Cleaning the Ganges AC ost Benefit Analysis by 1GNdSx

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									           Valuation and Policy




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                 Objective
• To show the utility of valuation in setting
  policy
• Cost-Benefit Analysis method
• Use of Valuation in setting taxes




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               Cost-benefit Analysis: Methodology
                                      Define Project


                Identify and Quantify Positive and Negative Project Effects


                 Price (Value) the project effects (i.e. Benefits and Costs)


       Determine Present Value of Benefit Stream and Present Value of Cost Stream



Apply Project Selection Criteria & Conduct Sensitivity Analysis / Quantified Risk Assessment


                      Identify the Distribution Effects of the Project


                         Incorporate Non-monetary Considerations


7/4/2012                               Make Decision                                      3
 STAGE 1: Project Definition - Baseline Definition and
               Incremental Analysis

Project Scenario          Baseline Scenario         Project Appraisal
    with FGD                without Trap

 Impacts on Health          Impacts on Health           Big external cost
                                                      Incremental Benefit
                      -                         =
   -ve £5 million            -ve £40 million             benefit million
                                                     ( = +ve £35if reduced)

            -                      +                          -
FGD + Normal O & M         Normal O & M Costs          Incremental Cost
                      -                         =
  +ve £10 million            +ve £2 million             +ve £8 million
            =                      =                          =
  Total Net Benefit          Total Net Cost         Incremental Net Benefit
                      -                         =
   -ve £15 million           -ve £42 million           +ve £27 million

 7/4/2012                                                                 4
STAGE 1: Project Definition - Baseline Definition and
              Incremental Analysis

Project Scenario          Baseline Scenario             Project Appraisal
    with Trap               without FGD

 Impacts on Health          Impacts on Health             Incremental Benefit
                      -                            =
   -ve £5 million            -ve £40 million                +ve £35 million
            +                      -                               -
Trap + Normal O & M        Normal O & M Costs               Incremental Cost
                      -                            =
  +ve £10 million            +ve £2 million                  +ve £8 million
            =                      =                               =
   Total Net Cost           Total Net project
                            However, Benefit to reduce emissions and Net Benefit
                                                           Incremental
                      -                              =
                            associated impacts still has negative value
   -ve £15 million           -ve £42 million                    +ve £27 million
                                  Therefore, bad project, or is it?
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 STAGE 1: Project Definition - Baseline Definition and
               Incremental Analysis

Project Scenario          Baseline Scenario         Project Appraisal
    with Trap               without Trap                   of Trap

 Impacts on Health          Impacts on Health         Incremental Benefit
                      -                         =
   -ve £5 million            -ve £40 million            +ve £35 million
            -                      -                           -
FGD + Normal O & M         Normal O & M Costs           Incremental Cost
                      -                         =
  +ve £10 million            +ve £2 million              +ve £8 million
            =                      =                          =
  Total Net Benefit         Total Net Benefit       Incremental Net Benefit
                      -                         =
   -ve £15 million           -ve £42 million            +ve £27 million

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     STAGE 3: Discounting Future Costs and Benefits

Projects typically involve costs and benefits occurring over long periods of time.
We need to add up benefits/costs in each time period to derive a measure of total
net benefit at the time of the (investment) decision.


                -£10 million + £4 million + £4 million + £4 million = £2 million
  (1) * -£10 million + (1) * £4 million + (1) * £4 million + (1) * £4 million = £2 million


The simplest way to do this would be to say that a benefit of £1 to individual 1 in
year 1 should be added to a £1 benefit to that individual in year 2, and so on.


This would be correct if the individual concerned did not care when benefits and
costs occurred.


  7/4/2012But   typically people do care. Why ?                                          7
STAGE 3: Discounting the Future: the Bird in the Hand

        Money available now can be put to productive use, at the very least
        earning interest; money in the hand offers scope, including capital
        productivity and the ability to purchase today.


