WATERRESOURCES

RESEARCH,VOL. 29,NO. 7, PAGES1955-1963,

JULY 1993

Sustainability
of PotableWaterServices
in thePhilippines
ROBERT A. BOHM

Department
of Economics,
Collegeof Business
Administration,
University
of Tennessee,
Knoxville

TIMOTHY J. ESSENBURG

Departmentof Economics,
BethelCollege,St. Paul, Minnesota

WILLIAM F. Fox

Center
for Business
andEconomic
Research,Collegeof Business
Administration,
University
of Tennessee,
Knoxville

Financial
sustainability
ofruralwatersystems
inthePhilippines
isevaluated basedona comparison
ofwillingness
to payforimprovedwaterandthecosts
of service
delivery.Willingness
topayestimates
indicatethat userfees are unlikelyto be sufficientto coverthe full costof serviceand subsidiesare
necessary,at leastfor a majorportionof capitalcosts,or thewatersystems will becomeunsustainable
because
ofinsufficient
resources.
Sustainability
ismoreprobable
whencareisexercised
in selecting
villagesfor improvedwaterservices.Economies of scaleleadto lowerunit costsin largervillages.
Willingness to pay is greaterfor household
connections
thanfor publicfaucets.Willingness to pay
increaseswith incomeand wealth, family size, education,and dissatisfaction
with traditionalwater
sources.

INTRODUCTION lending agencies,but in some cases these may need to be

locally financedas well. Though the primary sourcesof
TheIssue of Sustainability revenue must be user charges collected from customers, a
second less desirable revenue source is additional subsidi-
in their we!l-known work on rural water supply in devel- zation. Viewing the problem in this way is consistentwith
opingcountries,Saunders and Warford [1976] concludethat the donor community's increasing emphasis on requiring
thefailureof many systemscan be traced to poor operating benefiting recipients to contribute substantially toward the
andmaintenanceprocedures.For example, they report a payment of recurrent costs. Equity may be used as a
litanyof caseswhere systemsare misused,not repaired,or counterargumentbecause inability to pay may preclude
failto providea reliable supplyof water due to a lack of many peoplefrom receivingthe service, but the choice often
financial
andadministrativeresourcesto dealwith the prob- is between a sustainableproject providing services only to
lem.Ten yearslater, this was identifiedby the United States those who can pay or the eventual waste of investment
Agencyfor InternationalDevelopment(USAID) as a signif- resources as the project falls into disrepair because of
icantproblemin the Philippines[USAID, 1986] and was insufficientresourcesfor project operation.
reiterated
by Whittingtonet al. [1987, !989] as they pointto
thesesameproblemsas major impedimentsto providing Study Objectives
sustainableand replicablewater systemsin rural areasof
The key factor determining financial viability of a water
otherdevelopingcountries.
The United States Departmentof Agriculture(USDA) systemis a consumer'swillingnessto pay sufficientlyhigh
defines
sustainability abilityto user chargesto cover systemcosts. The stepsin establishing
broadlyasthe "... collective
financial viability are, first, examining determinantsof will-
continuea flow of valued benefits or outcomesbeyond a
ingness to pay for water in rural villages and, second,
giveninvestmentperiodat an acceptablecost" [USDA,
conductinga cost analysis of rural water systemsat alterna-
1987,
p. 3]. Oneaspectof sustainability is financialviability,
tive scales of operation. Putting these two investigations
wherefinancialviabilityis definedto existwhenusercharges
forwater servicesare sufficientto cover the financial costsof togetherallowsus to answerthe following questions.First,
under what conditionswill operation of a rural water system
delivering
the service.Local water authoritiesmustthere-
yield revenuessufficientto cover costs?Second,under what
fore,at a minimum,generatesufficient
revenuesto cover
conditions will revenues be less than costs, and how much
recurring
annualcosts,suchas operatingand maintenance
subsidywill be requiredif the systemis to becomesustain-
costs,capital replacement (e.g., a new pump), and any
able and replicable?
required
loanrepayment.It oftencanbe assumed thatinitial
Specifically, on the demand side of the problem, we
systemcostssuch as construction,fixed capital, and equip-
examine the willingness to pay (WTP)for an improved
ment are covered by a combination of loans, grants, and
subsidies or frominternational systemto deliverpotablewater in the rural Philippines.The
fromthecentralgovernment
analysis employs the contingent valuation method (CVM)
Copyright
1993by theAmerican
Geophysical
Union. and is basedon data derived from householdlevel surveysin
Papernumber92WR02997. four unserved villages. Observation of actual water con-
0043-1397/93/92WR-02997505.00 sumptionand paymentsin a village with an operatingwater
1955
1956 BOHMET AL.: SUSTAINABILITY
OFPOTABLE
WATERSERVICES
1NTHEPHILIPPINES

system allows us to consider the extent to which the demand to thelatter,thegreatest

concerns
havebeenwithhypothet.
curve may shift to the right once the product is actually icalbias,strategic
bias,andstarting
pointbias,allofwhich
available. Following the demandside analysis,estimated havereceived extensive
treatmentin theliterature
[e.g.,
WTP is comparedwith estimateddelivery costsfor the Schulze et al., 1981; Rowe and Chestnut, 1983].
service to determine the share of costs which beneficiaries
can be expectedto pay. The Household Questionnaire

