[BLANK_AUDIO]. In this video, we're going to take you through the answer for this week's quiz. It goes without saying, please don't watch the rest of this video, if you haven't already attempted the quiz. The capital cost per household is 25,000 US dollars. We obtained this by dividing the US$4 million cost of the water and sanitation system by the 160 households in a village. Next, we calculate the annual capital cost per household by multiplying the capital recovery factor, 0.11. By the $25,000 total capital cost per household. The result is $2,750. Next, we want to estimate the annual O&M cost. We assume this is 25% of the annual capital cost. Two thousand seven hundred and fifty dollars times 0.25 is $688. To calculate the total annual cost we add the total annual capital cost and the annual O & M cost. The result is $3,438. To calculate the total cost per month per household we divide this amount by 12. The result is $287. Throughout here we're rounding up to the nearest US dollar. A typical Hopi water bill is about $10 per month. So the water bill represents approximately 3% of the total monthly cost of water and sanitation services. Why are these costs of service so high? There are three primary reasons. First the villages are too small to capture economies of scale. Second, construction is expensive on these rocky mesas especially laying sewer lines through solid rock. The third reason is that we ascend a 10% interest rate or cost of capital. I suggest that after you watch this video, you redo these calculations with a lower interest rate such as 5%, and see how this effects the cost per household per month. On the other hand, there are many reasons that these costs could be higher. These costs do not include any long distance water transport cost. Nor did the capital cost assume advanced water intake treatment. They've also not included advanced waste water treatment. We also assume that the raw water supply was free to the Hopi's. I have recently calculated the cost of water and sanitation services for several Egyptian cities. The costs in Egypt were about 10% of the costs. On the Hopi reservation. The lower cost in Egypt are due to several factors. First, the Egyptian systems are larger and capture economies of scale. Second, construction cost in Egypt are cheaper than in Arizona due to lower cost of materials and labor. Third, excavation conditions are much more favorable in Egypt than on the Hopi Mesas. But like the Hopis, Egyptian households pay only a very small fraction of the total cost of service. Both Hopi and Egyptian households have little idea of how their water bills compare to the total cost of service. In this respect they're similar to households in most places around the world. Few people have a clear idea what piped water and sewer services really cost. There are five main reasons why most people are unaware of the real cost of piped water and sanitation services. First, capital costs are heavily subsidized by higher levels of government. Like the Hopi villages many communities receive capital grants or gifts from higher level government or perhaps a non-governmental organization, to build their water and sanitation systems. And they don't have to repay these grants. This means that like the Hopis when their capital assets are fully depreciated they need to find another grant from somewhere or dramatically raise water tariffs. Second, in larger cities O&M costs are often paid by cross-subsidies from businesses and industries to households. Households would typically not know about the size or even the existence of such cross-subsidies. Third, water bills may not even cover operation and maintenance costs. In many developing countries communities receive only, receive not only capital subsidizes but operating subsidizes as well. In such cases utilities run very large financial deficits. Because piped water and sanitation services are expensive these deficits can be a significant drain on the national budget. Fourth, like the Hopi villages many cities and small communities do not pay for their raw water supplies. Cities rarely compensate upstream communities or farmers when they take their water supplies. This is a real cost that is not reflected in the price, prices that customers pay. So it's understandable that they may not be aware of it. Fifth, waste water externalities are often imposed on others downstream without compensation. So households are unaware that these costs exist. For the Hopi villages this was not an important issue because the villages are so remote and the population density is low. But in rural and urban areas of many developing countries, population density is high and waste water externalities are large. To wrap up, the fact that few households understand the actual cost of piped water and sanitation services is an important aspect of status quo conditions in both industrialized and developing countries. In the next video, we will look in more detail at the relative size of the cost of different components of water and sanitation services. We will also use a different unit of analysis, cost per cubic meter, to look at the costs of service from a slightly different perspective.
