Economic Evaluation of Water Supply & Waste Water Projects

Cost-Benefit Analysis Methodology Paper

Final Report

DKM Economic Consultants Ltd. Aquavarra Research Ltd. ESRI

August 2004

DKM Economic Consultants Ltd., Davy House, 49 Dawson Street, Dublin 2. Telephone: 353 1 6797755 Fax: 353 1 6796379 E-mail: dkm@davy.ie

CONTENTS

1 2 2.1 2.2 2.3 3 3.1 3.2 3.3 3.4

Introduction Literature Review Background Methodological Issues CBA Manuals Proposed Methodology Introduction General Principles Stages in the CBA Notes on Specific Investment Types

1 2 2 3 6 21 21 24 25 29

APPENDICES A B C Bibliography Valuing Fossil Fuel-Related Externalities The Importance of Pricing to Infrastructure Investment Decisions Benefits Transfer
Quality Assessment of Water Valuing Water Quality Method for valuing environmental effects of Irish schemes Benefits transfer using Environment Agency (England and Wales) Guidance Water Quality Measurement

37 39 42

D
D.1 D.2 D.3 D.4

43
43 49 56 79

Section 1:

Introduction

A requirement of the Economic Evaluation of Water Supply & Waste Water Projects assignment is to: a) Carry out a literature review of current approaches to economic appraisal of water and wastewater projects, both nationally and internationally; Propose a Cost-Benefit Analysis (CBA) methodology(ies) to meet the requirements of EU Council Regulation 1164/94.

b)

Article 13.4 of the Regulation states: After their (the projects) completion, the Commission and the beneficiary Member State shall evaluate the manner in which they have been carried out and the potential and actual impact of their implementation in order to assess whether the original objectives can be, or have been, achieved. This evaluation shall inter alia, address the environmental impacts of the projects, in compliance with existing Community rules. The proposed methodology is to have regard to the findings of the literature review and to national and EU guidelines on CBA of water projects1, and should also address: The developing framework for financing such projects in Ireland; The values of benefits arising during the implementation of the projects; The benefits of the projects to tourism, industry, commercial development, fishing, etc.; The direct and indirect employment effects of the projects; The environmental benefits and future impacts of the projects, having regard to national and EU requirements; The economic viability of the projects; The economic and social benefits commensurate with the resources deployed on the projects; The contribution made to EU Community policies; The contribution of the projects to balanced regional and rural development; Establish the Internal Rate of Return of the projects.

This paper addresses this requirement. Section 2 summarises the Literature Review, while Section 3 sets out the proposed methodology.

Notably:

Proposed Working Rules for cost-Benefit Analysis CSF Evaluation Unit, Dublin. June 1999. Guidelines for the Appraisal and Management of Capital Expenditure Proposals in the Public Sector Department of Finance, July 1994. Guide to Cost-Benefit Analysis of Investment Projects Evaluation Unit, DG Regional Policy, European Commission, 2001 edition.

Section 2:

Literature Review

2.1

Background

Good public investment requires sound appraisal. Cost-Benefit Analysis (CBA) is a well established and widely applied methodology for appraising public investment projects. Appropriately in the current context, much development of the method took place on water projects under the US Flood Control Act of 1936. This Act stated that projects should proceed if the benefits to whosoever they accrue are in excess of the estimated costs, in other words, if the project would represent a net benefit to society. Improving public sector efficiency has been the major stimulus to the development of CBA, especially in the US. In Europe, CBAs are often required of projects funded by the EU Commission, and many European Treasury Departments and Finance Ministries lay down guidelines for the economic pre-appraisal of public investment projects using CBA techniques. CBA tries to incorporate all social costs and benefits of an investment in monetary terms (whether they have a market price or not), and in doing so determine whether benefits exceed costs. Where market prices are not available, some other means of arriving at monetary values must be used. An important advantage of CBA is that by reducing everything (environmental and nonenvironmental, private and social) to monetary terms and assessing them with a consistent methodology, Governments can effectively compare apples and oranges. That is, they can compare projects within and across different fields of public policy (e.g. roads, hospitals, water treatment plants) and prioritise public investment policy according to which projects give the greatest return to society. The systematic use of CBA appraisal is becoming more common in Ireland, but practical problems and differences of view arise in its implementation. A few of the more important methodological issues are discussed in Section 2.2, namely Valuation of Non-Market Costs & Benefits Treatment of Future Costs & Benefits Discount Rates Timeframe Calculation of Net Benefit Benefits Transfer

Efficiency and Equity.

This is followed by a review of CBA manuals in Section 2.3.

2.2
2.2.1

Methodological Issues
Valuation of Non-Market Costs & Benefits

This is perhaps the most controversial aspect of CBA. Environmental characteristics that are not normally bought and sold in the marketplace cannot readily be valued. Growing recognition of the importance of these characteristics has been matched by increased attempts to develop monetary valuations of them, however. This is particularly pertinent in the economic evaluation of water supply and wastewater treatment projects. A variety of approaches has been developed to address this. Two broad categories are Stated Preference and Revealed Preference techniques. The former involve administering carefully controlled questionnaires that ask people their monetary valuation of particular attributes. A sample of the public are asked how much they are Willing To Pay (WTP) for an environmental improvement, or how much they are Willing To Accept (WTA) in compensation for environmental disimprovements. These responses can then be used to generate an estimate of societys valuation of the attribute. One point to note is that WTP cannot exceed total income. There is no such limitation on WTA, of course, and it is often the case that WTA studies generate higher valuations than WTP studies, though in theory they should not, and study design is concerned among other things with ensuring that the two equate. Revealed Preference techniques on the other hand try to elucidate values for environmental attributes via actual markets related to the attribute in question, notably a) the Hedonic Price method, based on the fact that house prices can reflect differing local environmental attributes. If we can isolate these price effects, we can estimate societys valuation of (the equivalent of WTP for) the environmental attribute in question. b) The Travel Cost method, which measures how much people are willing to spend on travel to enjoy a particular attribute. Again, isolating this can enable us to estimate societys valuation of the attribute (the equivalent of WTP). One needs to be careful in defining the group of beneficiaries (or losers) from an environmental change. While the people living in the vicinity are an obvious group, those who occasionally visit the area will also be affected, as indeed will those who never visit it, but put a value on its continued existence and quality. Indeed, the latter two groups often outnumber the first, though their individual valuations may be less. Hedonic and Travel Cost methods have limitations in measuring these non-use valuations.

2.2.2

Treatment of Future Costs & Benefits Discount Rates

An important issue in CBA is the choice of discount rate. People generally prefer present benefits to future benefits. Comparison of costs and benefits with different time-paths is facilitated by discounting them to their present day values using a discount rate, which is comparable to an interest rate. The further into the future the cost or benefit, the lower its present value, and raising the discount rate will lower the present value. The rate traditionally used in Ireland for public projects, as recommended by the Department of Finance (1994), is 5% real (i.e. net of inflation). Controversy arises because many environmental benefits and costs accrue long into the future, and discounting means that their present values can be negligible. It is usually the case also that future costs and benefits are estimated on the basis that there is no inflation, so that everything is valued at the prices in a particular year, usually the year the project is taken to commence or becomes operational.

2.2.3

Timeframe

An investment will have a certain lifespan, and in general this should determine the timeframe used in the CBA, although in many cases a standard timeframe such as 30 years is used. Sometimes the lifespan will vary for different parts of the investment, e.g. a waste water treatment plant will have longer-lived buildings and shorter-lived pumps and electronic equipment. This can be accommodated in CBA as follows: incorporate the full capital cost of the asset at the start of the project as normal, then for assets that will last longer than the timeframe of the CBA, include estimated residual values in the final year, as a receipt that year; for shorter-lived assets, include replacement costs in the year the assets are replaced. Replacement may happen more than once during the CBA timeframe.

2.2.4

Calculation of Net Benefit

CBA usually involves calculation of: a) Cost Benefit Ratio (CBR), the ratio of the PV of benefits to the PV of costs (one sometimes sees the ratio of undiscounted benefits to costs, but this is a less useful measure). The Internal Rate of Return (IRR), which estimates the actual return on the project, expressed as a percentage or interest rate. The Net Present Value (NPV), which is the PV of benefits minus the PV of costs.

b)

c)

These enable projects to be compared and prioritised. The most widely used are NPV and IRR, and they give slightly different information. NPV gives an indication of the size of the net benefit, and will tend to be higher for larger projects (subject to passing the hurdle discount rate). IRR on the other hand is independent of size: a project could be very small or very large but have the same IRR. This can be relevant if one is deciding between larger and smaller (more or less expensive) projects which are aimed at substantially the same problem, and where choosing the smaller project eliminates the possibility of undertaking the larger project. The task is to identify whether the additional benefits of the larger project are worth the additional cost. In this case another measure can be useful: d) The Incremental Benefit Cost Ratio (IBCR). IBCR = (PV of Benefits of Project A PV of Benefits of Project B) (PV of Costs of Project A PV of Costs of Project B)

Where Project A is larger (i.e. more expensive) than project B.

2.2.5

Benefits Transfer

Sometimes policy makers require cost-benefit analyses to be undertaken, without wishing to commit the time and resources to analyse directly the benefits or costs arising on the specific project. On these occasions, valuations are generally taken from studies undertaken elsewhere, a technique known as Benefits Transfer. Methodological issues with Benefits Transfer have provoked a lively debate and empirical testing (Brower and Spaninks, 1999). A notable case in the UK was the 1998 Public Inquiry into a proposal to extract borehole water from near the River Kennet in Wiltshire, located in an Area of Outstanding Natural Beauty and a Site of Special Scientific Interest. The Inquiry rejected the Environment Agencys CBA on the proposal, which had based its valuations on a Benefits Manual prepared by the Foundation for Water Research (1997). The lesson to emerge from this is the need to calibrate values of benefits and costs that have been taken from elsewhere. The risks of poor practice in using Benefits Transfer in CBA are high. But with virtually no valuations available for Ireland2, its use will be unavoidable in most cases. Among the various approaches to Benefits Transfer, it is better where possible to avail of the function that expresses the benefit in terms of characteristics of site and users. (Brouwer and Langford, 1997, Bateman et al., 2000). Notably, adjustment in values found in other countries may be necessary for differences in average income levels and income distribution. A more detailed discussion of Benefits Transfer is contained in Appendix D.

Studies by Clinch (1999) and Curtis (2003) being notable exceptions but in only remotely related

fields.

2.2.6

Efficiency and Equity

CBA implicitly accepts the existing distribution of income and wealth in society, and is concerned simply with whether the benefits of an investment are greater than the costs, regardless of who gains and loses. From a policy point of view, one might be more concerned, for example, about benefits (or costs) that accrue to lower income groups or groups in particular regions. Another complication is that the valuation of environmental benefits by the public (particularly with WTP methods) is generally highly related to income levels. Thus, all other things being equal, an investment that brings environmental benefits to low income groups may be valued at less than an investment that benefits higher income groups.

2.3

CBA Manuals

Many CBA manuals have been developed over time and in various jurisdictions. Here we review in detail the most relevant and up-to-date, in the context of Cohesion-funded projects in Ireland, namely: 1. The Economic Appraisal of Environmental Projects Supported by the EU Cohesion Fund, by Fehily Timoney Weston in association with DKM, for the Department of the Environment, November 1995. 2. Guide to Cost-Benefit Analysis of Investment Projects (Structural Fund-ERDF, Cohesion Fund and Instrument for Structural Policies in Pre-Accession Countries [ISPA]), Prepared for the Evaluation Unit of the Regional Policy DG of the EU Commission, 1999 Edition. 3. The UK Environmental Agency (EA) Assessment of Benefits for Water Quality and Water Resources Schemes in the PR04 Environment Programme.

2.3.1: Fehily Timoney Weston Study

This study was commissioned in the context of the EU Commissions requirement for CBA of projects requesting Cohesion funding. It comprised two parts 1) assisting the Department in examining data submitted by the Local Authorities, evaluating the projects and preparing reports on the projects for the EU Commission; formulating an agreed methodology, with the Department and the Commission, for economic evaluation of environmental projects.

2)

The methodology developed had three elements Quantify all identified costs

Quantify direct and indirect benefits Ascribe values to project benefits

The valuation of scheme costs was considered to be relatively straightforward, and was to include marginal operating costs (discounted at 5% real per annum) over the life of the assets, which was assumed to be 20 years. However, the report highlighted the lack of Irish data on the valuation of benefits, and recommended the use of Contingent Valuation Methods (CVM) to generate these benefits. It acknowledged that this was not practicable within the timeframe of the study. Detailed methodologies were then set out for wastewater projects and water supply projects, as follows:

(i) Wastewater Projects

To facilitate the quantification of costs and benefits in wastewater projects, a questionnaire was designed, which also sought to identify the degree to which the project was necessary for compliance with the UWWTD, and current compliance levels. Where operating costs could not be identified, standard levels were assumed to apply. Standard operating costs were based on experience in a number of existing schemes, set out in IR per Population Equivalent (pe). Benefits were quantified in terms of standard reductions in Biological Oxygen Demand (BOD) and Phosphorous (P) for primary, secondary and tertiary treatment. In the absence of valuation of benefits, the effectiveness of the projects was to be assessed in terms of total discounted cost per kg of BOD and P removed.

(ii) Water Supply Projects

Quantitative information to be collected comprised Pre- and post-project demand broken down into domestic, commercial, industrial and agricultural, Pre- and post-project population serviced, Pre- and post-project design demand and population.

The degree to which the project was necessary for compliance with national legislation under the EU Drinking Water Directive, as well as existing compliance levels, was to be established. Existing water quality was taken from the EPAs 1994 report on the Quality of Drinking Water in Ireland.

Marginal operating costs were to be calculated by applying a standard level of IR0.05 per m3. Benefits were assumed under three headings 1. 2. 3. quality improvements extension of supply to new customers waste elimination and control.

Quality improvements were valued at IR13 per household per annum (1989 prices, for domestic demand only) based on a UK CVM study (Turner et al., 1992). Extension of supply and leakage reduction were to be valued at IR0.70/m3, based on costs in Wales and the South-West of England (OFWAT, 1994). Cost/benefit ratios were then to be calculated, which was to allow ranking of projects.

The methodologies were then applied to a number of water supply and wastewater projects and to the Integrated Suir Valley Catchment project.

2.3.2: EU Guide to Cost-Benefit Analysis of Investment Projects

This is a detailed CBA manual, covering projects in a very wide range of areas, including water and wastewater, which are eligible for assistance under the Structural and Cohesion Funds and the ISPA (Accession country fund) over the period 2000-2006. It gives a set of steps for a project evaluator, from an ex ante standpoint: a) b) c) d) e) Objectives Definition Project Identification Feasibility & Options Analysis Financial Analysis Economic Analysis

These are discussed in terms of general principles, and then applied to a wide range of investment types, from hospitals to telecommunications, including water projects. We set out below a synopsis of the general principles and their application to water projects.

General Principles
a) Objectives Definition Projects should be defined in terms of the socio-economic benefits to flow from them, as well as their contribution to EU Fund and sectoral objectives. Questions to be addressed include Are the objectives clearly defined in terms of socio-economic variables? Have all the variables been considered, and the means of measuring them indicated? Are they attainable with the implementation of the project? Are they logically connected? Are the overall welfare gains worth the cost?

b)

Project Identification The project should be identifiable as a self-sufficient unit of analysis, where the constituent parts are mutually dependent, regardless of whether one or more are eligible for grant aid. Various elements should only be included, however, if they are actually implemented. If say a water treatment plant is built in order to enable another development, they should be considered together only if the other development is actually built.

c)

Feasibility & Options Analysis The feasibility of the project must be demonstrated, and alternative options adequately considered. At least three options should be considered Do Nothing, Do minimum (e.g. up-grade the existing infrastructure), and Do something (usually using a different technology to achieve the end, e.g. build a new road as opposed to a new railway).

d)

Financial Analysis This is concerned with financial inflows and outflows. The Guidelines give detailed layouts of tables for this purpose, which will generate the financial NPV (FNPV/K) and IRR (FRR/K) on Capital. The Guidelines note that these financial assessments of environmental projects will generally turn out negative. The following points are made regarding the financial analysis: Operating costs these should exclude anything that is not an actual cash payment, specifically depreciation and amortisation, transfers to future replacement cost reserves, and to contingency reserves.

Taxes and Subsidies costs and benefits should exclude VAT. Subsidies (e.g. from other authorities) should be excluded from revenues. Residual Value this is effectively the liquidation value. It may be calculated in one of two ways (1) the residual market value of the investment, if it were to be sold, or (2) the residual value of all assets and liabilities. Subsequent net receipts should be included in the residual value. In project analysis, constant prices (i.e. with inflation netted out) are generally used. However, in the analysis of financial flows, current prices (i.e. with inflation included) are recommended by the Guidelines. If constant prices are to be used, corrections must be made for changes in relative prices (i.e. different inflation rates applying to difference costs and benefits), if significant. The discount rate to be used should reflect the opportunity cost of capital. The Guidelines suggest an indicative rate of 6% real.

An important issue is the lifespan of the project. The report highlights Cohesion Fund guidelines, which indicate that - where different elements of the project have differing lifespans, one should assess the project over the lifespan of the principal infrastructure. Where other elements last for a shorter period, their replacement costs (as well as their initial costs) should be included. Lifespan may also be determined by some administrative or legal criterion such as the length of a concession or licence. ISPA guidelines indicate that infrastructure would not normally be evaluated beyond 30 years. If an investment lasts longer than that, its residual value should be included as a receipt in the final year of the analysis. An ad hoc survey of CF projects in the early Nineties indicated that the average lifespan used for 47 water and environmental projects was 29.1 years. The Guidelines recommend using a lifespan of 30 years.

e)

Economic Analysis This is the next step after the financial analysis, and converts from financial flows to real resource flows, by correcting for distortions caused by market imperfections, notably external costs and benefits. There are three stages: (i) Fiscal corrections. Notably, prices should be net of VAT, other indirect taxes (unless their function is to correct for an externality) and transfer payments (e.g. social security payments), and gross of direct taxes. Externalities corrections. Inclusion of environmental and other external costs and benefits (unless already adequately dealt with by taxes); where these cannot be valued they should be at least listed and physically quantified to the degree possible.