General
features.Thehousehold
questionnaire
closely
Rural Water Programsin the Philippines followstheformatdeveloped
by Whittington
et al. [1987].
It
wasdesignedby an interdisciplinaryteam, fieldtested,and
The recent history of rural water programsin the Philip- implemented
in localdialectby trainedfieldworkersinsix
pines dates from 1978 when the United StatesAgencyfor barangays duringthe periodJuly 16to August28, 1987.The
InternationalDevelopmentand the governmentof the Re- questionnairewas used to collect microdataon household
publicof the Philippinesbeganwork on the BarangayRural characteristics,water use patterns, perceptionsof current
Water Supply Program. Systemsdesignedand built under sources,perceptions of the needfor a potablewatersystem
this programdeliveredwater to rural villages,knownlocally and the desired improvements it should have over the
as barangays,as early as July 1979[ComprehensiveMarket- existingsources,the willingness to join an RWSA (WTJ),
ing Systems,Inc., 1988, pp. 9-11]. The two phasesof this andWTP. A copy of the questionnairemay be obtainedfrom
program, Barangay I and Barangay II, have been succeeded the authors upon request.
by the Rural Water Supply and SanitationProject. The household questionnaire was administered in two
There have not been notable gainsin providingrural water barangayswhich were currently servedwith improvedwater
in the Philippinesdespitethe effortsunder BarangayI and II. (SanJuanand Tangil-Tapon)and four unservedbarangays
The Barangay I and II programs suffered from all the (Banaga, Coral N a Munti, Pakigne, and Santol). Served
problems of nonsustainability mentioned earlier. By way of villageswere surveyedto provideinformationfor compari-
contrast, most unserved villages have access to electricity son with results derived for unserved villages. Criteria used
and the national media [ComprehensiveMarketing Systems, to select servedbarangaysincluded: (1) The water system
inc., 1988, p. 9]. Thus the new program faces a dual must have been operational and working since January1,
dilemma: On the one hand, the failures of the past must be 1985.(2) The systemmust be level 3 or level 2-3, allowingf0r
corrected and confidence established in the new effort. On the determination of householdconsumption. (3) The corre.
the other, the rising expectations that emanate from contact spondingRWSA must have proper records on operations
with the modern world demand the projects become opera- since January 1, 1985. (4) There must be unserved house-
tional quickly. holds within the village. (5) Two hundred usable interviews
The institutional setting has an important influenceon how could be collected. (6) One of the served barangayssurveyed
people articulate their demand for water services in the should be outside of Luzon. Criteria used to select unserved
Philippines. Rural Waterworks and Sanitation Associations barangays included: (1) At least one unserved barangay
(RWSA) are established as water providers to one or more should be outside of Luzon. (2) Current improved water
rural barangays. These associations set the rates and fees, sources could not exceed level 1. (3) At least 200 interviews
oversee collections, and manage systemoperations. House- were possible;i.e., the numberof householdslocatedinthe
holds must join a RWSA (by payment of a one-time fee of barangay must be greater than 200.
approximately 10 pesos) prior to having accessto potable Also, the selectionof sample sites was designedto maxi-
water service. mize variationbetweenbarangayswith regardto degreeof
Three types of water service are available in the Philip- prosperity,remoteness (i.e., nearness
to urbanactivity),and
pines. Level 1 is a well and point sourcestandpost.Level 2 availability of traditional water sources.Finally, an effort
involves providing public faucets to serve six to eight was made to vary the barangay settlementpattern (clus-
households.Level 3 service is private or individual house- tered, semiclustered,or scattered)and reliability of existing
hold connections. RWSAs are created to offer level 2, level villagewater supplies(i.e., use of shallowwells,useof
3 or a combination with a monthly fee establishedfor each rainwater).
level. No fees are imposedfor level 1 service. Households Willingness to pay. Informationon WTP waselicited by
desiring level 3 also must pay for a water meter and askingrespondents to play a biddinggame.The bidding
installation costs (approximately 1000 pesos). gamewassetup in four differentwaysto allowtesting for
strategicbias and startingpoint bias. The openingstatement
SURVEY AND DATA
brieflynotedthatthe respondent's
barangaywas(wasnot)
servedby a water system,that fees were requiredto
The essenceof CVM is specificationof a hypothetical maintainitsoperation,andthatmembership
in a RWSAwas
market for a nonmarket commodity and a query to individ- a prerequisite
forutilizing
theservice.
Versions
A andCals0
ua!sregardingthe value placedon increments(decrements) explicitly
statedthat"the actualwaterchargeswouldbe
of that good. The techniquehas been employedin a wide decidedonbythelocalwaterassociation." Versions
Band
varietyof areas.The mostcriticalaspectof CVM involves D had no such statement.This differencefurnishedthe
the designand executionof a successful
surveyinstrument. possibilityof testingfor strategicbias.
Successful,in this case, can be defined as (1) soliciting Ascending
anddescending
bidswereemployed
indifferent
sufficientinformation on relevant socioeconomicparameters versionsof the questionnaire.
The starting
pointwas10
of the demand for water such that ceteris paribusconditions (public
faucet)and20(individual
connection)
pesosforthe
canbe confidentlyinvokedand(2) controllingfor potentially ascending
bids(versions
A andB)and55(public
faucetl
and
biased WTP values elicited from interviewees. With respect 70 (individualconnection)
pesosfor descending
bidstver-
 BOHMETAL.' SUSTAINABILITY
OFPOTABLE
WATER
SERVICES
IN THEPHILIPPINES 1957

