1. Willingness to Pay for Sanitation Services in Dagupan City, Philippines1 D. S. Harder*, A. U. Sajise** and E.M. Galing*** * Resources Environment and Economic Center for Studies (REECS), Quezon City, Philippines (E-mail: dieldre@yahoo.com) ** University of the Philippines at Los Banos (UPLB), Los Banos, Laguna (E-mail: asajise@yahoo.com) *** WB-WSP, Ortigas, Metro Manila, Philippines, UK (E-mail: egaling@worldbank.org) Abstract Using the Contingent Valuation Method (CVM), the Study looks at the septage management and sewerage2 services demand of households with latrines in Dagupan City, Philippines vis a vis the cost of providing these services. The survey covers a total of 1200 respondents for the septage and sewerage demand study. Under the Willingness to Pay (WTP) Study, certainty corrections and protest vote screening were applied to WTP responses to control for hypothetical bias. For the septage and sewerage studies, income was shown to significantly influence WTP. WTP was also found to increase across income groups, indicating the plausibility of implementing a socialized pricing scheme for the septage and sewerage fees. Another important implication of the results is that increased demand for sanitation facilities would only take place as general income levels of Dagupan City improves. Under certain assumptions, the individually rational and financially viable Septage Fee is around PhP 46.00/ mo with optimal desludging frequency of three years. This means that a self-financed Septage Program is possible for the city. However, the case is different for the Sewerage program since none of the proposed fees (including the average WTP of Php102/mo for the whole sample) is sufficient to cover the huge investment costs associated with a self-financed Sewerage infrastructure. Thus, the LGU has to source funds elsewhere. Keywords Septage; Sewerage; Willingness to Pay (WTP); Sanitation1.0 BACKGROUNDThis study on household sanitation behavior and demand for sanitation services in Dagupan City ispart of the continuing activity under the Program for Sustainable Sanitation for South Asia(SuSEA). This is implemented in six pilot provinces nationwide that include the municipalities ofBauco, Alabel, Guiuan and Polomolok as well as the cities of Dagupan and General Santos. Theoverall objective of SuSEA is to increase the access of poor Filipinos to sustainable sanitationservices. It is composed of two national components: 1) Establishment of a national sustainablesanitation program (NSSP); and 2) Formulation of a national sustainable sanitation communicationsand hygiene promotion program (NSSCHPP).Among the objectives of the NSSP is for all provinces and cities and half of the municipalities tocome up with a sustainable sanitation program, as well as a 100% increase in sustainable sanitationinvestments by 2016. This links closely with the objectives of the study that aims to understand thesanitation decisions households make and their willingness to pay for sanitation services.In particular, using the contingent valuation method, the study looks at the septage management andsewerage3 services demand of households with toilets in Dagupan City vis a vis the cost of1 This study is an initiative of the SuSEA Program of the World Bank Water and Sanitation Program (WB-WSP) with Coffey International as theresource agency/contractor of the Study2 Sewerage demand covers only the Central Business District3 Sewerage demand covers only the Central Business District

2. providing these services. It reveals what people say they would do given the hypothetical scenarioof providing sanitation services in their area.2.0 THE CONTINGENT VALUATION METHOD (CVM)2.1 The CV DesignContingent valuation, a method used to study household preference and behavior, directly askspeople in a survey how much are they willing to pay (or willing to accept) for a good or service. Itis referred to as contingent because peoples willingness to pay (WTP) responses is anchored on aspecific hypothetical scenario and description of the good/service to be provided. The hypotheticalmarket includes a statement of the proposed change (i.e. sanitation services) and an institutionalmechanism in which the proposed change is to be provided and financed (i.e. waterbill).Since not all goods and services are traded in the market (i.e. reduction in water pollution),information on market demand is usually unavailable, thus making Contingent Valuation a usefuland practical decision-making tool for valuing well-known goods. Initial applications of contingentvaluation studies in the Philippines have been on water and sanitation (Choe et. al. 1996; Lauria et.al. 1999).2.1.1 The Contingent Valuation scenarioThe two hypothetical CV scenarios presented in the survey includes the septage and seweragemanagement plans. This is compared to the existing practice or status quo (Table 1).Table 1. CV Scenario for Septage and Sewerage Study Status Quo Management Plan Septage Only V2 (x2 , m2 )) VAn interesting application of this model is a hypothetical scenario used to analyze and explain thestated preferences of households for the proposed Sanitation Programs in Dagupan City (i.e.Septage and Sewerage Management Plans). These services will be available for a household inexchange for a reduction in income. Suppose that the household is offered a price or bid (b) inexchange for the hypothetical service. Agreeing to pay the bid or price implicitly implies that:

4. where: v0 is the status quo utility v1 is the utility after the proposed change ti is the bid offered zi is a vector of demographic variables (e.g. education, age, gender, etc.) yi is respondent is income level i is a vector of other control variables (e.g. classification)Assuming a linear utility function we can restate the earlier probability statements. Specifically, wecan rewrite the status quo indirect utility and decompose it to its deterministic and randomcomponents (ij for j=0,1):(2)Similarly the indirect utility function for the proposed change is expressed as:(3)Notice that in the previous equation we are subtracting the bid from the income level. This is howwe capture the trade-off from reducing income but paying some amount ti. Using equations (2) and(3), we can alternatively write equation (1) as:(4)orSimplifying difference terms for the coefficients yields:(5)The next step would be to estimate the simplified coefficients. This involves assuming a specificfunctional form for the probability distribution Pr(). A common assumption is the logistic function.The log likelihood function is derived through taking the summation the log of the logistic functionfor each observation or respondent. The usual estimation procedure for obtaining the estimatedcoefficients is the Maximum Likelihood Estimation (Greene, 2002). Finally theMean WTP is calculated using the following formula:(6)2.2.1 Some Econometric Issues

