TN 04 Economic Issues Wastewater Treatment

ERD TECHNICAL NOTE SERIES NO.
4
ECONOMICS AND RESEARCH DEPARTMENT
Economic Issues
in the Design and Analysis
of a Wastewater Treatment
Project
David Dole
July 2002
Asian Development Bank

ERD Technical Note No. 4
Economic Issues in the Design and Analysis
of a Wastewater Treatment Project
David Dole
July 2002
David Dole is an Economist with the Economic Analysis and Operations Support Division of the Economics and
Research Department, Asian Development Bank. The author thanks In-Ho Keum, Peter Choynowski, Max Clark, Peter
Jaques, and Geoffrey Dent for vital information and suggestions.
Asian Development Bank
P.O. Box 789
0980 Manila
Philippines
2002 by Asian Development Bank

July 2002
ISSN 1655-5236
The views expressed in this paper are those of the author(s)

and do not necessarily reflect the views or policies of the
Asian Development Bank.
Foreword
The ERD Technical Note Series deals with conceptual, analytical, or

methodological issues relating to project/program economic analysis or statistical
analysis. Papers in the Series are meant to enhance analytical rigor and quality in
project/program preparation and economic evaluation, and improve statistical data
and development indicators. ERD Technical Notes are prepared mainly, but not
exclusively, by staff of the Economics and Research Department, their consultants,
or resource persons primarily for internal use, but may be made available to
interested external parties.
Table of Contents
Abstract v
I. Introduction 1
II. Managing Water Quality through Ambient Standards 2

A. Setting Targets for Ambient Water Quality 3
B. The Economic Approach to Achieving the Given
Targets 4
C. Application of the Economic Theory to Wastewater
Treatment Plants 5
D. Practical Complications in Implementing Least-cost
Pollution Control 6
III. The Hebei Wastewater Management Project 8

A. Legal Standards and Targets for Surface Water Quality 9
B. Public Support for the Targets 10
C. Basin-wide Plans for Achieving the Targets 10
D. Economic Evaluation of the Pollution Control Plan 13
IV. Conclusions 18
V. References 20
Appendix 21
Abstract
A wastewater treatment plant is often planned as one small part in a greater