sionsC andD). The difference

in startingbidsallowstesting is provided.
Thedifference,
H, is thereduction
in expendi-
forstarting
pointbias.Subsequent to thebiddinggame,the tureontradedgoodswhichwouldmaintainwell-being with
respondent
wasgivena chance
to reflectuponhisorherbid improvedwater. UnbiasedCVM bids are direct measuresof
andreviseit [Whittingtonet al., 1989]. H for improved water services.
Hypothetical
bias. Simplyput,theissuehereis whether
ornotrespondentsunderstandwhat they are being asked. H(p, u)= m(po, qo, Uo)- e(po, q•, uo) (1)
Therearetwo dimensionsto the problem.The first revolves Econometricanalysisis undertakento measurethe deter-
around familiaritywith improvedwatersources.Thisaspect minantsof WTP values.WTP valuesfor improvedwaterare
isattackeddirectlyby askingthe intervieweein an unserved truncated at zero, and a significantnumber of villagers
village
if heor sheis familiarwith improvedoperatingwater indicatedan unwillingnessto join and thereforewere at the
systems
in othervillages.
Thesecond
partof theproblem
is constraint. The truncation and discrete/continuous nature of
moresubtle;specifically, Can an unservedhouseholdcor- the decisionrequire an econometrictechniqueother than
rectlyanticipatethe changein water consumption behavior ordinary least squares(OLS). A tobit or Heckman correc-
thatwill resultfrom accessto an improved water source?An tion model [Heckman, 1976, 1979] is appropriatewhen
analysis of servedvillageswas our primary attack on the censoringoccurs. The tobit model was selectedfor detailed
latteraspectof the problem. considerationin the paper. (A Heckman structurepermits
calculationof separatecoefficientsfor WTJ and WTP mod-
Characteristics
of SurveyedHouseholdsand Barangays els. These results are available from the authors upon
request.)
A rich data set has been generated on householdsin the six
Equation(1) indicatesthat WTP is explainedby water
barangays where the householdquestionnairewas adminis- source, q, characteristicsand prices. Income, other house-
tered.The purposeof this sectionis to presenta descriptive hold factors, and respondent characteristicsalso must be
evaluation whichwill serveas an introductionto the analysis included in empirical estimates of WTP to account for
in the following sections. differencesin tastes.Appropriateproxiesfor theseare listed
Of the six barangayssurveyed, four are located in Luzon. in Table 1 and illustrated in (2):
Santolis located approximately 40 km from Manila in the
province of Bulacan.Despiteits proximity to the capital,it is WTPF, WTPC
somewhatdifficult to access.It is considereda relatively
well-offbarangay. Banaga, located in Pangasinan,is 193 km = (BAN, PAK, ST, SEX, AGE, POSITION,
northof Manila. It is consideredrelatively poor but hasgood
accessto provincial cities and roads. Coral Na Munti is YRSCHO, FAMILIAR, MEMHH, HOME,
locatedin Batangas. It is 135 km south of Manila and is
TUTILITY, QUAL, WALKTIME, BID, STRAT) (2)
considered remote and poor. San Juan, a servedbarangay,is
locatedin Bulacan 35 km from Manila. Incomes are quite SEX, AGE, and POSITION are all respondentcharacter-
highin this barangay, and it has good accessto towns and istics included to account for systematic differences in
transportationfacilities. survey responses.Economic theory provides little guidance
Two barangaysincluded in the study are located in the on the relationship between these variables and WTP, but
Visayason the island of Cebu. Pakigne does not have a someexpectedeffectscanbe deduced.A positivesignwould
RWSA.It is located approximately12 km from Cebu City be expectedfor SEX if adult women are the primary water
whichis 625km southof Manila. Pakigneis considered poor carders, but a negativesignwould be appropriateif females
butnot isolated.Tangil-Taponis 72 km southwestof Cebu are more tentative bidders. AGE would be positive if water
City. This servedbarangayis also consideredpoor. It is carrying becomes more onerous with age, but negative if
somewhat
more remote than Banagaand considerablymore older people prefer the status quo. POSITION probably is
remote than San Juan vis •t vis Manila. positive becausethe husbandor wife are likely the primary
decision makers.