5. There are two econometric issues associated with the nature of the data for the study. The first oneinvolves the nature of the CVM data for the Septage Management Plan. In particular, differenthypothetical scenarios were offered to households with and without water connections. Connectedhouseholds were offered the hypothetical scenario of whether they would be willing to pay somebid amount for the SMP. Non-connected households, on the other hand, were offered a hypotheticalscenario of whether they would want to be connected or not. This was followed by the samehypothetical scenario offered to connected households.We conjecture that there is a potentially a larger hypothetical bias for non-connected householdsbecause they essentially face two hypothetical scenarios. The likelihood of actually experiencingthe septage infrastructure is less real for this subgroup of respondents. A consequence of this is thatthe probability of being offered a two-staged scenario is conditional on the household beingconnected at the time of the interview. Since, the choice of being connected could be linked tocertain household characteristics, we expect that some will be more predisposed of having waterconnections. This leads us to the potential problem of sample selection. Simply pooling connectedand non-connected households and following the specification outlined above for the septagesample can lead to inconsistent estimates and hence biased WTP values. To address this issue wefirst estimate an endogenous switching regression model where both the selection and outcomevariables are discrete or dichotomous.Consider first the selection mechanism. A household chooses to connect to DCWD water system if: Pr(connection = 1) = Pr(Vconnected (g + connected > Vnot connected (g + not connected ) ) ) = Pr( > Vnot connected (g Vconnected (g ) )) where = connected not connectedThe outcome variable on the other hand, pertains to the households answer to the CV scenario. Thehousehold agrees to pay the offered bid if: Pr(yes) = Pr(Vyes (g + yes > Vstatus quo (g + status quo ) ) ) = Pr( > Vstatus quo (g Vyes (g ) )) where = yes status quoSince, the error terms of the selection and outcome are hypothesized to be correlated we canobserve the conditional choice of agreeing to a bid as: Pr ( > Vstatus quo (g Vyes (g > Vnot connected (g Vconnected (g ) )),( ) )) Pr(yes | connection = 1) = Pr( > Vnot connected (g Vconnected (g ) ))Instead of estimating the conditional probability of observing an agreement to a bid, we can opt toestimate the joint probability. To do this we can assume that both error terms are normallydistributed and estimate a bivariate probit expressed in equation terms as follows: Pr ( > Vstatus quo (g Vyes (g > Vnot connected (g Vconnected (g = ) )),( ) )) (, , )d d where is the bivariate normal density functionLooking at whether rho is significant or not at an assumed confidence level easily tests the presenceof sample selection. If rho is statistically different from zero then the decision to connect is

6. necessarily related to the decision of agreeing to a bid offer. A simple application of theeconometric model in the previous section to a pooled sample of connected and non-connectedhouseholds will lead to biased estimates of WTP.2.2.2 Variables Used in the Various AnalysisThe covariates used in the implementation of the empirical strategy are shown in Table 2:Table 2. Variables Used in the Regression Model Variables Description bid Bid offered to respondent and assumes the following values: 50, 100, 150,200, 250 know Respondents score on sanitation issue test age Age of respondent civil Civil Status of respondent: 1 - Divorced/separated 3 - Married 5 - Widowed 2 - Live in 4 - Single educ 1 has value of 1 if respondent finished some elementary; 0 otherwise educ 2 has value of 1 if respondent has graduated from elementary; 0 otherwise educ 3 has value of 1 if respondent finished some high school; 0 otherwise educ 4 has value of 1 if respondent graduated from high school; 0 otherwise educ 5 has value of 1 if respondent finished some years in College; 0 otherwise educ 6 has value of 1 if respondent graduated from College; 0 otherwise educ 7 has value of 1 if respondent have post-graduate schooling; 0 otherwise educ 8 has value of 1 if respondent finished Vocational; 0 otherwise hseown has value of 1 if respondent/ family of respondent fully owns the house; 0 otherwise agehouse Age in years of respondents house ageown Interaction term between age of house and house ownership: agehouse*hseown yrslive Number of years household has lived in the house yrslive2 Square of the yrslive diarr has a value of 1 if any household member has had diarrhea in the past three months; 0 otherwise buss has a value of 1 if a business is being run in the house; 0 otherwise Income 1 has value of 1 if households monthly income is PhP 35,001; 0 otherwise hh_all Total number of household members age_septic Age of septic tank Class 1 has a value of 1 if baranggay is classified as a Central Business District baranggay; 0 otherwise Class 2 has a value of 1 if baranggay is classified as a Coastal/ Inland baranggay; 0 otherwise Class 3 has a value of 1 if baranggay is classified as a Island baranggay; 0 otherwise Class 4 has a value of 1 if baranggay is classified as a River baranggay; 0 otherwise2.3 Sampling Frame

7. For the septage and sewerage study, a total of 12004 respondents were sampled, distributed between850 and 350 respondents, respectively. A 12% non-response rate was noted for the whole sample.The allocation of the sample is based on the following formula: Ni i ni = N ci Ni i ci k w h ere N is th e total sam p le size N i is th e total p op ulation in the ith inco m e strata i is the in com e variance fo r the ith inco m e strata c i is the cost of ob tain ing a sam p le from the ith inco m e strataThe above equation provides the least cost allocation for a fixed sample size given the variability inincome. We assume that cost differences are insignificant since Dagupans terrain is homogeneousand its land area (4,446 has) is not that large. Thus, this variable can be ignored in the computation.Variability in income5 is based on barangay clusters, which is the only available disaggregatedinformation from the baseline study6. However, for the sewerage study, a simple proportionalallocation was used because barangays under this scenario belong to the same type/cluster. Thus,the income variability cancels out in the equation.For the septage study, sample allocation for each barangay was further categorized into householdsconnected and not connected to the Dagupan City Water District (DCWD). Considering all this, thesample size allocation for the septage management and sewerage options are shown in Tables 3 and4, respectively.Table 3. Sample Size Allocation, Sewerage Respondents No. of Type of Total surveyName Households Barangay HouseholdsHerrero Perez 509 CBD 23Lucao 1395 CBD 64Pantal 3087 CBD 142Poblacion Oeste 683 CBD 31Barangay I (T. Bugallon) 124 CBD 6Pogo Chico 903 CBD 42Tapuac 913 CBD 42TOTAL 7614 350Table 4. Sample Size Allocation, Septage Respondents4 The total sample takes into account cost and time considerations in doing the survey5 Incorporating income variability is important since demand is basically determined by income and prices.6 2007 Baseline Study Report: Dagupan City. Sustainable Sanitation in East Asia (SuSEA). It would have been ideal to use the income variability foreach barangay, but since the raw data from the baseline study was not available, further disaggregation is not possible.

