[BLANK_AUDIO]. In this week's videos I want to discuss the cost of water and sanitation infrastructure, both piped water and sanitation networks, and non-piped technologies. Also, I want you to become familiar with the different technologies available for providing water and sanitation services. The documentary video for this week, The Problems and Solutions To film will provide you with an introduction to some of these technologies if you are not already familiar with them. Also, I want you to be sure to watch my interview with Professor Don Loria on estimating costs. When I first began working in this sector, I assumed that the benefits of water and sanitation projects would be hard to quantify, but that determining the costs of investments would be easy. I didn't know the costs, but I assumed the engineers would. I've since learned that both the benefits and costs are difficult to measure. Costs of network infrastructure vary by location and are uncertain, but they're much larger than most people realize. In my opinion, there's a systematic downward bias in most cost estimates of water and sanitation network services. This is in part because some water sector professionals want the cost to be low and mostly manageable. But it's also because some private firms and contractors providing services have an interest in not revealing their total cost, just as is true in industrial sectors. Nevertheless, there is cost information from contract bidding documents. We know the winning bids from many construction projects. Data such as these can be summarized in cost functions. One of the sources of uncertainty in cost estimation is the cost of financing. Because piped water and sanitation infrastructure is so capital intensive, the financing costs are a large component of total cost. In this video, I'm going to give you a specific example of estimating the cost of serving households with piped water and sewer networks, and you are going to do some calculations. From 2003 to 2009, I worked for the Hopi Tribe as an expert witness on a water rights litigation case before the Supreme Court of Arizona. The Hopi are Native Americans. As shown on this slide, their reservation is in the North-Central part of Arizona in the United States. We are going to estimate what its cost per household per month to provide piped water and sanitation services to Hopi villages. The Hopi are very ancient tribe. Their ancestors were the people who built the famous cliff dwellings in the U.S. Southwest shown in this photograph. The Hopi are agricultural people, not nomads. Historically, they have grown corn and squash. They started raising sheep after the arrival of the Europeans. This photograph shows some of their homes and a village at the end of the 19th century. The Hopi live on the top of remote rocky mesas. They were actually never conquered by the U.S. military. This slide shows an old photograph of the Hopi village of Oraibi. This is the oldest continuously settled community in the United States. It dates from the 12th century. The Hopi are great potters. Their old pottery is now highly prized. Much of it was purchased by early tourists to the Hopi villages in the late 19th and early 20th centuries. The Hopi have their own language and religion. The photograph on the right is of a Hopi religious leader. The Hopi religious ceremonies and dances follow the agricultural cycle. The Hopi believe that the spirits of their ancestors return in the rains to nourish their people. This photograph shows one of the Hopi dances. You can see some of the non-Hopi visitors in the background watching. In the late 19th and in the 20th century, with the arrival of the railroad, people from the Eastern United States traveled out to the mesas to see the Hopi communities. One such visitor was Albert Einstein. This is a recent picture of one of the Hopi villages in the 21st century. Some of the early dwellings remain embedded in the more modern houses shown here. In the past, Hopi women and children would walk to springs at the bottom of the mesa and carry water in pots to their homes on the top of the mesa. This is very similar to water collection in rural areas of many developing countries today. After World War II, the United States government started to install piped water systems in the Hopi villages, but the villages still did not have 100% coverage. The U.S. government built very simple pipe systems. They drilled deep bore holes and extracted groundwater using electric pumps and pumped the water into small overhead storage tanks. The water received very little or no treatment, perhaps just simple batch chlorination. The pipe networks that were installed used small diameter pipe designed to meet minimum public health requirements. Household connections are not metered. If the overhead storage tank runs out of water, households wait for it to refill before water arrives at their home, perhaps the following day. There's no ex, extra capacity built into these water systems to support economic enterprises. There is just enough water for household use. Waste water treatment systems are simple lagoons at the bottom of the mesas. There are no waste water treatment plants. In fact, the Hopi water in waste water systems are not very different from some that I've seen in developing countries. For this level of service, Hopi households pay water bills of about ten U.S. dollars per month to the, their village government. But these systems were built over 50 years ago and now many of them