ECONOMETRIC AND EMPIRICAL MODELS

Householdswith more members (MEMHH) are expected
to have greater water demands.HOME, a proxy for wealth,
Brookshireet al. [1980] and Hoehn [1991] have demon- and TUTILITY, a proxy for income, should be positively
stratedthatthe conceptualbasisfor measuringWTP canbe related to water demand. A positive sign is expected for
foundin Bradfordbid curves,andthe Bradfordbid curveis YRSCHO as a reflection of the greater knowledge about
equivalentto the Hicksiancompensating measureof bene- potentialhealthbenefitsand income-generatingpower. FA-
fits.Suppose a household maximizeswell-beingacrossa MILIAR can be thought of as testing for one type of
vector of household goods, x, and water, q. Only the hypotheticalbias. A positive signis expectedfor knowledge
watersourceis availableat q0, andq 1represents of well-run systems and a negative relationship for knowl-
traditional
wateronce an improved source is available. WTP is the edgeof poorlyrun systems.The variablesBID and STRAT
amount
of incomeor expenditures
whichmustbe takenfrom test for bias as discussed above.
ahousehold
afterimproved
waterhasbeenprovided
inorder Price and quality for the improved water sourcecannotbe
toreturnwell-beingto the initiallevel. Algebraically,thisis included because the values would be the same for each
shown
in (1)whereincome
priorto improved
waterisgiven householdin a village. Price and water quality characteris-
byrnat initialprices(P0) andutility(u0)andwithonly tics for traditional water sources are included in the econo-
traditionalwater sourcesavailable. The e function evidences metric analysisto allow for such substitutionsby consumers.
theminimum expenditure on marketgoods(x) whichis Bothpriceand qualityfor the alternativesourceare hypoth-
necessary to maintain utility after an improvedwater source esizedto have positive signs.
1958 BOHMETAL.:SUSTAINABILITY
OFPOTABLE
WATER
SERVICES
IN THEPHILIPPINES

TABLE 1. Variable Definitions

Variable Definition

Dependent Variables
WTPF Respondent'sWTP bid for accessto a publicfaucet when given
the opportunityto rethink the bid statedin responseto the
biddinggamea
WTPC Respondent's WTP bid for accessto household connections
when given the opportunity to rethink the bid stated in
responseto the biddinggamea
Independent Variables
Village dummy variables
BAN 1 if the observationis from Banaga,0 otherwise
PAK 1 if the observationis from Pakigne,0 otherwise
ST 1 if the observation is from Santol, 0 otherwise
Respondent characteristics
SEX 0 if the respondent is male, 1 if female
AGE Age of the respondent
POSITION 0 if the respondentis an adult other than husband/wife,1 if
husband or wife
Household characteristics
YRSCHO Total years of formal schooling
FAMILIAR 0 if respondentis not familiar with improvedwater systemsin
other barangays;1 if respondentis familiar with improved
water systems
MEMHH Number of people living in respondent'shouse
HOME A descriptionof respondent'shousebasedon a 10-pointquality
index (e.g., 1 denotessquattertype: no roof and walls of
salvaged
materials
andno flooring;10denotesover100m2,
decoratedor architecturallytreated, either wood or concrete)
TUTILITY Total monthly pesosspenton lightingand cooking
Current water source
characteristics
QUAL Respondent'soverall opinion of household'sfirst major water
source;
0 if good,1 if fairor badb
WALKTIME Minutes neededto walk to the household'sfirst major water
sourceand backb
Bias control variables
BID 0 denotesdescendingbiddinggame; 1, ascendingbidding game
STRAT 0 denotesthe openingparagraphinformed the respondentthat
"their bid will not determinehow much you actually pay.
... [This] would of coursebe decidedon by the local water
association"; 1 denotesthe opening statement did not
contain this information

aSee Whittingtonet al. [1989]for discussionof allowingpeopletime to evaluatetheir bids.

bTheoriginalvariable
wasdefined
withthreevalues(1, 2, and3) denoting
bad,fair,andgood,
respectively. The variable was restated as a binary variable becauseonly 6.7% of the observations
reported a "bad" rating.
CThisis a proxy for the price of water. The price shouldreflect both cash payment and the
opportunity cost of time. No cash price is levied at the household'smajor water source. A more
precise variable which attempted to measure the opportunity cost was defined as (wage/hour) (walk
time) (liters/week). The values pertainedto the primary water carrier and yearly incomewas used as
a proxy for hourly wage. It performed poorly in the regressionanalysis.