(ii)

10

(iii)

Conversion of market prices into accounting prices, which reflect social costs and benefits. These correct for market imperfections that can be caused by monopoly provision or regulatory restrictions, which mean that the market price for particular goods and services is not equal to the marginal social cost (i.e. shadow price). Examples cited include provision of electricity at above or below long run social marginal cost, minimum wages set above the market-clearing rate for unskilled labour, public sector wages above or below the equivalent private rates, and subsidised land3. In the case of internationally traded goods, border prices are often a good indicator of accounting price.

The appropriate social discount rate is used to generate the economic NPV (ENPV) on investment, and the economic IRR (ERR) should be calculated. The Guidelines suggest a 5% European social discount rate. The Guidelines note that the expected ERR for 51 EU-funded water and environment projects was 15.8%.

Other points noted include: Existing publicly-owned assets (including land) used for the project should be valued at their opportunity cost, i.e. the alternative use value. The Guidelines discuss the issue of the benefits of additional employment. They highlight that in the first place, employment is a cost of the project, since it involves the usage of labour resources which are not then available for use in the rest of the economy. The benefit of employment, the incomes that flow from the project, are accounted for by the valuation of the outputs of the project. They list two mutually exclusive ways of accounting for the social benefits of increased employment (1) using a shadow price of labour lower than the market price and (2) applying an income multiplier to the project output, thus increasing the value of the output. The latter is best applied at macro-economic level or for (a) very big investment program.

f)

Multi-Criteria Analysis

This can be useful where certain objectives are not amenable to valuation, such as social equity, equal opportunities and environmental protection (though many individual environmental benefits will be measurable). These can be listed, scored, and given weights, which when summed can give a means of comparing alternative projects for these objectives. g) Sensitivity and Risk

It may be the case that land in Ireland is in some cases priced at more than the marginal social cost,

due to restrictive planning regulations.

11

This is important as different levels of uncertainty attach to forecasts of variables within and between projects. The Guidelines define a risky project as one where there is a high probability that the project will not overcome a certain IRR threshold, rather than one where there is simply a high level of variability in the forecasts. They recommend a two-step approach: 1) Sensitivity Analysis, which measures the impact of changes in the forecast values of variables on the financial and economic IRR and NPV, and identifies the critical variables. As a general rule the Guidelines recommend that variables for which a 1% change will cause a one percentage point change in IRR or 5% change in NPV be considered critical. Risk Probability Analysis, which involves attaching a probability distribution to each of the critical variables, and using these to build up a probability distribution of IRR or NPV. This can be very complex where there are even a few critical variables, but statistical techniques such as the Monte Carlo method can be used to generate the distribution.

2)

A shortcut (but not substitute) procedure is Scenario Analysis, which can be used to generate optimistic and pessimistic outcomes, by taking the extreme positive and negative values for the each of the critical variables.

Application to Water Projects

These general principles are then applied to a wide range of sectors, including water projects (Guidelines Chapter 3, Section 2). The main points in this regard are:

a)

Objective Definition

Usually it will be in terms of improving the quality, effectiveness and efficiency of the service. Significant parameters would include, for instance Extension of numbers of customers serviced Volumes of water saved Reductions in quantities taken from polluted sources Improvements in continuity of service Removal of polluting load Reduction in operating costs Improvement in environmental parameters.

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b)

Project Identification

A definition of currently available services, or a territorial framework will often provide an appropriate definition of the project. It should also address the projects consistency with the economic-financial planning for the sector, with national sectoral policies (e.g. industrial policy), and with EU, national and regional policies.

c)

Feasibility and Options Analysis

Feasibility
The following need to be considered Analysis of demand in terms of quantity and usages, leakages where relevant, and price elasticity of demand (which may vary by user). Forecast of actual and potential demand, and the relationship between the two. The economic and environmental sustainability of the project, including capacity to provide for demand, and capacity of receiving waters in the case of wastewater treatment. The institutional, administrative, managerial and technical capacity to deliver the project.

Options
Mainly the various physical and technical options for meeting the objectives of the project.

d)

Financial Analysis

The main point here is to incorporate the revenues that will flow from the infrastructure. Where net revenues will be generated, it is appropriate that a significant amount of the funding should come from the promoters own funds.

e)

Economic Analysis

The accounting price of water can be ascertained by means of the users Willingness to Pay (WTP). One way of estimating WTP is by reference to the market price of alternative services. In the case of water for industrial or agricultural purpose, the added value of the industrial or agricultural outputs made possible by the water supply will give guidance for valuation. Where the project will address problems of water sanitation and pollution, the reductions in illnesses and deaths can be valued, via inter alia hospital costs, loss of earnings, and Value of a Statistical Life (VOSL) techniques. Where flood control is involved, the damage avoided to

13

property and land can be considered. Where the specific costs and benefits of the project are difficult to value, values from similar projects can be used. Specific externalities that can be considered include the increase in the value of land as a result of providing the infrastructure increased incomes from collateral activities (tourism, fishing, coastal agriculture, etc.) negative impacts in terms of soil consumption, spoilage of scenery, etc. negative impacts during construction, particularly in urban and sensitive contexts.

f)

Other Evaluation Criteria

Additional techniques such as Multi-Criteria Analysis may be appropriate where for example the location for the project is environmentally sensitive, e.g. national parks, protected areas, or where particular fauna are going to be affected.

g)

Sensitivity & Risk Analysis

Critical factors include unexpected occurrences during construction, which can affect cost of the investment. Factors affecting demand forecasts, including population growth, migration and tourist flows, etc. Rate of change in tariffs (often dependent on decisions by regulatory bodies). Lack of capacity to respond to shock in the investment (which often requires excess capacity in the (early) operating periods). the influence of collateral interventions (for example, the effectiveness of water supply is strictly related to the state of distribution networks). Management efficiency. Future costs of critical inputs, e.g. energy, chemicals, and sludge disposal.

A detailed case study of an Integrated Water Supply Service (IWS), which includes supply and wastewater treatment, is then presented, which goes through the procedure outlined above

14

2.3.3: UK Environmental Agency Guidance Introduction

The UK Environmental Agency (EA) has recently produced very detailed updated guidance for carrying out CBAs on a range of water infrastructure projects, entitled Assessment of Benefits

for Water Quality and Water Resources Schemes in the PR044 Environment Programme,
produced by Risk & Policy Analysts Ltd. (RPA). This builds on a number of earlier studies and guidance from the EA and its predecessors. The main focus is on Benefits Transfer techniques, based on a comprehensive review of (mainly) UK literature, and on developing a methodology that can be applied to a large number and wide range of projects, with relatively little time (no more than a few days) and resources to apply to each, to be used by those who have little or no experience of economic evaluation. The Guidance defines objectives or Drivers, which it is hoped to achieve in the scheme. The EA divides these into environmental and policy drivers. Policy drivers refer to compliance with particular regulations with respect to the water body in question. There are separate sections in the Guidance on Water Quality and Flows in rivers and groundwater Reservoirs, Lakes and Broads5, Coastal Waters and estuaries Impacts from scheme-related Construction works.

The CBA methodology is first described. A five-step approach to appraisal is recommended 1. Identify which benefits or costs are likely to apply; 2. Describe the benefits or costs qualitatively;

At the moment we understand the Guidance has the status of a Working Document. PR04 is Ofwats

Periodic Review 2004 of planned investments in the Water Industry. The periodic-review process requires a five-year cycle of fixing the capital investment programme of the water industry. This programme is the outcome of considerations of the legal requirements (typically defined by EU directives), desirable environmental improvements and the willingness of consumers to pay. Defra has the role of striking this balance in its guidance to the EA and Ofwat; the EA has the role of proposing the requirements; and Ofwat has the duty to set the prices and hence determine the functions that are to be financed. (Economic Appraisal and Assessment of Benefits in the PR04 Environment Programme,

Findings of an Environment Agency seminar, January 2003, Benefit Assessment: The Context, Dieter
Helm.)

A Broad is defined as an expansion of a river.

15

3. Describe them quantitatively; 4. Where impacts are significant, apply monetary valuations, either directly or via Benefits Transfer; 5. Undertake sensitivity analysis.

In general, the Guidance is in agreement with the other documents already discussed, but a number of differences in emphasis are raised, including: a) The environmental impact of an investment can relate to improving current conditions or preventing future deterioration. This is incorporated in the CBA via the use of discount rates, but various studies indicate that the public view maintenance of an existing environmental asset differently from the creation of a new one; in many cases they appear to be willing to pay more to preserve an existing asset. b) Discount rate for public sector projects, the UK Treasury recommended discount rate should be used (3.5%), while for projects by privatised water companies, the cost of capital rate set by Ofwat should be used. This highlights one of the differences between the Irish and UK water industries, in that the latter is commercialised and largely privatised. c) The Guidance indicates that CBA be applied only to non-statutory schemes, or improvements over and above statutory requirements. The UK Environmental Secretary has indicated that any water improvements in excess of EU requirements over the period 2005-2010 will have to pass rigorous CBA tests6. d) The Guidance draws attention to the fact that any positive discount rate will affect the recorded impacts of schemes that have environmental benefits or costs a long time into the future. Where such costs or benefits exist and are considered significant, they should be highlighted in a qualitative manner. e) Economic analysis implicitly accepts the current distribution of wealth and income. In other words, questions of equity do not enter into the analysis. They can be incorporated qualitatively. However, a more sophisticated approach is to incorporate distributional effects into estimates of NPV through the use of weights that reflect the additional gains in wellbeing to lower income groups of an increase in income. Instead of treating each unit of benefit or cost as being equal, these would place greater weight on those to low income groups than those to higher income groups. The identification of appropriate weights is also controversial, however. f) The timeframe should be matched with the lifespan of the assets; alternatively, a default period of 25 years should be used.

Initial Guidance from the Secretary of State to the Director-General of Water Services, 2004 Periodic

Review of Water Price Limits, reported in The ENDS Report January 2003, issue No. 336.

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g) Future benefits and costs should be measured in constant prices. In general, inflation can be assumed to affect all prices equally and does not need to be considered. h) The main concerns with the use of Benefits Transfer are "the reliability of the original estimate a difficulty, given the lack of relevant studies. the similarity of the environmental change being valued in terms of end outcome and its significance and magnitude; and the similarity of the environmental characteristics of the target site to which the value is to be applied.

i) Biodiversity and Non-Use Values These are difficult to measure quantitatively, and biodiversity impacts should also be discussed in qualitative and descriptive terms. Issues involved in considering non-use values include problems in defining what is the relevant population for aggregating non-use values, where this includes the potential need to separate users from non-users to avoid double counting; and ensuring that the inclusion of non-use values in individual scheme assessments does not result in total household budgets for non-use being exceeded. There are few studies which have estimated total budgets for non-use values. It is obviously hard to take account of such a budget at the individual scheme level, but as schemes are pulled together at the catchment level, these budgets should be given more detailed consideration. There are suggestions in the economic literature that non-use values should only be significant when a resource (environmental attribute, site or habitat) is scarce or unique. This follows the principle that if there are a number of close alternatives, then the value attached to a resource will be less. The population over which a non-use value should be aggregated is another area of uncertainty. Varying assumptions have been made in the past, ranging from applying a value to the whole population to applying the value to a local population beyond which the willingness to pay is believed to reduce to zero, known as distancedecay. Uniqueness is an important factor here.

j)

Use Values and Relevant Population The relevant population will vary with type and relative importance of the site, and settlement patterns in the surrounding area. Seasonal patterns of usage are also

17

important. Annualisation of visitor numbers observed on a particular day or time of year must be undertaken with caution. Various annualisation factors are given in the Guidance for this purpose. For example the coastal bathing season is taken to last 150 days, i.e. roughly 5 months. A different (possibly shorter) period might be appropriate in Ireland. It is recommended that reality checks be undertaken to determine: (i) whether the site could support the estimated number of visitors; (ii) if the number of visitors estimated fits in with what would seem to be realistic; and (iii) if the number of estimated visitors is comparable with known visitor numbers to other similar sites. It (is) important .. to carry out sensitivity analysis on these assumptions. assuming only 50% of the rates predicted are realised (particularly where common sense and the reality checks say that the predicted rates are too high). Or, the number of visitor days required for a project to break even.

k) Avoid Double Counting There are three potential sources of double counting in an economic assessment: (i) overlap between categories; (ii) using the same population for different impacts (particularly use and non-use); and (iii) use of Benefits Transfer values that include more than just the specific impact being valued. There is a significant risk that double counting could be introduced, in particular where impacts may be experienced in more than one environmental compartment (rivers and groundwater, reservoirs, lakes and broads, coastal waters and estuaries).

l)

Uncertainty Failure to take uncertainty into account can result in an option being chosen which appears best, but which has a high likelihood of providing a lower level of net benefits than predicted. A range of different uncertainties may surround different aspects of a CBA. Those of most relevance (include):

scientific uncertainty, for example, on the effectiveness of a particular control measure, or on the period over which an environmental impact will occur; uncertainty over populations (users and non-users) for use in aggregation; and

18

uncertainty on the robustness and applicability of the transfer values being used to estimate costs and benefits.

One approach to sensitivity testing is to calculate the degree of variation in a particular variable which would by itself reduce the net benefits of an action to zero, or result in a change in preference between competing options.

m) Energy Usage Where investments will lead to substantial energy usage, either in construction or operation, the environmental (including global warming) implications will need to be considered. However, where environmental taxes including the climate change levy are in place and are taken into account in the costs, this may obviate the need to include further costs.

The Guidance gives detailed instructions on how to put together the CBA, and discusses benefits under categories. Benefits categories are listed for each broad type of impact in Table 2.1 overleaf. The Guidance shows how to assess each of these benefit types, either directly or using default values from appropriate studies, and suggests valuation, based on relevant studies. For instance, it sets out likely attraction levels for types of improvements, taking into account the importance of the waterway, the availability of alternatives, visitor seasonal patterns and part of the country (which impacts on population densities and hence likely visitor levels). These indicators are likely to be very valuable in the Irish context, but the following provisos are necessary if they are to be used 1. population densities are in general much higher in the UK than in Ireland, and this needs to be kept in mind in terms of likely visitor numbers and affected populations; 2. Relative popularity of different pastimes (e.g. angling) needs to be considered. 3. Valuations need to take into account average income levels, income distribution and purchasing power parity in the year and country of the original study compared with those in Ireland in the current context.

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Table 2.1: Benefit Categories Included in each Part of the Guidance

Part 2: Rivers and Groundwater Informal recreation Angling Recreation (informal and water sports), Commercial fisheries Heritage, archaeology and landscape In-stream recreation Amenity Heritage, archaeology and landscape Land take (for new reservoirs) Amenity Biodiversity and non-use Abstractions Biodiversity and non-use Biodiversity and non-use Shellfisheries Energy and global warming Recreational fishing Traffic related impacts Water sports Property-based disamenity effects Coastal bathing Landscape impacts Informal recreation Land take Part 3: Reservoirs, Lakes and Broads Part 4: Coastal Waters and Estuaries Part 5: Works Related Impacts

Notes:
1. Informal Recreation incorporates activities such as walking/hiking, photography, bird-watching, etc. Bathing is a separate heading under coastal waters because of its relative importance; care is needed not to double-count benefits covered under informal recreation.

2.

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Section 3:

Proposed Methodology

3.1

Introduction

In the current context we are concerned with ex post analysis of investments where ex ante CBAs have already been (or were supposed to have been) carried out. In a number of cases, notably water conservation investments, ex ante studies were not carried out, so they fit into a somewhat different category for this study. This arises out of the following requirement in the Terms of Reference for the Study: The consultants are required to .. propose a Cost-Benefit Analysis (CBA) methodology(ies) to meet the requirements of EU Council Regulation 1164/94. Article 13.4 of the Regulation states: After their (the projects) completion, the Commission and the beneficiary Member State shall evaluate the manner in which they have been carried out and the potential and actual impact of their implementation in order to assess whether the original objectives can be, or have been achieved. This evaluation shall inter alia, address the environmental impacts of the projects, in compliance with existing Community rules.

CBA in its essence is a decision tool designed to help in determining whether an investment should go ahead or not. Since in the current case all the projects have already gone ahead, this particular function of CBA is redundant; however, the technique can be used to review the rationale for a particular investment, and perhaps generate lessons for assessment of future investments. For studies where ex ante CBAs have been undertaken, our function is to review the position, to see how the forecast costs and benefits have turned out. These CBAs were carried out at various points in time (usually the mid-1990s), by a range of individuals/firms and for various investment types around the country. This leads to a number of issues, notably: a) The Celtic Tiger" boom has intervened, leading to greater population growth and economic activity than was perhaps anticipated (some parts of the country will have been affected more than others). What have been the consequences for the investments and their costs and benefits? b) CBA techniques are evolving. Do these developments have implications for the methodology and/or valuations used in the ex ante study? Two questions will thus need to be addressed: (i) how accurate and valid was the ex ante CBA, and ii) with the benefit of hindsight, was this project worth undertaking? As stated,

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some investments were not subject to ex ante CBAs (notably on water conservation investments). Hence there is no analysis to review. In these cases only the second question will be addressed. The Terms of Reference for this study also require that the following be specifically addressed: 1. The developing framework for financing such projects in Ireland; 2. The values of benefits arising during the implementation of the projects; 3. The benefits of the projects to tourism, industry, commercial development, fishing, etc.; 4. The direct and indirect employment effects of the projects; 5. The environmental benefits and future impacts of the projects, having regard to national and EU requirements; 6. The economic viability of the projects; 7. The economic and social benefits commensurate with the resources deployed on the projects. 8. The contribution made to EU Community policies; 9. The contribution of the projects to balanced regional and rural development; 10. Establish the Internal Rate of Return of the projects.

Some of these points fit easily into economic CBA methodology, while others do not. Two that require additional consideration are attainment of EU/national regulations and employment impacts:

Benefits from Meeting EU/National Requirements

There is clearly a political benefit in meeting regulations, and at some level a financial benefit may exist if fines are avoided. However, meeting regulations per se is not amenable to inclusion in CBA as a benefit. Only the actual physical benefits generated, converted to a monetary valuation in an appropriate manner, can be included. Where water investments help to meet EU or national regulations, this should be noted as one of the qualitative results of investment, but it does not obviate the need for a full CBA to be carried out7.

