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ETHIOPIA BRIEFING: ECONOMIC IMPACT OF WATER AND SANITATION INVESTMENT IN WATER AND SANITATION IN ETHIOPIA MAKES GOOD ECONOMIC SENSE FAILURE TO INVEST HAS MASSIVE COSTS Economic studies conducted in Africa have shown that impacts resulting from This briefing note, intended for the Ethiopian Ministry of Finance, sets out the poor sanitation and hygiene cost the economies between 0.9% and 2.4% of case for increased investments in water annual Gross Domestic Product supply and sanitation and higher (GDP)a. This translates approximately prioritization for the sector when budget US$ 10 per capita per year. These figures allocation decisions are made. The need for water and sanitation is fundamental to reflect the a) adverse health effects associated with poor sanitation and water all citizens, and increased coverage of supply, b) costs of treating these health these essential services will significantly contribute to population welfare as well as problems, c) loss of productivity that results when individuals are sick and the wealth and stability of Ethiopia. others have to care for them, and d) time spent to access services (see Figure 1). Figure 1: Cost, as a proportion of These estimates do not include the costs selected African countries’ annual GDP, of associated with environmental impacts not investing in improved sanitation (e.g. polluted water) and the adverse Niger impacts on tourism and business. Chad Liberia Burkina Faso Ghana DRC Benin Zambia Nigeria Mozambique Mauritania CAR Uganda Sudan Congo Malawi Tanzania Madagascar Rwanda Kenya 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% % of GDP Source: WSP, 2011, 2012. The impact of poor sanitation on Ethiopia’s GDP is expected to be significant a An important contributor to these costs is child mortality: the World Health Organization (WHO) estimates that diarrheal diseases caused the deaths of around 85,000 children under five years old in Ethiopia in 2008. The indirect effects of malnutrition – to which poor water and sanitation contribute 50% according to WHO – cost a further 3,800 lives. Malnutrition is widespread in Ethiopia, as evidenced by high rates of moderate and severe stunting and underweight in children under five: 51% and 12%, respectivelyb. Studies have World Bank, Water and Sanitation Program. 2011, 2012. www.wsp.org “Tracking progress on child and maternal nutrition. A survival and development priority”. UNICEF. 2009. “Environmental health and child survival: epidemiology, economics and experience”. Acharya A, Paunio M and Ahmed K. World Bank: Washington DC. 2008. d Healthy Life Years (HLY) are defined as ‘a year of life lived in full health’. They make it possible to compare different health interventions. e Figures refer to WHO AFRO region, epidemiological sub-stratum E: “Estimating the costs and health benefits of water and sanitation improvements at global level”. Haller L, Hutton G and Bartram J. Journal of Water and Health 5:467-80. 2007. f“ Economic assessment of sanitation interventions in Southeast Asia”. World Bank, Water and Sanitation Program. 2012. b c ETHIOPIA BRIEFING: ECONOMIC IMPACT OF WATER AND SANITATION shown that malnutrition leads to lower school productivity and work productivity from impaired cognitive function and learning capacity c. Other benefits of improved water and sanitation rarely captured in economic studies are ‘intangible’ impacts, so-called because they are difficult to measure. These include dignity, comfort, privacy, WATER AND SANITATION ALSO security, and social acceptance. Water OFFER NON-MONETIZED and sanitation at schools can improve BENEFITS school enrolment, attendance and There are also other benefits which create completion, and at the workplace can powerful arguments to invest in water and increase female participation in the workforce. Hence water and sanitation sanitation: health cost-effectiveness, promote social equality and economic safety and security, less water pollution, greater dignity and equality between men growth. and women, nutrient reuse, tourism, and Emerging evidence suggests that if a business. country like Ethiopia has a reputation for In Africa, the cost of basic water and sanitation has been estimated at US$ 534 per Healthy Life Year gained de. When a cost per Healthy Life Year gained is below three times the GDP per capita of a country, the intervention is deemed by the WHO as a cost-effective use of health budgets. In Ethiopia, where GDP per capita is US$ 345, a strong argument exists for investing health budgets in water and sanitation. When, in addition to improving access to water