working, is much harder to gauge since it depends on the nature of the househod activities they perform. For the purposes of the anaysis, the minimum wage of US$2.50 per day wi be used as an indicative vaue of househod time. Third, the impact of increased water consumption is measured not by the additiona revenues to the utiity but rather by the increase in consumer surpus; which represents the wefare a househod obtains from consuming water over and above the price it pays. The difference between these two concepts can Difference between economic and financia benefits be iustrated graphicay in Figure 3-1, where the ine D V represents househod demand for water under the conventiona system. A condominia approach incorporating hygiene education or promotion of bathroom construction wi increase househod preferences for water consumption eading to higher consumption of water at a prices, and an outward shift of the demand curve to the higher ine D D. Within this framework, the hatched square area represents the increased financia revenues to the water utiity of which a sma component wi be the profit margin, whereas the soid trapezium shaped area represents the higher consumer surpus obtained by the househod. It is important to note that the change in consumer surpus may be arger or smaer than the increase in utiity revenues depending on the specific parameters of the demand curve. However, the two are unikey to be the same. To summarize, the net benefits to the consumer (NBC) of the condominia system (D) are equa to the associated savings in the connection charge (CC), minus the opportunity cost of time (OC) devoted to the condominia process, pus the greater consumer surpus (CS) resuting from higher eves of consumption. Once again, it is important to note that the extent of these benefits wi depend on the exact form of the condominia approach that is adopted. For exampe, when the engineering component aone is appied, the ony impact wi be the reduction in connection charge. When the community participation component is appied the connection charge differentia wi increase but the opportunity cost of time wi aso come into pay. Finay, when hygiene education activities are conducted, a change in the consumer surpus can additionay be expected. NBC D = (CC V CC D ) OC D + (CS D CS V ) Socia perspective The socia perspective is the most hoistic, taking costs and benefits to both utiity and customer into account. Thus the net benefits to society (NBS) 22

25 3. EVALUATION METHODOLOGY of the condominia system (D) are simpy the sum of the net benefits to the utiity and the consumer. The connection charges drop out of this equation since what is a cost to the consumer is a benefit to the utiity. Hence, from a socia perspective what matters is the underying investment cost differentia between the two systems (C), taking into account the opportunity cost of time absorbed by community participation (OC). To this must be added the additiona profits (R) accruing to the utiity from additiona water consumption and the additiona consumer surpus (CS) experienced by the consumer from the same. Comparison Finay, for the purposes of carity, the key differences between the evauation methodoogy from the three different perspectives are summarized in the tabe. Essentiay, the utiity s perspective considers financia costs, connection charges and subsequent profits from higher revenues. The consumer s perspective considers connection charges, the opportunity cost of time and subsequent increases in consumer surpus. Whie, the socia perspective considers financia and opportunity costs and both additiona profits and gains in consumer surpus. NBS D = (C V C D OC D ) + (R D R V ) + (CS D CS V ) Tabe 3-3 Comparison between anaytica perspectives Utiity Consumer Socia Cost of distribution networks Financia costs of materias and abor ü û ü Utiity connection and service charges ü ü û Opportunity cost of househod time in construction works û ü ü Benefits of water consumption Profits accruing to the utiity ü û ü Consumer surpus û ü ü EL ALTO - BOLIVIA / PILOT PROJECT 23

26 WATER AND SANITATION PROGRAM 4. Cost Differentias This section presents an estimate of the cost savings of condominia systems reative to conventiona ones, considering both financia costs and economic costs (such as the vaue of time). Separate treatment is given to network costs and the costs of socia intermediation. Under each heading, the financia and economic perspectives are separatey considered. Financia costs Network costs Investment costs The financia costs of the network expansion can be broken down into two components; abor and materias. First, even when the condominia branches are constructed by the community, abor must sti be contracted to undertake the upstream network extension and reinforcement. The costing of this component is straightforward because the figures can be taken directy from the contract invoices and the corresponding payment records in the utiity s database. Second, materias are needed to compete both the condominia branches and the upstream extensions. In both cases, materias are provided from the utiity s storage depot. Physica withdrawas from the depot are registered on a corresponding materias baance sheet. However, this documentation is not aways compete. Furthermore, the unit cost for each type of materia wi depend on when it was purchased by the utiity which may have been some time before the construction works. For both of these reasons, the vaues taken for the cost of materias are based argey on estimates that were undertaken by staff at the water utiity and members of the WSP consutant team. Since these estimates were independenty performed they are not identica, but are broady consistent in most cases. The average financia costs per water and sewerage connection for each piot site are presented in the figures beow (supporting tabes can be found in the Annex). For Phase One, where two sets of cost estimates are avaiabe the uncertainty range between the two estimates is shown as a fuzzy area in the figures. For Phase Two, ony the utiity s cost estimates are avaiabe and thus a singe point estimate is given. Unfortunatey, cost estimates are not avaiabe for a of the Phase Two sites, and in particuar for those neighborhoods where the condominia approach was appied without community participation. The reason is that these projects incorporated engthy 24