Valuation of Clean Water Supply by Willingness to Pay Method in a Developing Nation: A Case Study in Calcutta, India.

ABSTRACT

Developing countries do not always have the resources in place to provide potable water for its population. This study investigates the current problem in Calcutta, India, and presents possible solutions. Half of the 202 people surveyed in this study were slum dwellers while the other half were apartment dwellers. A weighted average of the willingness to pay for potable water has been complied, analyzed, and compared to the cost of providing potable water. The willingness to pay exceeds the production and maintenance cost for the potable water supply scheme suggesting that a water tariff is economically justifiable. If a tariff is imposed, the operation and maintenance cost of the system could be covered by the service provided. The city would then qualify for further financing from the international banks to expand the surface water treatment plant and supply network system. This aid, in turn, would reduce dependence on ground water, which is environmentally unsustainable, because of natural arsenic contamination.

INTRODUCTION

Safe drinking water is scarce in Calcutta (now Kolkata) like many other cities in developing countries. Press reports indicate that only twenty percent of operation and maintenance cost is recovered through a water tariff. This reality has led to an uneconomical and consumer impassive water distribution network. In recent years, the Municipal Corporation of Calcutta has been financing water supply projects with the help of international banks, such as World Bank, and Asian Development Bank that stipulates a specific tariff system in place to ensure self-financing of the operation and maintenance (O&M) cost of the built facilities as a condition of financing. The objective of this paper is to address the issue of water tariff from the consumer's point-of-view, while finding an implementable water management policy benifical to all involved.

Willingness to Pay for Water

A critical problem in valuation of an environmental product like the facilities for safe drinking water is that the explicit markets for environmental quality do not usually exist. As a result, the assignment of a monetary value for an environmental product is primarily based on non-market data such as the results of surveys. Agudelo (2001) presented a report for various methods that can be used for valuation of water. He agreed with Freeman (1993) that the adoption of economic efficiency as the central criterion to undertake in the valuation of water resources.

Consumer's willingness to pay (WTP) for getting benefits expressed in money terms is a central concept of this framework. In this approach, respondents (consumers) are offered a hypothetical market, in which they are asked to express the WTP for existing or potential environmental conditions not reflected in any real market. The most common form of questioning on hypothetical futures is called the contingent valuation method (CVM). It involves directly asking individuals what they would be willing to pay for particular goods or services contingent on some hypothetical change in the future state of the world. The monetary values obtained in this way are thought to be contingent upon the nature of the constructed (hypothetical or simulated) market, and the commodity described in the survey scenario.

WTP Studies in Developing Countries

The WTP survey for safe drinking water has been conducted in many places around the world including cities in India. In Calcutta, several surveys have been conducted to estimate the WTP. Roy et al. (2003) conducted a WTP survey in a ward of Calcutta Municipal Corporation for safe drinking water. A survey was conducted among 240 households selected both from residential and slum area. They start from the hypothesis that like any other market goods (food, clothing etc.) variations in WTP for drinking quality water across households may be explained by the household income. Household decision towards adoption of a purification method can be expected to largely depend on ability to pay. Aversion behavior is also expected to vary with household perception about the likely benefits that may accrue from a new system. The researchers considered the highest educational attainment in a family an indicator of the access to relevant information. Education level was also suspected to be correlated the impact the family could have in the community in the case of adopting a new program.

Roy et al. also controlled for family size. A multiple linear regression model was used to estimate the contribution of various determining factors of WTP. The explanatory variable is monthly family expenditure in Indian Rupees (INR) adjusted for family size and educational attainment (a categorical variable representing years of schooling). The dependent variable is the averting expenditure, a proxy for WTP, incurred by the households (INR/liter). They reported that WTP of households vary within a wide range from 0.0023INR/litre to1.06INR/litre ($0.023 US). Unlike food, water follows the trand of a luxury item. Spending power of households, and educational background are important determining factor in WTP. However, they have also noted non-willingness to pay among low income families, and suggested removing this factor through alternative pricing mechanism, like block pricing instead of flat pricing. During the annual meeting of the Urban Think Tank (2002), organized by Calcutta Metropolitan Development Authority and others, that the contradiction between the consumers' willing to pay, and expectation of improved service, and the insufficientcy of the present tarrif. O&M recovers only 15% of the total production cost, without taking into account the structural shifts necessary to improve the economic performance particularly, because of the problem of natural arsenic.