supply, interventions are added to improve water quality by treating it at the point that it is used, the cost-effectiveness is even more favourable, approximating those of other preventive health interventions such as those commonly used against malaria and HIV/AIDS. poor environment, polluted water and an unhealthy workforce, it can affect its ability to earn foreign currencies, and hence hinder economic growthf. Furthermore, as the effects of climate change are felt – with increased predictions of extremes such as flooding and droughts – it will become even more important to invest in resilient water supply and sanitation systems. IMPROVEMENTS TO SANITATION AND WATER YIELD MASSIVE RETURNS ON INVESTMENT Economic returns on water and sanitation projects are highly favourable (see Figure 2). Average rates of return exceed 20% annually on over 60 projects of development banks in Africa g. Several 1 ETHIOPIA BRIEFING: ECONOMIC IMPACT OF WATER AND SANITATION A new global study estimates the benefitcost ratio of investments in water supply and sanitation for Ethiopia, which took into consideration health improvements and time savings. The economic benefits are estimated to be 1.7 times the costs for water supply and 3.0 times the costs for sanitation (see Figure 3)l. Indeed, the case for investment becomes even more compelling when one considers that these results underestimate economic benefit as Benefit-Cost Ratio projects supported by the development Figure 3: Benefit-cost ratios (BCR) of banks in Ethiopia have high rates of return, with 15% in an urban projecth, 20% sanitation and water programmes in 5.0 in the nation’s capital Addis Ababai, 21% 4.5 j for a national programme and 38% in a 4.0 3.5 rural projectk. Such rates of return are 3.0 attractive for sectors which are not 2.5 2.0 traditionally seen as productive. 1.5 1.0 0.5 0.0 Low Mean Water supply Economic rate of return (ERR) 40% 35% Mean High Sanitation they do not take into account a range of other health and non-health benefits associated with improved water and sanitation. The average economic rate of return on sanitation and water exceeds 20 per cent. 45% Low Water and sanitation programmes have highly favourable benefit-cost ratios Figure 2: Annual economic rates of return (ERR) on sanitation and water programmes in selected African countries (%) 50% High The costs of investments in better sanitation and water supply are offset by the benefits that accrue in other sectors, such as health, water resources, tourism and employment. 30% 25% 20% 15% 10% 5% W- Water S- Sanitation U- Urban R- Rural Ethiopia US Lesotho UW Uganda UW + US Niger UW + US Senegal UW + RW Burkina Faso UW Chad RS Madagascar RW + RS Ghana UW + US Malawi RW + RS Sierra Leone UW Senegal W + S Burundi UW Côte d'Ivoire W + S Guinea W + S Niger RW + RS Mozambique UW + US Chad RW Lesotho W Ethiopia UW + US Liberia UW + US Uganda UW + US Uganda UW + US Niger RW + RS Angola UW + US Mozambique RW + RS Mozambique RW + RS Angola W Burkina Faso UW Tanzania RW + RS East Africa W + S Mozambique UW + US Cameroon UW + US Comoros W + S Ethiopia UW + US Kenya US Uganda W + S Ghana RW + RS Tanzania RW + RS Ethiopia W + S Gambia RW + RS Ghana UW Zambia W + S Tanzania UW + US Zimbabwe UW + US CAR W + S Rwanda RW + RS Nigeria RW + RS Ghana RW + RS Kenya UW + US Rwanda RW + RS Sierra Leone UW + US Congo UW + US Congo US Senegal US Kenya W + S Ghana RW Zambia RW + RS Burundi RW DRC UW + US Congo UW Chad UW Nigeria UW + US Zambia W + S Senegal RW + RS Tanzania RW + RS Cameroon RW + RS Ethiopia RW + RS Congo UW Uganda UW Guinea-Bissau UW 0% Programmes ETHIOPIA BRIEFING: ECONOMIC IMPACT OF WATER AND SANITATION SIGNIFICANT INVESTMENT IS NEEDED IN SANITATION AND WATER SUPPLY COVERAGE IN ETHIOPIA Large numbers of people in Ethiopia lack access to basic sanitation and water supply. One of the UN Millennium Development Goal (MDG) targets is to halve, by 2015, the number of people who lack access to these services. According to data compiled by the WHO/UNICEF Joint Monitoring Program (JMP), the rate of progress towards achieving this target in Ethiopia is such that the water target will be reached but that the sanitation target will not be reached by 2015m. The Government of Ethiopia’s own targets for 2015 are considerably more ambitious, at 98.5% coverage of both water supply and sanitation in 2015. Since 1990, there has been little change in sanitation coverage in Ethiopia – despite the fact that sanitation coverage has increased by 8 percentage points, this is insufficient to meet the targets. The results of recent national sanitation programmes has not translated into increased coverage due to lack