EMPIRICAL RESULTS ON WILLINGNESS TO PAY greater variation in the village samplesleads to higher
Resultsfor the willingnessto pay equationsfor individual standarderrors and fewer significantvariablesfor village
connectionsare reported in Table 2 for eachunservedvillage equations.Nonetheless,coefficientvaluesfor eachvariable
and for the pooled data. The same results for the public oftenareequalor greaterin villageequations
compared
with
faucet equationsare available from the authors. A chi-square pooled equations.
test of differencesin log likelihood values was performedto The interceptindicatesa strongWTP independent of
determine whether the structure of the responsesdiffers respondent,
household,andwatersourcecharacteristics
for
across villages. We fail to reject the null hypothesisthat bothhouseholdconnections andpublicfaucets.Theinter-
coefficientsare the same acrossvillages at the 10% level of ceptsfor a publicfaucetand an individualconnection
significancefor the public faucet equationsand at the 5% represent
!14%and39%,respectively, of themeanWTP
level of significancefor the householdconnectionsequa- bids.Eachof the villagedummyvariables decreases the
tions. Thus poolingis generallysupported. probability
of payingfor a publicfaucetrelativeto the
Discussionof the empiricalresuksfocuseson the pooled omittedvillage,CoralNa Munti,whichis remote and
partic- reportedto havebadqualitywaterat thetraditionalsources.
equations.Most variablesare statisticallysignificant,
ularly in the individual connection equation. Relatively Household characteristics
generallyare significant
deter-
 BOHM ET AL.: SUSTAINABILITY OF POTABLE WATER SERVICESIN THE PHILIPPINES 1959

TABLE 2. Willingnessto Pay for an Individual Connection

Data Set

Coral Na
Pooled Banagaa Munti Pakigne Santol'•

Number of observations 757 197 171 193 196

Mean value of WTP 20.71 21.58 19.46 15.90 25.68

Variables
Intercept and village dummies
INTERCEPT 8.02/' 8.40 - 3.66 3.24 21.74c
(1.79) (1.21) (-0.43) (0.35) (2.17)
DUMBAN 0.81
(0.37)
DUMPAK -4.51 c
(-2.15)
DUMST 1.40
(0.66)
Respondentcharacteristics
SEX -0.62 -0.74 -3.55 1.10 1.91
(-0.43) (-0.32) (- 1.28) (0.33) (0.63)
AGE -0.13 c -0.07 0.03 -0.10 -0.33 a
(-2.47) (-0.81) (0.28) (-0.93) (-2.83)
POSITION 0.74 1.29 -3.04 5.06 1.60
(0.34) (0.40) (-0.61) (0.94) (0.38)
Household characteristics
YRSCHO 0.79'• 0.53 1.47d 1.38d -0.005
(3.63) (1.36) (3.40) (2.77) (-0.01)
FAMILIAR 2.07 7.45• 1.14 -0.02 0.82
(1.48) (2.59) (0.43) (-0.01) (0.31)
MEMHH 0.50/' 0.59 1.30c -0.10 -0.20
(1.85) (1.30) (2.36) (-0.16) (-0.35)
HOME 1.55c 1.13 1.87c 1.28 1.79c
(3.48) (1.25) (2.02) (1.43) (1.99)
TUTILITY 0.04,t 0.03 0.07t, 0.08a 0.04't
(5.29) (1.49) (1.89) (3.18) (3.94)
Water source characteristics
QUALS1 2.06 2.00 1.21 3.68 0.82
(1.48) (0.88) (0.38) (1.03) (0.28)
WALKTIME 0.07b 0.39 0.04 -0.26 0.31
(1.76) (1.59) (0.82) (- 1.19) (0.59)
CVM bias control
BID -3.01a _5.59a 4.35 -9.95a 0.74
(-2.33) (-2.59) (1.51) (-3.54) (0.25)
STRAT -2.04 1.40 -5.78c -6.40•t - 1.18
(- 1.59) (0.65) (- 1.98) (-2.42) (-0.44)
Statistics
R2e 0.197 0.186
Adjusted
R2 0.144 0.132
The t valuesare in parentheses.
The econometric technique
usedis tobit.Tobitanalysisusesz
scoresto testthe significance
of coefficients.
In largesamples,
z scoresareindistinguishable
from
corresponding t values.
aOLSstatistics are reported,aslessthan10%of the bidswereequalto zero.
t'Significant
at the 10%levelof significance.
CSignificant
at the 5% level of significance.
'tSignificant
at the 1%levelof significance.
eTobitmodelsoffer no goodness-of-fit measure,sincethe constrained
versionof the model
(includingonly a constant)cannotbe estimated.

minantsof WTP, particularlyfor individualconnections. ual connections.The positive sign may reflect responseto
Largerhouseholds (MEMHH) have greaterwillingness to higherearningpotential,but also may evidencegreater
paybecauseof higher demand.Higher householdincome understanding of the potentialfor healthbenefits.Note that
(TUTILITY) increasesWTP bids. The coefficientson in- familiarity
with existingwater systemsinfluences WTP for
comeare similarin the publicfaucetandindividualconnec- publicfaucets, but not individual connections. AGE, the
for onlyrespondent
tionequations,but wealth (HOME) is also significant characteristicwhichis significant,
is nega-
individualconnections.The latter may substantiatethe tive in bothequations,suggesting that olderrespondents are
hypothesis
that the demand for individual connectionsde- more comfortable with the status quo.
pends
on the abilityto payfor installation
charges.Formal Water sourcecharacteristicsalso influenceWTP. WALK-
years
of schooling(YRSCHO)is alsosignificant for individ- TIME, a proxyfor price,is significantin bothequations
but
1960 BOHMET AL.: SUSTAINABILITY
OF POTABLE
WATERSERVICES
IN THE PHILIPPINES