8. Non- Total No. of ConnectedName Type of Barangay connected Households Households Households Householdsa (survey)Bacayao Norte 289 River 3 8 11Bacayao Sur 307 River 3 9 12Bolosan 660 River 6 19 25Lasip Chico 166 River 2 5 7Lasip Grande 267 River 3 8 11Mamalingling 230 River 2 7 9Mayombo 1222 River 12 36 48Pogo Grande 380 River 4 11 15Salisay 336 River 3 10 13Tambac 424 River 4 12 16Bonuan Binloc 1185 Coastal & inland 8 25 33Bonuan Boquig 1978 Coastal & inland 14 42 56Bonuan Gueset 3085 Coastal & inland 22 65 87Caranglaan 1281 Coastal & inland 9 27 36Maluedb 1567 Coastal & inland 11 33 44Tebeng 463 Coastal & inland 3 10 13Calmay 943 Island 7 21 28Salapingao 418 Island 3 10 13Herrero Perez 509 CBD 6 19 25Lucao 1395 CBD 17 51 68Pantal 3087 CBD 38 114 152Poblacion Oeste 683 CBD 8 25 33Barangay I 124 CBD 2 5 7Pogo Chico 903 CBD 11 33 44 bTapuac 913 CBD 11 33 44TOTAL 212 638 850a - 25% of total household coveredb - In the actual survey, the sample size in Barangay Tapuac was adjusted from 86 to 69 since is was found out that 78% of the housesin the area are apartments and excluded from the survey. The remaining respondents were transferred to Malued with sample sizeincreasing from 44 to 61 (all hh).

9. 3.0 SURVEY RESULTSThe discussion of survey results is divided into two parts. First is a qualitative description of thedata in terms of environmental and health hazards that relate to the design, construction andmaintenance of existing household sanitation facilities. The second part outlines the results of theeconometric strategy discussed in the methodology section.3.1 Overview of Current Sanitation in Dagupan City73.1.1 Environmental problem/prioritiesBase on household ranking, the more visible environmental threats that the local government shouldgive priority to include solid waste (36%) and flooding (30%). It is common knowledge thatmajority of the barangays in Dagupan are vulnerable and susceptible to the disturbing effects ofinundation.Poor sanitation (26%) only ranks third among the top environmental problems of Dagupan Cityfrom the perspective of households respondents. This is not only in terns of lack of access to latrinesbut also by the threat posed by badly designed sanitation facilities including the lack of propersludge and wastewater disposal systems. Receiving water bodies often absorb the pollution loadcoming from households. Thus, it is not surprising that DENR-EMB included Dagupan River asone of the rivers nationwide that pose contact risk to public health and the environment. It hasshown a very high total and fecal coliform level8, about 30 times higher than the DENR standard.3.1.2 Current sanitation facilities & the environmentSurvey results show that 43% of households have single vault septic tanks that do not conform tothe standard design prescribed under the Sanitation Code of Dagupan City. These vaults provideonly minimal treatment and limited sludge storage compared to two or three chambered septictanks. Although most of households reported that their septic tanks are water sealed (at least for onechamber), 15% of the remaining septic tanks are bottomless or do not have concrete flooring. Thiscould lead to wastewater seepage.In terms of location and access, the Sanitation Code of Dagupan City further stipulates that septictanks should not be constructed under any building and shall be located such that desludgingequipment can have convenient access to the manhole. Nonetheless, almost half of the respondentsinterviewed had septic tanks located inside the house, with some directly under their toilets. A thirdfurther reported that their septic tanks are more than 20 meters away from the nearest access road.This concern however, can be addressed by using longer vacuum pumps (i.e. vacuum pumps ofManila waters has a maximum length of 80 meters). The only constraint is the width of the accessroad that should be able to accommodate the desludging truck. This could be a problem particularlyfor the island barangays.Another disturbing observation is the 13 meters average distance of the nearest water source to thelatrine, which is lower than the specified distance of 25 meters and above under the Clean WaterAct. However, the survey shows that only 6% of the respondents are familiar with this provisionunder the Act. In general, the close proximity of toilets and water sources coupled with poorlyconstructed septic tanks could lead to groundwater contamination that is hazardous to public health.A faulty septic tank can also lead to hydraulic overloading9 particularly during flooding.7 This section uses the original database (n=1200) as basis for discussion9 Hydraulic overloading can force the waste out through the septic tank before it receives adequate treatment. It can lead to anaerobicconditions in the drainfield and might not give solids time to settle out before being pushed through the system(http://www.stormwatercenter.net/Assorted%20Fact%20Sheets/ Tool7-Non_Stormwater/SepticSystems.htm; accessed 4/28/2010).