        The bird in the hand is worth three in the bush, for the future is always
        uncertain with risks of death and illness, a return to high inflation rates,
        collapse of markets, bankruptcies, scams and fraud etc.


        People also prefer money in the present because of impatience.


        The general outcome is that people discount future benefits and returns,
        and to induce people to forgo present consumption requires positive rates
        of interest and other assurances. This brings us to the phenomenon of
        discounting.
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                 STAGE 3: Positive Discounting
Present value of £1 received t years from now:

      Year                              Discount Rate

                  5.0%         7.5%         10.0%       12.5%        15.0%

             5     0.784        0.697        0.621       0.555        0.497

         10        0.614        0.485        0.386       0.308        0.247

         15        0.481        0.338        0.239       0.171        0.123

         20        0.377        0.235        0.149       0.095        0.061

         50        0.087        0.027        0.009       0.003        0.001


The concept of positive discounting has resulted in considerable controversy over
the years - what are the implications of positive discounting? Low rates
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versus high rates?
     STAGE 3: Implications of Positive Discounting

       Fewer investments are undertaken, which have large initial costs and long
       term returns or benefits, e.g. hydroelectric and water irrigation projects. The
       benefits of long-term projects such as hardwood plantations are grossly
       minimized in terms of present values.
       Major future costs are not given much importance, e.g. the need to
       decommission large undertakings such as a nuclear or conventional power
       plant, or the cleaning up of contaminated land. The cost of storing and
       disposing of nuclear or toxic wastes is significantly minimized.


       The higher the rate of discount, the greater the discrimination against
       future generations:
                future generations may bear a disproportionate share of the future
                costs of the project (or forego future benefits)
                the lower will be the level of overall investment and hence the
7/4/2012        lower (higher) the capital (natural) stock inherited.           10
                           STAGE 3: Project Selection

             Year                     0            1         2              3            30
 1 Discount factor                   1.000      0.9259     0.8573      0.7938          0.0994
 2 Investment cost                   £800,000          -          -          -                -
 3 Annual cost                              -    £10,000    £10,000    £10,000          £10,000
 4 Total cost (3 + 4)                £800,000    £10,000    £10,000    £10,000          £10,000
 5 Discounted total cost (4 * 1)     £800,000     £9,259     £8,573     £7,938             £994
 6 PVC (sum line 5)                  £912,578
 7 Annual benefit                           -   £100,000   £100,000   £100,000         £100,000
 8 Discounted benefit (7 * 1)               -     92,593     85,734     79,383            9,938
 9 PVB (sum line 8)                £1,125,778

 10 NPV (9 - 6)                     £203,201

  Net Present Value
                                                              Positive      
            =
Present Value Benefits                 If NPV is:                                   Why?
             –
                                                                 Negative       
 Present Value Costs
  7/4/2012                                                                                 11
            STAGE 3: Risk and Uncertainty Analysis

                    1 Variables where the project is likely to be sensitive are (1)
  Interval            listed; (2) alternative values assumed (based previous project
  Analysis            data); (3) change in value is calculated.
                    2 NPV is recalculated for likely changes in variables one at a
                      time.
                    3 Calculate sensitivity indicator (SI) - summarises effect of 
                      in a variable on the NPV. SI = ratio of the %  in the NPV to
 Sensitivity
                      the %  in a variable. High SI indicates project sensitivity to
  Analysis            variable.
                    4 Calculate switching value (SV) – shows the %  in a cost
                      item (decline in a benefit item) required for NPV to become
                      zero. A relatively low SV shows there may be a significant
                      risk for the project NPV.
Monte Carlo
                    5 Results should be presented in a table, and actions taken to
Simulation            mitigate/manage key sensitivities.

