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202.? 92AP Infrastructure and Urban Development Department The World Bank October 1992 WPS 1005 An Approach to the Economic Analysis of Water Supply Projects Laszlo Lovei A simplified method aimed at improving the quality of economic analysis on water supply projects. Policy Research Woiking Papers disseminate the findings of work in progress and encourage the exchange of ideas among B ank staff and all others interested in developmcni issues. These papers carry ihc names of the authois, reflect only their views, and should be used and cited accordingly. The findings, interpretations, and conclusions are the authors' own. They should not be attributed I its Board of Directors, its management, or any of its member countries. o ~7 C\ A o I "7 iLO L' f- — Ji fiy I I 2S 7 1 WPS 1005 This paper— a product of the Infrastructure, Energy, and Environment Division, Europe and Central Asia Country Department III — is part of a larger effort in the Bank to improve operational practice and raise the quality of projects in the water and sanitation sector. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Man Dhokai, room S12-005, extension 33970 (October 1992, 37 pages). Development economists are increasingly water supply projects; reviews the method of concerned about the correct approach to eco- economic analysis applied in 21 recently ap- nomic analysis of projects. By looking for a proved Bank projects; and describes a simplified compromise between theory (which identifies method that was tested in practice and found to ideals) and practice (which deals within the improve substantially the quality of economic bounds of time and resource constraints), Lovei analysis in the sector. focuses on potential guidelines for economic appraisals of water supply projects. This new method relies on standardized and rigorous use of information that is routinely He summarizes theory and the current World available during the preparation of water supply Bank guidelines on the economic analysis of projects. The Policy Research Working Paper Series disseminates the findings of work under way in the B ank. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy. Produced by the Policy Research Dissemination Center An Approach to the Economic Analysis of Water Supply Projects by Laszlo Lovei Laszlo Lovei is an economist in the Infrastructure, Energy and Environment Division of Country Department EC3 of the World Bank. The author would like to thank Ian Bartlett, Colin Gannon, Christian Gomez, Luis Gutierrez, Lars Jeurling, Mike Gam, Chris Shugart, and Dale Whittington for their comments on earlier versions of the paper and the ECOWAT programs. Table of Contents 1. Summary 3 2. Theory and Guidelines 3 3. Current Practice at the World Bank 4 4. A Proposal for Improvement 7 References 14 Annex 1: Staff Appraisal Reports Reviewed 15 Annex 2: Numerical Example 16 Annex 3: Introduction to EC0WAT1 17 Mathematical Formulas of ECO WATl ; 25 Annex 4: Introduction to EC0WAT2 28
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