10. Most respondents perceive that water from the septic tank goes underground (48%) or stays insidethe tank (38%)10. Only 9% believed that wastewater from septic tanks eventually finds its way intothe water bodies. More than three fourths of the respondents still had the misconception that septictanks can provide 100% treatment for sludge and wastewater, thus controlling for water pollution.For the septic tanks to function as designed, it has to undergo regular maintenance through theremoval of built up solids. However, the survey shows that only 13% of households have desludgedtheir septic tanks for the past 10 years. This is despite majority of respondents agreeing to thestatement that septic tanks should be desludged once every three to five years as required under theSanitation Code of Dagupan City11. Desludging is done mainly as a response to emergencysituations such as septic tank overflow, clogging or damage caused by flooding, earthquakes, etc.Poor maintenance reduces the effectiveness of septic tanks to treat waste before it is discharged tothe environment.Also, there is no existing sludge treatment and disposal facility within Dagupan. The nearest DENRapproved composting facility is in Sual, Pangasinan. This resulted to indiscriminate disposal ofuntreated or poorly treated sewage into the environment. The survey shows that of those that hadtheir septic tanks emptied, 40% do not know where the septage is brought while 30% buried theirwaste in a pit (i.e. manual desludging). The rest disposed of the waste in nearby water bodies(13%), in a farm (5%), or anywhere (7%). This practice is prohibited under the Sanitation Code ofDagupan City, which stipulates that, no discharge of septage or sludge shall be allowed inmanholes, drainage areas, canals, creeks, rivers or other receiving bodies of water or land.Unceremonious discharge of untreated sewage into vacant spaces and receiving water bodiesprovides a vector for pathogens that could transmit disease to humans.In terms of health impacts, 10% of the respondents reported incidences of diarrhea in the past threemonths12. Meanwhile, occurrences of other waterborne diseases are negligible and no reportedoutbreaks were observed during the duration of the study.4.1 Econometric ResultsThis section covers the Willingness to Pay (WTP) of Dagupan City households for the SeptageManagement Plan, and WTP of the Central Business District (CBD) households for the SeweragePlan. The final models used are corrected for both uncertainty and protest votes (CC/PC model).In particular, the discussion includes characteristics of the respondents, results of the CV analysisincluding simulation exercises that helped identify some important provisions of a potential SeptageManagement Program and Sewerage Plan. For instance, we determine the most efficient desludgingfrequency (only for the SMP) and pricing policy. Efficiency is referred to in the context of anintertemporal decision wherein discounting or time preference plays an important role. Likewise italso refers to that which is rational for the individual household as well as financially feasible to theLocal Government.4.2.1 Implementing A Septage Management Program in Dagupan CityAfter screening for protest votes, 790 useable responses were used for the WTP analysis under theSeptage Management Plan (7% lower than the original sample). This includes both householdsconnected and not connected to the Dagupan City Water District (DCWD).10 These respondents view septic tanks as simply a storage of sludge and urine rather than a primary treatment system11 Apparently, this item, despite approval from respondents, gained the most comments. Those who got it wrong were respondents whohad larger septic tanks with only few household users.12 Three percent of respondents also had diarrhea in the past week of the survey. On average, they spent Php604 for treatment,including in patients.

11. Respondent Characteristics (pooled sample)Based from the socio-economic profile of households, those that are willing to pay for the SeptageManagement Plan are relatively younger. Also, nearly a third are married with an average of sixmembers per family. In addition, majority of these respondents are relatively well off in terms ofasset & income. Nearly a fourth earns monthly income greater than Php20,000 compared to 16% ofthose who are not willing to pay. Households who support the Plan are likewise better educated. Interms of location, a higher percentage of septage respondents from the Central Business District andisland barangays are willing to support the SMP while a greater number of refusals to pay wereobserved from coastal/inland and river barangays.Likewise, respondents who are willing to pay have older houses and septic tanks and have livedlonger in their current residence. In general, septic tanks have a mean age of 16 years for bothsubgroups. Respondents from the island barangays used to have hanging latrines, some accesspublic or shared toilets within their neighborhood while others had to reconstruct their toilets andseptic tanks after the damages brought by typhoons Ondoy and Pepeng, including the 1990earthquake.Bid DistributionCursory evidence shows that in general, percent of respondents saying yes on willingness to payfor the Septage Management Plan decreases with the offered bid (Fig 1), thus conforming totheoretical expectations. 59.28 60 50 36.42 40 % yes response 26.92 30 18.00 20 10.32 10 0 50 100 150 200 250 Bids (Php) Fig 1. Bid Distribution of Yes Responses, the Septage PlanSimilarly, percentage of those saying yes to the offered bid increases with income (Table 5).Table 5. Distribution of WTP Responses by Income Bracket, Septage RespondentsIncome Willingness to Paybracket No % no Yes % yes AllIncome 1 74 69.81 32 30.19 106Income 2 191 73.75 68 26.25 259Income 3 194 69.53 85 30.47 279Income 4 62 63.27 36 36.73 98Income 5 25 53.19 22 46.81 47Total 546 100 243 100 789aa excludes one dont know response for income