Jalan and Somanathan (2004) investigated the issue from an awareness perspective. In their study in 2003, a randomly selected group of one thousand households in Gurgaon, a suburb of New Delhi, India were informed whether (or not) their drinking water had tested positive for fecal contamination. Households that were initially not purifying their water, and then were told of the possible contaimination of their water were 11percentage-points more likely to begin some form of home purification in the next 7 weeks than households that received no information. By way of comparison, the addition of one year of schooling to the most educated person in the household is associated with a 4.4 percentage-point rise in the probability of initial purification. Furthermore, shifting from one wealth quartile to the next is associated with a 15 percentage-point rise. The researchers concluded that that the issue of under-provision of information needs to be addressed when estimates of the demand for environment quality are used for welfare or policy analysis.

In Vijaywada, India (Marie 2002) a surveyed examined the connection between the perception of the service and the willingness to pay for water for the higher income group. The survey indicates that 77% of the group considers that water is inexpensive. Their preference for improvement is primarily for an increase of quality (81% of the households), rather than the provision of a water connection, additional hours of service, or an increase of the pressure level. The option to increase water quality is significantly more in some zones, as well as the option of asking for additional hours. In other zones, increase of pressure seems to have the preference. For the connection charges, households are willing to pay around Rs. 2,600, which is lower than what they pay today for the monthly charges. Households are ready to pay a bit more than what they pay today. However, in both cases, WTP is more than one and a half the current tarriff.

In Varanasi, India, Singh et al. (2003) attempted to find the consumers' willingness to pay, and the affordability of cost of water through a bidding game. They found that about 37% of population has a willingness to pay for the sum of INR 40 twice the existing charge of INR 20 per month for water supply. They further concluded that as compared to large water supply projects small water supply projects could be made financially viable.

Astana (1995) studied the economic behavior of the poor citizens through the collection of safe drinking water. The study reveals that perception of health benefits by the participants is significant, and they are prepared to spend significantly higher amount of time collecting safe water as opposed to unsafe water. In his opinion, the common assumption that people are either unwilling or unable to pay for water is incorrect. In almost all poor countries, there is need for subsidy of urban water supply, that responsibility falls mainly on to the rich. Similar situations can be found in other poor countries of the world where surveys show higher willingness to pay for improved water supply. For example, Kaliba et al. (2002) presents the result of a CVM survey conducted in Tanzania where the surveyed community is willing to pay 32 shillings/20L of water, which is about twenty five percent above the existing tariff.

Nurul-Islam et al. (1994) studied the willingness to pay in Dhaka, Bangladesh. They opined that the city water supply, and sanitation system suffers from problems rooted in the lack of technology, policy, and coordination . Some of these can be explained by low willingness to pay. They found that in Dhaka, Bangladesh lower middle income people may have to pay about 10 % of the income for water and sanitation service which is more than the World Bank recommendations.

Katz et al. (1998) in a UNDP – World Bank study proposed the projects should adopt flexible design standards. It should allow communities that prefer higher levels of service to bear the cost of household connections as part of the original design. Projects should also provide the option of lower service levels for communities that prefer to pay less.

Case for Water Tariffs

Asian Development Bank (ADB) (2003) found that official policies of the governments often support tariffs covering O&M costs, depreciation, debt servicing, and a contribution to new capital investment. ADB (2001) commented that the people in Asian cities have a willingness to pay for water but governments do not have a willingness to charge. They felt that about 5% of household income would be a realistic ceiling on affordability for water supply and sanitation services. Nearly all people in developing countries could pay this amount, they reasoned. In Part II of the water sector report ADB (2000) proposed to privatize the water supply systems based on the satisfactory performance at cities like Macau, Johar Baru, Manila. ADB granted loans to urban water supply projects in several states in India. The loans are subject to the economic viability of the project, following the ADB guidelines. In such studies, CVM was used to assess the economic benefits. According to ADB (2001) the main drawback of this technique is that, for the results to be meaningful, respondents need to have a good perception of the without-project' situation, so that their responses address the actual impact of the project. The reality, according to ADB (2001), is that this method may seriously underestimate economic benefits, since it uses unit rate for incremental water that does not fully take into account the without-project' situation. Notwithstanding these difficulties, ADB (2003) continued to use CVM to estimate the benefit for water supply.