system to manage ambient water quality. Indeed, that is probably the best
role for wastewater treatment, since the benefits of treatment are not secured
unless all current and future pollution sources nearby are also controlled.
When a comprehensive and effective system for managing water quality is in
place, economic analysis of an individual treatment plant will not reveal the
full motivation or justification for a plant. Instead, economic analysis should
focus first on the greater system to manage water quality. If the system as a
whole is economically justified, then any constraint imposed on an individual
project can be taken as given. In that case, economic analysis of a project
would consider only whether the project meets the constraints at least cost.
Standard economic theory shows that least-cost wastewater management can
be achieved if all point sources are controlled and face a charge set at the
marginal cost of processing wastewater at the central treatment plant. These
conditions can be easily obtained through the design and management of the
plant. As such, both least-cost wastewater management and the economic
justification for the plant can be directly built into a project.
I. Introduction
The economic rationale for public involvement in wastewater treatment is clear and simple.
Wastewater treatment is subject to increasing returns to scale, so economic efficiency requires large-
scale, centralized wastewater collection and treatment. That is, wastewater treatment is a natural
monopoly, so public involvement is justified at least to the extent of regulating the firm operating
the treatment plant. (Train 1994 provides a thorough discussion of the economics of natural
monopoly.)
The economics of wastewater treatment is complicated, however, by the natural and
institutional environment in which treatment occurs. Wastewater, whether treated or not, is quite
appropriately disposed of in rivers and streams, or “surface water.” Surface water is typically an open
access resource: a natural resource that people may use freely, like a public good, but which cannot
be used without at least partly detracting from other people’s use. For both social and economic
reasons, an open access natural resource is best managed as a common property resourcethat is,
through either formal or informal government. (See Stevenson 1991 for a thorough discussion of
the economics of common property resources, and Ostrom 1991 for a thorough discussion of
institutions for managing common property.)
So there are at least two dimensions of public involvement in wastewater treatment: through
operation or regulation of treatment plants, and through management of the water bodies receiving
the plants’ effluent. Each dimension affects the design and analysis of a wastewater treatment
project.
When public management of surface water is not in place, the benefits of wastewater
treatment are tenuous, at best. The benefits of treatment depend on the quality of the water
receiving the plant’s effluent, that is, the “ambient water quality”. If ambient water is already
seriously degraded by other emissions, then cleaning up one source may not have much effect. A
concerted effort is required to realize the benefits treating wastewater, but even a concerted effort
can be spoiled by new, uncontrolled emissions. A wastewater treatment project is therefore better
designed as one component of a greater plan to manage surface water quality.
When public management of surface water is in place, the benefits of wastewater treatment
are secured. In that case, though, standard methods of project analysis do not give a complete view
of the economic rationale for wastewater treatment. One can, of course, identify the costs and
benefits of wastewater treatment, following the same principles as applied to other kinds of projects.
But in these circumstances, an individual wastewater treatment plant is not intended as the solution
to a specific problem. Instead, in such circumstances an individual plant is but one component of a
larger plan, as one brick is to a wall. So to analyze a wastewater treatment project without regard to
the institutional framework will not reveal the full economic justification for a project, as the analysis
of one brick does not reveal the justification for a wall.
This paper discusses one common approach to public management of surface water quality,
and the design and analysis of a wastewater treatment project within that management framework.
The framework, discussed in Section II below, consists of targets for ambient water quality,
established in law, and plans aimed at meeting the targets. Economic analysis can contribute to
setting the targets, and is especially useful in developing and choosing the plans. The economic
approach to developing and choosing plans is to meet the water quality targets at least cost.
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Economic incentives, and especially wastewater tariffs, are vital to achieving least-cost wastewater
management (if not least-cost pollution control). If economically efficient wastewater tariffs are
incorporated into the project, then the project is efficient by design, and little or no additional
economic analysis is required.
In such a case, economic analysis is more productively focused on the overall management
framework, rather than on an individual project. If the framework is consistent with economic
principles, then every project that fits sensibly into that framework can be economically justified
with respect to the framework. Surface water quality would be efficiently and effectively managed,
and project analysis would be simple and easy.
Effective water quality management and streamlined project analysis is more than merely a
theoretical possibility. The kind of water quality management described in this paper is common
throughout the world, including the People’s Republic of China (PRC). Section III of this paper
describes the institutional framework supporting water quality management in the Hai River Basin
of PRC, and analyzes the framework from an economic perspective. The analysis shows that the
institutional framework is broadly consistent with economic principles. The Asian Development
Bank (ADB) has been involved in the development of plans to manage water quality in the basin,
and in the funding of wastewater treatment plants there. Section III also describes one of ADB’s
projects in the basin, and shows that the project is designed to achieve least-cost wastewater
management.
II. Managing Water Quality through Ambient Standards
Various methods of managing surface quality are in use around the world. For example, one
approach is to focus on a particular, site-specific pollution problem, and the means to address that
problem. This “decentralized” approach is the only option where centralized, coordinated
management is weak or does not exist. But as argued above, the benefits of addressing a particular
problem cannot be secured without a coordinated approach to water quality management.
Another approach is to focus on the sources of water pollution, and to dictate the allowable
practices or emissions. Initial efforts at water quality management in the United States, for example,
dictated the allowable practices for water polluters, with the intent of gradually changing the
allowable practices until all water pollution was eliminated. That approach proved expensive and
ineffective (that is, pollution has not been eliminated), and so the United States has moved toward a
system of setting targets for ambient water quality. (See Helmer and Hespanhol 1997 for a thorough
description of methods to manage surface water quality.)
This section focuses on that kind of system, namely managing water quality through ambient
standards. Such a system requires a detailed and elaborate legal, scientific, administrative, and judicial
framework. Each of these components is essential to the system, but this section focuses only on
two aspects where economic analysis can play a significant role: in setting the targets, and in
developing the plan to meet the targets. There is nothing about setting ambient water quality targets
that particularly or uniquely affects the design of wastewater treatment plants, but the setting of
targets is discussed since wastewater treatment would be an integral part of any plan to attain the
targets.
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Economic Issues in the Design and Analysis of a Wastewater Treatment Project
A. Setting Targets for Ambient Water Quality
Water quality is fundamentally a scientific concept, encompassing the physical, chemical, and
biological characteristics of water. A water quality target, in contrast, is fundamentally a
socioeconomic concept, focusing on society’s intended or desired use of the water. The use of the
water, of course, depends on the scientific characteristics of the water. So the first step in setting
targets is to establish the entire range of potential uses of surface water, and determine what
characteristics would support each intended use. To be consistent with the terminology in Section
III, a potential use of water is referred to as a water quality “class.” Socioeconomic analysis (plus
common sense) can help establish the set of classes, but the real work at this stage is in defining the
classes in scientific terms. (See Enderlein et al. 1997 for a review of water quality classes.)
Once the classes are defined in scientific terms, the next step is to decide what class should
apply as a target to each body of water, or in the case of rivers and streams, each reach. In contrast
to defining the classes, setting the targets is almost exclusively a socioeconomic process, since setting
a target requires a consideration of the tradeoffs among competing uses of water.
Societies typically make collective decisions through either a political or bureaucratic process.
A political process may (and ideally, should) be informed by economic analysis, but economics
would clearly be subordinate to the overall political process. It is perhaps more natural, though, for
water quality targets to be set through a bureaucratic process (that is, within established agencies of
government), since setting targets is a technical issue that is not likely to appeal to either politicians
or the general electorate.
The form of a bureaucratic decision process is ideally determined by a political process, to
ensure that the ultimate decision incorporates public (rather than strictly bureaucratic) preferences.
A political process may, for example, decree that a bureaucracy set the targets to minimize the risk to
public health, to restore aquatic ecosystems to their natural state, or to meet any of a variety of goals.
The authorized agency would then assemble the required information, and make the decision on the
legally stipulated grounds.
Economic analysis can play a major role in setting targets if, say, the political process decreed
that targets should be set by standard benefit-cost analysis. To set a target by standard benefit-cost
analysis, a bureaucracy would collect information on the monetary value of the benefits that would
result from moving from the current level of water quality to another level. Given the targeted level
of water quality, the bureaucracy would determine the least-cost means of meeting that target. The
optimal target is that target where the benefits of moving to that target most exceed the costs of
attaining it.
Although mainstream economists focus heavily on standard benefit-cost analysis, in fact
there are many other reasonable methods of social choice, including other methods firmly based on
economic theory (see, for example, Arrow et al. 2002). Targets that do not maximize net benefits
can still have social value, and in fact can still have maximum “economic” value, if the social choice
method is based on economic theories other than standard benefit-cost analysis.
The common feature among reasonable social choice methods is that each is based on
people’s preferences. A reasonable method of social choice assesses people’s individual preferences,
and then integrates these preferences somehow to derive public preferences. Social choice made
through a democratic political process will be driven directly by individual preferences, but social
choice made through a bureaucratic process must involve soliciting people’s preferences. Public
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participation is therefore the key to ensuring social value in social choice. This holds for any method
of social choice, including standard benefit-cost analysis.
B. The Economic Approach to Achieving the Given Targets
Having established water quality targets, the next step in building the system to manage
water quality is to establish effective monitoring and enforcement. Economic analysis can contribute
to developing monitoring and enforcement mechanisms, but as long as the mechanisms are
effective, monitoring and enforcement does not affect the design and analysis of a wastewater
treatment project. If the mechanisms are not effective, then the water quality targets are strictly
nominal, and the project should be designed and analyzed as if no standards or targets existedthat
is, by standard benefit-cost analysis. If the mechanisms are effective, then the targets can be taken at
face value.
Taking the water quality targets as given, economic analysis of a wastewater treatment
project would then be based strictly on cost. That is, the economic approach to achieving the water
quality targets would choose the least-cost plan that achieves the targets.
Least-cost analysis, like standard benefit-cost analysis, treats all costs as equal and
comparable. But despite that similarity, least-cost analysis is usually not as problematic as benefit-
cost analysis. Perhaps the biggest limitation of benefit-cost analysis arises when benefits include
general welfare effects on individuals, with the welfare effects translated into monetary units; the
problems result both from translating individual preferences into money, and making comparisons
of monetized welfare across different people (see Sagoff 2000 and Hammond 1993.) In contrast, the
cost of meeting water targets is typically a financial cost to firms. In standard economic analysis, the
value of a firm is determined strictly in monetary terms, so comparing monetary impacts across
firms is less of a problem, unless those monetary impacts are directly and exclusively associated with
specific people (as in a small firm).
A simple approach to least-cost analysis would focus only on the design of the treatment
plant. For example, the treatment plant may have an effluent quality standard, so least-cost analysis
would consider whether the plant is designed to meet that standard at least cost. The least-cost
option could be easily identified by comparing the cost of alternative designs that met the effluent
standard.
This simple approach to least-cost analysis, however, establishes only that the cost is
minimized at the treatment plant, and is not sufficient to establish that cost is minimized across the
local area. To establish that cost is minimized across the local area, the economic analysis can draw
on the economic theory of pollution control.
The economic theory of least-cost pollution control involves two components: (i) an
estimate of the maximum pollution load that would achieve the given water quality target; and (ii) a
pollution abatement cost function at every pollution source. (The pollution abatement cost function
gives the cost of reducing or removing waste from the waste stream; abatement cost is not
necessarily the same as the operating cost of a treatment plant.) Given this information, the least-
cost plan of achieving the target would allocate the total allowable emissions across sources such
that the marginal abatement cost is equal across all sources, including the central treatment plant.
(See Hanley et al. 1997 for a thorough review of the economics of pollution control.)
The first component (maximum pollution load) is strictly a scientific matter, although far
from a simple one. Establishing the maximum pollution load requires advanced expertise in water
4
quality modeling, and would be an expensive and time-consuming project. In the early stages of
developing a pollution control system, the highest priorities would typically be to respond quickly to
the most important pollution problems, and to show progress in improving water quality.
Establishing maximum pollution loads is usually not a high priority. Without this scientific
information, though, the given water quality target could only be achieved through a process of trial
and error.
The maximum pollution load, however, is only required to achieve the given water quality
target, and is not requred to achieve least-cost pollution control. If maximum pollution loads are not
known, then the economic approach to water quality management would achieve the resulting level
of water quality at least cost, although the resulting level need not be the targeted level.
Regardless of the maximum pollution loads, least-cost pollution control can be achieved
through at least three different approaches. First, in a “command and control” approach, a
regulatory agency would dictate to each source the amount of pollution it is allowed to emit. To
determine the allowable emissions per source, the regulatory agency would need information on the
marginal abatement cost for each firm: the extra cost to the firm of reducing its emissions by one
additional unit. Such information is very difficult to obtain, so this form of “command and control”
is an impractical method of achieving least-cost pollution control.
Second, in the “market-based” approach, the regulatory agency would issue transferable
emission permits, with the total emissions across all permits equal to the maximum pollution load
(or whatever limit is decided, if maximum load is unknown). If two firms have different marginal
abatement costs at the level of emissions allowed under their given permits, then the two firms will
each save costs by transfering permits to the firm with higher abatement cost. (Of course the firm
with higher costs pays the other firm for giving up its permits, but that exchange of funds is a mere
transfer and does not affect the true economic cost.) Transfer of permits would occur as long as
there are significant differences in marginal abatement cost. If the cost of transfering a permit is
negligible, then the marginal cost of abatement would eventually be equalized across firms.
And third, in the “economic incentives” approach, the regulatory agency would assess a
uniform charge per unit of emissions (uniform across similar emissions). Each firm could reduce its
total operating cost if it lowered its emissions until the cost of further reducing emissions was
greater than the emission charge. If the maximum pollution load is known, the regulatory agency
would set the charge at the level such that the total emissions that resulted is less than or equal to
the maximum. If the maximum pollution load is unknown, the agency could adjust the charge until
water quality reached the targeted level. (A variable or even temporarily changing tax rate has its own
disadvantages, though, since it increases uncertainty and so complicates private investment
decisions.)
C. Application of the Economic Theory to Wastewater Treatment Plants
This general economic theory of pollution control applies to emissions directly to surface
water, rather than specifically to emissions to a sewer connected to a central wastewater treatment
plant. One can easily adapt the theory to the design and management of a centralized wastewater
treatment plant, though. In fact, centralized wastewater treatment is probably the ideal context in
which to apply the theory.
Other principles, besides economic ones, are also important in wastewater treatment,
though, and these other principles must also be accommodated in the design and management of a
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centralized plant. Financial viability, in particular, is one noneconomic principle that is most likely to
conflict with economic principles. That is, public policy may require that a publicly owned and
operated sewerage utility should generate sufficient revenue from its users to cover all of its capital
and operating costs.
A sewerage system and wastewater treatment plant can indeed be designed to achieve least-
cost water quality management and financial sustainability. In addition to the tariff for processing
wastewater, the most important factors are the extent of the sewerage network and the scale of the
treatment plant.
Achieving full cost recovery in a sewerage utility requires thorough and detailed financial
analysis, analysis that is beyond the scope of this paper. But for the purposes of the discussion here,
it is assumed that full cost recovery is implemented through a tariff assessed on each connection to
the sewer. The tariff is set at the total average cost per unit of wastewater processed (including
conveyance cost as well as treatment). The sewerage utility measures the volume of wastewater
discharged to the sewer, and each connection is charged an amount equal to the tariff times the
volume discharged. The sewerage utility thus earns revenue equal to all of its cost, including both
fixed and variable costs.
As mentioned above, least-cost pollution control can be achieved through a uniform charge
set at the level of marginal cost. If financial viability requires that the tariff be set at average cost,
then marginal cost and average cost must be equal. According to basic microeconomic theory,
average cost and marginal cost are equal when production occurs at the level of least average cost.
So marginal cost and average cost pricing can be achieved simultaneously by designing a plant so
that it will operate at the level of least average cost.
Finally, marginal cost pricing will achieve least-cost pollution control if all (equivalent)
pollution sources in the relevant area face the same price. Assessing a common charge on all
pollution sources can be achieved by designing the sewerage network so that it includes all
significant point sources.
In summary, a sewerage network and treatment plant will be financially sustainable and will
achieve least-cost pollution control if
(i) the utility assesses a tariff set at the utility’s average cost;
(ii) the treatment plant operates at minimum average cost; and
(iii) the sewerage network includes all emissions that would otherwise drain into the same
reach as the treatment plant.
D. Practical Complications in Implementing Least-cost Pollution Control
All of the three factors above can be incorporated into the design of a wastewater treatment
project. Other considerations in the design, though, may require sacrificing at least one of the factors
above. For example, if (as is likely) the amount of wastewater is increasing over time, then the
treatment plant will be designed with excess capacity relative to the amount of wastewater currently
generated. The plant may therefore be operating, initially, at a level where average and marginal cost
are not equal, and a tariff set at average cost would not achieve least-cost pollution control. If,
however, the plant eventually reaches capacity, then least-cost pollution control would be achieved
in the long run.
Installing excess capacity can be economically justifiable if the full capacity is utilized in the
near (or at least not distant) future. In the short run, though, financial independence and least-cost
6
pollution control can both be maintained through a two-part tariff. Two-part tariffs are typically
used in telecommunications pricing, and include a fixed charge to cover the system’s capital costs,
plus a variable charge to cover operations and maintenance (Mitchell and Vogelsang 1991). Setting
the variable charge at marginal cost therefore would achieve both financial independence and least-
cost pollution control.
In the absence of a two-part tariff, a simple model of production costs can help gauge the
difference between average and marginal cost pricing. A typical treatment plant can run at constant
marginal cost up to and slightly beyond the engineer’s design capacity (Clark 2002). The design
capacity is an engineering concept, and essentially indicates the rate of production at which capital
constraints are reached. The design capacity is typically a conservative estimate, so capital constraints
are likely to be reached at a slightly higher rate of production.
So suppose that marginal cost increases at a constant rate beyond the point of constant
marginal cost. Average cost is minimized only where marginal cost is increasing, so the optimal
economic rate of operation of the plant will be above the design capacity. Suppose that marginal
cost starts increasing at a multiple of f1 > 1 of the design capacity Q0, and that average cost is
minimized at a multiple of f2 > f1 of the design capacity. If the plant is operating at a multiple of
f > f1 of the design capacity, then the difference between average and marginal cost is
( )( )
(K/fQ0)* f ;; − f ; / f ;; − f:; , where K is the plant’s fixed cost (see the appendix for derivation of
the formula). The difference is increasing in f2, so an upper bound on the difference could be
estimated by taking the largest feasible value of f2. The economic significance of this difference
depends on how sensitive wastewater generation is to the tariff (that is, the price elasticity of the
demand for discharging wastewater).
Another complication in implementing least-cost pollution control is that either the terrain
or the size of the city may make it economical to have independent sewerage networks, with each
network serviced by its own treatment plant. Uniform and simultaneous control of point sources is a
vital element of least-cost pollution control, an element that a single, comprehensive sewerage
network provides automatically. With multiple, independent networks, uniform and simultaneous
control will occur if all treatment plants are identicalthe same scale, inflow, and treatment
technology. If, however, the treatment plants are different, then control must be explicitly built into
the system.
The distinction between a treatment plant’s operating cost and abatement cost is important
when there are several different treatment plants discharging to the same reach. The operating cost
is the cost of processing an average unit of wastewater to meet the treatment plant’s targeted
effluent quality; the effluent quality is taken as given. The abatement cost, in contrast, is the cost of
reducing the waste load in the plant’s effluent, regardless of the targeted or design standard. Of
course the targeted effluent quality and the operating cost are the focus of the design and
management of a plant. But the abatement cost and actual effluent quality are most important in
implementing least-cost pollution control across a system of different treatment plants.
Least-cost pollution control requires that the marginal abatement cost be equalized across all
sources, including the central treatment plants. So if the plants are different, then the operation of
the plants would have to be coordinated to equalize their marginal abatement costs. This may
require some plants operating above or below their design effluent standards, say through a change
in variable inputs.
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In other words, a “command and control” approach would be applied at the level of the
central treatment plants. The difficulty with implementing “command and control” is getting
sufficient information about abatement costs, and coordinating the generation and treatment of
wastewater across many sources. With a system of different treatment plants, though, this difficulty
is largely avoided if the plants are controlled through a single municipal utility company.
Another way that uniform and simultaneous control can be lost is if there are significant
point sources outside the service territory of any treatment plant (whether there are many or just one
plant). In that case, the point sources outside the service territory must also be charged the same
wastewater tariff, even though they are not discharging to the sewerage network. Assessing a tariff
on sources outside the system could present political or at least public relations problems, though,
since wastewater tariffs are typically presented as “user charges”: the tariff provides the payee with a
service or “benefit”, namely the conveyance and treatment of wastewater. Assessing the same
wastewater tariff outside the service territory, then, could conflict with the stated justification for the
tariff.
Yet another common impediment to least-cost pollution control is the way wastewater
tariffs are assessed. Wastewater tariffs are commonly assessed on the volume of wastewater
discharged, or on the volume of water used, without measuring the quality of the wastewater. But
the waste load, as opposed to the mere water volume, is the focus of least-cost pollution control.
To achieve least-cost pollution control, the wastewater tariff should send a signal to
generators about the cost of treating that wastewater at the central treatment plant; if the cost of
treatment is less at the point of generation, then the generator has the incentive to treat it there, and
society as a whole saves cost. But if the firm is already discharging clean water (for example, the
water is used only for cooling), then a wastewater tariff would not contribute to pollution control.
Indeed, it might even be justifiable to subsidize a firm discharging clean water. Without monitoring
of wastewater quality, the best that could be achieved through marginal cost pricing is least-cost
“wastewater management.”
Of course it would be prohibitively expensive to monitor the quality of every source
discharging to a sewer. This limitation could be at least partly overcome by defining different classes
of discharges, by wastewater quality, and then assessing a different tariff to each class, according to
the marginal abatement cost of treating all of the wastewater in that class. Such a tariff, however,
would still not send the kind of signal envisioned in the economic theory of pollution control, since
it provides dischargers only with the incentive to reduce the volume of wastewater discharged.
Least-cost pollution control would be achieved only if the volume is closely related to the waste
load.
III. The Hebei Wastewater Management Project
In 2001, ADB analyzed a proposal for a loan to the government of Hebei Province, PRC,
with the proceeds of the loan used to help finance the construction of five municipal wastewater
treatment plants. The plants would be constructed in Baoding, Chengde, Tangshan, Xuanhua, and
Zhangjiakou. ADB’s standard guidelines for economic analysis call for a benefit-cost analysis of
proposed projects, but such an analysis would not have revealed the full economic justification or
motivation for the project in Hebei Province.
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Hebei Province lies within the Hai River Basin, and ADB had previously funded the
development of a comprehensive plan to manage water quality in the Hai River Basin, the Hai River
Pollution Control and Prevention Plan (the “Pollution Control Plan”, or the “Plan”). Water quality
management in the Hai River Basin is based on ambient water quality targets, and the Pollution
Control Plan was aimed at meeting the targets. The Hebei Wastewater Management Project (the
“Project”) was motivated largely by the Pollution Control Plan, so the economic analysis and
justification of the Project depended at least partly on the Plan.
This section applies the concepts discussed in Section II to analyze the Project. The analysis
shows that the water quality targets in Hebei Province have general support from the public, and so
provide a reasonable basis to develop plans to manage water quality. Scientific information on water
quality in the Hai River Basin is still quite limited, so the water quality targets can be approached
only with some uncertainty. Despite the uncertainty in meeting the targets, though, the analysis
shows that the Project is designed to manage municipal wastewater at least cost.
A. Legal Standards and Targets for Surface Water Quality
The current institutional framework for managing surface water quality in Hebei Province
consists of two main components: (i) legal standards and targets for surface water quality; and (ii) the
policies, regulations, and plans aimed at meeting the given targets. The standards and targets are
therefore the foundation of the framework, and the starting point for an evaluation.
The 1996 Water Pollution and Prevention Law authorized setting standards for surface water
quality, and using these standards to set targets for individual watercourses. Under the law, the State
Environmental Protection Agency (SEPA) was charged with defining the technical standards at a
national level, and deciding what standards (or targets) should apply to certain key watercourses.
The standards consist of five main classifications of surface water quality, set according to
the intended use of the water. Classes I, II, and III apply to surface water that is intended for
potable purposes. Classes IV and V are for surface water intended only for irrigation or industrial
use. Each class is defined by 30 criteria, prescribing numeric ranges for the physical, chemical, and
biological properties of water, such as temperature, pH, and coliform counts (SEPA 1998).
Once SEPA defined the water quality classes, the next step in the process was to determine
which class of water quality should apply to a given river reach. SEPA itself set the desired or
targeted water quality class for some key, strategic, river reaches. More generally, though, the
relevant environmental protection department at either a municipal, provincial, or state level was
responsible for setting the targeted water quality class.
Table 1 (ADB 1999) shows the targeted water quality and current water quality for the reach
below each proposed treatment plant in the Project. The table shows that ambient water quality in
the reach below each project site does not meet the targeted water quality standards, and is generally
worse than the targeted quality by a wide margin.
Table 1. Targeted and Actual Water Quality in Treatment Plants
Project Component Targeted Class Pre-project Situation