12. Willingness to Pay for a Septage ProgramAs elaborated earlier, a bivariate probit model was used to test whether the error terms in theselection mechanism and the outcome decision (i.e probability of agreeing to the offered bid) arecorrelated. A simple likelihood ratio test shows that the correlation parameter () is not significantlydifferent from zero. Thus, we can run a logit regression on the pooled sample of connected and non-connected households.The results of the logit regression for the Septage study are shown in Table 6. The negative andsignificant coefficient for the bid offer indicates that respondents are less likely to pay for higherbids. Younger respondents are also more likely to pay for the sanitation service. Besides this, onesknowledge on sanitation issues increases the probability of saying yes to the bid offer. In particular,knowledge regarding the provisions of the Sanitation Code of Dagupan City as well as generalknowledge on wastewater hazards and sanitation can increase the probability of agreeing to a bidoffer by 13 percentage points. The probability of agreeing to a bid is also positively related to thelevel of education. This implies that well-informed households tend to agree more to the offeredbid, perhaps, because these households can comprehend the scenario better. We can see this becauseall the categorical variables for education (educ 2 to educ 8) are significant and exhibit positivesigns. Another determinant of the probability of agreeing to an offered bid is the age of the house.The variable is negatively related with the probability of paying the bid offer. That is, householdswith older houses have a lower probability of supporting the Septage Management Plan. This is notsurprising since old houses are prone to abandonment.The information obtained from the logit analysis is used to compute for the amount that householdson average are willing to pay (WTP) for septage service improvements (Table 7). Calculationsshow that the mean WTP of Dagupan City residents is around PhP 73. Note that WTP increaseswith income. For instance, households with monthly income in excess of 35,000 would be willingto add PhP 121 to their monthly water bill to avail of the improved septage services. Whilehouseholds in the lowest monthly income bracket (below PhP 4,999) are willing to pay anadditional PhP 67 per month. Furthermore, the WTP for each income bracket are significantlydifferent from each other at 5% level of confidence. The variability in the WTP across incomebrackets is suggestive that a socialized pricing scheme can be implemented.However, not all of the WTP amounts shown in Table 8 would pass a referendum. Estimates showthat for the whole sample and across income brackets, only 50% on average would vote for areferendum that will add the septage fee to the existing water bill. The calculated bid or proposedprice and the probability of a yes vote are shown in Table 8. From the table, inorder to have at least60% of households across income brackets agreeing to a new septage ordinance, the proposedseptage fee should only be around PhP 46. The discussions to follow will revolve only on the bidsthat would pass a referendum, i.e. bids PhP 0.50 to PhP 73.00

13. Table 6. Results of Logit Regression for the Septage ProgramVariables Coefficientsbid -0.0134***Know (score) 0.6555*age -0.0196***civil 0.0492educ 2 1.4595*educ 3 1.8127**educ 4 1.5965**educ 5 2.0786**educ 6 1.9787**educ 8 2.2788**hseown -0.0014agehouse -0.5830*ageown 0.0021yrslive 0.0022yrslive2 0.0093diarr 0.0001buss 0.3662Income 2 0.2794Income 3 -0.3054Income 4 -0.0790Income 5 0.2850hh_all 0.4004age_septic -0.0078Class 2 -0.2574Class 3 0.0269Class 4 -0.3794constant 0.1418*** significant at 1%; ** significant at 5%, * significant at 10%

14. Table 7. Calculated Willingness To Pay for the Septage Program, by Income Bracket and for theWhole SampleIncome bracket WTP/mo(N=790)Income 1 67Income 2 55Income 3 73Income 4 102Income 5 121Whole Sample 73Table 8. Probability of Paying/Voting for Different Proposed FeesProbability of Paying Proposed Fee (PhP/ (%) mo) 30 133.80 40 101.60 50 73.00 60 46.00 70 23.00 80 7.00 90 0.50 99 0.00The Efficient Price and Desludging FrequencyWe are now left with the question on the relevant price to charge households and the optimaldesludging frequency. To answer this, we will use the Benefit Cost Analysis approach. BCAassumptions are outlined in Appendix Table 1.The welfare gains households derive from different fees and desludging frequencies are shown inTable 9. The figures are welfare gains in present value terms of different pricing schemes andhousehold desludging frequency. The Status quo represents the present value of paying the averagecommercial desludging price of PhP 2,500.The first thing to notice is that the range of septage fees widens as the desludging frequency isshortened. For example, if the Dagupan LGU imposes that households desludge their septic tanksonce in every 10 years, then households will only rationally participate in that scheme if Septagefees are between Php 0.50 and PhP 7.00. This is because they will be better off with the status quoof hiring a commercial desludger and paying him the average of PhP 2,500 (or PhP 1,060 in PVterms) every 10 years. On the other hand, if the mandated desludging is every three years, then theSeptage Program will be more appealing to households. We expect, given the current costassumptions that households will participate if the Septage fees are between PhP 0.50 to PhP 46.00.Fees falling between these ranges are shown to be superior to the status quo.What drives the results of the BCA analysis is the discounting or assumptions on households timepreferences. Increasing the interval between desludging (i.e. reducing desludging frequency) favorsthe status quo because they are smaller in present value terms.

15. Table 9. Welfare Gains of Households from Various Proposed Fee and Desludging Frequencies Bid/ 3 Year Desludging 5 Year Desludging 10 Year Desludging Price (PhP/ Difference Difference Difference mo) PV PV PV PV PV PV (Proposed (Status (Proposed (Status (Proposed (Status Septage) Quo) Septage) Quo) Septage) Quo) 73 2,636 2,066 -570 3,653 1,708 -1,945 5,921 1,060 -4,861 46 1,661 2,066 405 2,302 1,708 -594 3,731 1,060 -2,671 23 831 2,066 1,236 1,151 1,708 557 1,865 1,060 -805 7 253 2,066 1,813 350 1,708 1,357 568 1,060 492 0.5 18 2,066 2,048 25 1,708 1,683 41 1,060 1,020An attendant question is which of these proposed septage fees would be feasible to implement?Earlier, we have answered the question on which fees and desludging frequency is rational for thehousehold. We found out that the three-year interval will yield the largest gains for thehouseholds. Given this, we will analyze which of these Septage fees would be financially viable toimplement along with the three-year desludging plan. Another BCA was conducted using the sameassumptions in Appendix Table 1.Given the assumptions, results show that the financially viable Septage Fees are PhP 46/mo. andPhP 73/mo. By financial viability, we mean that the initial investment costs are recovered (fullypaid) within 10 years and that yearly operation and maintenance (O&M) expenses are alsorecovered within the lifetime of the project, which is set at 25 years. These are the only SeptageFees that will result to a positive Net Present Value (NPV). Given this, the only rational andfinancially viable Septage Fee is PhP 46. Thus, with the current information at hand, a SeptageFee of PhP 46/ mo. is recommended. Households in turn will receive regular scheduled desludgingof their septic tanks every three years.Table 10. Financial Viability of Different Proposed Septage Fees Bid/ Price NPV (PhP/mo) (3 year Desludging) 73 103,152,095.48 46 28,591,923 23 -34,922,297.86 7 -79,106,103.73 0.5 -97,055,775Comparison of the Proposed Septage Program with Other Existing ProgramsThe recommended Septage Program would charge PhP 46/ mo. or approximately Php 2/ cu. m. ifthe average household water consumption were 24 cu. m. per month. These charges are similar withthe computed price by the LINAW project in Dumaguete CIty. In terms of monthly water bill, theproposed fee is close to the partial charges of Manila Water. It roughly constitutes 11% of theaverage household water bill of PhP 416.20 (Table 11).