In 1993, ADB (2003) found in MP (a state in India) that nearly 80% of the households were willing to pay a monthly fixed charge of INR100 for improved water supply, while 13% were willing to spend up to INR200; the remaining households were willing to spend only below INR100. Similarly, when asked about their willingness to pay for an improved in-house metered water connection, 78% were ready to pay INR100 per month. Willingness to pay INR200 was recorded for 18%. Only 2% were willing to pay INR300. The mean average for all the cities was INR125 per month.

In 2003 Joël studied the managerial and administrative aspects of the water and sanitation service in Indian metropolis including Calcutta. The study indicates that despite good intentions users are no longer served efficiently by public water boards. Tariffs have become regressive and costly. For water, local entrepreneurs have been shown to be both feasible and profitable. At present, substantial work is contracted out to private sector. Privatization and the tariff system might be a desirable alternative.

Bangladesh and West Bengal, India(where Calcullta is located) are the most arsenic affected areas in South East Asia. Arsenic is an element and exists naturally in earth's crust. Massive and extended withdrawal of the ground water for drinking and irrigation purposes has lowered the ground water table resulting in a series of chain reactions that has increased the level of arsenic in the ground water. More than hundred million people are at risk (Roy et al 2002). The current method of unrestricted ground water extraction is unsustainable. The willingness to pay for an average household in southern suburbs of Calcutta to reduce the arsenic level to World Health Organization standard (Roy 2003). Junaid et al. (2002) also studied this issue in Bangladesh. In both cases, the estimates of WTP clearly indicate a strong preference for treated surface water supply, which is arsenic-free. The WTP estimates indicate the rural households of Bangladesh would be willing to pay the O&M cost. There is a possibility of recovering from them more than 10% of the capital cost.

Roy & Chakrabarty (2007) reported that 178 deep tube wells scattered over the city are in operation to augment the potable water supply in Calcutta. The ground water supply in Calcutta should be replaced with treated surface water for arsenic risk. The maintenance cost of water treatment and distribution for Calcutta was obtained from a study by Roy and Chakrabarty (2007)

METHODS AND MATERIALS

The survey for this study was conducted in two parts. The first part of the survey was conducted in the premises of Prachesta Welfare Society which is a NGO with an objective of providing primary health services in the slums of Tollygunge, Calcutta. A number of economically disadvantaged people come here every morning to obtain free medical care. The CVM survey was conducted among them to estimate their WTP for potable water. The survey is composed of 102 participants. The second part of the survey was conducted in apartment buildings in Dhakuria, Calcutta. People in the low and middle income group mostly live in these housings. One hundred persons were interviewed in Dhakuria.

The author interviewed each participant in Bengali, the native tounge, and compiled their responses. Demographics like age, educational qualifications, income, numbers of members and children in the household etc were recorded. Methods of obtaining water, and purification were collected.

The WTP obtained from the survey and census data was combined to estimate the WTP for water supply for a part of Calcutta. The result was compared with the cost of production and maintenance. The cost of filtered water was obtained from a recent estimate in the literature (Roy & Chakrabarty, 2007) and was used to compare to the WTP estimates. The estimate studied the accounting and engineering records of the actual operations of four water treatment plants located in Calcutta metropolitan area, and estimated the cost of operations for each plant.

A multiple linear regression analysis was also executed using MS Excel for estimating the contributions of various determining factors on WTP. Five explanatory variables household income, age of respondent, years of education, number of children in the household, and numbers of family members in the household of each respondent were used. These variables were regressed against respective WTP of the household for potable water in INR per month.

RESULTS

The weighted average cost for filtered water from treatment plants is about 1.38 INR / kilo liter of water (Roy and Chakravarty 2007) and is presented in Table 1.

Table 1: Treatment and Distribution Cost of Water (INR / Kilo liter)

Table 1: Treatment and Distribution Cost of Water (INR / Kilo liter)

The socio-economic status, and statistics of the sample are presented in Table 2 & 3 respectively.

Table 2: Socio – economic status of surveyed household

Table 2: Socio – economic status of surveyed household

Table 3: Descriptive statistics of the sample in the study

Table 3: Descriptive statistics of the sample in the study

Mean WTP is presented in Table 4. Kundu (2003) reported that forty percent of population in Calcutta lives in slums according to 2001 census data. Therefore, a ratio of forty and sixty percent of slum and apartment dwellers is used to estimate the weighted average of WTP in Table 4.