Baoding III (Baiyangdian Lake) V
Chengde II (Wulie river ) >V
Tangshan IV >V
Zhangjiakou and Xuanhua III >V
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B. Public Support for the Targets
Before the water quality targets were finalized, there was a consultative process within
government to resolve differences of view over the designated beneficial use of the river reach, and
over what target could reasonably be met (ADB consultant, personal communication). Different
kinds of water users were represented in this process through the relevant ministry or government
department (for example, farming interests are represented by the Ministry of Agriculture). There
was no formal requirement in the target-setting process for broader public consultation, but
apparently some informal involvement of NGOs, universities, and professional bodies did occur.
Setting targets for surface water quality is a fairly technical and detailed process, and this
process is naturally the responsibility of a bureaucracy, rather than a matter for, say, a plebiscite. So
in this sense, PRC’s process of setting targets is both proper and consistent with best practices in
other countries. In best international practice, though, individual water users are more involved in
the process, they have more rights to challenge bureaucratic decisions, and the government directing
the bureaucracy is more accountable to the public.
Despite the public’s limited role in determining environmental policy, it appears that there is
ample public support in PRC for environmental policies in general. Socioeconomic surveys
undertaken in the PRC have indicated strong public interest in the environment, and also broad
support for environmental laws. Surveys have also indicated public dissatisfaction with the
effectiveness of government enforcement action to ensure compliance with environmental laws,
which may indicate demand for further improvements in environmental quality.
Although there is no specific information indicating the public’s interest in the water quality
targets in the Project areas, the survey conducted for the Project indicated general public support for
improved water quality management. In the project cities, 61 percent of survey respondents rated “a
clean environment and unpolluted rivers” as “most important”, and installing a sewerage system was
the number one priority for urban improvement (ADB 2001). The analysis of other recent ADB-
funded projects in PRC found similar support for water quality management and environmental
improvement.
In summary, the potential for public involvement in setting targets is limited by the technical
nature of the matter itself. Hence, the generally limited role for public participation in PRC is, in this
case, not inconsistent with best practice. The justification for the targets (and the Project) would be
stronger if there was more direct evidence of public participation and support for the chosen water
quality targets. However, public support for environment policies, in general, and public concern for
water quality expressed in the survey for the Project both indicate that the given water quality targets
are broadly consistent with public preferences.
C. Basin-wide Plans for Achieving the Targets
Various national policies, regulations, and plans affect water quality management in the Hai
River Basin and Hebei Province. For example, building regulations from the Ministry of
Construction require the construction of septic tanks for all new residential and other nonindustrial
developments; new developments are excused from this requirement if they discharge to a sewer
connected to a wastewater treatment plant. The Tenth Five-Year Plan requires progress in
establishing discharge permits, installing continuous monitoring for larger industrial discharges, and
moving toward a system of setting discharge limits based on total pollution loads.
10
The most important initiative, though, is clearly the Pollution Control Plan. The Plan
provides a strategic framework for pollution control and prevention in the Hai River Basin.
Following State Council’s approval of the Plan in 1999, each of the provinces and provincial-level
cities within the Hai River Basin (Hebei, Henan, Shandong and Shanxi provinces, and Beijing and
Tianjin municipalities) obtained SEPA's endorsement of a pollution control plan for that part of the
Hai River Basin within its jurisdiction. Each municipality prepared subordinate local plans.
The Pollution Control Plan identified more than 660 potential projects to enhance water
quality in the basin. The projects were initially identified at the local level, according to local
preferences and priorities, and subject to national objectives and regulations. The projects are not
mutually exclusive alternatives, but instead were proposed solutions to locally identified pollution
problems. A wide variety of projects were identified, including watershed management, effluent
reuse, clean production processes, as well as standard point-source pollution control projects.
The Pollution Control Plan does not, by itself, provide a feasible plan to meet the basin’s
water quality targets, since it merely identified potential projects without prioritizing them. To help
refine the Plan, ADB funded the development of a refined Hai River strategic plan, which was
completed in December 1999 (ADB 1999). The results of the study included an Immediate
Implementation Plan and a Strategic Basin Management Plan. The Immediate Implementation Plan
was developed by assessing and prioritizing each of the projects in the Plan, while the Strategic Basin
Management Plan addressed the long-term strategy.
Prioritizing the hundreds of projects in the Pollution Control Plan followed a two-stage
procedure. First, projects were omitted that did not have a clear environmental benefit, that were
not clearly related to the aims of the Plan, or that were either completed already or obviously not
feasible. The remaining projects were mainly large or centralized point-source pollution control
projects.
After the initial screening, a relatively simple method was developed to assign a score to each
project. Table 2 (ADB 1999) shows the factors that went into the score, and the weight for each
factor. The scoring method was discussed at the Inception Workshop for the ADB TA project and
then refined according to feedback, so there was at least some opportunity for public participation in
developing the method.
Table 3 shows the scores for wastewater treatment projects in Hebei Province. The Project
includes the highest scoring treatment plants in each of the three planning zones. Only the plant for
Tangshan New District received a relatively low score.
The Tangshan treatment plant was included in the Project because of significant changes in
Tangshan since the completion of the refined plan. The treatment plant at Tangshan is planned for
the “New District”, so called because the district has been redeveloped following the Great
Tangshan Earthquake of 1976 (the deadliest earthquake of the 20th Century). The New District’s
development plan was approved after the scoring method was completed. As a result, the New
District will undergo much faster development than was earlier thought, and the treatment plant for
the New District will be a significant component of the district’s future development. A project
funded by the World Bank is also addressing wastewater treatment in Tangshan, as well as two other
cities in Hebei Province.
Table 3 shows the “prioritizing score” for all proposed wastewater treatment projects in
Hebei Province (ADB 1999).
11
July 2002
Table 2. Factors and Weights used to Prioritize Pollution Control Projects
Factor Weight Comment