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            STAGE 3: Non-monetary Considerations

 Investment              Water Quality
 Expenditure               Impacts                      Are the non-
                                                         monetised
                                                      impacts likely to
Labour, Energy                                          be this big?
 and Material
    Costs
                          Calculate the magnitude of the non-monetised
                          project effects necessary to make:
Health Benefits            an ‘unfavourable’ NPV ‘favourable’; or
                           a ‘favourable’ NPV ‘unfavourable’.
 Time Saving
   Benefits


Visual Intrusion        Habitat Impacts
     Costs
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            Cleaning the Ganges
           A Cost Benefit Analysis
           Based on Markandya and Murty
           Environment and Development
           Economics, Volume 9, Issue 01,
                 Feb 2004, pp 61-81
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                 Background
• Ganges in one of the world’s major rivers –
  2,510 km long, with a basin of 861,404km2
• About half a billion people live in the basin,
  projected to increase to one billion by 2030.
• There are 52 cities, 48 towns and thousands of
  villages, all of which discharge their sewerage to
  the river.
• Loadings are 1.3 billion liters/day of HH effluent,
  260 million liters of industrial effluent, 6 million
  tons of fertilizers and 9,000 tons of pesticides.

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           Some Pictures!




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               Background
• Result has been an erosion of river quality, by
  1970s over 600km were effectively dead
  (anaerobic).
• Ganga Action Plan (GAP) originated from
  personal intervention of Indira Gandhi and her
  son. It was launched in 1985 and first phase
  was largely completed in 1988. Second phase
  completed in 1998
• Investment costs estimated at about $320 million
  and operating costs at around $10 million a
  year.
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           Evaluating The Program
• We have to make a ‘with’ and ‘without’
  comparison – pollution loading increased during
  project period. Hence water flow modeling is
  essential.
• Results of such a model show some
  improvements: DO levels lower with almost
  everywhere. With project 437 km violate the 3.0
  mg/l limit. Without the project over 1000 km
  would have violated this limit.
• DO levels everywhere are over 5.0 mg/l.
• But is this improvement ‘worth the money’?
7/4/2012                                        18
           Bathing in Ganga




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              Benefits & Beneficiaries
           Benefit   Benefit       Beneficiaries
           Class     Category
           User      Instream      Recreational Users
                     Withdrawal    Farmers, Fishers,
                                   Households
                     Aesthetic     Recreation, Religious
                     Ecosystem     General public
           Non-User Vicarious      Indian and
                     Consumption   international citizens
                     Stewardship
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         Benefits & Beneficiaries
       • Religious use is very important.
       • Includes visitors but also non-visitors (non-
         use value)
       • Withdrawal benefits include health gains,
         plus increased fish production
       • Project generates employment, which has
         benefits that need to be included
       • Farmers gain from fertilizer recovered from
         sludge.
       • Ecosystem benefits are improved
         conservation for 25,000+ species in the
7/4/2012 river. (use + non-use)                          21
    Estimating Non-user Benefits
• CVM survey in 10 cities, 250 HH in each
• Urban literate population only.
• Each HH valued non-use with:
     – Quality before clean up
     – Current (1996) quality
     – Bathing level quality everywhere
• WTP question was Dichotomous Choice +
  Single Follow Up

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    Estimating Non-user Benefits
• Estimation of WTP was carried out using
  answers regressed against, income, residential
  location etc, AND quality of river (3 qualities
  were assessed for each person).
• Results show a high level of significance for all
  variables, including quality.
• Estimates were aggregated over entire urban
  literate population of India (8.7 million).


7/4/2012                                              23
           Estimating User Benefits
• Similar estimation of WTP was carried out
  for users (those living within 0.5 km of
  river).
• Estimates were aggregated over entire
  population living in this band along entire
  river (37,000 households).



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     User & Non-User Benefits: Nos.