16. Table 11. Charges for Septage and Sewerage Programs in the PhilippinesManila Water Sewerage and sanitation programs are funded partly by 10% environmental fee charged to all MWSS customers on the water bill. Households covered by sewerage are also assessed 50% of household water bill. This is not enough to cover O&M of sewerage (perhaps only 60-70%). There is also some cross- subsidization from water supply incomeDumaguete City Dumaguete will cover its O&M costs for its septage treatment facility through a user fee of PhP 2/m3 on the water bill. This user fee will cover both capital and operating costs, as well as funding an environmental feeZamboanga City Metro Zamboanga Water District sets its sewerage charges at 50% of the water bill, and has a 99% collection rate, allowing it to fully recover its O&M costs.Others Other cities charge a flat rate (or zero) tariffs, collect revenues lower than their O&M costs and, are dependent on subsidies from the LGU or, where managed by a Water District, on cross-subsidies from water supply income.Source: USAID (2007)All in all, the proposed Septage Management Plan is not far from existing and planned SeptagePrograms in the country. The innovation is that the numbers obtained came from a more rigorousmethodology. Furthermore, we are sure that the recommendations are based on household statedbehavior or preferences.4.2.2 Implementing the Sewerage Plan13 in Dagupan CityFor the Sewerage Plan, the useable sample for the analysis is 322 after protest screening (8% lowerthan the original sample).Respondent CharacteristicsHouseholds who are willing to pay are relatively more mature in age, have older houses and septictanks and have lived longer in their current residences relative to respondents who are not willing tosupport the Sewerage Plan. Both, however, have almost the same number of household membersper family, number of families living in the house and number of houses owned within DagupanCity.For both subgroups, nearly three fourths are female and married. Respondents who are willing topay are also more educated as two thirds have reached college. Thus, they may be more familiarwith sanitation issues and can better appreciate the Sewerage Plan presented to them.A higher percentage of WTP respondents also had income under brackets 4 & 5 or income greaterthan Php20,000/month (28%) vis a vis those who are not willing to pay (16%).Bid DistributionSimilar with the Septage Plan, the figure below exhibits a negative relationship between the offeredbid and the percentage of respondents who said yes to the Sewerage Plan. This observed trend13The CBD area is estimated to generate 2,772 cubic meters of wastewater per day, necessitating the need for a maximum designcapacity of 6,00 cubic meters/day for the wastewater treatment plant. This takes into account population growth and the correspondingincrease in wastewater generation. The projected cost of the STF would be around PhP 250-300 million. Nonetheless with additionalconstruction of sewer lines/pipe networks, total investment could increase up to Php500-600 Million to fully address the sanitationproblems of Dagupan City (SuSEA 2008)

17. conforms to economic theory. 80 71.64 70 60 51.61 % yes response 50 40 29.23 30 22.73 19.35 20 10 0 50 100 150 200 250 Bids (Php) Fig 2. Bid Distribution of Yes Responses, Sewerage PlanTable 12 also shows a positive relationship between income and willingness to pay.Table 12. Willingness to Pay for the Sewerage Plan by Income BracketsIncome Willingness to Paybracket No % no Yes % yes AllIncome 1 24 77.42 7 22.58 31Income 2 57 65.52 30 34.48 87Income 3 83 61.03 53 38.97 136Income 4 23 52.27 21 47.73 44Income 5 9 39.13 14 60.87 23Total 196 61.06 125 38.94 321Willingness to Pay for the Sewerage PlanResults of the logit regression for the Sewerage Program are shown in Table 13. For the final modelused, only the bid, knowledge, and Income 4 estimates were found to significantly differ from zero.The bid variable shows a theoretically predicted sign. Specifically, the probability of a yes votedecreases with the increasing bid offer. Income 4 is the only significant income bracket. This meansthat compared to the relatively poorest households in the CBD, households with income betweenPhp20,000 to Php35,000 have higher probability of agreeing to the bid offer. All other incomebrackets have the same probability of agreeing to an offered bid relative to income 1. Theknowledge variable is also significant but it does not have the predicted sign. This counterintuitiveresult indicates that households with more knowledge on sanitation issues are less likely to pay. Oneexplanation would be that these households might have already been doing actions to improve theirlevel of sanitation. Hence, they may be reluctant to pay more for a new program. Since, we have noinformation on the specific sanitation decisions of households other than what is associated withdecisions affecting their septic tanks, we were not able to control for this in the regression model.In terms of the marginal effects of these variables, income bracket 4 has the largest effect.Households in this income bracket are 33 percentage points more likely to vote for an offered bidthan those in other income brackets. On the other hand, increases in the offered bid by PhP 50reduce the probability of saying yes by only 0.03 percentage points. The marginal effect of the