It is worth noting that in the UK, CBA is not used where projects are necessary to meet EU

requirements. The following quotation (Helm, 2003) in a UK context raises the point that the regulations themselves should have been subject to CBA before implementation:

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Direct and Indirect Employment Effects, and Regional Development

Direct employment effects are those generated in the construction of or manufacture of materials for the project in question, while indirect effects relate to employment generated or sustained by the benefits that flow from the project. Employment generation - direct or indirect - is not amenable to inclusion in CBA as a benefit. In CBA, labour is a resource and its usage is a cost, which may be less (or more) than the actual wages paid. Policymakers who remember the days of high unemployment may look upon the generation of employment as a benefit. But where it is done via public investment (which must be paid for by taxation) the likelihood is that one is merely displacing private sector employment with public sector employment. In any event, where the economy has full or near full employment, the issue is of less importance. The presumption, endorsed in the CSF Evaluation Unit's guidelines, is that in current Irish circumstances, the market price (i.e. wages) and shadow price (i.e. resource cost) of labour coincide. If identifiable employment impacts are sizeable, however, they should be noted as one of the non-valued results of the investment. Measuring indirect employment impacts can be problematic. To what degree is the water project critical to the generation of economic activity in the wider economy, or could alternative investment have equivalent results? Are we simply moving activity from one part of the country to another, or is there a net gain for the economy as a whole? What is the net benefit where the economy is at or near full employment? The same points can be made about regional development effects.

the EA (Environmental Agency) argues that much of the capital programme is statutory: that there is no option but to carry out the necessary works, because they are mandated by EU Directives. In many respects, this is correct, although in most cases there are important issues in timing and the forms of compliance. But, of perhaps greater concern, is whether these Directives themselves pass the cost benefit test. Often environmental quality requirements are laid down with regard to problems of countries with inland waterways and geographical and climate conditions very different from the UK with its short, fast-flowing rivers and extensive coasts. It is a serious issue that many of these Directives have not been tested against proper costbenefit assessments; but it is perhaps more serious that there is little account taken of the different locations. Common European standards of environmental outcomes do not necessitate common approaches to environmental inputs.

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3.2

General Principles

While each CBA will be somewhat different, we would list the following as general principles that should apply in most cases. Where deviations from these principles are made, they should be explicitly justified. 1. The lifespan of the investment should be taken as 30 years from the time the infrastructure is commissioned, i.e. becomes operational. Residual values should be used where assets last longer. It may be appropriate to consider each major element of the investment separately. In the absence of better information, the following formula could be used: Residual Value = (Capital Cost as defined in Year Zero) x (Useful Life-30)/(Useful Life) This implies a straight-line depreciation of the asset over its life. A reducing balance approach could alternatively be used, where appropriate. Replacement costs can be incorporated where some assets last less than 30 years, though care is required not to double count this if it is also included in O&M contracts. 2. All costs and benefits incurred since the decision was taken to go ahead with the project (which will usually be a number of years before commissioning) should be included. 3. Year Zero should be the year the infrastructure is commissioned8. All monetised costs and benefits should be stated in Year Zero prices, using the appropriate deflator (i.e. inflation index). Capital costs already incurred should be deflated using the Water & Sanitary Services Output Price Deflator9. All other costs and benefits (internal and external) should be deflated using the CPI. The prices of costs and benefits due to occur in the future can be converted to Year Zero by taking their current year price levels and then deflating them back to Year Zero using the appropriate deflator. 4. The discount rate to be used is 5% real, i.e. net of inflation (CSF Evaluation Unit, 1999). Once the costs and benefits arising in each year are deflated to Year Zero prices, they can be discounted to year Zero at 5% per annum. 5. All monetary values used should be net of VAT. 6. Financing costs (i.e. interest charges) should be excluded. As we are applying a social discount rate to all costs and benefits, to include interest charges as well would be double-counting. 7. Operating costs should be included on a cashflow basis. Thus, accounting entries such as depreciation and amortisation of grants should be excluded. As stated, unrecovered VAT paid and interest charges should also be excluded. Where O&M contracts are in place,

When carrying out an ex ante CBA, Year Zero is generally taken to be the year the decision is taken to

go ahead with the project. However, with an ex post CBA it is easier to use year of commissioning. The results will be the same in any event.
9

As published in the annual Review and Outlook for the Construction Industry, by the Department of

the Environment, Heritage & Local Government. (See Table A2.7, p.119, in the 2003 edition).

24

the payments under these can be used, though care is needed in the treatment of VAT, capital replacement, amortisation of grants, interest, etc. 8. The value of extra land used should be included at its alternative use value. This might be less than was actually paid (e.g. possibly under compulsory purchase, or where the value includes capitalised agricultural subsidies) or more than was paid (e.g. if the local authority used land it already owned).

3.3

Stages in the CBA

The following should be the stages undertaken in the CBA process:

3.3.1: Define the Objectives, the Project and the Counterfactual

Most of the schemes we are required to review contain a number of sub-projects. Aggregating the projects before working out the costs and benefits runs the risk of hiding elements that are more or less worthwhile. On the other hand projects should not be disaggregated below the level at which they can stand as independent entities. Engineering assessment will play a part here. The ability to identify benefits separately may be a factor in how the project is defined, from a practical point of view. The counterfactual represents the alternative course of action against which to test the project. There can be a whole range of counterfactuals, and the definition of some of them might be quite complex. They generally fall under the following headings do nothing, i.e. continue with the existing situation, which may generate increasing costs in the future. do minimum, in many cases similar to the do nothing, where the minimum that can be gotten away with is done. Again there can be increasing cost implications in the future. do something, perhaps an alternative technology. This itself might be tested against a do nothing or do minimum scenario.

In the current circumstances, given the limitations on time and resources, and the fact that we are looking at these investments from an ex post viewpoint, the counterfactual should be do nothing or do minimum, unless there is an obvious alternative.

3.3.2: Identify and evaluate internal (i.e. monetary) Costs and Benefits Internal Costs
These are the capital and operating costs of the scheme. They should be relatively straightforward to value, particularly when looked at from an ex post viewpoint. Future costs will have some uncertainties attached, as discussed already.

25

Internal Benefits
Internal benefits as those that accrue to customers of the water industry, and which are charged for or should be charged for. We include residential water services in the latter. The flow of benefits over the lifetime of the investment will need to be quantified. This will involve making forecasts about number of customers and consumption rates over 30 years, which is of course highly speculative. Demographics and economic growth rates are likely to be important variables. The CSO produces long term population forecasts for Ireland as a whole and for the regions, and the ESRI produces medium-term economic growth forecasts10, but these are unlikely to sufficiently detailed information for specific projects. The local authorities are likely to have some indications of medium-term trends from their planning function. Beyond that we would recommend a conservative approach of low annual growth rates unless there is specific information to suggest otherwise. Benefits would also include avoided costs related to the counterfactual. For example, if sludge disposal at sea has been replaced by treatment and disposal on land, then the avoided cost of sea disposal should be treated as a benefit. Likewise, if basic treatment has been replaced by more advanced treatment, the avoided cost of continued basic treatment should be included as a benefit11. An important consideration in measuring internal benefits is that project definition cannot be separated from the pricing policy relating to its output. This is because demand for a product or service is a function of (among other things) its price. Where a product or service is underpriced (or free), as much of the output of the Irish water industry is, consumption is likely to be excessive, and the marginal value of an extra unit of output may be very low. Unless a change in pricing policy is explicitly part of the project, as is the case with some waste water treatment plants, the implication is that current pricing policy will continue. Particular care is needed when using values from other countries in these circumstances. It is not appropriate to value the benefits of under-priced output in Ireland at the price/marginal benefit level of fully priced water in other jurisdictions. The marginal benefits in Ireland are likely to be lower, all other things being equal. See Appendix C for further discussion. What falls out of this analysis is that proper pricing of water services should be the first response to capacity constraints, and only then should extra investment be undertaken, if there remains a demand for it. This is a counter-argument to the predict and provide approach to public infrastructure.

10

The latest versions are CSO, Population and Labour force Projections 2001-2031, July 1999, and

Regional Population Projections 2001-2003 June 2001; it needs to be kept in mind that these forecasts have been superseded by the results of the 2002 Census of Population. ESRI, Medium Term Review 2003-2010, July 2003.
11

An alternative approach is to net avoided costs off against the internal costs of the new investment,

but it may be preferable to allow the two to remain separately identifiable.

26

3.3.3: Identify external (i.e. non-monetary or non-market) costs and benefits and quantify them to the degree possible External Costs
These could come under a number of headings, such as noise, odour, visual intrusion, traffic congestion and increased accidents during the construction and operation of new plant. The extent of the impact will be determined by the number of people affected, which in turn is dependent on location (urban or rural, amenity value of the area). They should be expressed net of the counterfactual position. In most cases, planning conditions may have taken account of most of these effects. However, there may be some cases (such as large plants in urban locations) where significant costs exist. Some modern plants are energy intensive, and the environmental externalities from the net increase in energy usage should be considered. The main pollutants from combustion, whether on site or from electricity generation, are SO2, NOx, N2O and CO2. There are standardised emission factors which can be gleaned from ExternE, (EC 2003) as well as EPA and ESRI publications for estimating pollution quantities from fuel usage (Appendix B).

External Benefits
These will mainly relate to benefits to the environment as a result of the investment. It is important to note that they relate to the actual improvements to the environment, e.g. receiving waters, rather than output of the investment, e.g. the condition of output from a waste water treatment plant.

3.3.4: Put monetary valuations on the significant external costs and benefits
This is probably the most controversial and uncertain part of the process. We are not in a position to put valuations on the actual external costs and benefits generated in the schemes in question, and very few valuations have been generated in Irish studies. Hence we are forced to use valuations generated elsewhere, and the obvious source, as discussed in the Literature Review, is the UK. A wide range of valuations exists, and it is not possible to compile a list that will apply in all cases. Appendix D contains a more detailed discussion.

3.3.5: Calculate NPV, IRR, BCR and where appropriate IBCR

Having generated the flow of internal and external costs and benefits over the 30 years, the data can be discounted and the various measures of return on investment can be generated.

27

3.3.6: Undertake risk/sensitivity analysis

This will be a less substantial exercise than would have arisen from an ex ante viewpoint, as many of the uncertainties (notably with capital costs) will have been resolved. Our main concern is, what are the chances that the hurdle rate of return (i.e. 5%) will not be achieved. Given that we know the capital cost and we also should have a good indication of the current improvement in water quality as a result of the investment, and of likely operating costs, the main sources of uncertainty should have been eliminated. Remaining possibilities include 1. Operating costs might increase by significantly more than the general inflation rate in the economy. Energy, chemicals and monitoring are some of the possibilities. Price increases of (say) 50% could be tested. Some of these price increases might represent the internalisation of environmental costs, and so should already have been included in our calculations. Plant might not continue to operate as designed, and may require greater expense to maintain or replace parts. The predicted increase in population or industrial load may not materialise, meaning that the improvement in water quality might have been achieved at lower cost.

2.

3.

These are difficult to predict. Conservative predictions in the first place should minimise the scope for surprises in the future. The nature of O&M contracts may give protection against increased operating costs. Given the population increases in recent years, the scope for oversizing plants has been reduced. Unless there are specific reasons to suspect that these or other eventualities might arise, there is probably limited benefit in undertaking a detailed risk or sensitivity analysis. Where undertaken, risk analysis (where probabilities are attached to various forecasts) is preferable to sensitivity analysis, as it allows us to assess the likelihood of the various outcomes, and even to generate a spectrum of probabilities. Where there are more than a few critical factors, however, risk analysis can become very complex. Sensitivity analysis is simpler, testing for changes in the critical factors without attaching probabilities in a systematic way.

3.3.7: Compare Results with ex ante CBA

As stated, in some cases ex ante CBAs will have been undertaken, while in others none will exist. Reviewing some of those that have been done highlights a wide range of approaches and levels of detail. We have also highlighted that there has been a number of developments both in the Irish economy and CBA methodology in the interim. In view of this, we feel there may be limited value in trying to assess these CBAs line by line, with the benefit of hindsight. It would be better if in all cases new CBAs were drawn up using a standardised methodology for each main type of investment (wastewater treatment, supply, conservation, etc.). The results could be compared with the NPV, IRR or BCR generated in the original study, and a general commentary made on reasons for differences. One issue worthy of

28

specific comment is the comparison of actual demand with that predicted in the ex ante analysis, and its implications for rate of return on the investment.

3.3.8: Non-CBA Notes

The following, though not included in the CBA calculations as such, should be specified and details given as appropriate Engineering assessment. Assessment of technology used. Capacity planned and delivered, actual throughput (e.g. population served) planned and delivered, now and over the lifetime of the investment. Reasons for differences between actual and planned values. Assessment of Costs per unit of output. Means of procurement - traditional, DB, DBO, etc. O&M contracts where used. Notes on the implications (e.g. for costs), should be included. Contribution to Irish/EU environmental regulations, both actual and planned. Direct employment generated. Industries affected. This would include significant industrial customers of the water infrastructure, and industries such as tourism for whom water supply, quality, etc. is important. Measures of the significance of the industries, for example Population Equivalent (PE), Value Added and employment should be stated. Sources of finance, divided between EU fund, Central Government, Local Authorities own resources, capital contributions from local industry, private investment, etc.

3.4

Notes on Specific Investment Types

The schemes and projects to be considered come under the following categories: a) b) c) d) e) f) Wastewater Treatment Works Water Treatment Works Water Distribution Water Conservation Sewerage Infrastructure Water Resources Management.

Each will have specific issues that are peculiar to them, some of which are discussed below.

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3.4.1: Wastewater Treatment Works

Define the Objectives, the Project and the Counterfactual

Objectives could include meeting the requirements of the UWWTD, and/or improving the quality of receiving waters. Wastewater treatment works will generally be well defined, but a complication arises when sewerage works are also being undertaken. Are the latter an essential part of the former? This might be the case where areas that previously had other means of disposal become connected to the treatment plant, and without which the plant would be unviable. Renewal of existing sewerage on the other hand might be considered a separate project, as might additional connections above and beyond connection of the most important urban areas. Common sense should provide the answer in most cases. The relative investment cost of the sewerage compared to the treatment works might also give an indication. The counterfactual should in general be the continuation of the position pre-investment, with the minimum expenditure needed to maintain the pre-existing infrastructure.

External Benefits
The most important benefit of a wastewater treatment plant will usually be improvements in the quality of receiving waters. This does not equate to improvements in the outflow of the plant, or elimination of (say) sludge disposal at sea, though these should be included in the non-CBA notes. Actual water quality improvements achieved should be quantified. The EPA has a database of water quality at a large number of points going back over the last decade or so, and the local authorities themselves monitor water quality. Thus, in most cases it should be possible to identify before and after data. Care is needed in identifying locations of water testing. As a general rule, a location as near as possible to the outfall should be used. More than one location might be worth investigating, for example if there were water abstraction downstream of a wastewater treatment plant, or if there were a number of different amenity areas affected. Where this is not possible, experience from similar investments elsewhere may be useful. Benefits can be expressed in terms of the usual water quality measures BOD, Suspended solids, N and P content where appropriate. Colour and odour should also be considered if possible, though these will be difficult to measure objectively. Care is needed to avoid double-counting benefits. The flow of net benefits over the lifetime of the investment, compared to the counterfactual, will need to be quantified.

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3.4.2: Water Treatment Works Define the Objectives, the Project and the Counterfactual
Objectives could include meeting the requirements of the Drinking Water Directive, and/or specific improvements in the quality of water to be supplied to customers. These plants will often form part of a larger scheme, which might include new abstractions, possibly reservoirs, pumping stations and supply networks. The degree to which the projects can stand as independent entities or that their objectives can be achieved independently should inform the degree of aggregation/disaggregation. A treatment plant per se is no use without a network bringing water to it, and from it to customers. This network may or may not pre-exist. If it does, one might consider the treatment plant on its own as a separate project; if not, it is probably appropriate to include it in a larger project. The counterfactual should in general be the continuation of the position pre-investment.

Internal Benefits
The output of the plant, i.e. improved water quality, will have customers, for whom that improvement has a value. Care needs to be taken to distinguish between the supply of water and the quality of the water. In general, treatment plants are concerned with quality, while networks are concerned with supply. This needs to be considered if we are treating the two investments as separate projects. Some customers pay for water and some (i.e. the residential sector) do not; often those who do pay are not paying the full economic price. As discussed earlier, where this is the case, the benefit of an extra unit of water (or water quality) to the customer is likely to be low. Care must thus be taken in valuing the extra output from the investment.

External Benefits
Most of the benefits of a water treatment plant should be internalised, or be capable of internalisation, via customer charging. There may be some health benefits due to the improved water quality, but these are likely to be difficult to quantify.

3.4.3: Water Distribution Define the Objectives, the Project and the Counterfactual
The objective will usually be to provide (or improve the provision of) water to customers. The water distribution network, pumping stations, etc. may or may not sit logically with a treatment plant or other investment as part of the same project. The counterfactual should in general be the continuation of the position pre-investment.

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Capital costs
Where we are considering piping only, and it is clear that the network will have a life well in excess of 30 years, it may be simpler to use the actual useful life as the timeframe for the CBA, leaving no residual value at the end.

Internal Benefits
The most important benefits of a network investment will usually be improvements in water supply to existing customers, supply of water to new customers, or both. Improvements can be in terms of flow and/or reliability. The Local Authorities data on these should be adequate for quantification purposes. Care needs to be taken to distinguish between the supply of water and the quality of the water. New networks are unlikely to have an impact on water quality, unless they reduce contamination. In general, water quality is a function of the source and treatment rather than networks. If we are treating the network as a separate project, we need to be able to separate the benefits also.

External Benefits
It is likely that most benefits will be internalised or be capable of internalisation. Some health benefits may arise where network supplies replace private supplies such as wells.

External Costs
Since networks are for the most part underground, ongoing external costs are likely to be limited. Noise, visual intrusion, traffic congestion and increased accidents during construction may arise to some extent, mainly in urban areas. In most cases, the planning process should take account of most of these effects. A major potential external cost relates to the impacts of abstraction. This impact will need to be measured. Again, the planning process may have accounted for this to some degree.

3.4.4: Water Conservation Define the Objectives, the Project and the Counterfactual
Water conservation projects generally attempt to cut leakages by a certain percentage, with one or more of the following objectives: To provide a more reliable service to customers; To cut maintenance costs;

32

To avoid or postpone the need to increase abstractions; To reduce contamination, thus improving water quality.

The project generally consists of a. replacing supply networks; b. installation of a network of meters (often with telemetry) to enable improved control of the network; c. development or purchase of computer systems to map the network and process the data from the meters;

d. possibly hiring additional IT and maintenance personnel; e. Pumping stations may possibly be included.