Affected population High: 6 High > 500,000 > Medium > 100,000 > Low
downstream Medium: 3
Low: 1
Risk to public health High: 8 Subjective assessment based on risk to drinking
Medium: 5 water supply, location, etc.
Low: 2
Irrigated land High: 4 Considers quality of land, if known.
downstream Medium: 2
Low: 0
Employment High: 6 Adjusted depending on protected employment as
protected Medium: 3 percentage of total employment.
Low: 1
Targeted water Classes I or II: 6 Adjusted upwards or downwards, depending on
quality Class III: 4 difference between actual and targeted quality.
Class IV: 2
Bo Hai Bay: 2
Class V: 1
Pollution load High: 10 Based on COD and a subjective assessment of the
removed Medium: 6 industry.
Low: 2
Unit cost of pollution High: 2 Based on cost of COD, or subjective assessment.
removed Medium: 4
Low: 6
Water efficiency High: 6 Considered potential value of reuse of treated
savings Medium: 2 wastewater.
Low: 0
Each plant in the Project included at least some development of the sewer network in the
city. The network was designed so that it covered the entire city and all significant point sources, a
feature that is somewhat rare in municipal wastewater management in PRC. The Pollution Control
Plan requires that specific cities (determined by size and location) install secondary wastewater
treatment plants; each of the five cities in the Project are on the list of cities required to install
secondary treatment. SEPA also requires secondary treatment for all new treatment plants that
discharge to inland water courses. Hence, each plant in the Project will provide secondary treatment.
The plants are expected to be completed by 2005, and will be operating at full capacity by 2010.
Each component of the Project is designed to achieve full cost recovery through wastewater
tariffs. The proposed tariffs are consistent with broad public policy in PRC, and are supported at the
local level. For example, PRC’s economic and enterprise reform programs require that all wastewater
management projects be financially sustainable. Recent policy guidance on setting wastewater tariffs
dictates that wastewater tariffs be set at the level of full cost recovery. Hebei Province is one of the
priority areas for implementation of this policy.
12
Table 3. Scores of Components of Wastewater Treatment Projects in Hebei Province
Planning Zone Municipality or Prefecture Treatment Plant Score

Daqing River Baoding Baoding City 40
Baoding Mancheng County 36
Luan River Chengde Chengde City 44
Chengde Shuanluan 44
Chengde Chengde Cnty Paper 42
Chengde Xiabangcheng 42
Tangshan West Suburb 40
Tangshan Zunhua City 39
Tangshan Qian'an 39
Tangshan Zunhua Fertilizer 38
Qinghuangdao East Suburb 37
Chengde Xinglong County 36
Chengde Pingquan County 36
Chengde Yingzi Mine 36
Tangshan New District 36
Yongding River Zhangjiakou Zhangjiakou City 42
Zhangjiakou Xuanhua 42
Zhangjiakou Hualai 42
Zhangjiakou Zhangjiakou Pharm. 39
D. Economic Evaluation of the Pollution Control Plan
There are at least two facets to the economic analysis of the Pollution Control Plan. First,
the analysis should consider the priorities assigned to all projects in the Plan, and whether those
priorities make sense from an economic perspective. Second, the analysis should focus on individual
or specific projects within the Plan, and whether those projects are designed to meet the goals of the
Plan in an efficient (that is, least-cost) manner; the analysis here focuses on the five projects that are
in the Hebei Wastewater Management Project.
The Pollution Control Plan is clearly too large to be implemented simultaneously, and so
sensible implementation requires a ranking or prioritization of the many components of the Plan.
The standard economic approach to ranking the projects would estimate the net benefits of meeting
the targets for every reach. It is clearly not feasible, though, to conduct a benefit-cost analysis for
each of the hundreds of projects in the Pollution Control Plan. But ranking the projects does not
require a detailed benefit-cost analysis of each and every project, since it is necessary only to identify
that a given project has higher or lower net benefits relative to the others. From that perspective, a
streamlined approach to ranking, such as that described above, is justified. The only question is
whether the actual approach used is consistent with benefit-cost analysis (or other economic
criteria).
Table 4 lists the kinds of benefits that each type of water use would experience from
improved water quality. The table also indicates whether that benefit is associated with any of the
factors in the ranking method listed in Table 3. Table 4 shows that most of the benefits of improved
water quality are at least related to the factors included in the ranking method.
13
July 2002
Table 4. Benefits of Water Use from Improved Water Qualitya
Use Benefit Included in Ranking

Domestic self-supply Lower treatment cost
Lower medical expenditure
Fewer sick days
Reduced mortality
Municipal water supply Lower treatment cost
Lower medical expenditure
Fewer sick days
Reduced mortality
Irrigation Lower treatment cost
Increased productivity
Avoided productivity losses
Increased quality
Livestock watering Lower treatment cost Not applicable
Increased productivity
Lower medical expenses
Increased quality
Industrial self-supply Lower treatment cost
Commercial fishing Increased productivity Not applicable
Avoided productivity losses
Increased quality
Recreation Lower travel cost
Increased recreation days
Aesthetics Increased property values
Macroeconomic Avoided unemployment from
firm closures
aRelative to the ranking method in Table 3.
The last two factors in Table 3 (unit cost of pollution removed and water efficiency savings)
are related to the cost of treatment. The cost component of treatment is much simpler than the
benefit component, and the last two factors in Table 3 capture virtually all of the essential
components of cost.
Perhaps the biggest limitation in the ranking method is that it is not explicitly based on the
marginal impact of a treatment plant on water quality downstream. The size of the affected
population and the risk to public health, for example, are clearly related to the benefits of water
quality improvement. But if water quality is already satisfactory upstream of a large city, then
installing a treatment plant upstream would not necessarily have the same benefit as installing
treatment plant upstream of a smaller city on a heavily polluted river.
Two factors in the ranking method, the “targeted water quality” and the “pollution load
removed”, help make up for the lack of a measure of marginal impact. The “targeted water quality”
is related to the potential marginal benefits of water quality improvement, since it is based on the
14
difference between actual and targeted water quality. The “pollution load removed” is related to the
potential marginal improvement in water quality, whether or not there is any benefit to the
improvement. These two factors are also related to the other factors in the ranking method, so there
is some redundancy across the factors. The redundancy has the effect of increasing the weighting
assigned to some of the benefits, and so is not necessarily a serious flaw in the ranking. In any case,
the potential redundancy is certainly worth contribution of these factors to gauging the marginal
benefit of improving water quality.
In summary, the ranking method is a simple and efficient means to process a lot of
information, which of course is its aim. Despite the simplicity, the method includes the most
important benefits and all of the costs, and includes measures related to the potential marginal
benefits of water quality improvement. As such, the method is broadly consistent with economic
principles, in general, and standard benefit-cost analysis in particular.
As mentioned above, authorities have recently been authorized to develop estimates of
maximum pollution loads, in Hebei Province and across PRC. The current lack of such information
is not unusual for a water quality management system that is in the early stages of development, like
that in Hebei Province. In fact, the United States is still developing maximum pollution loads for its
surface waters. But since the maximum pollution loads for the Hai River Basin are not yet known, at
this stage the plans for achieving water quality targets can be implemented only with some
uncertainty about the impact of the plans on ambient water quality.
In the absence of a water quality model, a useful indicator of the potential impact of a
treatment plant is the observed water quality above and below the service territory of a plant (or
more generally, above and below the city if the city has more than one sewerage network). The
difference in observed water quality shows the impact of current wastewater discharges on water
quality, and shows the maximum impact that a plant can have on water quality. That is, if water
quality above the plant does not meet the target, then installing a single treatment plant will not be
sufficient to meet the water quality target. Table 1 shows the water quality target and water quality
below the proposed site of each treatment plant, but water quality data above the plants is not available.
The lack of knowledge of maximum pollution loads and potential impact of each plant limits
the economic evaluation of the plan to achieve water quality targets. That is, absent such
information, one cannot determine whether the proposed level of treatment (secondary for each
plant) is necessary or sufficient to attain the targeted water quality. It is clear, though, that centralized
treatment of municipal wastewater, as proposed in the Project, is consistent with the least-cost
management of water quality (wastewater treatment is subject to decreasing average cost over a wide
scale of operations; see Fraas and Munley 1984). Furthermore, the level of treatment proposed
(secondary) is consistent with standards in other countries, particularly the United States.
Taking those limitations as given, economic analysis would consider the cost of wastewater
management at the treatment plant, and across the service territory. Analysis of the treatment plant
considered three kinds of alternatives: (i) alternative treatment processes; (ii) alternative sites for the
new or expanded wastewater treatment facilities; and (iii) alternatives for wastewater collection,
including alternative routes for interceptors, trunk sewers, and replacement of existing overloaded or
deteriorated sewers. The treatment process is the most expensive component of the Project, so it is
the most important element in the least-cost analysis.
Table 5 (ADB 2001) shows the cost of the chosen treatment process relative to the best
alternative. Except for the plant at Baoding, the chosen option is the least-cost alternative. The more
expensive option was chosen for Baoding, because that option used a technology similar to that of
15
July 2002
the treatment plant already in operation near the proposed site. Using similar treatment technology
at adjacent plants can save operation and maintenance costs, since the same labor and materials can
be used at both plants. This kind of cost saving is important but difficult to quantify. Engineers in
the feasibility study advised using the same technology for the plant at Baoding, and absent other
information, the chosen treatment process appears justified despite the higher cost.
Table 5. Comparison of Cost of Treatment Options
Cost of Chosen Option

Project Component Relative to Best Alternative (%)
Chengde 95
Xuanhua 96
Tangshan 97
Zhangjiakou 97
Baoding 113
Each plant includes two key aspects that, given the proposed level of treatment, are required
to achieve least-cost wastewater management across the local area. First, each sewerage network in
the Project is designed to capture all of the major point sources in the feasible service territory of the
plant. Second, all sources discharging to the sewers will face a uniform tariff set at the level of “full
cost recovery”. As discussed in Section I, only one other factor is required to provide a complete set
of incentives for least-cost pollution control: each plant should operate at the minimum efficient
scale, or where average and marginal cost are equal.
The Project is designed so that each treatment plant will reach its “design capacity” by 2010.
As discussed in the previous section, this means that each plant will be operating at constant
marginal cost until sometime beyond 2010. Since average cost exceeds marginal cost where marginal
cost is constant, a tariff set at average cost will exceed marginal cost. Hence, the tariff is above the
level that would provide the right economic incentives for least-cost wastewater management. This
means that the Project will promote excessive on-site wastewater management even while there is
spare capital at the central treatment plant.
How much on-site wastewater treatment occurs depends on how much marginal cost differs
from the actual tariff, and on the price elasticity of demand for wastewater discharge. The elasticity
of demand is not available, so incentives for on-site wastewater generation can be evaluated only
with respect to the difference between marginal cost and the tariff.
Table 6 shows the initial tariff relative to the marginal cost of processing wastewater
(operation and maintenance costs) at each treatment plant (ADB 2001). For each plant, the tariff is
more than double the marginal cost of processing wastewater at the plant.
Table 6. Initial Tariff Relative to Marginal Cost of Processing Wastewater
Project Component Initial Tariff