of up-todate national surveys, and also because JMP does not count ‘basic’ technology options. Based on the most recent estimates of sanitation coverage in 2010, Ethiopia needs to increase sanitation g coverage from 29% to 61% in urban areas, and from 8% to 51% in rural areas to meet the MDG sanitation target in 2015. In rural areas access to safe water needs to increase by 3 percentage points, and in urban areas the water target has been reached (see Figure 4). Even if Ethiopia meets the MDG target in both rural and urban areas, 49% of the rural population and 39% of the urban population would remain without access to improved sanitation; and 50% of the rural population would still be using unimproved sources of drinking water. Equity in achieving the MDG targets is important, not only because the poorest households are least able to invest in their own facilities, but also because they have the most to gain due to their heightened vulnerability to adverse health outcomes. Therefore, additional efforts and resources are needed to ensure the poorest and most vulnerable are reached. GOVERNMENT INVESTMENT IS AN IMPORTANT PART OF THE FINANCING OF WATER AND SANITATION Investment needs in Ethiopia are sizable, and considerably greater than current government spending. However, recently there has also been a significant increase in financial resources committed to the sector. Based on a special survey conducted for Sanitation and Water for All in 2012. World Bank. Project appraisal document on a proposed credit in the amount US$ 65.0 million equivalent and a proposed grant in the amount US$ 35.0 equivalent to the Federal Republic of Ethiopia for an urban water supply and sanitation project. 2007. i World Bank. Project appraisal document on a proposed credit in the amount US$ 65.0 million equivalent and a proposed grant in the amount US$ 35.0 equivalent to the Federal Republic of Ethiopia for an urban water supply and sanitation project. 2007. j World Bank. Project appraisal document on a proposed credit in the amount US$ 100.0 million equivalent to the Federal Republic of Ethiopia for water supply and sanitation project. 2004. k African Development Fund. Ethiopia. Rural water supply and sanitation programme. Appraisal Report. 2005. l “Global costs and benefits of drinking-water supply and sanitation interventions to reach the MDG target and universal coverage”. World Health Organization. 2012. h ETHIOPIA BRIEFING: ECONOMIC IMPACT OF WATER AND SANITATION Figure 4: Water and sanitation coverage, 1990 – 2010, and projection to 2015 (%)n 100 98 89 77 Coverage (%) 80 60 61 47 51 50 40 29 21 20 8 1 0 0 1990 1995 2000 2005 2010 Sanitation rural Sanitation urban Water rural Water urban 2015 Compared to current or anticipated financing, a major share of the costs of meeting the water target is expected to be met, with a significant contribution (US$ 169 million annually) anticipated from domestic and external public sources. Households are expected to contribute US$ 73 million. Hence the capital expenditure deficit is US$ 24 million annually. Year Progress towards the targets for sanitation in Ethiopia has stalled and a significant increase in investment is required A number of studies have sought to estimate how much it costs to improve access to sanitation and water supply. In Investing in 2009/10, the Ministry sanitation and water can help Ethiopia both of Water Resources improve health and of the Government tackle economic challenges. of Ethiopia estimated capital expenditure financing needed to achieve the government’s own water targets at US$ 260 million per yearo. Financing estimates were not made for sanitation. The Ethiopia Country Status Overview in 2009-10p estimated the annual capital expenditure m requirements for sanitation are US$ 795 million per year. Sanitation, on the other hand, is anticipated to receive under US$ 50 million annually from public sources, and hence the annual shortfall from public sources of US$ 745 million will need to be met from household sources. In sanitation, the national policy is one of increasing coverage through promotion of sanitation and hygiene behavioural change, rather than by offering public subventions for household sanitation facilities. As noted by the Civil Society Organisations (CSO), the assumptions of public sources of investment funds may be overoptimistic given the low levels of budget utilization in donor programmes. In recent years the combined utilization rate amongst major donor programs was below 50 percent. World Health Organization and United Nations Children’s Fund Joint Monitoring Programme (JMP) for Water Supply and Sanitation. Coverage estimates for 2010. The rural – urban target breakdowns presented here are not official JMP data, but are used to indicate what progress is needed in rural and urban areas separately to meet the global MDG target. National targets are also provided for comparison. o Plan for Accelerated and Sustainable Development to End Poverty (PASDEP-2). 