The counterfactual might be the continuation of the position pre-investment, or investment in new water abstraction. The condition of the network pre-investment and likely demand conditions will inform this.

Capital costs
Where we are considering piping only, and it is clear that the network will have a life well in excess of 30 years, it may be simpler to use the actual useful life as the timeframe for the CBA, leaving no residual value at the end. IT assets will generally have a much shorter life, and their replacement should be accounted for, though by their nature it is very difficult to predict future IT costs. The replacement cost of assets with a life of less than 30 years should be included (e.g. meters and telemetry stations), though care is required not to double count this if it is also included in O&M contracts.

Operating Costs
Care is needed in defining the operating costs of the project, as there may be an overlap between ongoing work on conservation and ongoing maintenance.

Internal Benefits
Reduced leakage can lead to improved water supply (better reliability and/or pressure). The Local Authorities should be in a position to supply data on this. Where water quality is improved, this also needs to be taken into account.

33

There could also be avoided costs related to the counterfactual. For example, if an old network has been replaced, the avoided cost of operating and maintaining the old network should be included as a benefit.

External Benefits
It is likely that most benefits will be internalised or be capable of internalisation. The exception is where new abstractions are avoided. The level of avoided abstraction may increase significantly over time.

External Costs
As with water distribution, since networks are for the most part underground, ongoing external costs are likely to be limited. Noise, visual intrusion, traffic congestion and increased accidents during pipe and meter laying may arise to some extent, mainly in urban areas. In most cases, the planning process takes account of most of these effects, however.

3.4.5: Sewerage Infrastructure Define the Objectives, the Project and the Counterfactual
Sewerage infrastructure investment will generally be concerned with the removal of wastewater from a location, to a new or existing treatment plant, or indeed to an untreated outfall (though this would be rare in the context of new investment). The objective may be to enable the development of the location, or to reduce pollution from existing infrastructure such as septic tanks. The project may be stand-alone, may include pumping stations, or be part of a larger investment including a wastewater treatment plant. The counterfactual should in general be the continuation of the position pre-investment, or the minimum required to maintain existing infrastructure.

Capital costs
Where we are considering sewerage only, and it is clear that the network will have a life well in excess of 30 years, it may be simpler to use the actual useful life as the timeframe for the CBA, leaving no residual value at the end.

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Internal Benefits
The main internal benefit will be the removal of wastewater from those customers connected to the sewerage. The flow of net benefits over the lifetime of the investment will need to be quantified, by reference to forecasts of residential and other developments. There may also be costs avoided due to the removal of the need for septic tanks (maintenance of the tanks and disposal of waste from them). These are market services that should be readily amenable to pricing, and should be added to the benefits of the new infrastructure.

External Benefits
There might be some reduction in pollution due to the removal of septic tanks, or redirecting of untreated outfalls. However, if the septic tanks are properly maintained, and the cost of this is incorporated above, the scope for pollution would be limited.

External Costs
As with water networks, since sewerage networks are for the most part underground, ongoing external costs are likely to be limited.

3.4.6: Water Resources Management

Two water resource management sub-projects are included in those to be reviewed: 1. The Lough Derg/Lough Ree is part of the Lough Derg Water Quality Improvement and Lough Ree Catchment schemes, mainly covering sewerage investments. 2. The Three Rivers Monitoring and Management System report deals with the Rivers Boyne, Liffey and Suir schemes (the River Suir scheme is not covered by the Cohesion Fund). These will not be amenable to standard CBA, since they will not have physical outputs as such. It may be appropriate to allocate the costs of these reports to the CBAs of the various physical investments included in the relevant schemes. In any event, we will undertake an assessment of the reports, covering the following headings: Technical assessment of report findings Potential benefits Where practicable, implementation costs

35

For future reference, where water resources management projects are set up, which also involve capital investment, CBA should be used in line with the methodology described above for the various elements of the scheme.

36

Appendix A:

Bibliography

Bateman I. J., A. P. Jones, N. Nishikawa, R. Brouwer, 2000. Benefits transfer in theory and practice: a review and some new studies. CSERGE and School of Environmental Sciences, University of East Anglia. Brouwer, R. and I. Langford, 1997. The validity of transferring environmental benefits: further empirical testing, WP 97-07, CSERGE, University of East Anglia. Brouwer, R. and F. A. Spaninks, 1999. The validity of environmental benefits transfer: further empirical testing Environmental and Resource Economics. Vol 14 No. 1. Clinch, J. P., 1999. Economics of Irish Forestry, Coford. CSF Evaluation Unit, 1999. Proposed Working Rules for Cost-Benefit Analysis, Dublin. CSO, 1999a. Population and Labour force Projections 2001-2031, July 1999. CSO, 1999b. Regional Population Projections 2001-2003 June 2001. CSO, 2002 et seq. Census of Population, various volumes. Curtis, J., 2003. Demand for leisure based water activity, Journal of Environmental Planning and Management, Vol 46, No. 1, Jan, Carfax. Department of the Environment, Heritage & Local Government, various years. Review and Outlook for the Construction Industry. Dublin. Department of Finance, 1994. Guidelines for the Appraisal and Management of Capital Expenditure Proposals in the Public Sector, Dublin. Environmental Agency (UK), 2003. Assessment of Benefits for Water Quality and Water Resources Schemes in the PR04 Environment Programme. Working Document (due for finalisation in 2004). http://www.environmentagency.gov.uk/business/444304/444643/425378/425401/425411/507669/?lang=_e EPA (Bowman et al.), 1996. Water Quality in Ireland 1991-1994. Dublin. EPA (Lucey et al.), 1999. Water Quality in Ireland 1995-1997. Dublin. EPA (McGarrigle et al.), 2002a. Water Quality in Ireland 1998-2000. Second (revised) edition. Dublin. EPA, (Page et al.) 2002b. The Quality of Drinking Water in Ireland A Report for the Year 2001. Dublin.

37

EPA, (Mahony et al.) 2002c. Feasibility study for centralised anaerobic digestion for treatment of various wastes and wastewaters in sensitive catchment areas. Dublin. ESRI, 2003. Medium Term Review 2003-2010, July 2003, Dublin. European Commission, 2003. External Costs, Research results on socio-environmental damages due to electricity and transport, DG for Research, Directorate J-Energy. Available at: http://europa.eu.int/comm/research/energy/gp/gp_pubs_en.html Evaluation Unit of the Regional Policy DG of the EU Commission 1999. Guide to Cost-Benefit Analysis of Investment Projects (Structural Fund-ERDF, Cohesion Fund and ISPA), 1999 Edition. Fehily Timoney Weston in association with DKM, 1995. The Economic Appraisal of Environmental Projects Supported by the EU Cohesion Fund, for the Department of the Environment, November 1995. Foundation for Water Research, 1997. Assessing the benefits of surface water quality improvements, FR/CL0005, Marlow, Foundation for Water Research.
Helm, D, 2003. Benefit Assessment: Concluding Remarks, from Economic Appraisal and Assessment of

Benefits in the PR04 Environment Programme, Findings of an Environment Agency seminar, January
2003, New College, Oxford.

Moran, D., 1999. Benefits transfer and low flow alleviation: what lessons for environmental valuation in the UK? Journal of Environmental Planning and Management, Vol 42, No. 3, May, Carfax.
OFWAT (Office of Water Services) 1994. 1993-1994 Report on the Cost of Water Delivered and

Sewerage Collected.

Pearce, D, 1998. Cost-benefit analysis and environmental policy, Oxford Review of Economic Policy, Vol 14 No. 4, Winter, Oxford University Press. RCEP (Royal Commission on Environmental Pollution), 1994. Nineteenth Report: Sustainable Use of Soil., CM 3165, London, HMSO. Scott, S, 2001. "Discharges to water and use of water services", chap 2 in S. Scott, J. Curtis, J Eakins, J. Fitz Gerald and J. Hore, Environmental Accounts: Time Series + Eco-Taxes. Project for EC DG XI and Eurostat B1, ref. no. KITZ99/274, Sub 99/39963. Turner, RK, Batement, IJ & Pearce DW, 1992, Valuing Environmental Performance: the UK Experience, CSERGE Working Paper GEC 92-04.

38

Appendix B:

Valuing Fossil Fuel-Related Externalities

Most external costs and benefits arise locally, and hence are location-specific. Ideally, in each case research should be carried out to identify, quantify and value the externalities that arise. This is not practicable in the current circumstances, so Benefit Transfer, using valuations calculated elsewhere, must be used. A large body of literature exists, with values for a wide range of circumstances. The most comprehensive collection of these values that we are aware of is the Environmental Agency (UK) 2003 document Assessment of Benefits for Water Quality and Water Resources Schemes in the PR04 Environment Programme. Even within this, a range of valuations exists, and it is not possible to identify valuations that will be appropriate in all circumstances. Appendix D discusses this in more detail. While most externalities are location-specific, some have significant elements that are invariant within Ireland, internationally and even globally. Examples include accident costs (fatalities, serious injuries, minor injuries) and externalities related to fossil fuel usage, related to acid rain or global warming (emissions of SO2, NOx and CO2). At the time of writing, the Department of Transport is about to commence a study that will update values to be used in transport CBAs, accident externalities included. The study is due to be completed by the end of March 2004. As for fossil fuel usage, we must first convert from energy usage to emission quantities, and thence to valuations of damage. Table B1 sets out the level of emissions from burning various fuel types. Emission factors are shown per unit of the original fuel burnt, and converted to Tonnes of Oil Equivalent (TOE), which is a standardised way of comparing the energy content of various fuels.
Table B1: Emissions for Various Fossil Fuels TOE/Unit of Fuel Tonnes of Emissions/TOE Tonnes of Emission/Unit of Original Fuel

CO2
Natural Gas (kilotherms) Oil (tonnes) Coal (tonnes) Peat (tonnes) 2.440 1 0.655 0.313 2.07 3.01 3.7 4.34

SO2
0 0.0059 0.0241 0.0126

NOx
0.0021 0.0021 0.0021 0.0042

CO2
5.050 3.010 2.424 1.358

SO2
0.000 0.006 0.016 0.004

NOx
0.005 0.002 0.001 0.001

Note: Conversion factor ktherms of gas to TOE: 0.409871 (Kinsale gas). The oil is 0.3% sulphur. The peat is milled peat.

Sources: Fitz Gerald & McCoy, 1992; Barrett, Lawlor & Scott, 1997.

Electricity is of course a major means by which energy is consumed, and is generated mainly from fossil fuels. We can calculate the average emissions for electricity, based on fuels used

39

to generate it in Ireland in 2001. In future years the fuel mix, efficiency levels and load factors may differ; it is generally believed that natural gas will increase its share, but there are countervailing concerns that Ireland may be come too dependent on this fuel. Table B2: Calculation of Emissions from Electricity Generation in Ireland, 2001 Gross Output Fuel Used MWh TOE'000 9,478,977 1,855 5,119,213 1,171 6,893,244 1,527 1,929,390 583 732,511 78 722,700 53 24,876,035 5,267 Implied Emissions Tonnes SO2 NOx CO2 3,839,850 3,896 3,524,710 6,909 2,459 5,649,900 36,801 3,207 2,530,220 7,346 2,449

Natural Gas Oil Coal Peat Hydro Renewables Total Emissions per MWh

15,544,680 0.62

51,055 0.0021

12,010 0.0005

Note: Conversion factor ktherms of gas to TOE: 0.409871 (Kinsale gas). The oil is 0.3% sulphur. The peat is milled peat.

Source: DKM estimates.

The next and more controversial step is to put valuations on these emissions. The valuation should represent the lower of the damage caused by the emission and the cost of avoiding the emissions. Many attempts have been made to value the emissions, and a wide range of estimates exist (e.g. EPA 2002c), mostly related to damage caused. We are fortunate in that emissions trading systems exist in the USA for both SO2 and NOx, and these should give us an indication of the marginal cost of avoiding emissions12. The average monthly price of SO2 allowances in 2001 was US$185/ton. Prices for NOx have been significantly more volatile, but in the first half of 2001 prices were in the region of US$1,600/ton, having been significantly lower in 2000 and significantly higher prior to that13. These prices convert to 227 and 1,964/ tonne respectively, in 2003 prices. As for CO2, The EU plans to have a trading system in place for 2005. Practise trades by large European companies were indicating prices of 12 13.20/tonne in late 200314, an average of 12.60/tonne. However, large changes are possible post March 2004, when each countys National Allocation Plan (NAP) must be in place, and subsequently when the new EU members join, as many of them will be net sellers of emissions allowances.

12

The system in the US is cap and trade, i.e. a national cap is set on emissions, and there is trading

within that cap. The requirement to stay within the cap could mean that the trading price overestimates the true marginal cost of emission reduction.
13
14

see US EPA website http://www.epa.gov/airmarkets/index.html

See Dow Jones Newswires, November 19, 2003. European Companies Gearing Up For Emissions

Trading : CO2 Price Rising. http://www.ieta.org/Library_Links/IETAEnvNews/Nov19_EU.htm

40

Based on the foregoing, we can make an estimate of the cost of emissions per unit of fuel burned. Given the level of uncertainty involved and the likelihood of significant changes in the future, this should be used with caution.

Table B3: Estimate of Emissions Cost per Unit of Fuel Burned CO2 Cost per tonne of emissions (2003 ) 12.60 SO2 227 NOx Costs per Unit of Fuel Burned () 1,964

Tonnes of emissions per Unit of Fuel Burned Natural Gas (kilotherms) 5.050 Oil (tonnes) 3.010 Coal (tonnes) 2.424 Peat (tonnes) 0.807 Electricity (2002, MWh) 0.62

0.0000 0.0059 0.0158 0.0023 0.0021

0.0051 0.0021 0.0014 0.0008 0.0005

73.70 43.39 36.82 12.24 9.29

Note: On the face of it, the above numbers may appear to indicate that natural gas is a heavier polluter than the other fuels, but one has to take into account the energy content of the fuels in question. For instance, one kilotherm of natural gas is the energy equivalent of 13 tonnes of milled peat. For future reference, a number of expected developments in the energy sector over the coming years need to be kept in mind when carrying out CBAs, including: 1. If emissions trading is established in Ireland, energy from sources subject to the regime (including electricity generation stations, but probably not water or wastewater treatment plants) will automatically have their emission costs internalised, and it will no longer be necessary to include additional costs for these in CBAs. 2. Concomitant with the emissions system, it is probably that smaller energy users (including water schemes) will either have to participate in voluntary agreements to reduce emissions, or pay a carbon tax. In either case, subject to uncertainty regarding the efficacy of voluntary agreements and setting the tax at an appropriate rate, the external costs of CO2 emissions should be automatically taken care of in the price of fossil fuels, and no further addition will be required in CBAs. 3. Apart from a possible SO2 and NOx emissions trading system, EU Directives require significant investment to reduce SO2 and NOx emissions over the coming years. The cost of this will be incorporated in energy prices, and to that degree the further addition of costs for emissions in CBAs will be unnecessary. 4. Regardless of future developments, however, In the current context it is necessary to incorporate externalities from energy usage by the water schemes. Current internal prices plus an estimate of external costs should be used, and the fact that these energy users may at some point in the future be subject to emissions trading or energy taxes should be ignored.

41

Appendix C:

The Importance of Pricing to Infrastructure Investment Decisions

In commercial markets, price and quantity consumed are determined by the interaction of supply and demand. This can be expressed graphically as follows:

P
p0 Supply

p*

Demand q* q0 Q

Price (P) is on the vertical axis and quantity (Q) on the horizontal. The demand curve, slopes downwards from left to right, while the supply curve slopes upwards. Intuitively, less demanded as the price rises, and more is supplied as the price rises. It can be shown that the demand curve also represents the marginal benefit from consumption of the good, while the supply curve represents the marginal cost. In a normal market, the intersection of the curves gives the equilibrium price and quantity (p* and q*). In the absence of external costs and benefits, this represents the optimal position, as societal benefits are maximised at this point. In a situation of under-pricing, however, we get a sub-optimal position, with marginal benefit lower than marginal cost, and excessive consumption. In the extreme case where the good is supplied for free, consumers keep consuming the good until their marginal benefit reaches zero (q0 in the chart). Supplying this level of output is very expensive at the margin (p0 in the chart). It can thus be seen that the marginal benefit of extra capacity without proper pricing can be very low, and the cost very high. The slope of the demand and supply curves will determine the extent of this, but it is almost inevitable that without proper pricing the cost of extra supply will exceed the benefit.

42

Appendix D:

Benefits Transfer

D.1

Quality Assessment of Water

Classifying Water Quality In order to assess the change in water quality that may result from a water scheme, there needs to be a means of classifying water quality. The classification task needs to be undertaken before and after the scheme is put into operation so that the change in water quality can be described. Classification schemes have been developed to record the quality of water in rivers, lakes and estuaries/coastal waters. This sub-section briefly describes them in turn. Rivers There is a classification system in use known as the biological river quality classification system. It classifies river water quality into five levels, Q1 to Q5, with Q1 and Q5 respectively indicating bad and good water quality. The classification system is outlined in the following table:

Quality: Q value

Diversity of the macroinvertebrate community

Water quality

Condition (with respect to potential uses)

Q5 High Good Satisfactory Q4 Reduced Fair Satisfactory Q3 Much reduced Doubtful Unsatisfactory Q2 Low Poor Unsatisfactory Q1 Very low Bad Unsatisfactory Source: Water Quality in Ireland 1998-2000, p. 3, EPA 2002. Notes: Macro-invertebrates, some at immature stages, include aerial insects, crustacea, molluscs, worms, etc. In addition to the five Q values entered in the table above, intermediate Q values such as Q12, Q4-5, are also used. It needs to be stressed that assessment of river water quality is inexact owing to changing circumstances, such as the weather and so forth. While it is the Q values outlined above that this report uses in general, there are other ratings with which readers may be more familiar. These are the quality classes unpolluted, also called class A, down to seriously polluted, class D, that appear as coloured points on the maps accompanying the EPAs reports on water quality. These relate directly to the Q values just described, in the following manner:

43

Q value Q5 Q4-5 Q4 Q3-4 Q3 Q2-3 Q2 Q1-2 Q1

Pollution status Unpolluted Slightly polluted Moderately polluted Seriously polluted

Quality class Class Class Class Class A B C D

Class A waters are unlikely to present water quality problems that would impinge on existing or potential uses. The main characteristic of classes B, C and D is eutrophication, defined below, which may interfere with amenity, abstraction or fisheries use of such waters. Roughly translated from the Greek eu means well and trophic means nourished. In the worst class of waters, class D, excessive organic loading leads to deoxygenating and may produce sewage fungus, with most beneficial uses curtailed or eliminated. Eutrophication is defined in the Urban Waste Water Treatment Directive (91/271/EEC) and Nitrates Directive (91 676/EEC). Water that is defined as eutrophic is described as exhibiting all the following three characteristics:

enrichment by nutrients, especially compounds of nitrogen and/or phosphorus accelerated growth of algae and higher forms of plants, and undesirable disturbance to the balance of organisms present and to the quality of the water concerned.