TABLE 3. RatesNecessaryto FinanceLevel 3 Water SystemsUsingDifferentLoan/Grant

Options

Rates, pesos/month

150 250 500 1000

Households Households Households Households

System A/no granta 429.96 340.04 256.84 249.97

SystemA/100%grantfor system
b 167.78 119.80 83.80 70.63
System A/100% grant for system 79.33 60.80 51.80 48.30
and maintenance fund c
SystemB/nogrant•t 191.98 151.83 115.37 110.17
SystemB/25% grant for systeme 175.45 132.82 100.43 94.70
System
B/75%grantfor system
f 129.19 94.81 70.57 63.74
System B/100% grantg 106.57 75.80 55.63 48.27

SystemA is a highlyreliablewater system.SystemB is patternedafter constructionand operating

costsincurred in San Juan RWSA, where systemoperationhas been regardedas relatively good.
aBasedon costsfor the systemdiscussed in text (labeledsystemA) with zero grant.This assumes
a 100% loan at an annual interest rate of 14.39%, the rate used in Philippinesfor governmentprojects
in 1988.
bSystemA withtheinitialcapitalcostprovided
witha 100%grant.
CSystemA with the initial capitalcostand capitalization
of the maintenance
fundprovidedthrough
a 100% grant.
dSystem
B isbasedonthecostof replicating
theSanJuansystem.
A lowerinputpriceis assumed
for both construction and the maintenance fund. No grant is given here.
eSystem B is used with a 25% grant for the initial capital cost.
fSystemB usedwitha 75%grantfortheinitialcapitalcost.
gSystem B is used with a 100% grant for water systemconstructed.

sustainablesystem under different assumptionsabout sys-

the elasticities are very low. Perception of existing water
tem reliability and the grant/loanmix to RWSAs from donor
quality was positive for both types of water servicebut was
significantfor public faucets only. organizations [ComprehensiveMarketing Systems,Inc.,
Variables were included to identify bias in the bidding 1988]. Estimates of the costs were based on patternsdrawn
game (BID) and to measure strategicbehavior (STRAT). In from a sample of 52 operating RWSAs and engineering
the public faucet equation, BID indicatesthat respondents analyses.Appropriate systems were designed,and costs
using the ascending game had bids which averaged 3.72 were measuredseparatelyfor RWSA systemsservingcom-
pesosless than the overall average.This translatesinto a munity sizes of 150, 250, 500, and 1000 households.Also,
26.2% drop from the mean value for all bidders.Respon- separatecostestimateswerepreparedusingcostdataforthe
dentsgave bidswhich were 3.01 pesoslessfor the individual San Juan RWSA system. In this analysis, people are as-
connections,representing14.5% of the mean value. Strate- sumedto consume156.98L of water per day, the levelused
gic behaviorwas detectedonly in the publicfaucetequation in the San JuanRWSA duringthe first half of 1987.This
where the coefficientwas significantin the pooledequation consumptionlevel is approximatelytwice the average
andthreeof the four villageequations.A one-tailtestis used RWSAusage,thoughit is lowerthanthe highestconsuming
for this coefficient because the variable tests for underbid- RWSA. San Juanis adoptedas a patternbecausethe system
ding. is operatingwell and only offershouseholdconnections.
Overall, the results point to income/wealthvariables' Further,consumption
is growing
in SanJuanandlikelywill
playinga large role in determiningWTP for individual be evenhigherin the future,so this may understate long-
connections and water source characteristics' being more termconsumption
in an efficientlyoperating
system. The
importantfor publicfaucets.In addition,the largeintercept analysisisbasedona constant consumption level,regardless
for publicfaucetsevidencesa consistentwillingness to pay of the water fee, which is comparableto assuming a zero
which is more independentof other variablesthan for price elasticity.
householdconnections.These findings suggestpublic fau- Monthlyhouseholduserfeesnecessary to fundtheesti-
cetsare demandedas an improvedwater source,andhouse- mated costs aregivenin Table3. An average familysizeof
hold connectionsare soughtmore for convenience.WTP 5.75is usedin thesecalculations, andno allowance ismade
elasticities for all variables are low, with values ranging
fordelinquent
payments
inthese
estimates.
Capital
costs
for
between0.02 (WALKTIME for individualconnections)and system A inTable3arebasedontheengineering
analysis
for
0.38 (YRSCHOfor publicfaucets)for significant
variables. level3 service.
ForsystemB, costs
arebased
ontheexisting
level3 system
in SanJuan.Capital
costsforlevel2 service
ESTIMATEDCOSTVERSUSWILLINGNESSTO PAY arelower,butonlybecause
ofthetertiary
piping.
Otherwise
CVM estimatescan be comparedwith servicedelivery the systemmustbe builtto level3 specifications
because
there
costs to determine financial viability of water systems. isa propensity
forhouseholds
totapinforindividual
Engineering
estimatesof the coststo plan,construct,oper- connections
after
thesystem
isbuilt.
Results
froma similar
ate, andmaintainwatersystems the analysis
wereusedto calculate of level2 systems
areavailable
fromtheauthors.
The firstrow in Table3 showsthat the fee for a 250-
user fee which would be necessaryto provide a financially
 BOHM ET AL.: SUSTAINABILITY OF POTABLEWATER SERVICESIN THE PHILIPPINES 1961