                Mean WTP RS/HH 1995-96 Prices
           Water     Bathing   1995      1985      1995
           Quality   Quality   Quality   Quality   Quality
                               Wi/GAP    Wi/GAP    Wo/AP
           Non-        558       193       101        98
           users
           Users       582       167       93         71


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     User & Non-User Benefits: Nos.
            Aggregate WTP Rs. Mn. 1995/96 Prices
           Change in Quality            Non-     Users
                                        Users
           1985 to Bathing Quality       4021      32
           1985 to 1995 Quality           798       5

           Simulated 95 to Bathing Q.     3987     33

           Simulated 95 to Actual 95      832       6
           Q.

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               Health Benefits
• Surveys conducted of affected
  populations, comparing populations close
  to river with control groups, before and
  after GAP.
• Benefits measured in terms of :
     – Changes in user income due to changes in
       working days
     – Savings in cost of treatment of raw water for
       public supply due to GAP.
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                   Health Benefits From Reduced
                       Loss of Working Days
           Town           Average No   Regular Users of   Individual   Total
                          of Working   Ganga in Town      Daily        Value
                          Days Saved   (No of Families)   Income       (Rs. Mn.)
                          Yearly                          (Rs.)
                          Family

           Haridwar       6.09         41,300             64           16.00

           Kanpur         3.42         15,560             35            1.86

           Patna          6.58         22,480             88           12.94

           Chandannagar   6.44          5,690             38            1.37


           Nabadwip       7.37          4,760             65            2.28

           Titagarh       2.61          4,920             31            0.39

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           Health Benefits to Sewage
                 Farm Workers
• With GAOP sewage farm workers will
  suffer less from worm and protozoal
  infections.
• Estimate was 4 days less per month of lost
  work days per worker.
• Total estimate was Rs. 4,800 per worker
  per year, or Rs. 16.8 million for the 3,500
  workers.

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           Benefits to Water Supply
       • Lower costs of treatment for water
         supply companies compared to a
         without project case are estimated as
         Rs. 731 million a year.
       • Main reason is that without GAP
         current treatment systems would be
         inadequate and would need to
         introduce activated carbon absorption
         techniques costing Rs. 3,000/Million
         Liters
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           Agricultural Benefits
• Benefits to farmers estimated as value of
  incremental farm output due to irrigation and
  savings in the cost of conventional fertilisers
  from making use of the partly treated water from
  sewage treatment plants.
• A survey of 108 farmers around STPs in Kanpur
  and 116 farmers around STPs in Varanasi was
  conducted in August, 1996.


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             Agricultural Benefits
       • To irrigate 1000 ha. of land, a STP of 74.3 MLD
         capacity is needed.
       • Hence 919 MLD waste water capacity of all STPs of
         GAP can irrigate additional 12,380 ha. of land.
       • The estimate of average annual yields per hectare
         of cropped area for GAP and non-GAP farms are
         respectively given as Rs.16,837 and Rs.9,518.
       • Therefore, the incremental benefits per hectare of
         irrigated land in GAP farms is Rs.7,319.
       • And annual incremental benefits from irrigating
         12,380 hectares of land by the GAP projects are
         Rs.91 million at 1995-96 prices
7/4/2012                                                  32
             Agricultural Benefits
       • Sludge provided from STPs also replaces
         fertilizer.
       • Content per Mt of fertilizer is: 18.4 Kg/N,
         51.kg/Ph and 4.6 Kg/Po.
       • GAP generates 73,914 MT of sludge
       • At retail prices of fertilizers value is
         estimated at Rs. 12 million at 1995/96
         prices.


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           Fisheries Benefits
• GAP could contribute to the increased supply of
  fish and reduce the risk of fish infection or
  contamination.
• Estimating these benefits we data on fish
  species caught, catch volume, catch effort, fish
  prices, and the significant non-Gap changes and
  GAP changes that could affect fish catch.
• Unfortunately, the reliable data on these various
  items are not available so that the fisheries
  benefits from the GAP could not be estimated.