How these features are translated into detailed criteria that then translate into the final Q values is described in Section D.4 at the end of this Appendix. The description in the Appendix is given by reference to estuaries and coastal waters. Given that we have seen that there are several classifications of water quality, the reason that Q values are used for this study is that they are recorded at each sampling point reported in the EPAs water quality datasets. They are important for this study because, as described above, they indicate the condition of waters with respect to beneficial uses. The main uses in question broadly include the potential for water abstraction, the fishery potential and amenity use. The manner in which the Q values affect these uses has been spelt out by the EPA and is shown in the table below (Water Quality in Ireland 1998-2000, App I Table I.1). In addition to showing the three main uses in the last three rows, that is, abstraction potential, fishery potential and amenity value, the table specifies in the higher rows the meanings of the different terms in common usage namely pollution status, water quality, and condition. At Q2 for example the water is only useful for low grade abstractions. At Q3 coarse fishing is a possibility, though the amenity value is reduced and abstraction for normal use requires advanced treatment. By contrast at Q4 and Q5 the water is suitable for abstraction for all usual purposes, there is good game fishery potential and amenity value can be high.

44

Water quality (Q values) and beneficial uses of water

Quality Classes Quality Ratings (Q)

Class A Q5 Pristine, Unpolluted Highest quality Satisfactory Q4 Unpolluted Fair quality Satisfactory

Class B Q3-4 Slight Pollution Variable quality Transitional

Class C Q3 Moderate Pollution Doubtful quality Unsatisfactory

Class D Q2 Heavy Pollution Poor quality Unsatisfactory Q1 Gross Pollution Bad quality Unsatisfactory

Pollution Status Water Quality Condition Beneficial uses: Abstraction Potential Fishery Potential Amenity value

Suitable for all

Suitable for all

Potential problems

Advanced treatment

Low grade abstractions Fish usually absent Low

Extremely limited

Game fisheries Very high

Good game fisheries High

Game fish at risk Considerable

Coarse fisheries Reduced

Fish absent Zero

Source: Water Quality in Ireland 1998-2000, App I Table I.1, EPA ( 2002)

45

The Environmental Protection Agencys summary of this information is:

Q4 Q4-5 Q5

Satisfactory condition: problems relating to existing or potential uses are unlikely to arise Unsatisfactory because of potential risk to wild game fish populations of nocturnal dissolved oxygen (DO) depletion, particularly in times of low flow and elevated temperature. Unsatisfactory. The main characteristic is eutrophication which may interfere with the amenity, abstraction or fisheries uses. Excessive organic loading leads to deoxygenation and may produce sewage fungus growths, severely curtailing most beneficial uses.

Q3-4

Q2-3 Q3

Q1 Q1-2 Q2

The Environmental Protection Agencys reports are the major source of information on the water quality assessments relating to the periods before and after the schemes have been commissioned. In order to obtain local information of a sometimes more discursive nature, and to update information where the EPA has not yet received recent measurements, the regional fisheries boards were consulted. In all instances, the local authorities, which undertake the primary measurements and are also in a position to assess current conditions, were asked for any results that they had recorded or observed.

Lakes Up to this point we have dealt with the assessment of water quality in rivers. Where lakes are concerned, eutrophication or nutrient enrichment, principally by phosphorus and to a lesser extent by nitrogen, is again the principal threat to their quality. Lake water is most commonly assessed by reference to a different classification scheme proposed by the OECD and which has several criteria. In Ireland a modified version of this scheme is used in which assessments are based solely on the annual maximum concentration of chlorophyll a, with sub-divisions according to the maximum levels of planktonic algae measured during the period. Details of the criteria used here for lakes are given below. As can be seen from the next table the categories for lakes range from Oligotrophic, indicating very low level of pollution and probably no impairment of use, to Hypertrophic with very high level of pollution and impairment of use. These are the classifications that will be used in this study for the assessment of the effects of the water schemes on lakes.

46

Water Quality of Lakes and Impairment of Use Classification: Lake Trophic Category O Oligotrophic M m-E s-E h-E H Mesotrophic Moderately eutrophic Strongly eutrophic Highly eutrophic Hypertrophic Criterion: Annual Maximum Chlorophyll mg/m3 <8 8 25 25 35 35 55 55 75 > 75 Description Algal growth Low Moderate Substantial High High Very high

Degree of Deoxygenation in Hypolimnion Low Moderate May be high High Probably total Probably total

Level of Pollution Very low Low Significant Strong High Very high

Impairment of Use of Lake Probably none Very little May be appreciable Appreciable High Very high

Source: Water Quality in Ireland 1998-2000, Table 3.2 p. 37, EPA (2002) Note: This is the Modified version of the OECD scheme, based on values of annual maximum chlorophyll concentration, with indicators related to water quality and probable level of pollution.

47

Estuaries and coastal waters A detailed examination was undertaken by the EPA in its report entitled An Assessment of the Trophic Status of Estuaries and Bays in Ireland for the then Department of the Environment and Local Government (EPA, 2001). Eutrophication is again the condition to be investigated and the detailed criteria for eutrophication are spelt out and described in Section D.4 at the end of this Appendix.

References: EPA, 2001. An Assessment of the Trophic Status of Estuaries and Bays in Ireland, Report prepared for the Department of the Environment and Local Government. Johnstown Castle Estate, Wexford. EPA 2002. Water Quality in Ireland 1998-2000. Also Statistical Compendium on CD. Johnstown Castle Estate, Wexford. EPA, 2003. River Water Quality Report 2002: The Biological Survey of River Quality Results of the 2001 Investigations. www.epa.ie/Water/Quality/RiverReport.htm . Johnstown Castle Estate, Wexford. (Coverage is partially complete)

48

D.2

Valuing Water Quality

Water Quality valuation In order to estimate the value of changes in water quality brought about as a result of investment in water schemes, there needs to be a means of placing values on attributes such as cleaner rivers or rivers with fish. The total benefit of a scheme that improves water quality would then include the value of this improvement. To estimate this one has to overcome the problem that such values are not readily available, and secondly those that are available have not been estimated for Ireland. In this sub-section a brief description of valuing non-marketed goods is given, followed by a discussion of transferring values calculated elsewhere, a procedure called benefits transfer. A short description of the principles of benefits transfer is given. The next sub-section summarises the procedures recommended in the Guidance manual of the Environment Agency of England and Wales, with a view to applying those procedures to the schemes under review here.

Introduction to valuing goods that are not marketed A major challenge in cost-benefit analyses is the measurement of the value of the things that have been considered to be unmeasurable. Prominent among these are items such as resource quality, species loss, visual intrusion or merely having the option to enjoy an amenity or to know that it exists. There can be option, non-use or existence value as well as use value. The items in question are largely environmental in type that are not directly bought and sold in the ordinary sense and cannot readily be incorporated in the calculations of costs and benefits. Rapidly growing recognition of the importance of these items is being matched by the growth in developments in means to place a monetary valuation on them. The issue of valuation and the techniques employed received particular attention as a result of the claims for damages arising from the Exxon Valdes oil spill close to the Alaskan coast, in 1989. Procedures for finding the money values of non-marketed goods, such as cleaner rivers, started with techniques that used indirect markets that were related to the good in question. House prices can reflect the value of local environmental attributes, enabling the hedonic price method to be used. Or the cost of travel can reflect the amount that people are willing to pay to enjoy a recreational asset - the Travel Cost Method (TCM). These are revealed preference methods. Another method comes under the category of stated preference techniques. These involve administering carefully controlled questionnaires that ask people their monetary valuations. People may be asked how much they are willing to pay (WTP) for an environmental improvement, or the amount they are willing to accept (WTA) in compensation to forgo that improvement. Values of losses in environmental quality, alternatively called negative benefits or disbenefits, can be estimated in a similar manner to values of improvements.

49

In the UK, transport projects in the sixties, such as the M1 motorway and the Third London Airport, were subjected to CBA in which the non-marketed time saved was given estimated monetary values. Valuation of environmental aspects, rather than time saved, came to the fore in recent assessments of, for example, the conservation of the Norfolk Broads. Here the non-use benefits of the Broads were shown to be a prominent part of the benefits. Despite such findings of significant real, though non-marketed, costs and benefits, some analysts might still not consider the costs that are not directly marketed. For example, a report of the Royal Commission on Environmental Pollution (1996) on soil erosion omitted any mention of the economic cost of soil erosion. Omission of important external effects means the analysis is incomplete. With the demands of the sustainable development agenda, project-based and policy-based studies and manuals have been produced which cover air quality, agricultural externalities, solid waste and minerals, energy pricing, chemical pollution, forestry, wildlife, habitat and landscape and cultural heritage (Pearce, 1998). In particular there is a literature on economic evaluation of water supply and wastewater treatment projects that considers evaluation techniques designed to value many of the outputs of such schemes. Major authors include the Environment Agency (2004) in the UK, the US Environmental Protection Agency (2000), the World Bank (1996) and Resources for the Future (1996).

Benefits transfer Policy makers often require cost-benefit analysis to evaluate a project without having committed the time and resources to estimate the benefits or costs of the specific project. In these circumstances, resort is often had to valuations from studies undertaken elsewhere. In an exercise called benefits transfer these values are then transferred to the project under review. A definition of benefits transfer is quoted by Bateman et al (2000), on whose work this sub-section draws, as the transfer of existing estimates of non-market values to a new study which is different from the study for which the values were originally intended Boyle and Bergstrom, 1992. Questions as to the validity of approaches used to date have provoked a lively debate and empirical testing (Brower and Spaninks, 1999). Application of benefits transfer suffered a setback in 1998 with a public inquiry, commonly known as the Axford case, into a proposal to extract borehole water from near the River Kennet in Wiltshire. This is located in an Area of Outstanding Natural Beauty and a Site of Special Scientific Interest, and the Environment Agency had conducted a cost-benefit analysis15 in which they concluded that reduced abstraction should be required. The study was based on valuations relating to the River Darent in Kent. The decision in the public inquiry went against the Environment Agency and its cost-benefit appraisal. A key issue was the use of benefits transfer to estimate the non-use value of maintaining the flow and, in particular, the number of people who should be deemed willing to pay to maintain the flow.

15

Based on the benefits manual prepared by the Foundation for Water Research (1996).

50

A lesson to emerge from the disagreement is the need to calibrate very carefully values of benefits that have been taken from elsewhere. Allowance should be made for differences between sites in the key variables that explain willingness to pay, for both use and non-use. Other considerations include whether to use mean or median willingness to pay, how wide a geographic spread of population should be used or what assumption to make about fall-off in WTP with distance (so-called distance decay), and how to deal with marginal differences in the quality, or water flow in that case (Moran, 1999). The risks of misrepresentation are high when benefits transfer is used and it is strongly advised that site specific surveys of WTP be undertaken in order to make results firmer. But with virtually no valuations available for Ireland,16 valuations have to be borrowed from elsewhere and applied with due regard for the lessons learned.

Principles of Benefits Transfer There are three broad approaches to benefit transfer which will be outlined in turn: (i) (ii) (iii) Transferring unadjusted unit values Transferring adjusted unit values Transferring benefit functions

(i)

Unadjusted unit values

The unit value estimate of WTP from some original study site can simply be transferred for use in the target or policy site for which benefits estimates are required. The estimation of recreational and other non-market benefits from the River Darent to analyse the River Kennet, is an example. A variety of unit values may be transferred, the most typical being mean or median measures. The problem is that the unit values may not apply to other sites where circumstances are likely to be different. Reasons may include the following: a. b. c. d. Differences in the socio-economic characteristics Difference in physical characteristics of the study and site Differences in the policy or change being analysed Differences in market conditions, such as availability of substitutes.

(ii)

Adjusted unit values

Since all these differences are likely to be present, a way to try to overcome them is to adjust the unit values. In the UK for example the valuation of noise called on the opinions of estate agents on house values, and this present study of water schemes could do likewise with

16

Studies by Clinch (1999) and by Curtis (2003) being notable exceptions. Only the last is in a field that

relates to the subject of this study. Other studies by Indecon (2003) and by a series of authors in the ESRI have looked at expenditures on water-based leisure including salmon angling.

51

respect to nearby waters that are polluted or otherwise. In some cases sub-samples of the original study data might be amenable to re-analysis if they replicate, say, the income group or conditions at the site in question. Given that the initial sample size is likely to be too small to yield reliable results, another approach is to use the findings of a number of prior studies and analyse them statistically. It is possible to integrate all the findings to derive useful generalisations. This is called meta-analysis. An example of a meta-analysis is the study by Bateman et al. (op. cit.) who gathered some 77 estimates from various studies of the value per person per visit to woodland. These values were formulated into an equation by regression analysis. That is the valuations were expressed as a function of the elicitation method,17 on whether or not option value rather than merely use value is included in the willingness to pay, on evaluation method18 and on estimation method.19 Another meta-analysis of 200 travel cost studies was undertaken by Smith and Kaoru (1990) of recreation sites in general, be they for water-based activities, hunting or enjoyment of wilderness and be they lake, river, forest, State Park or National Park. A notable finding in that instance is the significance of the modelling assumptions adopted by researchers. Of most significance is the fraction of the wage rate used to estimate the opportunity cost of time. Meta-analyses of hedonic pricing studies of noise and of air quality also highlight the part played by method in the results derived. A meta-analysis by Brouwer et al (1999), also described in Bateman et al, of Contingent Valuation studies of use value and non-use value of wetlands showed that average willingness to pay was substantially higher in North America than in Europe. A further finding was that higher response rates, a rough indicator of overall study quality, appear to result in significantly lower average WTP than low response rates. In addition, non-use function such as biodiversity, in the case of wetlands, did not rate such a high value as the use value of flood control. This may reflect the fact that the ultimate use of biodiversity is not clearly understood.

(iii)

Benefit function transfers

Thirdly, instead of using the unit value, be it unadjusted or adjusted, the researcher can apply an entire function (if one has been estimated) from the study site to the new policy site. This enables the assumptions about value and its determinants made for the original site to be carried over to the new or policy site and relationships between the characteristics and the estimate of benefit can be exploited. Many tests of this procedure have been undertaken. These tests compare the coefficients produced in the regression exercises. Coefficients from studies of similar benefits are

17

This would be represented by dummy variables, for example whether or not the elicitation method Contingent valuation, travel cost and so forth. Ordinary least squares, maximum likelihood, etc..

was open-ended: how much are you willing to pay - it would be expected to yield lower estimates.
18 19

52

compared using a mixture of tests.20 Transfer errors have been calculated in terms of the difference between the observed unit values at the original study site and at the policy site. Another measure of this error is the difference between the predicted value at the policy site derived from transferring the benefit function from the original study site, on the one hand, and the observed average value at the policy site on the other. An example of testing benefit transfer errors is the analysis undertaken by Loomis (1992) of the functions valuing ocean fishing trips in different states of the US. These tests rejected equality of the coefficients. In another test within the state of Oregon, an analysis of results from ten freshwater fishing sites was used to calculate an average value for each site and then a grand average from the full ten-site model. This study showed that transferring functions based on the remaining nine sites produces figures that are closer to the valuations at the tenth site than use of the simple grand average. As a result of work to date recommendations for valuations research have been made to help benefit transfer in the future. In an ideal world, of the various approaches to benefits transfer, a preferred option is to avail of the function that expresses the benefit as a function of the characteristics of the site and users (Bateman et al., 2000). It would also be desirable that benefit functions would have been routinely drawn up in valuation studies according to a code of practice. This would include accurate definition of users and non-users, with a clear view to aggregating numbers in an appropriate way. A minimum set of common variables should be used such as age, household income, composition and membership of environmental associations. Bandwidths and scales ought to be consistent with those used in other studies or with national data, such as the Household Budget Inquiries of the Central Statistics Office.

Practical lessons to be drawn For this study it is well to be aware of the pitfalls of benefits transfer. The study for the River Kennet can be usefully drawn upon for practical lessons. It involved simple unit-value transfer applying the results of a study of the River Darent to evaluate the case for restricting abstraction on the river Kennet. The restriction of abstraction on the Kennet would have entailed expenditure by the water company of 6.2 million on developing alternative sources of water. Against this the benefit for the Kennet was evaluated at 13.9 million and it was the uncertain nature of this benefit estimate that was one of the causes of objection by the water company, Thames Water Utilities Ltd to the restriction. The benefits had been transferred from the mean willingness to pay for the recreation value, on the part of residents and of visitors (16.44 and 12.01 per household per year, respectively), for maintenance and improvement of the river Darent. These values were aggregated up to the relevant populations around the Kennet. Turning to non-use value, the general public mean WTP was taken from a module of the Darent study that investigated improvement of 40 low-flow rivers, divided by forty. This gave a conservative WTP of 0.32 per household per year. However, it is the aggregation of this figure that appears to have been the contentious issue. The study was actually required to aggregate over the water

20

These include Chow, Likelihood Ratio (LR), Lagrange Multiplier (LM) and Wald tests.

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companys entire customer base, which is some 3 million households, and apparently had no choice but to do that. Bateman et al (page 90) point out that, given use of an arguably low figure of WTP and high population figures, there is no way of knowing whether the benefits estimate was in fact too low or too high. Having outlined both the academic discussion and recent events, there are some pointers on how to proceed. In the absence of site-specific studies of willingness-to-pay (WTP), relevant valuation studies from elsewhere can be availed of in what is called benefits transfer. Two classes of data are required, namely, the valuation of the benefit and the population to be used to aggregate up to a total value. Figures for the population of users, such as visitors and fishermen, have to be obtained, and potential users need to be estimated in some manner. The definition of the non-user population over which to aggregate is crucial. The non-user population are the people who value the existence of an environmental asset. WTP is likely to be differentiated by distance from the site and by site-specific aspects such as access. Given the uncertainties it is advised that analysts undertake sensitivity analyses, using upper and lower bound assumptions.

These lessons have been taken in to account by the Environment Agency in their guidance manual for assessing environmental benefits of water schemes. The next sub-section outlines their recommendations that could be applied in Ireland for estimating the population and finding the valuation to be applied.