Chengde 2.77
Xuanhua 2.56
Zhangjiakou 2.56
Tangshan 2.50
Baoding 2.17
16
As operation of the treatment plants expands, average cost should fall and marginal cost
should rise, ideally to the point where they are equal. The Project therefore has the potential for
achieving least-cost wastewater management in the long run. The model of production cost
discussed in section I.D can provide at least a preliminary assessment of the difference between
marginal and average cost beyond the start of operations for each plant. Engineers for the Project
estimated that capital constraints would be reached at 10 percent above the design capacity, and that
the plants could not maintain their designed effluent targets running at more than 50 percent above
their design capacity. Hence, the marginal cost would start increasing at 110 percent of design
capacity, and the minimum economically efficient rate of production is between 110 and 150 percent
of design capacity.
Figure 1 shows the estimated difference between average and marginal cost, expressed as a
percentage of average fixed cost, and assuming the economically efficient scale occurs at 30 percent
above the design capacity. Four of the plants will reach the economically efficient scale of operation
by 2015; the plant at Zhangjiakou reaches that scale sooner, by about 2012. The plant at Tangshan
does not reach the economically efficient scale by 2020. Although Tangshan would reach the design
capacity by 2010, along with the four other plants, the projected growth of wastewater generation in
Tangshan is lower than at the other plants. The economic significance of the difference between
average and marginal cost cannot be determined without information on the price elasticity of
demand for discharging wastewater.
In summary, four out of the five plants have the potential for promoting full cost recovery
and least-cost wastewater management, at least in the long run. That is, the plants are designed to
cover all point sources, all point sources will be charged a uniform tariff set at the average cost of
treatment, and the average and marginal cost could be equal by around 2015. Only the plant at
Tangshan will not run at the economically efficient scale in the foreseeable future. With the tariff set
above marginal cost, Tangshan will promote too much on-site wastewater management. This could
be corrected, though, with a two-part tariff. (At the time of writing, PRC is engaged in a nationwide
study of wastewater tariffs, with the aim of establishing national guidelines for setting wastewater
tariffs; see ADB 2001.)
0.6
0.5
Average Cost-Marginal Cost
0.5
0.3
0.2
0.1
0.0
2005 2010 2015 2020
Zhangjiakou Baoding Chengde
Xuanhua Tangshan
17
July 2002
IV. Conclusions
Wastewater treatment makes the most sense as part of a comprehensive system to manage
surface water quality. When such a system is not in place or is not effective, wastewater treatment
can justifiably be pursued as an independent initiative, but the benefits of treatment could be lost
through pollution from other uncontrolled sources. Establishing a comprehensive and effective
system to manage water quality not only secures the benefits of wastewater treatment, but it also
provides a strong context, motivation, and justification for treatment.
Establishing a comprehensive and effective system to manage water quality affects the
economic analysis of a wastewater treatment project. In this case, analyzing a project independent of
the system would not contribute to the overall analysis of the project. If the system is well designed,
then each component of the system should be economically justified; conducting an independent
project analysis to show that again is clearly unnecessary. If the system is not well designed, then an
independent project analysis could reveal just that. But in that case, an independent project analysis
is not a sufficient critique of a system, and a project analysis should not have to evaluate the
institutional or sectoral context of the projectsuch an evaluation should already be in place before
the individual project is analyzed.
When a system of water quality management is in place, the system itself should be the first
focus of an economic analysis. If the system is economically justified, then any constraints imposed
on an individual project can be taken as given. Depending on the nature of the constraints,
economic analysis of an individual project could then focus only on whether the project meets the
constraints at least cost. The economic analysis of the system need only be done once (until the
system changes), and the analysis of every project that comes under that system can merely refer to
the original sectoral or institutional analysis, without having to conduct a new analysis.
This paper has discussed one common way of managing surface waterthrough ambient
standards or targetsand the economic analysis of both the system and an individual wastewater
treatment project within that system. Public participation is perhaps the most important component
of this kind of system of water quality management. If the ambient standards are set through a
process that solicits, considers, and adapts to public preferences, then the water quality targets
should be socially and economically justified by design. The targets may also be able to a pass a
standard benefit-cost analysis, but that need not be the case, for benefit-cost analysis is, of course,
not the only reasonable way to make social decisions.
Taking the water quality targets as given, economic analysis of a project would consider
whether the proposed project is the least-cost means to achieve the standards. The simplest
approach to achieving least-cost wastewater management is to build it into the design of the project.
A project will provide sufficient incentives for least-cost wastewater management if it includes all
nearby point sources, with all sources assessed a charge equal to the marginal cost of processing
wastewater at the central treatment plant. A wastewater treatment project may achieve least-cost
wastewater management without these design elements, but only at the cost of additional elements
that are slightly more complicated.
This approach to designing and analyzing a wastewater treatment project is more than a
mere theoretical possibility. The analysis of the system for managing water quality in the Hai River
Basin, and the wastewater treatment plants that are part of that system, showed that the analysis is
feasible, and comparable to the information and analytical requirements of standard benefit-cost
18
analysis. The analysis showed that both the system and the proposed treatment plants are sensibly
designed, and roughly in accordance with economic principles.
The design and analysis of the Project could be improved in several ways, though. There was
less public participation in setting the water quality targets than in best international practice. Taking
the targets as given, though, the analysis of the targets would be stronger if there was more and
better information on public perceptions of water quality and the government’s efforts to manage it.
The lack of a water quality model also is a limiting factor in the analysis. The system for
managing water quality is still developing, and developing a water quality model is understandably
not a high priority at this stage. In the absence of a model, though, the analysis would benefit
substantially from observations of water quality above and below the proposed treatment plants.
Finally, the Project may achieve least-cost management of wastewater in the long run, but
the initial tariff is not set at a level that will provide sufficient incentives for least-cost management
of wastewater in the short run. This limitation could be addressed through a two-part tariff. If a two-
part tariff is not feasible, then the extent to which the Project departs from least-cost management
of wastewater could be gauged with the price elasticity of demand for discharging wastewater.
19
July 2002
References
Asian Development Bank, 1999. Final Report of TA No 3095-PRC: Hai River Basin Wastewater
Management and Pollution Control. Manila.
, 2001. Final Report of ADB TA No 3488-PRC: Hebei Province Wastewater Management
Project. Manila.
, 2001. Technical Assistance to the People’s Republic of China for Preparing the National
Guidelines for Urban Wastewater Tariffs, TAR: PRC 33456. Manila.
Arrow, K. J., A. K. Sen, et al., eds., 2002. Handbook of Social Choice and Welfare Economics. Elsevier
Science.
Clark, M., 2002. Personal communication.
Enderlein, U. S., R. E. Enderlein, et al., 1997. “Water Quality Requirements.” In R. Helmer and I.
Hespanhol, Water Pollution Control. Thomson Science and Professional.
Fraas, A. G., and V. G. Munley, 1984. “Municipal Wastewater Treatment Cost.” Journal of
Environmental Economics and Management 11(1):28-38.
Hammond, P. J., 1993. “Interpersonal Comparisons of Utility: Why and How They Should be
Made.” In J. Elster and J. E. Roemer, Interpersonal Comparisons of Well-Being. Cambridge:
Cambridge University Press.
Hanley, N., J. F. Shogren, et al., 1997. Environmental Economics in Theory and Practice. Oxford: Oxford
University Press.
Helmer, R., and I. Hespanhol, eds., 1997. Water Pollution Control: A Guide to the Use of Water Quality
Management Principles. Thomson Science and Professional.
Mitchell, B. M., and I. Vogelsang, 1991. Telecommunications Pricing: Theory and Practice. Cambridge:
Ostrom, E., 1991. Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge:
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Environmental Science and Technology 34:1426-32.
State Environmental Protection Agency, 1998. Selected Standards of the People’s Republic of China (1979-
1998). Beijing, People's Republic of China.
Stevenson, G. G., 1991. Common Property Economics: A General Theory and Land Use Applications.
Cambridge: Cambridge University Press.
Train, K., 1994. Optimal Regulation: The Economic Theory of Natural Monopoly. MIT Press.
20
Appendix
Let Q0 denote the “design capacity” of the plant. Suppose that the treatment plant can
process additional wastewater by expanding variable inputs at a constant rate, until inflow reaches
ρQ0, where ρ > 1. Hence, the marginal cost of processing additional wastewater is constant until
inflow exceeds ρQ0. Suppose that beyond ρQ0, marginal cost then increases at a constant rate. This
pattern of marginal cost can be represented mathematically as
0, Q ≤ ρ Q0
C '(Q) = b + a  (1)
Q − ρ Q0
where Q is the inflow of wastewater and a > 0 and b > 0.
Given the marginal cost function in expression Error! Reference source not found., the
total cost of processing wastewater is
a 0, Q ≤ ρ Q0
C (Q ) = c + bQ +  (1)
(Q − ρ Q0 )
2
2
where c is the plant’s fixed cost. Average cost is then
a 0, Q ≤ ρ Q0
C (Q ) / Q = c / Q + b +  . (2)
(Q − ρ Q0 ) / Q
2
2
Average cost is minimized where average and marginal cost are equal. Let Q* denote the
level of inflow where minimum average cost occurs. Since average cost is minimized only where
marginal cost is increasing, Q* > ρQ0. Setting C '(Q* ) = C (Q* ) / Q* gives
a
a ( Q*2 − ρ Q0Q* ) = c + (Q* − ρ Q0 ) 2
2
 1 
a ( Q*2 − ρ Q0Q* ) − (Q∗ − ρ Q0 ) 2  = c
 2 
. (3)
 2 1 2 2 2 
a ( Q* − ρ Q0Q* ) − (Q* − 2 ρ Q0Q* + ρ Q0 )  = c
 2 
a
2
( Q*2 − ρ 2Q02 ) = c
Solving for a gives
2 2
a=c =c . (4)
Q* − ρ Q0
2 2 2
(Q* − ρ Q0 )(Q* + ρ Q0 )
21
July 2002
Substituting a into expressions Error! Reference source not found. and (2) gives marginal
cost and average cost as a function of Q* and Q0:
2 0, Q ≤ ρ Q0
C '(Q ) = b + c 2 2 
(5)
Q* − ρ Q0 Q − ρ Q0
2
and
c 1 0, Q ≤ ρ Q0 
C (Q) / Q = b + 1 + 2  2
. (6)
Q  Q* − ρ 2Q0 2 (Q − ρ Q0 ) 