2009/10. p An initiative led by the African Ministers' Council on Water (AMCOW) “Water supply and sanitation in Ethiopia. Turning finance into services for 2015 and beyond.” An AMCOW Country Status Overview. 3 n ETHIOPIA BRIEFING: ECONOMIC IMPACT OF WATER AND SANITATION These cost estimates are for meeting the Government of Ethiopia’s own target of 98.5% coverage by 2015. This requires improved access to be extended to an additional 6.65 million water users per year and 10 million sanitation users per year, mainly in rural areas. The costs of meeting the MDG target would be considerably lower, given that in rural areas the target is approximately 50% for both water supply and sanitation. Importantly, as well as hardware costs, financial planning has to take into account program costs (program establishment, population sensitization, monitoring, evaluation) which can be significant, but are largely excluded from the above estimates due to a lack of data. A rough estimate made by the CSO puts the total anticipated investment for sanitation promotion at around US$50 million per year. These funds will need to be safeguarded, and utilized efficiently, to successfully promote sanitation amongst the rural population remaining without sanitation access. In addition, future operation and maintenance commitments need to be considered in selecting interventions to invest in now, given the high percentage of system failure when operations and management costs are not considered. The estimated annual operating expenses of US$ 104 million for sanitation and US$ 82 million for water will need to be met largely by the user. If any of these expenses have to be covered from public budgets it will reduce the amount available for capital expenditure SOME WASH INTERVENTIONS ARE MORE COST-EFFECTIVE THAN OTHERS Recent evidence shows variation in economic returns from different technologies and approaches. For instance, in rural areas, improved pit latrines provide the best value for money, as they are generally low-cost, longlasting, and provide a range of quantifiable benefits. The findings from the World Bank Economics of Sanitation Initiative (ESI) showed that pit latrines had a more favourable benefit-cost performance than septic tanks in rural areas of selected countries. Findings were similar in urban sites of the same countries. The ESI study found that technologies that ensure the complete isolation or treatment of human excreta have the highest health and environmental benefits. However, these technologies usually cost more. Furthermore, when selecting sanitation solutions, decision makers should bear in mind that well-functioning, simple technologies can provide better services than poorly performing “high- ETHIOPIA BRIEFING: ECONOMIC IMPACT OF WATER AND SANITATION tech” systems. Hence capacity building should focus on service delivery and not just technology, and investments should only be made in higher level technologies if the funding mechanism is available to operate and maintain the service over the full life-span of the technology. RECOMMENDATIONS The recommendations for Ethiopia are as follows: 1. Policy: Implement policies that lead to increased public and private spending on water and sanitation services, especially sanitation, in areas where the country is most off-track. This Governments have includes a focus on an important role to play in catalysing increasing demand investments from other for services among sources, including the private sector. the population through sensitization and marketing campaigns, which will encourage households to invest. 3. Sustainability: Ensure funds and mechanisms are in place for adequate operations and maintenance in order to sustain services, avoid wasted investments and maximize costeffectiveness of services. 4. Targeting: Provide additional support to increase access for the poorest and most vulnerable households, to ensure socioeconomic benefits are spread equitably among the population. 5. Maximizing Efficiency: Seek to maximize efficiency gains through largescale implementation, ongoing monitoring and evaluation, and improved knowledge management. 2. Scaling-Up: Focus scaling-up efforts on the most affordable and sustainable services that have proven health and environmental benefits, and for which there is demand. 4