References
Bateman, I. J., A. P. Jones, N. Nishikawa and R. Brouwer, 2000. Benefits Transfer in Theory and Practice: A Review and Some New Studies, available from http://www.uea.ac.uk/~e089/, CSERGE and School of Environmental Sciences, University of East Anglia. Boyle, K. L. & Bergstrom, J. C., 1992. Benefit transfer studies: myths, pragmatism and idealism, Water Resources Research, 28 (3), p. 657-663. Bingham, Tayler H., Bondelid, T. R., Depro, B. M., Figueroa, R. C., Hauber, A. B., Unger, S. J., Van Houtven, G. L., 2000. A Benefits Assessment of Water Pollution Control Programs Since 1972: Part 1, The Benefits of Point Source Controls for Conventional Pollutants in Rivers and Streams, U.S. Environmental Protection Agency.

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Brouwer, R., I. H. Langford, I. J. Bateman and R. K. Turner, 1999. A meta-analysis of wetland contingent valuation studies, Regional Environmental Change, 1(1) p. 47-57.

Brouwer, R. and F. A. Spaninks, 1999. The validity of environmental benefits transfer: further empirical testing, Environmental and Resource Economics, 14(1), p. 95-117. Clinch, J. P., 1999. The Economics of Irish Forestry, Coford, Dublin. Curtis, J. A., 2002. Estimating the demand for salmon angling in Ireland, The Economic and Social Review, vol. 33 no. 3, winter, p. 319-332. Dublin. Environment Agency (England and Wales), 2004. Benefits Assessment Guidance for Water Quality and Water Resources Schemes. Eight volumes. Foundation for Water Research (FWR), 1996. Assessing the benefits of surface water quality improvements, FWR, Marlow. Frederick, Kenneth et al., 1996. Economic Values of Freshwater in the United States, Resources for the Future. Indecon, 2003. An economic/socio-economic evaluation of wild salmon in Ireland, report prepared for the Central Fisheries Board, Dublin Moran, D., 1999. Benefits transfer and low flow alleviation: What lessons for environmental valuation in the UK?, Journal of Environmental Planning and Management, 42(3), p. 425436. Young, Robert A., 1996. Measuring Economic Benefits for Water Investments and Policies, World Bank.

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D.3

Method for valuing environmental effects of Irish schemes Benefits transfer using Environment Agency (England and Wales) Guidance

There are several manuals that provide a shortcut for use by practitioners who require estimates of environmental benefits for their cost-benefit analyses. One manual that relates relatively well to conditions in Ireland is the document in eight volumes released by the Environment Agency of England and Wales (2004). Entitled Benefits assessment guidance for water quality and water resources schemes, henceforth referred to as the Guidance, it was prepared by consultants Risk & Policy Analysts (RPA) and will form the main source of information for this exercise. The 14 schemes that form the subject of this review can be broadly categorised into the following types of projects: Table 1: Categorisation of projects Project Category Wastewater Treatment Works Water Conservation Water Resources Management Sewerage Infrastructure Water Distribution Water Treatment Works Total

Number 27 10 2 3 5 11 58

In this list the project category that could have strongest environmental benefits is Wastewater Treatment works. The other categories having environmental benefits are, depending on the initial pressure on the water resource, Water Conservation and Water Resources Management. Water Treatment Works that entail increased water abstraction could also have an effect. In so far as Sewerage Infrastructure prevents pollution and Water Distribution diverts abstraction, these could also have an effect.

Guidance by the Environment Agency of England and Wales The Guidance deals with rivers, lakes, coastal waters and impacts of scheme-related construction works, and is designed to cover both water quality improvements and water resource management issues. It provides a means of evaluating the environmental and social costs and benefits of schemes proposed under the water regulators Periodic Review, in a manner that can be applied at a desk-top level using benefits transfer, a method described in the previous sub-section. It is not possible within the confines of this project to describe the Guidance in more than a summary fashion. Many detailed instructions are contained that call on the use of a considerable corpus of data and analysis that do not exist in Ireland, such as numbers of

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visitors, anglers and days fishing on specific stretches of river. It will therefore only be possible to apply the Guidance in a notional manner, for to do otherwise would be to impart a spurious air of accuracy to a procedure that, in any event, is likely to produce indicative rather than definitive values. As already outlined, valuation of an environmental benefit requires two broad types of figures to be provided. These are firstly a figure that represents the value, such as willingness to pay for the environmental benefit and, secondly, the number of persons to whom this value applies, that is, the numbers who would be willing to pay. Categorisation of benefits is given in Part 1 of the Guidance and is reproduced here. The Guidance advises on the need to avoid double counting of benefits, which could arise if, for example, anglers had already been included in the estimates of the numbers enjoying informal recreation and were then added as an additional category under angling without adjustment. Table 2: Categorisation of benefits included in each part of the Guidance Categories of benefits Part 2: Part 3: Part 4: Part 5: Rivers and Reservoirs, lakes Coastal waters Works related groundwater and broads and estuaries impacts Informal recreation. Land take Recreation. Informal Angling. Landscape recreation. Heritage, Commercial fisheries. improvements archaeology and Coastal bathing. In-stream recreation Property-based Water sports. landscape. Heritage, archaeology disamenity effects Amenity. Recreational and landscape. Traffic-related fishing. Biodiversity and Amenity. impacts non-use. Shellfisheries. Abstractions. Energy and global Biodiversity and Biodiversity and non-use. warming non-use. Source: Guidance Part 1, Table 2.1. Note: Benefits can be negative, often termed disbenefits. The projects or drivers covered in the Guidance are numerous and detailed and fall under the headings of projects involving groundwater, dangerous substances, the Directives on freshwater fish, bathing waters, shellfish waters, and on surface water abstraction, River Quality Objectives, the UKs Biodiversity Action Plan, and local priorities. A summary of how to estimate the main benefits is discussed here, in terms of their values and recommendations are made as to how to estimate the numbers or populations for aggregation. This summary covers the benefits of projects in terms of their effects on (1) rivers, (2) estuaries and coastal waters and (3) lakes. Estimation of the benefits for each of these is now discussed in turn.

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RIVERS The first task is to identify which uses apply to the stretch of river in question. All the potential uses, their users and possible valuations will now be discussed in turn. It is helpful if there exist data sets, as in the UK, that can aid estimation of the various populations of users.

Informal recreation
Informal recreation includes walking, hiking, picnicking, dog-walking and nature appreciation including bird-watching and photography. The Guidance recommends using monetary valuation only if the changes in water quality or in river flow/levels have a discernible impact on sites and if users are significant in number (over 1,000 visits per year), or if these could be significant if access were improved. Of the many values given in the Guidance, only those that might be relevant to the projects in this study are described here. The values for the UK, expressed in sterling at 2001 prices, for changes in water quality in respect of informal recreation are shown in Table 3. Before looking at this, the correspondence between the Irish and UK water classification schemes needs to be noted. Comparing the UK 90 percentile limits for BOD and ammonia concentrations with the Irish classification, the following is a rough correspondence between the two systems.

UK system RE1 RE2 RE3 RE4 RE5

= = = = =

Irish system Q4 and above the Irish 'satisfactory' category Q3-4 - slightly polluted Q3 - moderately polluted Q2 - seriously polluted Q1 - seriously polluted

There are a number of different ways for making the correspondence, however, and in the absence of a rigorous comparison of the two systems this should be taken with a fair bit of caution (McGarrigle, 2004). What it shows is that the highest quality category for Ireland has more stringent conditions than that in the UK. The EPAs starting position for all waters in Ireland is that all rivers and lakes should be salmonid by nature and Ireland has a higher class still, Q5, than the highest UK class.

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Table 3: Benefits of changes in the quality of water used for informal recreation (2001 UK prices) Quality change from To Transfer value Q2 or Q 1 Q3 0.65 per visit, by day tripper Not capable of Good enough for water birds or holiday maker supporting water birds Q2 (top) or Q3 Q3 (top) or Q3-4 0.13 ditto Good enough for water birds Good enough to support fish Q3-4 (bottom of) Q3-4 (top) or Q4 0.09 ditto Good coarse fishery Able to support trout *The conversion of classifications from the UK system to the Irish system has applied the approximate correspondence shown above. Source: Environment Agency Guidance, Part 2 Table 2.9, from Green and Tunstall (1991) who undertook surveys at 12 different sites in Southeast England.

The transfer values, ranging from 0.09 to 0.65 expressed in 2001 UK prices, are the values to be applied per visit, for the various improvements to water quality that are specified. Changes in river flows or levels are also relevant for informal recreation. In so far as the National Water Conservation scheme might alleviate pressure on water levels in Irish rivers, this could reduce harmful impacts of increased abstraction, in the rivers Liffey or Boyne for example. The most relevant values in the Guidance for the purposes of this study are those representing stated willingness to pay for a 5 cm increase and to avoid a 5 cm decrease in the water level of the River Ouse. In the survey, respondents were given descriptions and computer-enhanced photographs were used to describe the visual and environmental effects of the water levels. While conditions in Ireland could be very different it is informative to look at the willingness to pay, which is shown in Table 4. Table 4: Benefits of changes in river flow or water levels for informal recreation (2001 UK prices) Quality change from To Transfer value Current level of abstraction 5 cm increase in water 5.78 per visitor household levels per year Current level of abstraction 5 cm decrease in water 5.61 ditto levels Source: Environment Agency Guidance, Part 1 (Table 2.10, from Corrigenda), from Eftec and CSERGE (1998). The visitor numbers might be obtained from visitor surveys, car park officers, club officials and tourist offices. While these sources may provide estimates of current use for informal recreation they do not predict future use on foot of quality changes, so that the results are possibly conservative. The Guidance recommends that reality checks be undertaken.

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Angling With angling one should ask: what are the effects on angling if, in comparison to the baseline, a change in quality or quantity of water has occurred as a result of the scheme? The answer will depend on whether there is access or potential access to the river and on the type and quality of existing or potential angling. The number of anglers, potential or otherwise, that may be affected by quality change is obviously a key variable and the Guidance lays out various ways in which to obtain or estimate this or the number of angling trips to the site. This information would appear not to be available in Ireland in a centralised form. The information base assembled for 1986 by Whelan and Marsh appears not to have been maintained and local angling clubs or other bodies would need to be contacted. Failing local information, the Guidance gives a Table of default numbers. It also suggests reality checks be made. For example if the implication of the numbers chosen is a higher density of anglers along the bank than the likely maximum possible density on the stretch then this indicates that the estimate might be too high. Having discussed the estimation of numbers, attention now turns on estimates of willingness to pay. The scheme is first categorised as either a change in water quality or, alternatively, a change in water quantity in terms of flows and levels. A further aspect is whether a new fishery is being created. Starting with quality change and considering coarse fishing, the benefits per angling trip derived in a UK survey carried out in 1996 for the Foundation of Water Research were as shown in Table 5.

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Table 5: Benefits from Improvements in a Coarse Fishery, Per Angling Trip (2001 UK prices) Marginal value of Willingness to Pay improvement in Quality of Fishery to be Created* per person per trip fishery quality Poor (Q1, Q2 or Q3) assumed average fish biomass <600g/100m2 Moderate (Q2, Q3, Q3-4 or Q4) assumed average fish biomass 6002000g/100m2 No fishery to Poor fishery = 4.30

4.30

4.53

Poor fishery to Moderate fishery = 0.23

Good Moderate fishery to (Q3, Q3-4 or Q4 or above) 6.87 Good fishery = 2.34 assumed average fish biomass >2000g/100m2 Source: Guidance Part 2 Table 3.14. Green and Willis (1996) in FWR (1996) *The conversion of classifications from the UK system to the Irish system has applied the approximate correspondence shown above. From the table it can be seen, for example, that the incremental value of improving a fishery from a moderate to a good quality fishery is 2.34 per angler per trip in 2001 UK prices. The values found on canals were lower (not shown here, Guidance page 2-58). Where a quality change for trout fishing is being considered the following values shown in Table 6 were estimated for the UK.

Table 6: Benefit of Improvements in a Trout Fishery, Per Angling Trip (2001UK prices) Quality of Fishery to be Created Poor Assumed average density of fish >20 cm of <0.8 fish per 100m2 Moderate Assumed average density of fish >20 cm of 0.8 - 2 fish per 100m2 Good Assumed average density of fish >20 cm of >2 fish per 100m2 Willingness to Pay per person per trip 9.81 Marginal Value of Improvement in Fishery Quality Coarse fishery to Poor Trout fishery =1.94 Poor fishery to Moderate fishery = 1.62 Moderate fishery to Good fishery = 6.48

11.43

17.91

Source: Guidance Part 2 Table 3.15. Green and Willis (1996) in FWR Manual. For salmon angling, two estimates for England and Wales are mentioned in the Guidance and there is also an estimate for Ireland by Curtis (2002).

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The Guidance recommends that the figure of 28.20 per person trip be taken as the benefits transfer value of creating new, good quality sites or of achieving significant improvements in the quality of existing salmon fisheries. The analysis by Curtis is relevant owing to the fact that it relates to Ireland and is consequently more appropriate than values transferred from elsewhere. It provides the first estimate of a salmon angling demand function. It was not based on elicitation of willingnessto-pay but on travel cost and it used the data from an on-site survey of 118 salmon anglers visiting Co. Donegal whose primary reason for visiting Donegal was to fish. Studies based on travel costs are sometimes found to give higher values according to Bateman et al. (2000). But in addition to enabling one to calculate a demand function they provide information on the contribution of the activity to the economy, including multiplier effects (Whelan and Marsh, 1988). The study by Curtis gave an estimated travel cost per angler day of IR68 including meals and accommodation and a consumer surplus (that is, extra unpaid-for benefit to the angler) of IR138 per angler day. Figures for specifically Irish anglers, which are the relevant figures for this project, were IR49 for travel cost and IR146 for consumer surplus, giving total willingness-to-pay of IR195. The 90 per cent confidence interval gives a range for willingness-to-pay per angler day from IR100 to IR290. As these are at 1992 prices, even when adjusted to sterling they are considerably higher than the figures given in the Guidance. The comparable value when expressed in 2001 prices is a total willingness-to-pay of IR246 or 153 sterling on the part of Irish anglers. Being based on revealed preference and referring to the high quality type of fishing amenity that Ireland has to offer these values should be taken into consideration in the valuation of the effects of schemes on similar fisheries. Another result suggested by the study that is worth mentioning is that anglers who gave a positive rating to the quality of the fishery are likely to demand a higher number of fishing days in subsequent trips, with the marginal effect estimated at an extension of 1.5 days. This means that improvements to a fishery can rightfully be assumed to result in more fishing days per trip thereafter. Figures of total value, rather than improvement value, may be applicable to schemes that result in the creation of a new fishery. Advice by the Guidance, when a scheme results in the creation of a new fishery, is that more general total WTP values can be used, given in Table 7 below. As can be seen, the figure for game fishing in England and Wales is again way below the Irish figure, by more than a factor of five. This clearly illustrates the need for specific WTP values to be estimated for Ireland so that the game fishery resource and its potential can be reliably assessed, which it evidently cannot be at present.

Table 7: Total WTP per Trip by Type of Fishery and Water body (UK 2001 prices) Water body River Canal Coarse 22.15 16.50 Game 31.80 -

Source: Guidance Part 2 Table 3.17. Spurgeon et al (2001), page 2-61 of Guidance

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Up to this point changes in water quality or creation of new fisheries have been discussed. Two UK studies of improvements in flow levels in relation to angling have been undertaken. A willingness-to-pay to reinstate a days fishing ranged from a mean of about 6.20 for the coarse fishery at the River Ver, in Middlesex, to 11 per visit for the game fishery on the Misbourne. For the South West region willingness-to-pay by club and syndicate anglers for an increase in the numbers of days in June, July and August amounted to approximately 2.38 to 2.70 per additional angler day. To conclude on the valuation of benefits for the use of angling, the final annual benefits estimate is given by: Benefits = annual number of angling trips x transfer value (per visit per year)

Aquaculture and commercial fisheries

Aquaculture and commercial fisheries in rivers in Ireland would be dominated by salmon and trout farming. (Lakes and estuaries are dealt with separately. A list of marine fish farms and their addresses, but not quantities, has been obtained. ) It is first necessary to ascertain whether there are or could be commercial fisheries. Only where a significant change is expected is it worth trying to quantify the impacts of a scheme. The main ways that schemes could impact on aquaculture are through: reduction in the costs of using and operating aeration equipment; increase in the carrying capacity of a fishery reduction in the number of fish mortalities.

Since typically 17 per cent mortality is expected in a commercial fishery, only mass mortality as caused by a pollution incident should be considered. Costs of restocking, denominated in amounts to grow one tonne of fish, are given in the Guidance (on page 2-73). Should the scheme reduce the likelihood of a fish kill from, say, once every 2 years (probability = 0.5) to once every 20 years (probability = 0.05), and supposing 100 tonnes of salmon are to be replaced (220,000 using the Guidance costs), then the expected benefits per annum would be: 220,000 x (0.5 0.05) = 99,000.

In-stream recreation
Boating, canoeing and rowing are the main types of in-stream activity. The last two in particular could involve some degree of water contact and/or immersion. Note that swimming is considered under lakes and coastal waters. Activities and access, present or potential, are important issues. Type of impact are tabulated in the Guidance as shown in Table 8.