member systemmustbe 340.0pesosper monthto totally income, small communities will find it very difficult to
financethewatersystem.Feesfor largersystems aremuch financeoperationsand maintenancecostsbecauseof disec-
lower,evidencing considerable economies of scale,butstillonomies of scale. No community is likely to have WTP
dramatically higherthanhave historicallybeenpaid. Note sufficientto finance all service delivery costs including debt
thatthe first row assumesthat initially consumers begin repayment. Subsidiesmay need to be even greater for public
financing boththe capitalandthe depreciationfor all partsfaucetsbecausecapital costs(not shownin the table) may be
witha life equalto or below 10 years. nearly as large, but averagewillingnessto pay is only 68% of
Constructionof the systemis very expensiveand accounts the value for household connections (until people install
for64.8%of the necessaryfee. Thusthe secondrow shows legal or illegalhouseholdtaps). On the other hand, consump-
thatthe fee could be reducedto 119.8 pesosfor the 250- tion levels will be lower with public faucets, and this can
household
systemif constructionof the systemis totally reduce total costs relative to household connections. Our
grant-financed.
TheRWSAwouldcontinue to financeoper- estimatesindicate that the greater willingnessto pay could
ations,maintenanceand replacementof major parts under make householdconnectionsa preferred public policy in the
thesecondscenario.The third row indicatesthe fee couldbe Philippinesin comparisonto public faucets.
reducedeven further if a foreign donor or the Philippine Predicted values also were estimated using data for the
government wouldprovidein advance (orasneeded) suffi- average resident in San Juan, which is a relatively high
cientcapitalizationto providefor equipmentreplacement incomecommunityandis alreadyserved.PredictedWTP for
needswhich are anticipatedduring the first 10 years. Only level 3 service in San Juan is 28.0 pesosper month. How-
operations
andmaintenance
costsareincluded
in thisline. ever, the value is understated relative to predicted willing-
Costsare dramatically higher for the smaller system (150 ness before improved water was provided because some
households)and fall as the system size is increased. determinantsof willingnessto pay, suchas walking time to
Similaranalysis is provided for the San Juan prototype the water source and quality of water, have already been
system
whichis muchlessexpensiveto construct.Also, improved in this served community.
lower expendituresare assumedfor replacementparts. SanJuanresidentsare currently payingan averageof 73.9
Theseestimates are given in the fourth through seventh pesosper month,approximatelytwo andonehalf timestheir
rows.The fourth row, comparableto the first row, illustrates predictedwillingnessto pay and potentiallylower thantheir
the dramatic reduction in fee which can be achieved when a true willingnessto pay. Actual expendituresindicate that
lessexpensivesystemis constructed.Of course,the likeli- SanJuanresidentsare willing to pay a minimumof 2.38%of
hoodof systemfailure and unexpectedcostsrises. System their income. The San Juan results evidence that the CVM
failures could translate into lower WTP as users become findingsmaybe subjectto strategicor hypotheticalbias.Our
dissatisfied.The fifth, sixth, and seventh rows indicate the tests found some evidence of strategic bias, but the tests
necessary feesusinga 25%, 75%, and 100%grantfor system were not very rigorousand it is possiblethat peopledisre-
construction. gardedour openingstatementsand did not reveal their
Theactualpaymentfor water servicesfrom the surveyof willingness to pay becauseof fear their waterfeeswouldbe
52 RWSAs is 58.1 pesos per month. Thus the survey higherif a systemwere constructed.Second,the findings
estimatessuggestthat systemsbuilt to high engineering could result from a form of hypotheticalbias, as people
standardscould not be financially viable, unless existing inadvertentlyunderstatetheir demandbecausethey lackfull
payments to pay. A lesserquality, recognitionof how improvedwater will be useful.
arewell belowwillingness
but seeminglyreliable systemalso would need very large Based on the San Juan data, it may be reasonable to
subsidiesto operate. presume that the minimumwillingnessto pay by any com-
munityis approximatelytwice what would be revealedby
the equations.Even with this assumption,the cost data
Accu•cY OF CVM ESTIMATES indicatethat large subsidies(perhapsup to 100% of con-
structioncosts)are necessaryif an RWSA is to adequately
The tobit WTP estimates can be used to calculate pre- financeoperationsand maintenance,provide for needed
dictedvaluesfor any individualor community.Potentially, replacement parts,and financeinitial constructionof the
theseestimatescould be used to identify neighborhoodsor system.The annualizedsubsidyfor a systemwith 500
communitieswhere WTP is sufficiently high to cover system householdswould be 1.04 million pesos if the subsidy
costs.Systemsare financiallysustainablewhen WTP is equaledthe constructioncosts.
greaterthan or equalto delivery costs.Predictedvalues
wereestimatedfor all unserved residentsin the sample,and
WTP was found to be low relative to service delivery costs CONCLUSION
[Maddala,1983, pp. 158-160].The maximumpredicted
valuefor the 757 respondents was75.6 pesosper month. The focusof thisstudyhasbeenthe financialsustainability
Thusonly the highestpredictedWTP is even closeto of rural water systemsin the Philippines,basedon a com-
financingoperationsandmaintenance costsfor a smallwater parisonof thewillingness to payfor improvedwaterandthe
systemdesigned according to systemA standards (seeTable costsof servicedelivery. In the analysis,we have defined
3,thirdrow).Onlysixhouseholds havepredicted valuesof sustainabilityas the willingnessof water consumersto pay
48.3or greater,sufficient
to financeoperations andmainte- userchargesthat are sufficientto cover all costsnot paid
nancecostsfor a largerwater system.Theseestimates throughgrants.The major conclusionis that rural water
suggest that only large,high-income communities could systemsare unlikely to be sustainableunlessgrantsare
sustainthe operations andmaintenance costsfor a water available to finance most or all initial construction costs.
system.
It is implicitfromtheanalysis of Resourcesmade available by donors or host governments
thatirrespective
1962 BOHMETAL.: SUSTAINABILITY
OFPOTABLE
WATERSERVICES
IN THEPHILIPPINES