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           Benefits to Unskilled Labor
• As there is surplus unskilled labor in Indian
  economy, employment creation has a
  benefit.
• This can be measured by applying a
  shadow price to labor of less than one.
• In this study a shadow price of 0.5 was
  applied to the market wage for unskilled
  labor.

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                      COSTS

       • Both Phases of Ganga had costs of Rs.
         7657 million during period 1985 to 1997.
       • Unskilled labor costs are 24% and skilled
         labor costs are 22% of total.
       • O&M costs come out at Rs.480 million
         annually. (for both phases).
       • Cost to industry amount to Rs. 370 million a
         year. (GAP imposes higher standards on
         industrial discharges).

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            Net Social Benefits
• These are calculated using
     – Shadow price of capital 40% higher than
       actual price
     – Shadow price of unskilled labor 50% lower
       than actual wage.
     – Distributional weights based on an elasticity of
       MU of income of 1.75 and 2.0
     – Discount rate of 12%


7/4/2012                                             37
 NPV of Social Benefits Rs. Mn.
                          No Weights   Ε= 1.75   E=2.0
           Users              29          3         2
           Non-users        6871         440       295
           Farmers           575       1710      1998
           Health B.         827       2549      2874
           Fishers           NA          NA        NA
           Unskilled L.     1919       5708      6670
           Industry         -1505       -144      -102
           Governmen        -4569      -4569     -4569
           t
7/4/2012   NPV              4148        5696     7167    38
                   Implied Weights
           Group             Annual    E=       E = 2.0
                             Income    1.75
                             RS.
           Unskilled Labor     5,000    2.974    3.475
           Farmers and
           Health
           Urban Users        35,000    0.096    0.068

           Non-Users          44,705    0.064    0.043

           Industry           44,705    1.000    1.000
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             Financial Sustainability

• Polluter Pays Principle
     – A flat rate of tax on a kilolitre (KL) of effluent
       water can be collected from the households
       and industries basin. The O&M cost of
       treatment of a KL of effluent by the GAP
       projects is Rs. 0.15, while the total cost is per
       KL is Rs.3.48. Can be collected based on
       effluent discharge or on water use.


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    Examples of FS: Ganga Action Plan

  • Beneficiary Pays Principle
       – An additional income tax for cleaning the
         Ganges can be levied on urban user and non-user
         households or on all income tax payers in India.
         The tax liability of each income tax payer would be
         increased by Rs.216 if the total annual cost of
         GAP projects, amounting to Rs.1,145.5 million,
         were distributed among all the income tax payers.
         This equals 2.3 percent of individual average tax
         liability. To recover the O&M cost alone, the tax
         would be even more modest. Rs. 9 per taxpayer
         would be sufficient, amounting to 0.1 percent of
         the average tax bill.
7/4/2012                                                       41
    Examples of FS: Ganga Action Plan

  • Beneficiary Pays Principle
       – A Tax is naturally progressive
       – But there are general objections to raising income
         tax.
       – The cost of assessing the incomes of all Ganges
         households just for the sake of levying the special
         Ganges tax could be significantly high.




7/4/2012                                                       42
    Examples of FS: Ganga Action Plan

  • Beneficiary Pays Principle
       – One way to avoid these problems is to levy a flat
         rate of special Ganges tax on all the beneficiary
         urban households There are 24.9 million urban
         user and 5.18 non-user beneficiary households
         and million making a total of 30.00 million
         households. Hence the total annual cost of GAP
         would be Rs.38.18 per beneficiary household.
         This is around 27 percent of the average user
         household willingness to pay for the improved
         quality of Ganges due to the GAP of Rs.143.37.
         To recover only the O&M cost would require a tax
         of Rs 1.6, or 1.1 percent of the WTP.
7/4/2012                                                     43
    Examples of FS: Ganga Action Plan

  • Other mechanisms
     – Voluntary contributions from beneficiaries
     – Government support via budget
  • The final choice can be a combination of the
    above, depending on political and other
    options.




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