need to be replaced. The question I want to examine with you is, how much would it cost to replace these piped water and waste water systems? One of the first steps in the estimation of the cost of providing water and sanitation services is to choose the unit of analysis. I often like to express the cost in terms of cost per household per month because I think this is a number that everyone can easily relate to. So, we are going to calculate the cost per household per month to provide water and sewer services to these villages. We also want to see what percentage of these costs are covered by the monthly water and sewer bill that households pay. There are two issues to consider here if we want to estimate the monthly costs of service. First, economies of scale, and second, discounting in the cost of capital. These Hopi villages are small and dispersed, so it will be expensive to serve households here because it is not possible to capture what engineers and economists call economies of scale. We have economies of scale when average cost decreases as the scale or capacity of the water system increases. And we have diseconomies of scale when the average cost increases as the scale or capacity of the system increases. Both economies of scale and diseconomies of scale can exist in different components of the same water and waste water system. We also need a way of expressing the total upfront capital costs on a monthly basis. In order to express costs in terms of US dollars per household per month, I need to introduce the concept of amortization. I need to convert the total capital cost to cost per unit of time. This is similar to the problem of determining the payment needed to pay off a loan. For a constant amortization payment schedule, the interest payment decreases over the length of the loan, while the payment, or the principal payment, increases. However, the total payment remains the same constant amount. For example, imagine that a community borrow the capital in order to build a new water system. Then, one would have to make these payments over the life of the loan to repay the amount borrowed. These payments could be made monthly or annually over the life of the loan. This slide shows that amortization calculations are similar to net present value calculations. If you look at the second equation, you can see that the size of the payment will be a function of the size of the loan, the length of the loan, and the interest rate. Let's assume that the size of the loan is for the total capital cost of the water system, and the length of the loan is for the expected life of the water system. Now I need to introduce the concept of Capital Recovery Factors. Financial analysts use Capital Recovery Factors to simplify the amortization calculation of the annual payment of the loan. The formula on this slide for a Capital Recovery Factor is derived from the second equation on the previous slide. You can see from the equation on this slide that the Capital Recovery Factor is a function of r, the interest rate, and n, the life of the loan. Capital Recovery Factors are used to calculate the constant annual payment required to amortize a loan. You just multiply the amount of the loan by the Capital Recovery Factor to obtain the annual payment. This table shows Capital Recovery Factors for different combinations of interest rates and the length of the loan, or alternatively, the expected life of the capital assets. The various capital assets in the water system have different expected economic lives, but for purposes of illustration, let's assume that the water infrastructure lasts 30 years and the community pays an interest rate of 10%. Looking at this table the capital recovery factor then is 0.11. Now we're about ready to calculate the monthly cost per household of a piped water sewer in the Hopi villages. I need to give you some information and we need to make some assumptions in order for you to do the calculations. You may want to write these assumptions down as I discuss them. Assume that the total Hopi population on the reservation is 8,000 people. These 8,000 people live in ten villages. Assume each of the ten villages has the same population. Assume each village will need a separate water and sanitation system because they're, they're dispersed and too far apart to be connected to the same network. The average household size is five people. So, there are 160 households per village. Assume the total capital cost of a village system is U.S. $4 million. This is the capital cost of a system for each village, so the total for all ten villages will be 40 million. The capital cost is not the total cost of providing water and sanitation services. There is also the ongoing operation and maintenance cost of a system. This includes the labor required to run the system, the cost of electricity for pumping water, and any chemicals for treatment. Then there are minor repairs and the administrative cost of issuing and collecting water bills. Assume that the annual operation maintenance cost, or O&M, is equal to 25% of the annual capital cost. Assume that the Capital Recovery Factor is 0.11. Now we've reached the stage where you're ready to take this week's quiz. For this, I want you to calculate the total cost per month per household to provide water and sanitation services on the Hopi reservation. I'll show you the calculations in the next video, but I want you to try this quiz first. The table on this slide may help you. Good luck. [BLANK_AUDIO]