18. knowledge variable is around 28 percentage points. Thus, the probability of agreeing to a bid formore knowledgeable households are lower by 28 percentage points compared to less knowledgeablehouseholds. The caveat in the previous discussion however, still holds in the analysis of themarginal effects for this variable.The computed WTP for the Sewerage Program for the whole sample and for each income bracket isshown in Table 14. Computed WTP per income bracket are significantly different from each otherat 5% level. The mean WTP for the whole sample using the certainty and protest corrected model isPhP 102. What is interesting to note, is that unlike the trend observed for the WTP for Septage, theWTP for Sewerage increases with income for the first four brackets and then declines with furtherrise in income (bracket 5).Table 13. Results of Logit Regression for the Septage ProgramVariables Coefficientbid -0.013***know -1.261**age 0.010civil -0.187educ 2 1.222educ 3 0.442educ 4 1.464educ 5 1.504educ 6 1.704educ 8 1.883hh_all -0.073hseown -1.101agehouse 0.106ageown -0.111yrslive 0.026yrslive2 -0.000diarr 0.499buss -0.288Income 2 0.492Income 3 0.801Income 4 1.391**Income 5 0.970age_septic -0.001class 2 0.223constant 1.254*** significant at 1%; ** significant at 5%, * significant at 10%

19. Table 14. Calculated Willingness To Pay for the Sewerage Program, by Income Bracket and for theWhole Sample, in Php Income WTP/mo (Php)Income 1 48Income 2 83Income 3 103Income 4 157Income 5 137Whole Sample 102Going back to Table 14, the mean WTP for the whole sample has a 50% chance of being voted andis therefore expected to pass the referendum. Table 15 shows the proposed fee and thecorresponding probability of payment. If 60% of households will vote for the Sewerage program,then the proposed legislation should charge a sewerage fee of PhP 73.00. The sewerage feeshouseholds would be willing to pay range from PhP2 to PhP102 per month. Note that these valuesare higher than the fees for the Septage Management Program.Table 15. Probability of Paying for Different Proposed Fees, Sewerage Program Probability of Proposed Paying (%) Fee(PhP) 30 164 40 129 50 102 60 73 70 45 80 18 90 2Which of these referendum-passing fees would be financially viable? Given assumptions inAppendix Table 2, BCA results show that the prospects for an LGU financed Sewerage Program forDagupan is less optimistic. Given the huge investment outlay14, none of the proposed fees arefinancially viable (Table 16).Table 16. NPV of Different Referendum Passing Fees, Sewerage ProgramAdditional Price/ cu. NPVFee/ month m.102 4.3 -151,422,43373 3 -187,779,35545 1.9 -222,882,59118 0.8 -256,732,1392 0.1 -276,791,13114 Note that we have conservative cost and slightly exaggerated revenue assumptions

20. Comparison of WTP Estimates With Other StudiesThe bleak scenario for a self-financed Sewerage Program begs the question of whether the estimatesare indeed far off from other studies. The only other study on households willingness to pay wasconducted in 199315. Table 17 shows that in general, the WTP for Sewerage is in the range of thevalues obtained by the study. However, even if we use the estimates for Dagupan from this 1993study, it would not still be sufficient to cover the huge investment requirements for the proposedself-financed Sewerage Program.Table 17. Other WTP Estimates, Philippines Location Sewer Sewer Connection Connection + Treatment (PhP/mo/hh) (PhP/mo/hh)Calamba 124 103Davao 62 92Dagupan 169 207Source: Philippine Environment Monitor (2003)4.2.3 Household Perceptions on the Hypothetical Scenario for the Septage and Sewerage PlansPayment VehicleRespondents were asked of their opinion regarding the hypothetical elements contained in the CVscenario, particularly the payment vehicle. Waterbill was chosen due to its wider coverage,mandatory nature (i.e. disconnection as effective sanction against non payment), credibility, andclose link with sanitation services16. The Dagupan City Water District is also supportive of the Planand is willing to collect sanitation charges to its customers. Overall, respondents from the twosubgroups agree with the idea that they will pay for the septage and sewerage fees through theirmonthly waterbill. The major reason why some households did not agree to the current paymentvehicle is the continuous increase in the water rates. We learned that the DCWD increased its rateper cubic meter months before the survey thereby creating a negative impact to respondentsdecision making.An alternative payment vehicle considered by some respondents includes a separate bill for septageand sewerage fees that will be handled by a private collector, so that the computations of thecharges will be clear to them. Another suggestion would be to add these charges to the garbage fee(Php30/mo) collected by each barangay. Respondents find the barangay solid waste managementprogram successful and the collection of fees efficient. The idea of collecting the sewerage andseptage fees through community tax certificates was also forwarded (Table 18).Belief in the success of the Program/PlanMajority of the respondents believe that the Septage and Sewerage Management Plans, onceimplemented, will succeed in attaining the goal of reducing environmental pollution and healthhazards associated with poor sanitation. In fact, some are already curious as to the design, locationand actual start of the Project. Those that remained skeptic on the plausibility of the Plans gavethree major reasons: a) distrust on the LGU due to possible corruption of funds; b) impact to otherswho may not be able to afford the fees and; c) failure of other people to cooperate (Table 19).15 The date of the original study was cited in the Philippine Environment Monitor, 2003. However, there were no citations of the exactstudy in the publication.16 However, the disadvantage of using this payment mechanism is the timing of increase in water rates before the survey period.