The difference between average cost and marginal cost is then
C (Q ) / Q − C '(Q )
c 1 0, Q ≤ ρ Q0  2 0, Q ≤ ρ Q0
= 1 + 2  2
−c 2 2 
Q  Q* − ρ 2Q0 2 (Q − ρ Q0 )  Q* − ρ Q0 Q − ρ Q0
2
c 1 0, Q ≤ ρ Q0 
= 1 + 2   . (7)
Q  Q* − ρ 2Q0 2 (Q − ρ Q0 ) − 2Q + 2 ρ Q0Q 
2 2
c 1 0, Q ≤ ρ Q0 
= 1 + 2  2 
Q  Q* − ρ 2Q0 2 (Q + ρ Q0 − 2Q ρ Q0 ) − 2Q + 2 ρ Q0Q 

2 2 2
c  0, Q ≤ ρ Q0 
= 1 −  2 2 
Q  (Q − ρ Q0 ) /(Q* − ρ Q0 ) 
2 2 2 2
22
PUBLICATIONS FROM THE
ECONOMICS AND RESEARCH DEPARTMENT
ERD TECHNICAL NOTE SERIES (TNS)

(Published in-house; Available through ADB Office of External Relations; Free of Charge)
No. 1. Contingency Calculations for Environmental No. 3 Measuring Willingness to Pay for Electricity
Impacts with Unknown Monetary Values —Peter Choynowski
—David Dole July 2002
February 2002 No. 4 Economic Issues in the Design and Analysis of a
No. 2 Integrating Risk into ADB’s Economic Analysis Wastewater Treatment Project
of Projects —David Dole
—Nigel Rayner, Anneli Lagman-Martin, July 2002
and Keith Ward
June 2002
ERD WORKING PAPER SERIES (WPS)

No. 1. Capitalizing on Globalization No. 9 Microfinance in Northeast Thailand: Who Benefits

—Barry Eichengreen, January 2002 and How Much?
No. 2. Policy-based Lending and Poverty Reduction: —Brett E. Coleman
An Overview of Processes, Assessment April 2002
and Options No. 10 PovertyReduction and the Role of Institutions in
—Richard Bolt and Manabu Fujimura Developing Asia
January 2002 —Anil B. Deolalikar, Alex B. Brilliantes, Jr.,
No. 3. The Automotive Supply Chain: Global Trends Raghav Gaiha, Ernesto M. Pernia, Mary Racelis
and Asian Perspectives with the assistance of Marita Concepcion Castro-
—Francisco Veloso and Rajiv Kumar Guevara, Liza L. Lim, Pilipinas F. Quising
January 2002 May 2002
No. 4. International Competitiveness of Asian Firms: No. 11 The European Social Model: Lessons for
A Conceptual and Research Framework Developing Countries
—Rajiv Kumar and Doren Chadee —Assar Lindbeck
February 2002 May 2002
No. 5 The International Competitiveness of Asian No. 12 Costs and Benefits of a Common Currency for
Economies in the Apparel Commodity Chain ASEAN
—Gary Gereffi —Srinivasa Madhur
February 2002 May 2002
No. 6 Monetary and Financial Cooperation in East Asia: No. 13 Monetary Cooperation in East Asia: A Survey
The Chiang Mai Initiative and Beyond —Raul Fabella
—Pradumna B. Rana May 2002
February 2002 No. 14 Toward A Political Economy Approach
No. 7 Probing Beneath Cross-national Averages: to Prolicy-based Lending
Poverty, Inequality, and Growth in the Philippines —George Abonyi
—Arsenio M. Balisacan and Ernesto M. Pernia May 2002
February 2002 No. 15 A Framework for Establishing Priorities in a
No. 8 Poverty, Growth, and Inequality in Thailand Country Poverty Reduction Strategy
—Anil B. Deolalikar —Ron Duncan and Steve Pollard
April 2002 June 2002
23
MONOGRAPH SERIES
(Published in-house; Available through ADB Office of External Relations; Free of charge)
EDRC REPORT SERIES (ER)
No. 1 ASEAN and the Asian Development Bank Changes in Nine Asian LDCs
—Seiji Naya, April 1982 —Pradumna B. Rana and J. Malcolm Dowling, Jr.,
No. 2 Development Issues for the Developing East December 1983
and Southeast Asian Countries No. 22 Effects of External Shocks on the Balance
and International Cooperation of Payments, Policy Responses, and Debt
—Seiji Naya and Graham Abbott, April 1982 Problems of Asian Developing Countries
No. 3 Aid, Savings, and Growth in the Asian Region —Seiji Naya, December 1983
—J. Malcolm Dowling and Ulrich Hiemenz, No. 23 Changing Trade Patterns and Policy Issues:
April 1982 The Prospects for East and Southeast Asian
No. 4 Development-oriented Foreign Investment Developing Countries
and the Role of ADB —Seiji Naya and Ulrich Hiemenz, February 1984
—Kiyoshi Kojima, April 1982 No. 24 Small-Scale Industries in Asian Economic
No. 5 The Multilateral Development Banks Development: Problems and Prospects
and the International Economy’s Missing —Seiji Naya, February 1984
Public Sector No. 25 A Study on the External Debt Indicators
—John Lewis, June 1982 Applying Logit Analysis
No. 6 Notes on External Debt of DMCs —Jungsoo Lee and Clarita Barretto, February 1984
—Evelyn Go, July 1982 No. 26 Alternatives to Institutional Credit Programs
No. 7 Grant Element in Bank Loans in the Agricultural Sector of Low-Income
—Dal Hyun Kim, July 1982 Countries
No. 8 Shadow Exchange Rates and Standard —Jennifer Sour, March 1984
Conversion Factors in Project Evaluation No. 27 Economic Scene in Asia and Its Special Features
—Peter Warr, September 1982 —Kedar N. Kohli, November 1984
No. 9 Small and Medium-Scale Manufacturing No. 28 The Effect of Terms of Trade Changes on the
Establishments in ASEAN Countries: Balance of Payments and Real National
Perspectives and Policy Issues Income of Asian Developing Countries
—Mathias Bruch and Ulrich Hiemenz, —Jungsoo Lee and Lutgarda Labios, January 1985
January 1983 No. 29 Cause and Effect in the World Sugar Market:
No. 10 A Note on the Third Ministerial Meeting of GATT Some Empirical Findings 1951-1982
—Jungsoo Lee, January 1983 —Yoshihiro Iwasaki, February 1985
No. 11 Macroeconomic Forecasts for the Republic No. 30 Sources of Balance of Payments Problem
of China, Hong Kong, and Republic of Korea in the 1970s: The Asian Experience
—J.M. Dowling, January 1983 —Pradumna Rana, February 1985
No. 12 ASEAN: Economic Situation and Prospects No. 31 India’s Manufactured Exports: An Analysis
—Seiji Naya, March 1983 of Supply Sectors
No. 13 The Future Prospects for the Developing —Ifzal Ali, February 1985
Countries of Asia No. 32 Meeting Basic Human Needs in Asian
—Seiji Naya, March 1983 Developing Countries
No. 14 Energy and Structural Change in the Asia- —Jungsoo Lee and Emma Banaria, March 1985
Pacific Region, Summary of the Thirteenth No. 33 The Impact of Foreign Capital Inflow
Pacific Trade and Development Conference on Investment and Economic Growth
—Seiji Naya, March 1983 in Developing Asia
No. 15 A Survey of Empirical Studies on Demand —Evelyn Go, May 1985
for Electricity with Special Emphasis on Price No. 34 The Climate for Energy Development
Elasticity of Demand in the Pacific and Asian Region:
—Wisarn Pupphavesa, June 1983 Priorities and Perspectives
No. 16 Determinants of Paddy Production in Indonesia: —V.V. Desai, April 1986
1972-1981–A Simultaneous Equation Model No. 35 Impact of Appreciation of the Yen on
Approach Developing Member Countries of the Bank
—T.K. Jayaraman, June 1983 —Jungsoo Lee, Pradumna Rana, and Ifzal Ali,
No. 17 The Philippine Economy: Economic May 1986
Forecasts for 1983 and 1984 No. 36 Smuggling and Domestic Economic Policies
—J.M. Dowling, E. Go, and C.N. Castillo, in Developing Countries
June 1983 —A.H.M.N. Chowdhury, October 1986
No. 18 Economic Forecast for Indonesia No. 37 Public Investment Criteria: Economic Internal
—J.M. Dowling, H.Y. Kim, Y.K. Wang, Rate of Return and Equalizing Discount Rate
and C.N. Castillo, June 1983 —Ifzal Ali, November 1986
No. 19 Relative External Debt Situation of Asian No. 38 Review of the Theory of Neoclassical Political
Developing Countries: An Application Economy: An Application to Trade Policies
of Ranking Method —M.G. Quibria, December 1986
—Jungsoo Lee, June 1983 No. 39 Factors Influencing the Choice of Location:
No. 20 New Evidence on Yields, Fertilizer Application, Local and Foreign Firms in the Philippines
and Prices in Asian Rice Production —E.M. Pernia and A.N. Herrin, February 1987
—William James and Teresita Ramirez, July 1983 No. 40 A Demographic Perspective on Developing
No. 21 Inflationary Effects of Exchange Rate Asia and Its Relevance to the Bank
24
—E.M. Pernia, May 1987 No. 55 Financial Sector and Economic
No. 41 Emerging Issues in Asia and Social Cost Development: A Survey
Benefit Analysis —Jungsoo Lee, September 1991
—I. Ali, September 1988 No. 56 A Framework for Justifying Bank-Assisted
No. 42 Shifting Revealed Comparative Advantage: Education Projects in Asia: A Review
Experiences of Asian and Pacific Developing of the Socioeconomic Analysis
Countries and Identification of Areas of Improvement
—P.B. Rana, November 1988 —Etienne Van De Walle, February 1992
No. 43 Agricultural Price Policy in Asia: No. 57 Medium-term Growth-Stabilization
Issues and Areas of Reforms Relationship in Asian Developing Countries
—I. Ali, November 1988 and Some Policy Considerations
No. 44 Service Trade and Asian Developing Economies —Yun-Hwan Kim, February 1993
—M.G. Quibria, October 1989 No. 58 Urbanization, Population Distribution,
No. 45 A Review of the Economic Analysis of Power and Economic Development in Asia
Projects in Asia and Identification of Areas —Ernesto M. Pernia, February 1993
of Improvement No. 59 The Need for Fiscal Consolidation in Nepal:
—I. Ali, November 1989 The Results of a Simulation
No. 46 Growth Perspective and Challenges for Asia: —Filippo di Mauro and Ronald Antonio Butiong,
Areas for Policy Review and Research July 1993
—I. Ali, November 1989 No. 60 A Computable General Equilibrium Model
No. 47 An Approach to Estimating the Poverty of Nepal
Alleviation Impact of an Agricultural Project —Timothy Buehrer and Filippo di Mauro,
—I. Ali, January 1990 October 1993
No. 48 Economic Growth Performance of Indonesia, No. 61 The Role of Government in Export Expansion
the Philippines, and Thailand: in the Republic of Korea: A Revisit
The Human Resource Dimension —Yun-Hwan Kim, February 1994
—E.M. Pernia, January 1990 No. 62 Rural Reforms, Structural Change,
No. 49 Foreign Exchange and Fiscal Impact of a Project: and Agricultural Growth in
A Methodological Framework for Estimation the People’s Republic of China
—I. Ali, February 1990 —Bo Lin, August 1994
No. 50 Public Investment Criteria: Financial No. 63 Incentives and Regulation for Pollution Abatement
and Economic Internal Rates of Return with an Application to Waste Water Treatment
—I. Ali, April 1990 —Sudipto Mundle, U. Shankar,
No. 51 Evaluation of Water Supply Projects: and Shekhar Mehta, October 1995
An Economic Framework No. 64 Saving Transitions in Southeast Asia
—Arlene M. Tadle, June 1990 —Frank Harrigan, February 1996
No. 52 Interrelationship Between Shadow Prices, Project No. 65 Total Factor Productivity Growth in East Asia:
Investment, and Policy Reforms: A Critical Survey
An Analytical Framework —Jesus Felipe, September 1997
—I. Ali, November 1990 No. 66 Foreign Direct Investment in Pakistan:
No. 53 Issues in Assessing the Impact of Project Policy Issues and Operational Implications
and Sector Adjustment Lending —Ashfaque H. Khan and Yun-Hwan Kim,
—I. Ali, December 1990 July 1999
No. 54 Some Aspects of Urbanization No. 67 Fiscal Policy, Income Distribution and Growth
and the Environment in Southeast Asia —Sailesh K. Jha, November 1999
—Ernesto M. Pernia, January 1991
ECONOMIC STAFF PAPERS (ES)
No. 1 International Reserves: An Analysis of Recent Trends