Table 4: WTP estimates as a function of dwelling type

Table 4: WTP estimates as a function of dwelling type

The weighted average of WTP per person per day in Table 4 is combined with the census data for the year 2001 and the estimated daily WTP for fifteen wards in south Calcutta is presented in Table 5.

Table 5: WTP estimates for the different municipals

Table 5: WTP estimates for the different municipals

The summary of WTP and production cost for the fifteen numbers wards in south Calcutta is presented in Table 6. The standard water requirement per person is assumed as 130liters/day as specified by Bureau of Indian Standard (1983) for estimating the water requirement in Table 6. The weighted average cost for filtered water from treatment plants is assumed as 1.38 INR / kilo liter as derived from Table 1 for estimating the production cost in Table 6.

Table 6: Summary statistics, WTP and production costs for municipal wards in south Calcutta

Table 6: Summary statistics, WTP and production costs for municipal wards in south Calcutta

The summary result of the multiple regressions is presented in Table 7.

Table 7: Un-standardized multiple regression result summaries

Table 7: Un-standardized multiple regression result summaries

Further details are provided in Appendix. A scatter diagram showing the relationship between WTP for potable water and monthly income is presented in Figure 1.
Figure 1: Relationship between WTP for Potable Water & Income (in INR) for Calcutta, India

Figure 1: Relationship between WTP for Potable Water & Income (in INR) for Calcutta, India

DISCUSSION AND CONCLUSIONS

Water tariff

The WTP estimates for water supply in this study vary from 0.0034 to 0.0173 INR/liter. In a similar study in Calcutta, Roy et al. (2002) found that WTP of households vary within a range of 0.0023 INR per liter to 1.06 INR per liter of purified water. They surveyed 240 households. The explanatory variables were monthly family expenditure in INR adjusted for family size and years of schooling. The lower range of WTP found in this study is 0.0034 INR per liter is similar to that of Roy et al. (2002), which are 0.0023 INR per liter. However, the higher range of WTP found in this study is 0.0173 INR per liter is much lower than that of Roy et al (2002) which are 1.06 INR per liter. Further studies are required to explore the factors that have caused the difference in WTP for the higher range.

The WTP for potable water for all dwellers for the study area in Table 6 is 663,846 INR per day and the production and maintenance cost of water supply for the study area is 78,108 INR per day. Even for the slum dwellers, the WTP value of 77,204 INR per day is higher than the water supply cost of 31,244 INR per day. Asian Development Bank (ADB) (2001) similarly observed that in cities like Chennai, India or Manila, Philippines the WTP for water for poorer people are higher than the production cost of water. If a part of the WTP estimate can be actually collected as water charges from the citizens, the operation and maintenance cost of the water supply scheme can be maintained without taxing the municipal exchequer, as stipulated in loans for water treatment and distribution facilities from the international development fund.

The WTP indicates that the water charges should be imposed from economic point of view. However, there are other factors that may prevent imposing such levies. Firstly, the political will of the elected officials is a major issue for water taxes in developing countries, as pointed out by Asian Development Bank (2001). Secondly, the individual households are not marked or recorded in slums in Calcutta. Since the individual households are unregistered, paperwork for taxes in slums is not feasible.

Lastly, whether the tax would be attritional to the slum dwellers should be considered. Asian Development Bank (2001) pointed out that the ceiling for affordability for water supply and sanitation services as set by the bank is five percent of household income. The mean income of slum dwellers as found from this study is 6910 INR and the WTP is 44.43 INR which is about 0.64 percent of income. The mean income of apartment dwellers is 26575 INR and the WTP is 228.30 INR which is about 0.85 percent of income. The standard for affordability as set by the bank seems to be arbitrary. Whether the slum dwellers have the actual ability to pay for their preferred WTP has not been studied in this paper and should be investigated.

ACKNOWLEDGEMENTS

The author thanks Shaheli Guha, an undergraduate student who accompanied the author while conducting the WTP survey.

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Appendix: Multiple regression result with household income, age of respondent, years of education, number of children in the household, and numbers of family members entered as independent variables.

Appendix: Multiple regression result with household income, age of respondent, years of education, number of children in the household, and numbers of family members entered as independent variables.

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