withoutfull recognition of thisproblemarelikelyto yieldan of lowerquality.Thusimproved systems aremorelikelyto

inadequatereturnas the systemsbecomeunsustainable and be sustainableif thereis greaterdissatisfaction
withtradi.
fail because of insufficient resources. Unsubsidized water tiona!water. Finally, WTP growswith educational attain.
deliverycostsaredramatically higherthanwillingness
to pay ment, which may be the resultof greaterknowledge of
or actualpaymentexperience.However, it shouldbe recog- benefits fromimproved water.To the extentthisis true,it
nizedthat the CVM bidsappearto sufferfrom hypothetical indicatesthat WTP can be increasedthroughan effective
and strategic bias. information program.
An issue to consideris whether the Philippinegovern- Analternative todelivering waterwhereWTPmaybehigh
ment or internationalaid donorsshouldbe willing to subsi- is to lower the quality of water servicesto a level whichis
dize improved water. Several rationales for subsidiescan affordable.Examples of possibleways to reduce service
be made,thoughthesegenerallyfail to supporteithertotal deliverycostsareto acceptlowerwatertreatmentquality or
or continuous subsidies. First, economic efficiency is to cut back water flow to households.Public faucetsrather
achievedby delivering servicesas long as total willingness than householdconnectionsare another exampleof an effort
to pay (area under the demand curve) exceeds total cost. to reduce service quality. However, cost reduction strate-
This critefion could be met without the demand curve's giesof the lattertypehaveprovedineffective
in thePhilip.
crossingthe average cost curve, a necessarycondition for pines.A long-runconcernwith usingcost-saving
techniques
a single price to cover service delivery costs. A two-part is thatastheyreducequality,theymayalsoreducewilling-
tariff or a subsidy may be necessaryto cover the service nessto pay or people may be able to avoid consumption
delivery costswhen the demand and averagecostscurvesdo restfictions. Thus these strategies must be adoptedwith
not intersect. However, willingnessto pay estimatesin this greatcaution.Perhapstheproblemwith the pastcost-saving
paper are intended to measure the entire area under the methodshas been a focus on low-cost technology,andfuture
demand curve, so this is not an acceptable rationale for efforts could profitably consider alternative management
subsidies in the current context. Second, users may suffer schemes.
from hypothetical bias in giving their contingent value esti- This paper hasprovided severalresultswhich canassistin
mates. Simply, users may have insufficient familiarity with designingsustainablewater systemsin the Philippinesand
water systems to understand their value. A carefully de- other developing countries. Other important policy issues
signed education process prior to building a system may remain for future research. One topic is the impositionof
increase willingness to pay. Still, a subsidy may be appro- fees for joining a water systemor of connectionchargesfor
priate in the short term as users' WTP grows with their householdtaps. Concernsinclude whether thesetechniques
realization of the value. undesirablydiscouragedecisionsto join, whether they offer
Third, services may be subsidized on the basis of equity. good signalson willingnessto pay, whether they provide
Improved water may be so meritorious that it should be significantrevenues,and so on. Further study is necessary
made available to everyone regardlessof their willingnessto on the linkage between willingness to pay and quality of
pay, which depends partly on ability to pay. Health care delivered services. Greater understanding of how willing-
benefitsmay be an example of the anticipatedbenefitswhich nessto pay growsonceservicesare availableandconsumers
could make water a merit good. Finally, water servicesand are able to see the value is another topic for study.
other infrastructure may be provided as a meansto promote
economicdevelopment.Policymakersmay concludethat the
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 BOHM ET AL.: SUSTAINABILITY OF POTABLE WATER SERVICES IN THE PHILIPPINES 1963

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