Factors Determining Needs and Adequacy —A.H.M. Nuruddin Chowdhury and
—Evelyn Go, May 1981 J. Malcolm Dowling, March 1982
No. 2 Domestic Savings in Selected Developing No. 7 Industrial Growth and Employment in
Asian Countries Developing Asian Countries: Issues and
—Basil Moore, assisted by Perspectives for the Coming Decade
A.H.M. Nuruddin Chowdhury, September 1981 —Ulrich Hiemenz, March 1982
No. 3 Changes in Consumption, Imports and Exports No. 8 Petrodollar Recycling 1973-1980.
of Oil Since 1973: A Preliminary Survey of Part 1: Regional Adjustments and
the Developing Member Countries the World Economy
of the Asian Development Bank —Burnham Campbell, April 1982
—Dal Hyun Kim and Graham Abbott, No. 9 Developing Asia: The Importance
September 1981 of Domestic Policies
No. 4 By-Passed Areas, Regional Inequalities, —Economics Office Staff under the direction
and Development Policies in Selected of Seiji Naya, May 1982
Southeast Asian Countries No. 10 Financial Development and Household
—William James, October 1981 Savings: Issues in Domestic Resource
No. 5 Asian Agriculture and Economic Development Mobilization in Asian Developing Countries
—William James, March 1982 —Wan-Soon Kim, July 1982
No. 6 Inflation in Developing Member Countries: No. 11 Industrial Development: Role of Specialized
25
Financial Institutions Pacific Developing Countries: An Empirical
—Kedar N. Kohli, August 1982 Overview
No. 12 Petrodollar Recycling 1973-1980. —Pradumna B. Rana, January 1987
Part II: Debt Problems and an Evaluation No. 35 Agricultural Price Policy in Nepal
of Suggested Remedies —Gerald C. Nelson, March 1987
—Burnham Campbell, September 1982 No. 36 Implications of Falling Primary Commodity
No. 13 Credit Rationing, Rural Savings, and Financial Prices for Agricultural Strategy in the Philippines
Policy in Developing Countries —Ifzal Ali, September 1987
—William James, September 1982 No. 37 Determining Irrigation Charges: A Framework
No. 14 Small and Medium-Scale Manufacturing —Prabhakar B. Ghate, October 1987
Establishments in ASEAN Countries: No. 38 The Role of Fertilizer Subsidies in Agricultural
Perspectives and Policy Issues Production: A Review of Select Issues
—Mathias Bruch and Ulrich Hiemenz, March 1983 —M.G. Quibria, October 1987
No. 15 Income Distribution and Economic No. 39 Domestic Adjustment to External Shocks
Growth in Developing Asian Countries in Developing Asia
—J. Malcolm Dowling and David Soo, March 1983 —Jungsoo Lee, October 1987
No. 16 Long-Run Debt-Servicing Capacity of No. 40 Improving Domestic Resource Mobilization
Asian Developing Countries: An Application through Financial Development: Indonesia
of Critical Interest Rate Approach —Philip Erquiaga, November 1987
—Jungsoo Lee, June 1983 No. 41 Recent Trends and Issues on Foreign Direct
No. 17 External Shocks, Energy Policy, Investment in Asian and Pacific Developing
and Macroeconomic Performance of Asian Countries
Developing Countries: A Policy Analysis —P.B. Rana, March 1988
—William James, July 1983 No. 42 Manufactured Exports from the Philippines:
No. 18 The Impact of the Current Exchange Rate A Sector Profile and an Agenda for Reform
System on Trade and Inflation of Selected —I. Ali, September 1988
Developing Member Countries No. 43 A Framework for Evaluating the Economic
—Pradumna Rana, September 1983 Benefits of Power Projects
No. 19 Asian Agriculture in Transition: Key Policy Issues —I. Ali, August 1989
—William James, September 1983 No. 44 Promotion of Manufactured Exports in Pakistan
No. 20 The Transition to an Industrial Economy —Jungsoo Lee and Yoshihiro Iwasaki,
in Monsoon Asia September 1989
—Harry T. Oshima, October 1983 No. 45 Education and Labor Markets in Indonesia:
No. 21 The Significance of Off-Farm Employment A Sector Survey
and Incomes in Post-War East Asian Growth —Ernesto M. Pernia and David N. Wilson,
—Harry T. Oshima, January 1984 September 1989
No. 22 Income Distribution and Poverty in Selected No. 46 Industrial Technology Capabilities
Asian Countries and Policies in Selected ADCs
—John Malcolm Dowling, Jr., November 1984 —Hiroshi Kakazu, June 1990
No. 23 ASEAN Economies and ASEAN Economic No. 47 Designing Strategies and Policies
Cooperation for Managing Structural Change in Asia
—Narongchai Akrasanee, November 1984 —Ifzal Ali, June 1990
No. 24 Economic Analysis of Power Projects No. 48 The Completion of the Single European Community
—Nitin Desai, January 1985 Market in 1992: A Tentative Assessment of its
No. 25 Exports and Economic Growth in the Asian Region Impact on Asian Developing Countries
—Pradumna Rana, February 1985 —J.P. Verbiest and Min Tang, June 1991
No. 26 Patterns of External Financing of DMCs No. 49 Economic Analysis of Investment in Power Systems
—E. Go, May 1985 —Ifzal Ali, June 1991
No. 27 Industrial Technology Development No. 50 External Finance and the Role of Multilateral
the Republic of Korea Financial Institutions in South Asia:
—S.Y. Lo, July 1985 Changing Patterns, Prospects, and Challenges
No. 28 Risk Analysis and Project Selection: —Jungsoo Lee, November 1991
A Review of Practical Issues No. 51 The Gender and Poverty Nexus: Issues and Policies
—J.K. Johnson, August 1985 —M.G. Quibria, November 1993
No. 29 Rice in Indonesia: Price Policy and Comparative No. 52 The Role of the State in Economic Development:
Advantage Theory, the East Asian Experience,
—I. Ali, January 1986 and the Malaysian Case
No. 30 Effects of Foreign Capital Inflows —Jason Brown, December 1993
on Developing Countries of Asia No. 53 The Economic Benefits of Potable Water Supply
—Jungsoo Lee, Pradumna B. Rana, Projects to Households in Developing Countries
and Yoshihiro Iwasaki, April 1986 —Dale Whittington and Venkateswarlu Swarna,
No. 31 Economic Analysis of the Environmental January 1994
Impacts of Development Projects No. 54 Growth Triangles: Conceptual Issues
—John A. Dixon et al., EAPI, and Operational Problems
East-West Center, August 1986 —Min Tang and Myo Thant, February 1994
No. 32 Science and Technology for Development: No. 55 The Emerging Global Trading Environment
Role of the Bank and Developing Asia
—Kedar N. Kohli and Ifzal Ali, November 1986 —Arvind Panagariya, M.G. Quibria,
No. 33 Satellite Remote Sensing in the Asian and Narhari Rao, July 1996
and Pacific Region No. 56 Aspects of Urban Water and Sanitation in
—Mohan Sundara Rajan, December 1986 the Context of Rapid Urbanization in
No. 34 Changes in the Export Patterns of Asian and Developing Asia
26
—Ernesto M. Pernia and Stella LF. Alabastro, Anneli Lagman, March 1999
September 1997 No. 59 The Asian Crisis: An Alternate View
No. 57 Challenges for Asia’s Trade and Environment —Rajiv Kumar and Bibek Debroy, July 1999
—Douglas H. Brooks, January 1998 No. 60 Social Consequences of the Financial Crisis in Asia
No. 58 Economic Analysis of Health Sector Projects- —James C. Knowles, Ernesto M. Pernia, and
A Review of Issues, Methods, and Approaches Mary Racelis, November 1999
—Ramesh Adhikari, Paul Gertler, and
OCCASIONAL PAPERS (OP)
No. 1 Poverty in the People’s Republic of China: No. 12 Managing Development through
Recent Developments and Scope Institution Building
for Bank Assistance — Hilton L. Root, October 1995
—K.H. Moinuddin, November 1992 No. 13 Growth, Structural Change, and Optimal
No. 2 The Eastern Islands of Indonesia: An Overview Poverty Interventions
of Development Needs and Potential —Shiladitya Chatterjee, November 1995
—Brien K. Parkinson, January 1993 No. 14 Private Investment and Macroeconomic
No. 3 Rural Institutional Finance in Bangladesh Environment in the South Pacific Island
and Nepal: Review and Agenda for Reforms Countries: A Cross-Country Analysis
—A.H.M.N. Chowdhury and Marcelia C. Garcia, —T.K. Jayaraman, October 1996
November 1993 No. 15 The Rural-Urban Transition in Viet Nam:
No. 4 Fiscal Deficits and Current Account Imbalances Some Selected Issues
of the South Pacific Countries: —Sudipto Mundle and Brian Van Arkadie,
A Case Study of Vanuatu October 1997
—T.K. Jayaraman, December 1993 No. 16 A New Approach to Setting the Future
No. 5 Reforms in the Transitional Economies of Asia Transport Agenda
—Pradumna B. Rana, December 1993 —Roger Allport, Geoff Key, and Charles Melhuish
No. 6 Environmental Challenges in the People’s Republic June 1998
of China and Scope for Bank Assistance No. 17 Adjustment and Distribution:
—Elisabetta Capannelli and Omkar L. Shrestha, The Indian Experience
December 1993 —Sudipto Mundle and V.B. Tulasidhar, June 1998
No. 7 Sustainable Development Environment No. 18 Tax Reforms in Viet Nam: A Selective Analysis
and Poverty Nexus —Sudipto Mundle, December 1998
—K.F. Jalal, December 1993 No. 19 Surges and Volatility of Private Capital Flows to
No. 8 Intermediate Services and Economic Asian Developing Countries: Implications
Development: The Malaysian Example for Multilateral Development Banks
—Sutanu Behuria and Rahul Khullar, May 1994 —Pradumna B. Rana, December 1998
No. 9 Interest Rate Deregulation: A Brief Survey No. 20 The Millennium Round and the Asian Economies:
of the Policy Issues and the Asian Experience An Introduction
—Carlos J. Glower, July 1994 —Dilip K. Das, October 1999
No. 10 Some Aspects of Land Administration No. 21 Occupational Segregation and the Gender
in Indonesia: Implications for Bank Operations Earnings Gap
—Sutanu Behuria, July 1994 —Joseph E. Zveglich, Jr. and Yana van der Meulen
No. 11 Demographic and Socioeconomic Determinants Rodgers, December 1999
of Contraceptive Use among Urban Women in No. 22 Information Technology: Next Locomotive of
the Melanesian Countries in the South Pacific: Growth?
A Case Study of Port Vila Town in Vanuatu —Dilip K. Das, June 2000
—T.K. Jayaraman, February 1995
STATISTICAL REPORT SERIES (SR)
No. 1 Estimates of the Total External Debt of No. 5 Keeping Sample Survey Design
the Developing Member Countries of ADB: and Analysis Simple
1981-1983 —I.P. David, December 1985
—I.P. David, September 1984 No. 6 External Debt Situation in Asian
No. 2 Multivariate Statistical and Graphical Developing Countries
Classification Techniques Applied —I.P. David and Jungsoo Lee, March 1986
to the Problem of Grouping Countries No. 7 Study of GNP Measurement Issues in the
—I.P. David and D.S. Maligalig, March 1985 South Pacific Developing Member Countries.
No. 3 Gross National Product (GNP) Measurement Part I: Existing National Accounts
Issues in South Pacific Developing Member of SPDMCs–Analysis of Methodology
Countries of ADB and Application of SNA Concepts
—S.G. Tiwari, September 1985 —P. Hodgkinson, October 1986
No. 4 Estimates of Comparable Savings in Selected No. 8 Study of GNP Measurement Issues in the South
DMCs Pacific Developing Member Countries.
—Hananto Sigit, December 1985 Part II: Factors Affecting Intercountry
27
Comparability of Per Capita GNP No. 14 A Survey of the External Debt Situation in
—P. Hodgkinson, October 1986 Asian and Pacific Developing Countries: 1988-1989
No. 9 Survey of the External Debt Situation —Jungsoo Lee, May 1990
in Asian Developing Countries, 1985 No. 15 A Survey of the External Debt Situation
—Jungsoo Lee and I.P. David, April 1987 in Asian and Pacific Developing Countrie s:
No. 10 A Survey of the External Debt Situation 1989-1992
in Asian Developing Countries, 1986 —Min Tang, June 1991
—Jungsoo Lee and I.P. David, April 1988 No. 16 Recent Trends and Prospects of External Debt
No. 11 Changing Pattern of Financial Flows to Asian Situation and Financial Flows to Asian
and Pacific Developing Countries and Pacific Developing Countries
—Jungsoo Lee and I.P. David, March 1989 —Min Tang and Aludia Pardo, June 1992
No. 12 The State of Agricultural Statistics in No. 17 Purchasing Power Parity in Asian Developing
Southeast Asia Countries: A Co-Integration Test
—I.P. David, March 1989 —Min Tang and Ronald Q. Butiong, April 1994
No. 13 A Survey of the External Debt Situation No. 18 Capital Flows to Asian and Pacific Developing
in Asian and Pacific Developing Countries: Countries: Recent Trends and Future Prospects
1987-1988 —Min Tang and James Villafuerte, October 1995
—Jungsoo Lee and I.P. David, July 1989
SPECIAL STUDIES, COMPLIMENTARY (SSC)