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Table 8: Type of impact Type of impact Water quality* Significant Improvement to Q4 or Q5

Description Increase in number of trips enjoyment Moderate Improvement to Q3 Some increase in number of trips moderate increase in enjoyment Fair From Q1 to Q2 Slight increase in number of trips enjoyment Poor Q1 No change in number of trips enjoyment *The conversion of classifications from the UK system to the Irish system has applied the approximate correspondence shown above. Source: Guidance Part 2 Table 5.3. In determining whether any changes in the microbiological quality of a river would have benefits for activities that might entail water contact, the standards under the Bathing Water Directive and the proposed revised standard are given in Table 9. Table 9: Bathing Water Directive standards (per 100 ml water) Total coliforms Faecal coliforms Mandatory 10,000 (95% of samples) 2,000 (95% of samples) Guideline 500 (80% of samples) 100 (80% of samples) Proposed revision 200 (95% of samples) Source: Guidance Part 2 Table 5.4 The estimation of relevant population requires site-specific information on participation rates and trip numbers. These may be available from local clubs and the local authorities. In the UK there is a Day Visits Survey, published by the Countryside Agency et al in 1998, which gives a means of estimating possible default values for number of visits. For example, for a river with limited access and few or no facilities that is used by local residents only, the population within an 8-mile radius can be assumed to undertake 0.18 trips per year. There have been no studies that estimate the WTP of boaters and canoeists for improvements in water quality or river flow /levels. However, provided that double counting is avoided, the study by Green and Tunstall (1991), mentioned under informal recreation above, could be called upon for illustrative purposes.

or or or or

Amenity, property prices and regeneration The question should be asked: how many and what type of properties are located alongside the affected river and to what extent is the river visible or a focus of the property or of any proposed development or regeneration? If the answers indicate that significant impacts could result from the scheme then quantitative investigation is warranted. For schemes that affect water quality, local information should first be investigated. A Flood Water Research (FWM) Manual enables one to consider five factors that affect the aesthetic quality of the river: colour, debris, clearness, algae and odour. Each of these factors in turn is

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broken down into levels (e.g. severely discoloured, slightly discoloured). By means of five tables that can be consulted, the changes in levels of each factor can be given a number that represents the predicted percentage change in property value. The effects of changes in flows or levels should also be investigated locally. Failing this, house price premiums, derived from previous studies, can give indicative values of water resource attributes. Three in particular merit noting here, as shown in Table 10. Table 10: Studies valuing the price premium on properties. Study Method Environmental good Willis and Garrod, 1993 Garrod and Willis, 1993 RPA, 1995 Survey of estate agents Hedonic pricing model Survey of estate agents (Devoran R. and Fal Estuary) Survey of estate agents (South West England) Waterfront properties Properties within 1 km of navigable waterways Properties fronting clean rather than polluted or discoloured river and estuary Properties by a river Properties by normal rather than low-flow rivers Source: Guidance Part 2 Table 6.13. On the basis of this information the Guidance suggests lower, mid and upper bound estimates for the premium of 2%, 10% and 15%, respectively. For commercial property the Guidance suggests a premium of 2 %. Different low-flow incidence can also have different implications for property values and the Guidance gives a means and an example of calculating adjustments for different low-flow return periods (pages 2-107 and 2-109).

Premium as % of price 18.6 % 4.9 % 10 %

ERM, 1997

15 % 10 %

Abstractions
It is worth investigating effects on abstraction if the scheme is likely to cause a noticeable change for abstractors. Is the scheme expected to deliver a large change in flows or water quality and how many and which types of abstractors are expected to experience this? Flows could have an effect on abstracting fish farms, especially if they are subject to cessation orders before or after the scheme. Quality changes could affect the abstractors need to treat the water. The Environmental Protection Agency is in the process of establishing an abstraction database, which should help answer the question as to the numbers affected. At present one would need to contact each local authority.

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The valuation of the benefits to abstractors needs to be estimated by consultation with the licence holders, owing to the site-specific nature of the impact. It is the effects on profit or net margins that should be estimated.

Heritage use
Changes brought about by water schemes could have an impact on natural and man-made landscape, buildings and other aspects of heritage and archaeological interest. The higher the interest in the heritage asset the higher the potential effect. An example quoted in the Guidance is of a mill that was recorded in the Domesday Book and is a Grade 2 listed building. An Irish analogue might be a castle moat or the waters at Glendalough or Clonmacnoise. The argument for including heritage as a separate category of use is that an impact resulting from a scheme would amount to more than just a water-related impact. Information about the site should be obtained from the heritage bodies and qualitative impacts described. The qualitative description might benefit from the approach given in the manual The New Approach to Appraisal from the UK department and reproduced as Table 8.4 in Part 2 of the Guidance (DETR, 1998). If a quantitative analysis is deemed worth undertaking, then the relevant population needs to be estimated who would be willing to pay for the improvements (or to avoid disimprovements). The Guidance suggests the following table for England and Wales as a means of calculating the relevant population.

Table 11: Appropriate Populations for Heritage, Archaeology and Landscape Sites, England and Wales Distance from Site Site Type Relevant Population or Households Scheduled Ancient Monument Area of Outstanding Natural Beauty Those living within 150 Environmentally Sensitive Area (ESA) National population km sites/owned cared for by English Heritage/National Trust Those living within 120 Landscape of local distinctiveness km maximum or 60 km Landscape or site with strong local, cultural Regional population for more locally associations important sites Those living within 30 to 60 km maximum for significant changes or Other sites Local population only those living within, say, 3 km for smaller works related impacts Source: Guidance Part 2 Table 8.6

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As for the valuations, willingness-to-pay values derived through contingent valuation or other survey methods can be used to place a value on protecting or preventing damage to a given site. The Guidance gives numerous studies (in Tables 8.7 and 8.8 of Part 2), expressed per adult per year or per household per year, from which one could select those that are closest to the scheme in question.

Biodiversity and Non-use

Water supports a vast variety of life which plays a crucial role in the biological chain. Whether or not this is understood and realised is an important issue and levels of awareness can probably change as a result of media focus. The study that estimates willingness-to-pay would usually explain the implications of a scheme for biodiversity in an objective way. The value given can then be considered to be an informed one. It could be higher perhaps than the less informed value obtained without an explanation. This is mentioned as an issue. The importance of the site for biodiversity needs to be assessed first and it helps if, as in the UK, there has been widespread designation of sites with a description of what they contain. Only when impacts are neutral does the Guidance suggest that quantitative assessment should be foregone. The relevant population for non-use values could include visitors as well as non-visitors. If a site is of international or national importance, one might argue that people a greater distance away from the site will be willing to pay for its conservation. Conversely, if a site is only of local conservation importance, willingness to pay will trail off closer to the site. As found in the study of the Norfolk Broads, those living further away are more likely to hold a low or zero WTP for protection (Bateman and Langford, 1997). This is termed distance decay and the Guidance provides a table, reproduced in Table 12 below, to help determine the relevant non-use population to be used in the UK in multiplying up the figure of willingness-to-pay.

Table 12: Distance decay assumptions for determining numbers WTP in the nonuse population Distance (radius) Conservation Degree of Environmental Assumed Relevant for Importance Quality Change Aggregation Small Local only Moderate Large to very large Regional International/National Small to Moderate Large to very large Small to very large 30 km 40 km 60 km 60 km 120 km 60 km to 150 km

Source: Guidance Part 2 Table 9.8 Corrigenda page C-11.

Non-use values have been estimated that relate to changes in river water quality and to water resources. Starting with water quality, two studies in particular form the basis of the

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Guidances suggested estimates of willingness to pay for non-use benefits. They are
summarised in the table below. In the first study, values are provided in terms of changes in key water quality parameters, namely, total ammonia, dissolved oxygen (DO) and biological oxygen demand (BOD). (Only one parameter should be used because the benefits from a change in total ammonia, for example, are assumed to include any additional benefits that may occur to DO or BOD.) Transfer values are expressed in amount per km per household per year. In the second study the parameters of water quality improvement are in terms of the UKs water quality values, converted to the Irish Q values here. The values have been aggregated over the national population of England and Wales and are proposed for use for sensitivity analyses. Table 13: Suggested Transfer Values for Non-Use Benefits: improvements in water quality (2001 UK prices) Transfer Value per Required Study From To km of Improved Adjustments River 0.06 to 0.16 per km per household Small improvement per year to Q2 Survey undertaken in Water quality of Lower Improvement 0.09 to 0.31 per the Midlands. total ammonia relate to to Q3 km per household values (mg N/litre), Georgiou contingent valuation per year et al dissolved oxygen exercise and higher Improvement (2000) (% saturation) or relate to to Q3-4 0.14 to 0.50 per values BOD (mg/l) ranking km per household contingent equivalent to Q1 exercise per year Large improvement to Q4 or higher 0.17 to 0.60 per km per household per year Willis and Medium water 139,000 to Note that the survey Poor water Garrod quality 140,000 per km per was undertaken in three quality Q1 locations across England (1996) Q2 to Q3 year & Wales and is and as considered to be reported Medium water Good water in the applicable. 54,000 to 55,000 generally quality quality Q3-4 FWR Values can be per km per year Q2 to Q3 to Q4 or higher Manual aggregated across users (1996) and non-users Source: Guidance Part 2 Table 9.9, Corrigenda page C-15

Presentation in a different format is given in the Table 9.10 of the Guidance (note that this is on page C-16 of the Corrigenda). This shows the WTP for a marginal change in water quality class expressed in terms of the water quality parameter of interest. For example, if there is a

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scheme that will reduce total ammonia from 2.5 mg N/litre to 1.3 mg N/litre, the WTP value is 0.03 to 0.14 per household per km per year. Turning to water quantity and changes in river flows and levels in particular, the studies estimate WTP to protect the river environment against low flows. Estimates vary, reflecting factors such as the river in question, the respondents location relative to the site, and the flow or environmental change being valued. The Guidance summarises the results of studies of non-use WTP in the following table. Table 14: Suggested Transfer Values for Non-Use Benefits of water quantity changes: (2001 UK prices) Study From To Transfer Value Required Adjustments Figures were not developed for the purposes of benefits transfer and those specific to the Darent may not be readily transferable to other rivers or regions.

Willis and Garrod (1996)

Low flow conditions

Environmentally acceptable flow regime

General public: 0.15 per km per household per year

Values given in terms of per km per year and need to be applied to the number of households within each band Low flows every 4 to 5 years out of 20 in Mimram Distance <0.5km 0.5 3 km 3 12 km 12 60 km Users 0.16 0.12 0.03 0.01 Figures already adjusted for income effects and thus considered to be readily transferable, although the study notes that the values are specific to the Mimram.

Jacobs Gibb (2002)

Low flows once every 20 years

Non-Users <0.5 km 0.22 0.05 3 km 0.22 3 12 km 0.04 12 60 km 0.03 Source: Guidance Part 2 Table 9.10, Corrigenda page C-16.

The Jacobs Gibb figures are recommended in the first instance. If they are already applied to estimate use-related benefits, one should also apply their figures to estimate non-use benefits. Their breakdown between numbers user and non-user households, shown below, is recommended when their figures are being applied.

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User Households 0-0.5 km: 0.51-3 km: 3.01-12 km: 12.01-60km: 98% 70% 26% 2%

Non-User Households 2% 30% 74% 98%

The fisheries existence values may be more relevant in some sites, and in those circumstances they should be used instead of water resources values. Results of the study by Spurgeon et al (2001), depicting an 80 per cent decline in salmon caught on the river Wye, give values for WTP to restore the salmon population to its original level. This is a dramatic change such as the reinstatement of a historic game fishery. Non-visiting respondents gave an average WTP of 3.75 per household per year. Further breakdown by likelihood of visiting the site in the future enables one to single out those who reckoned they were definitely not likely to visit the site. Hence their willingness to pay, at 1.35 per household per year, could be viewed as pure existence value. Impacts on wetlands and willingness-to-pay have been the subject of many studies many of which have in turn been subjected to meta-analyses that provide generalisations and summary values. By consequence there is a good selection of transfer values for non-use values for impacts on wetlands and these are given in the Guidance Part 2 Table 9.14 (in Corrigenda pages C-20 and 21).

ESTUARIES and COASTAL WATERS As with rivers above, it is first necessary to check all the potential uses of the estuary and coastal waters in question to see if they apply. Commercial fisheries or amenity are not included in the Guidances list, for reasons that are not clear. In its revised version the Guidance simplifies the benefits transfer for estuaries and coastal waters by basing it on two studies, namely, by Eftec (2002) and Georgiou et al (2000). The studies have been adjusted to present values per beach. The Eftec value has been derived by estimating the total value of improvements to the whole of the nation (England and Wales) and dividing by the number of beaches that need to be improved (151). The values from Georgiou et al relate to East Anglia and have been adjusted by taking the number of beaches into account. It is recommended that the values be used as a sensitivity check, and they require additional information as to the number of alternative sites. The relevant populations and valuations will now be discussed for each use in turn.

Informal recreation, coastal bathing, water sports

In its revised version the Guidance combines these uses and uses values of bathing water for all of them. This is perhaps because it is assumed that all of bathing and water sports entail

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some contact with the water, though informal recreation to a lesser extent. The Guidance requires the following questions to be asked of the scheme being assessed. Will the scheme:

(a) reduce sewage litter, such that the beach could enter the next quality band or reduce complaints; (b) Reduce organic nitrogen concentrations in the effluent to an extent that the dissolved oxygen will increase by twenty per cent; OR (c) Reduce nutrient concentrations such that algal levels will decline significantly; (d) Reduce faecal bacteria and sewage-borne pathogens to levels within EC minimum standards. Are there data on visitor numbers to the shoreline or to particular sites? If not, is the site likely to be one that attracts considerable numbers of visitors?

The value of benefits can be selected from the following Table 15 which gives the values from the Eftec and Georgiou studies.

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Table 15: Suggested values for bathing waters (2001 prices) Study Quality change Transfer value Range being valued to Achieve the Large resort: 280,000 Eftec Bathing Water 646,000 per beach 510,000 per beach per year (2002) Directive Guide per year. values or better (achieve a 2.3 Small resort: 42,000 to 76,000 percentage point 96,000 per beach per beach per year* reduction in risk per year. of contracting beach: gastro-enteritis at [Small a given beach) assume 48,000 per beach per year.] Achieve guide values or better (mean expected reduction of 67% in the number of illnesses) ENGLAND: Large resort: 13,000,000 per year. Small resort: 1,900,000 per year. Small beach: 680,000 per year WALES: Large resort: 2,400,000 per year. Small resort: 360,000 per year. Small beach: 130,000 per year. ENGLAND: large resort: 9,600,000 to 17,000,000 per year. Small resort: 1,400,000 to 2,500,000 per year. Small beach 510,000 to 900,000 per year. WALES: Large resort: 1,800,000 to 3,200,000 per year. Small resort: 270,000 to 480,000 per year. Small beach 99,000 to 170,000 per year

Required adjustments Relates to surveys carried out nationally.

Georgiou

et
(2000)

al

These are holiday and local beaches in East Anglia. Assumes there are no alternative beaches; corrections may be necessary where there are alternatives (by dividing by the number plus one): England: within 130km for large resorts, within 50 km for small resorts and within 30km for small beaches. Wales: Within 65 km, 25km and 15km respectively.

Source: Guidance Part 4, Corrigendum page C - 33 * This is for a 1 percentage point reduction in risk, depending on starting and end level of risk.

Recreational fishing
Improvements in estuarial water can help recreational fisheries in estuaries as well as in inland fisheries, where impaired water quality acts as a barrier to fish migration (i.e. salmon and sea trout returning to spawn). Improvements to inland fisheries are best valued under the Rivers section above.

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The location of recreational fishing should be established as the area where angling takes place may be physically distinct from the area identified as benefiting from water quality improvement. The type of fish caught needs to be determined and the number of sea anglers. As already mentioned, valuations are not given for fishing along the coast and in estuaries.

Shellfisheries
Shellfisheries relate to those waters that are used for the rearing and harvesting of bivalve molluscs that are placed on the market live, including: Oysters Mussels Cockles Scallops Winkles, whelks, crabs, lobsters, prawns and shrimps are not included. Impacts on employment are not included because it is assumed that employment is not affected at a national level. Instead it reflects local shifts and hence is not relevant to an assessment that is based on national benefits and disbenefits. Standards apply to shellfish hygiene and to the quality of shellfish waters. Benefits of a water quality change will arise if a new shellfishery is being created or will become feasible to harvest. Benefits could also come through reduced treatment costs (heat treatment or relaying for a while in water of a better quality). In the case of a new fishery, expected yields per year and the value need to be estimated. The net margin is taken which relates to the amount of profit that can be expected once capital and operating costs have been removed. Information such as the catch and value given in the UK Sea Fisheries Statistics can provide data from which to estimate the margin. Improvements in water quality could remove the need for treatment. Shellfish that are found in beds that are classified as Category C need to be treated or relayed so that they can be sold for human consumption. The categories of waters and treatment required (under UK legislation) are shown in the following table. Table 15: Food safety regulations on shellfish hygiene Category E coli * Faecal coliform * Requirements A < 230 < 300 May go direct for human consumption B < 4,600 < 6,000 Must be depurated, heat treated or relayed to meet category A C < 60,000 Must be relayed for 2 months to meet category A or B. May also be heat treated by approved method. Prohibited > 60,000 Prohibited Source: Guidance Part 4 Table 6.3 * per 100 g shellfish flesh and fluid in 90 per cent of samples

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The costs of treating to go from Class B to Class A in the case of oysters and mussels are put at 310 and 174 per tonne, respectively (FWR, 1996). Scallops are considered not to require treatment.

Biodiversity and non-use value

There are likely to be valuation linkages to fisheries and shellfisheries, and also to informal recreation benefits. However other eco-system benefits are possible such as quality and diversity of marine habitat, food supply for higher order species, and indirect eco-system benefits including diversity of shoreline vegetation and aquatic life. It must be asked if there are marine conservation areas that are affected by the scheme and are there any sites of importance such as fish nursery grounds. Are there likely to be changes in parameters that feature in the various classification systems and Directives. Will species that are listed in the Biodiversity Plan be affected and are the designations of international, national or regional/local importance? A key issue in assessing coastal biodiversity-related non-use values is how to determine the numbers who may hold such values. Users and non-users can hold these values. However owing to the absence of any study of WTP for coastal biodiversity on which to base non-use values, the Guidance offers the options of merely using qualitative descriptions instead of quantitative analysis, or alternatively of availing of the study of the Norfolk Broads (discussed above, by Bateman and Langford, 1997). The distances that can be assumed for determining the non-use population are given in Table 17.