1. Improving Domestic Resource Mobilization Through 18. The Role of Small and Medium-Scale Industries in the
Financial Development: Overview September 1985 Industrial Development of the Philippines
2. Improving Domestic Resource Mobilization Through April 1989
Financial Development: Bangladesh July 1986 19. The Role of Small and Medium-Scale Manufacturing
3. Improving Domestic Resource Mobilization Through Industries in Industrial Development: The Experience of
Financial Development: Sri Lanka April 1987 Selected Asian Countries
4. Improving Domestic Resource Mobilization Through January 1990
Financial Development: India December 1987 20. National Accounts of Vanuatu, 1983-1987
5. Financing Public Sector Development Expenditure January 1990
in Selected Countries: Overview January 1988 21. National Accounts of Western Samoa, 1984-1986
6. Study of Selected Industries: A Brief Report February 1990
April 1988 22. Human Resource Policy and Economic
7. Financing Public Sector Development Expenditure Development: Selected Country Studies
in Selected Countries: Bangladesh June 1988 July 1990
8. Financing Public Sector Development Expenditure 23. Export Finance: Some Asian Examples
in Selected Countries: India June 1988 September 1990
9. Financing Public Sector Development Expenditure 24. National Accounts of the Cook Islands, 1982-1986
in Selected Countries: Indonesia June 1988 September 1990
10. Financing Public Sector Development Expenditure 25. Framework for the Economic and Financial Appraisal of
in Selected Countries: Nepal June 1988 Urban Development Sector Projects January 1994
11. Financing Public Sector Development Expenditure 26. Framework and Criteria for the Appraisal
in Selected Countries: Pakistan June 1988 and Socioeconomic Justification of Education Projects
12. Financing Public Sector Development Expenditure January 1994
in Selected Countries: Philippines June 1988 27. Guidelines for the Economic Analysis of Projects
13. Financing Public Sector Development Expenditure February 1997
in Selected Countries: Thailand June 1988 28. Investing in Asia
14. Towards Regional Cooperation in South Asia: 1997
ADB/EWC Symposium on Regional Cooperation 29. Guidelines for the Economic Analysis
in South Asia February 1988 of Telecommunication Projects
15. Evaluating Rice Market Intervention Policies: 1998
Some Asian Examples April 1988 30. Guidelines for the Economic Analysis
16. Improving Domestic Resource Mobilization Through of Water Supply Projects
Financial Development: Nepal November 1988 1999
17. Foreign Trade Barriers and Export Growth
September 1988
SPECIAL STUDIES, ADB (SS, ADB)

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$35.00 (paperback)
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2. External Shocks and Policy Adjustments: A Study of Indonesia, Republic of Korea, Malaysia,
Lessons from the Gulf Crisis Philippines and Thailand
Edited by Naved Hamid and Shahid N. Zahid, 1995 J. Zhuang, David Edwards, D. Webb,
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3. Gender Indicators of Developing Asian Vol. 1, 2000 $10.00 (paperback)
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Asian Development Bank, 1993 10. Financial Management and Governance Issues
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4. Urban Poverty in Asia: A Survey of Critical Issues Cambodia $10.00 (paperback)
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5. Indonesia-Malaysia-Thailand Growth Triangle: Pakistan $10.00 (paperback)
Theory to Practice Papua New Guinea $10.00 (paperback)
Edited by Myo Thant and Min Tang, 1996 Uzbekistan $10.00 (paperback)
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6. Emerging Asia: Changes and Challenges Selected Developing Member Countries $10.00 (paperback)
Asian Development Bank, 1997 11. Guidelines for the Economic Analysis of Projects
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Asian Development Bank, 1999
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13. Handbook for the Economic Analysis of Health Sector Projects
8. Mortgage-Backed Securities Markets in Asia Asian Development Bank, 2000
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Asian Development Bank, 1992 $15.00 (paperback)
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TN 04 Economic Issues Wastewater Treatment

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ERD TECHNICAL NOTE SERIES NO.

Asian Development Bank

2002 by Asian Development Bank

The views expressed in this paper are those of the author(s)

The ERD Technical Note Series deals with conceptual, analytical, or

II. Managing Water Quality through Ambient Standards 2

III. The Hebei Wastewater Management Project 8

A wastewater treatment plant is often planned as one small part in a greater

II. Managing Water Quality through Ambient Standards

A. Setting Targets for Ambient Water Quality

B. The Economic Approach to Achieving the Given Targets

C. Application of the Economic Theory to Wastewater Treatment Plants

D. Practical Complications in Implementing Least-cost Pollution Control

III. The Hebei Wastewater Management Project

A. Legal Standards and Targets for Surface Water Quality

Table 1. Targeted and Actual Water Quality in Treatment Plants

Project Component Targeted Class Pre-project Situation

B. Public Support for the Targets

C. Basin-wide Plans for Achieving the Targets

Table 2. Factors and Weights used to Prioritize Pollution Control Projects

Factor Weight Comment

Table 3. Scores of Components of Wastewater Treatment Projects in Hebei Province

Planning Zone Municipality or Prefecture Treatment Plant Score

D. Economic Evaluation of the Pollution Control Plan

Table 4. Benefits of Water Use from Improved Water Qualitya

Use Benefit Included in Ranking

Table 5. Comparison of Cost of Treatment Options

Cost of Chosen Option

Table 6. Initial Tariff Relative to Marginal Cost of Processing Wastewater

Project Component Initial Tariff

where Q is the inflow of wastewater and a > 0 and b > 0.

where c is the plant’s fixed cost. Average cost is then

The difference between average cost and marginal cost is then

ERD TECHNICAL NOTE SERIES (TNS)

ERD WORKING PAPER SERIES (WPS)

No. 1. Capitalizing on Globalization No. 9 Microfinance in Northeast Thailand: Who Benefits

EDRC REPORT SERIES (ER)

ECONOMIC STAFF PAPERS (ES)

No. 1 International Reserves: An Analysis of Recent Trends

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STATISTICAL REPORT SERIES (SR)

SPECIAL STUDIES, COMPLIMENTARY (SSC)

SPECIAL STUDIES, ADB (SS, ADB)

SPECIAL STUDIES, OUP (SS,OUP)

2. Key Indicators of Developing Asian and Pacific Countries (KI; annual)

Subsequent in line incumbent

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