Table 17: Distance decay assumptions for determining non-use population Conservation importance Degree of environmental Distance (radius) quality change assumed relevant for aggregation Small 30 km Local only Moderate 40 km Large to very large 60 km Small to moderate 60 km Regional Large to very large 120 km International/national Small to very large 60 km to 150 km Source: Guidance Part 4 Table 7.8 While people who live further away than the distances marked in the right-hand-side of the table are likely to hold positive non-use values, multiplying the mean WTP by the population within this distance provides the appropriate approximation of total WTP across the entire population. The paucity of studies that have evaluated the benefits of changes in water quality in coastal waters and estuaries means that there are few transfer values. The values derived in a study by the Institute of Offshore Engineering (1995) have the disadvantage that they include an

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element of use value and therefore double-counting must be guarded against. The study by Le Goffe of the natural harbour of Brest also included use value. These values are shown in Table 18. Table 18: Suggested transfer values for non-use benefits (2001 UK prices)* Study Quality change Transfer value Required adjustments Elimination of direct 4.66 per person per Adjustments for discharges and reduction of trip to the estuary relative wealth may sewage related litter. shoreline, or 45.78 be appropriate - the Institute of Achieve Guide values or per household per studies were carried Offshore better (reduction of risk by year. (It is not clear out in Northeast Engineering 3 percentage points of which households England (1995) contracting gastro-enteritis were surveyed) at a given beach) Le Goffe Prevention of asphyxiation 21 to 23 per WTP figures are (1995) of harbour waters due to household per year already adjusted for eutrophication. (they appear to be purchasing power visiting households, parity and income including for informal differences between visits) UK and France. * Values also include use values Source: Guidance Part 4, Table 7.10 The Guidance recommends that these values be used in conjunction with estimates of the population derived from the previous table of distance decay. Subtract from the resulting population the numbers of users for whom separate calculations have been made. This may err on the cautious side by understating value, since users also hold non-use values.

LAKES AND BROADS Part 3 of the Guidance dealing with lakes and broads also includes reservoirs and new reservoirs though we will ignore these as they are not affected by the water schemes under review. Only one sort of valuation will be considered, namely, for recreation uses. For the most part of the values for other uses the Guidance refers to the values already given above under rivers and estuaries and coastal waters.

Recreation
The questions to be asked under recreation are first: Is there or will there be access to the site? Is there recreational use at present? And, would the scheme result in significant changes that users could perceive? An answer of no to any of these means that recreation can be passed over. The Guidance gives the minimum size of water body that is appropriate to different activities (Part 3 Table 2.3). For example, angling requires 2 to 7 hectares, water skiing requires 11 and windsurfing 3 hectares.

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Recreation includes bankside activities such as walking, cycling picnicking etc; angling; boating activities, including sailing, cruising, canoeing, rowing, etc; and immersion activities, including water sports and bathing. Estimation of participation by activity may be possible, or else total visits to the lake can be estimated where many activities take place. Sources of advice on numbers, including site car park usage, angling trips, visitors and the rest can be obtained from local authorities, angling clubs and licensing authorities, tourist offices, ramblers, birdwatchers, boating clubs and boat hire companies. The Guidance provides in Part 3 Table 2.7 a means for using default data on annual visitor numbers, showing eleven examples of lakes in England and Wales, and for undertaking reality checks. The Guidance advises against proceeding to monetary valuation of recreation benefits unless there are at least 1000 visitors per year. On valuations for informal recreation it is suggested that the values already seen in the case of rivers, above, be used. Two studies relating specifically to lakes do not refer to changes in water quality or quantity but rather to the total value of a days angling. For angling on Rutland Water, a WTP figure of 24.80 per angler per day is given that covers both consumer surplus and fees, from a travel cost study by Gaterell et al, (1995). A study by Spurgeon et al. (2001) commissioned by the Environment Agency assessed anglers total willingness to pay, through a contingent valuation survey. Respondents were drawn from the Agencys database of rod licence holders in six regions within England and Wales. The total willingness to pay per trip for lakes was found to be 19.40 per coarse angler, and 30.10 for game anglers. Of this, consumers surplus was 2.40 and 3.10 respectively. These figures would be more relevant to valuation of the creation of a new fishery because, as mentioned they do not refer to changes in quality or quantity of water. In addition to the value enjoyed by anglers, fishery owners that charge would also stand to benefit from improved quality, in terms of changes in economic rent or profit. Estimates of the change in economic rent following a change in coarse fishery quality are shown in Table 19. Table 19: Change in economic rent due to improved quality of still water coarse fisheries (2001 UK prices, per ha per year) Change in quality of Value before and after Marginal value fishery From To None to poor 0 9,200 9,200 Poor to moderate 9,200 16,600 7,400 Moderate to good 16,600 34,500 17,900 Based on 2.3 million coarse anglers and 33,352 ha of coarse still water fisheries, and fees of 2.00, 3.60 and 7.50 per rod per day for poor, moderate and good quality of fishery, respectively (Spurgeon et al., 2001; Radford et al., 2001. The corresponding figures for change in economic rent enjoyed by trout fishery owners that charge are given in Table 20.

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Table 20: Change in economic rent due to improved quality of still water trout fisheries (2001 UK prices, per ha per year) Change in quality of Value before and after Marginal value fishery From To None to poor 0 9,200 9,200 Poor to moderate 9,200 16,600 7,400 Moderate to good 16,600 34,500 17,900 Based on 0.8 million game anglers and 12,335 ha of fishable still waters in England and Wales, and fees of 8.00, 10.60 and 20 per day for poor, moderate and good quality of fishery, respectively (Spurgeon et al., 2001; Radford et al., 2001. For valuing the benefits of changes in water quality for bathing and water sports in lakes, the Guidance recommends using the values already given for estuaries and coastal waters and for rivers, above. There was a study that relates specifically to still water by Pearson (1992) who assessed the value of maintaining the recreational and amenity values of Rutland Reservoir in an episode of cyanobacteria. From an open-ended questionnaire administered to 641 visitors, the mean WTP for preventing the outbreak was 19.67 per household per year (2001 UK prices). The Guidance alerts the reader to a lack of relevant valuation studies under the heading of heritage, archaeology and landscape sites. Where Irish lakes are concerned, the landscape value and non-use value could be significant and affected by the quality of the waters. The shortage of relevant valuation studies means that one must rely heavily on qualitative descriptions. CONCLUSION In conclusion, having summarised the method, the selection of benefits values and the estimation of populations, as advised in the Guidance manual of the Environment Agency of England Wales, these can now be applied to the schemes investigated in this study. Because of the uncertainty that must attach to the values yielded, the resulting estimates should be described as illustrative and the source of the values used needs to be clearly stated.

References
Bateman, I. J., A. P. Jones, N. Nishikawa and R. Brouwer, 2000. Benefits Transfer in Theory and Practice: A Review and Some New Studies, available from http://www.uea.ac.uk/~e089/, CSERGE and School of Environmental Sciences, University of East Anglia. Bateman and Langford, 1997. Non-users' willingness to pay for a National Park: an application and critique of the contingent valuation method, Regional Studies, 31(6) p. 571582. Boyle, K. L. & Bergstrom, J. C., 1992. Benefit transfer studies: myths, pragmatism and idealism, Water Resources Research, 28 (3), p. 657-663. Clinch, P. and F. J. Convery, 1999. Evaluation and the Environment in M. Mulreany (ed.) Economic and Financial Evaluation, Institute of Public Administration, Dublin.

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Eftec and CSERGE, 1998. Framework to Assess Environmental Costs and Benefits for a Range of Total Water Management Options, prepared for the Environment Agency. Environment Agency (England and Wales), 2003. Benefits Assessment Guidance for Water http://www.environmentQuality and Water Resources Schemes. agency.gov.uk/business/444304/444643/425378/425401/425411/507669/?lang=_e Risk and Policy Analysis (RPA) consultants. ERM 1997. Economic evaluation of the environmental costs and benefits of potential solutions to alleviate low flows in rivers Phase 2 study. Prepared for the Environment Agency, South West Region, March 1997. Garrod G. D. and K. G. Willis, 1991. "The Hedonic Price Method and the Valuation of Countryside Characteristics", Countryside Change Unit Working Paper 14, University of Newcastle upon Tyne. Gaterell et al., 1995. A valuation of Rutland Water Using Environmental Economics, Environmental Technology, vol. 16, p. 1073-1082. Green and Tunstall, 1991. The Evaluation of River Water Quality Improvements by the Contingent Valuation Method, Applied Economics, vol. 23 p. 1135-1146. Institute of Offshore Engineering, 1995. The use and appropriateness of valuation in the Firth of Forth project, in the FWR Manual, FWR, 1996. Le Goffe, P., 1995. "The Benefits of Improvements in Coastal Water Quality: A Contingent Approach", Ingnieries - E A T, n spcial Rade de Brest, p. 125-133 McGarrigle, M., 2004. Personal communication 20.May. Ozdemiroglu, E. and C. Bullock, 2002. Environmental Impacts and Parameters for Inclusion in the Economic Valuation of Road Schemes (2000-DS-1-M2), Prepared by Eftec for EPA, Johnstown Castle Estate, Wexford. RPA 1995. Economic benefits of improvements in water quality, in Wheal Jane Minewater Study: Environmental Appraisal and Treatment Strategy, edited by KPP for South West Region NRA. Spurgeon et al., 2001. Economic Valuation of Inland Fisheries, Module B: Indirect Economic Values Associated with Fisheries, R&D Project Record, W2-039/PR/2, report prepared for the Environment Agency. Whelan, B. J. and G. Marsh, 1988. An Economic Evaluation of Irish Angling, A report prepared for the Central Fisheries Board by the Economic and Social Research Institute, Dublin. Willis, K. G. and G. D. Garrod, 1993. The value of waterside properties, Working Paper 44, Countryside.

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D.4:

Water Quality Measurement

The three criteria for Eutrophication defined by reference to estuaries and coastal waters

The EPA initiated the estuarine and coastal water monitoring project in 1992/3, which initially operated on a pilot basis and was intensified in the second half of the nineties. The objective was to provide information on the quality of these waters and their sensitivity to eutrophication. Eutrophication can be defined as water exhibiting each of the following three features: (a) (b) (c) enrichment by nutrients, especially compounds of nitrogen and/or phosphorus accelerated growth of algae and higher forms of plants, and undesirable disturbance to the balance of organisms present and to the quality of the water concerned.

This definition is based on the EU Directive on urban waste water treatment (91/271/EEC) and on the Directive on nitrates from agricultural sources (91/676/EEC). In assessing trophic status, the report An Assessment of the Trophic Status of Estuaries and Bays in Ireland (EPA, 2001) states that a water body is classified as eutrophic if: (a) (b) (c) the criteria for nutrient enrichment in terms of either DIN or MRP are exceeded, and the criteria indicating excessive growth in terms of chlorophyll are exceeded, and the criteria for undesirable disturbance in terms of dissolved oxygen are breached.

Water quality parameters Parameters used in the above criteria are described in detail in the report Water Quality in Ireland 1995-1997 (EPA, 1999) (p. IV-3, p. IV-25) and the criteria for eutrophication are summarised in An Assessment of the Trophic Status of Estuaries and Bays in Ireland (op. cit., p. 5) and in Water Quality in Ireland 1998-2000 (EPA, 2002, p. 60-61, Table 4.1). The description given here draws on these sources. Where intermediate waters are being assessed, that is waters between fresh and fully saline waters, an important point to be noted is that the criteria vary with the level of salinity. In the listing of criteria below, median salinity of 17 psu is assumed. (For more detail, see footnotes to Table 4.1 in EPA 2002).

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Criterion (a) Nutrient enrichment DIN This is Dissolved Inorganic Nitrogen which is quantified as the sum of oxidised nitrogen (nitrate and nitrite) and ammonium. It is considered to be the readily available nitrogen for uptake by plants. The criteria for eutrophication due to nutrient enrichment by DIN are: Criterion A: Nutrient enrichment

Dissolved Inorganic Nitrogen (DIN) mg/l N Numeric Criterion Tidal Fresh Waters Intermediate waters** Full salinity waters >2.6 >1.4 >0.25* Statistic Period criterion applies winter or summer winter or summer winter or summer

median median median

*Because of natural variations, for high salinity waters these values are to be regarded as thresholds above which the issue of possible eutrophication should be considered. ** at 17 psu median salinity. See page A-1 of Annex 1 of the trophic status report (EPA 2001) The alternative nutrient criterion is enrichment by MRP (Molybdate Reactive Phosphorus). MRP is measured in g/l P and is considered to represent the biologically available phosphorus supply in waters; it is also called Orthophosphate. Phosphate is the primary agent of eutrophication in most freshwaters, as it is the least abundant essential nutrient in relation to plant growth requirements. This is because of the relatively larger quantities of nitrogen available via runoff from the catchment. Phosphate is particularly abundant in organic wastes such as sewage, in which artificial phosphorus-containing detergents are also present. Clean marine waters normally contain around 0.025 mg/l MRP or less, which is the background P concentration in the Northeast Atlantic. Criteria for eutrophication due to nutrient enrichment by MRP are: Criterion A: Nutrient enrichment (contd) Orthophosphate (MRP) (g/l P) Numeric Criterion Tidal Fresh Waters Intermediate waters** Full salinity waters >60 >60 >40* Statistic Period criterion applies winter or summer winter or summer winter or summer

median median median

* See note on first table above ** at 17 psu median salinity. See page A-1 of Annex 1 of the trophic status report (EPA 2001) For eutrophication criterion A to be breached, either DIN or MRP exceed the value under numeric criterion in the two tables above.

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Criterion (b) Accelerated growth This is indicated by Chlorophyll (g/l). Algal cell biomass may be quantified by the concentration of the photosynthetic pigment chlorophyll, which gives a reasonable indication of the biomass of phytoplankton present in waters. Unenriched coastal waters normally exhibit summertime chlorophyll concentrations below 10 g/l; within estuaries concentrations may naturally exceed this level because of elevated temperatures, restricted mixing and the generally greater supply of nutrients available for algal growth. Criteria for eutrophication due to excessively accelerated growth are: Criterion B: Accelerated Growth Chlorophyll a g/l Numeric Criterion applies Tidal Fresh Waters or Intermediate waters** or Full salinity waters or >15 >30 >15 >30 >10* >20* median 90 percentile median 90 percentile median 90 percentile summer summer summer summer summer summer Statistic Period criterion

* See note on first table above ** at 17 psu median salinity. See page A-1 of Annex 1 of the trophic status report (EPA 2001)

Criterion (c)

Undesirable disturbance

DO % Saturation: Dissolved Oxygen Saturation relative to Normal for ambient temperature and pressure. Well oxygenated conditions are required by most fish and other aquatic organisms. Saturation levels in unenriched waters are generally close to 100%, though they may vary over short periods depending on physical conditions such as the weather and so forth. Values significantly lower than 80% of saturation indicate increased microbial respiration in the presence of large quantities of organic matter. Saturation values greater than 110% mostly result from photosynthesis by aquatic plants, 120% being excessive and certain to be accompanied by oxygen depletion during the hours of darkness. Consequently both low and super saturation can harm fish and other aquatic organisms. Criteria for eutrophication due to undesirable disturbance are:

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Criterion C: Undesirable disturbance Dissolved Oxygen (D.O.) % saturation These criteria for D.O. are in respect of both deoxygenation and supersaturation Numeric Criterion applies Tidal Fresh Waters or Intermediate waters** or Full salinity waters or <70 >130 <70 >130 <80* >120* 5 percentile 95 percentile 5 percentile 95 percentile 5 percentile 95 percentile summer summer summer summer summer summer Statistic Period criterion

* See note on first table above ** at 17 psu median salinity. See page A-1 of Annex 1 of the trophic status report (EPA 2001)

Other parameters reported While the above are the criteria used in assessing eutrophication, other parameters that are reported include: BOD5 (mg/l): 5-day Biochemical Oxygen Demand. Biochemical Oxygen Demand reflects the quantity of biodegradable organic matter present. The BOD5 test is based on the loss of dissolved oxygen from a sample incubated for 5 days at 20oC, and gives a comparative measure of the degree of contamination by biodegradable waste matter. Natural sea waters are likely to have BOD values in the range >0 to 2 mg/l, and freshwaters between >0 and 3 mg/l. Values significantly above 4 to 5 mg/l indicate probable pollution by organic wastes. Raw sewages have BODs in the range 200 to 400 mg/l; primary treatment usually reduces the BOD concentrations to between 130 and 180 mg/l, while effluents from secondary treatment plants would be expected to have BOD concentrations less than 30 mg/l (Toner, 1991). TON (mg/l N): Total Oxidised Nitrogen (= sum of nitrate [NO3-] and nitrite [NO2-]). Nitrate plays a major role in eutrophication, particularly in marine waters and originates both from the microbial conversion of ammonia present in wastes and from runoff and leaching from agricultural land, especially where artificial fertilisers are applied. Nitrite is an intermediary between nitrate and ammonia and is usually found in substantial quantities only in the immediate vicinity of effluent outfalls. In unenriched freshwaters, oxidised nitrogen concentrations are not likely to exceed 1 to 2 mg/l N. Concentrations in unenriched coastal and marine waters generally do not exceed 0.2 mg/l N in winter. In summer N tends to be depleted to negligible levels by plant growth, thus N is effectively the limiting nutrient in marine waters.

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NH3/NH4 (mg l/N): Total Ammonia Nitrogen (sum of Un-ionised Ammonia [NH3] and Ammonium [NH4+]). Ammonia arises from the breakdown of protein and other nitrogenous substances in waste, and originates primarily from sewage and other organic inputs. It is gradually converted to nitrite and then to nitrate by microbial action, and it is the preferred form of nitrogen for uptake by many aquatic plants. In water, ammonia takes two forms, free ammonia gas (NH3) and the ammonium ion NH4+. Dissolved free ammonia gas is regarded as the form which is directly toxic to aquatic life in elevated concentrations, >0.02 mg/l N. Clean freshwaters are likely to have total ammonia concentrations less than 0.05 mg/l N; levels in excess of 0.1 mg/l N are indicative of organic contamination.

Monitoring sites have been selected to represent as far as possible the transition from fully freshwater to fully marine conditions: Freshwater (above the limit of tidal action) Estuarine zone (from freshwater limit to the estuarine-coastal boundary) Remainder of the bay outside the estuarine-coastal boundary Adjacent coastal waters outside the bay.

In the early to mid nineties the majority of industrial waste water, 80 per cent according to Bowman et al. (1996), was discharged directly to estuaries and coastal waters. In 2000 85 per cent went to tidal waters (Millennium Report, chap 5, EPA 2000). In addition these waters receive inputs of river-borne materials that originate upstream and inputs from agricultural runoff from land. These various inputs are predominantly composed of sewage effluent and other biodegradable wastes and their main potential effects are organic enrichment and oxygen depletion in the receiving waters. The associated release of nitrogen and phosphorus compounds has the potential to cause eutrophication of receiving waters.

References
EPA, 1999. Water Quality in Ireland 1995-1999, Johnstown Castle Estate. EPA, 2001. An Assessment of the Trophic Status of Estuaries and Bays in Ireland. Report prepared for the DELG, Johnstown Castle Estate. EPA, 2002. Water Quality in Ireland 1998-2000, Johnstown Castle Estate.

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