21. Table 18. Respondents Perception to the Payment Vehicle & Alternative Schemes Septage Sewerage All N % N % N %Agreement of using waterbill aspayment vehicleNo 242 30.63 82 25.47 324 29.14Yes 548 69.37 240 74.53 788 70.86Reasons for not agreeingWater bill is continuously increasing 140 57.85 58 70.73 198 61.11Not all have water connection 29 11.98 4 4.88 33 10.19Dont like mandatory payment 39 16.12 15 18.29 54 16.67Prefers annual rather than monthly 10 4.13 1 1.22 11 3.40collectionDont like DCWD service 1 0.41 - - 1 0.31Other people will not understand how 6 2.48 4 4.88 10 3.09the fee will be computedAll fees should be shouldered by the 6 2.48 - - 6 1.85govtWill migrate soon 2 0.83 - - 2 0.62Separate bill instead of adding to water 9 3.72 - - 9 2.78billAlternative payment proposedDont know 14 5.79 3 3.66 17 5.25Monthly electric bill 5 2.07 2 2.44 7 2.16Community tax 8 3.31 11 13.41 19 5.86Land tax 1 0.41 3 3.66 4 1.23Barangay collection 35 14.46 15 18.29 50 15.43Garbage fee 20 8.26 11 13.41 31 9.57Government fund 2 0.83 4 4.88 6 1.85None 116 47.93 15 18.29 131 40.43Own separate bill 41 16.94 18 21.95 59 18.21Table 19. Respondents Belief in the Success of the Septage & Sewerage Plans

22. Septage Sewerage ALL N % N % N %Belief in the success of the programNo 166 21.01 63 19.57 229 20.59Yes 624 78.99 259 80.43 883 79.41Reasons for no response 1112Money will be used for other purposes 1 18 7 11.11 8 3.85Lack of trust in the LGU due to corruption 70 42.17 22 34.92 92 44.23LGU lask technical skill to operate STF 4 2.41 2 3.17 6 2.88Water district may not agree to collect 8 4.82 2 3.17 10 4.81paymentProject difficult to implement 10 6.02 8 12.7 18 8.65Other people may not cooperate 19 11.45 12 19.05 31 14.90Others cannot afford addtl fee 32 19.28 11 17.46 43 20.67Effect on Water Connection to DCWDTable 20 shows that 95% and 88% of sewerage and septage respondents respectively would retaintheir DCWD connection even if majority will vote for the septage/sewerage fee to be added to thewaterbill. One of the main reasons for keeping their pipe water connection is the difficulty offinding alternative water sources in their area. On aggregate, 5% of those who choose to disconnectto the DCWD opt to get water from handpumps, neighbors with pipe connection and from watervendors.4.0 CONCLUSIONS AND POLICY DIRECTIONSThis study has looked at the stated preference for two hypothetical programs namely: a) SeptageManagement Plan that would affect households in Dagupan City; and b) Sewerage Program forhouseholds in the CBD area of Dagupan City. Several quantitative methodologies were employed toformulate policy recommendation that would be helpful in crafting a Sanitation Management Planfor the City. The empirical evidence provided in this study serves as a relevant input into theregulatory process of establishing fees for septage management and sewerage services based onconsumer demand.Specifically, the results point to the following:1. Income plays an important role on respondents willingness to pay. For the septage and sewerage studies, the variability of WTP across income groups indicates the plausibility of implementing a socialized pricing scheme for the fees. However, actual implementation of these fees would require a strong public consultation for the target to be met. Another important implication of the results is that increased demand for sanitation facilities would only take place as the general income levels of Dagupan City improves. Similar with the findings in General Santos City, the success of any sanitation initiative goes hand in hand with improvements in income levels and distribution.

23. Table 20. Decision to Stay Connected to DCWD & Alternative Water Sources Septage Sewerage All N % N % N %Connection decision if waterbill willincreaseDont know 38 6.42 8 2.48 46 5.03Keep connected 521 88.01 305 94.72 826 90.37Disconnect 33 5.57 9 2.8 42 4.60Sure of keeping connection to DCWDVery unsure 3 0.54 - - 3 0.35Unsure 60 10.83 41 13.06 101 11.64Sure 373 67.33 189 60.19 562 64.75Very sure 118 21.3 84 26.75 202 23.27If disconnected where to obtain water?Neighbor with pipe connection 7 21.21 1 11.11 8 19.05Public tap 1 3.03 1 11.11 2 4.76Water vendor - - 7 77.78 7 16.67Handpump 23 69.7 - - 23 54.76River 1 3.03 - - 1 2.38Deep well 1 3.03 - - 1 2.382. The individually rational and financially viable Septage Service Fee, given the assumptions outlined in Appendix Table 1, is around PhP 46.00/ mo. This corresponds to the optimal desludging frequency of three years. The septage fees are found to be similar to existing arrangements elsewhere in the country. This Septage fee further allows recovery of investment costs within 10 years as well as cover operating and maintenance (O & M) expenses of the Septage Program within a project lifetime of 25 years. This means that a self-financed Septage Program is possible for the city.3. The story for the Sewerage Program, however, is not as optimistic. There is a range of bids or prices that households would agree to pay (with average of Php102/month for the whole sample). These bids are slightly higher than that of the WTP for the Septage Program. However, none of these can cover the huge investment costs associated with a self-financed Sewerage infrastructure based on BCA assumptions outlined in Appendix Table 2. Thus, it would be prudent for the LGU to look for other funds.4. To implement the septage management and sewerage plan, waterbill can be used as a payment vehicle since its mandatory nature allows more efficient collection of fees unlike voluntary payment schemes such as community tax certificate and garbage fees. However, the computation of fees must be made transparent on the bill to allay the fear of customers of any hidden charges. If a private contractor will make a separate collection of septage and sewerage fees from the water bill, this needs to be studied carefully for cost implications.

24. ReferencesADB. 2007. Asian Water Development Outlook: Country Paper- Philippines. Manila: Philippines.Choe, K., D. Whittington and D. T. Lauria. 1996. The Economic Benefits of Surface WaterQuality Improvements in Developing Countries: A Case Study of Davao, Philippines. LandEconomics 72(4):51937. Cochran, W. G. 1977. Sampling Techniques. 3rd ed. New York: JohnWiley.Lauria, D. T., D. Whittington, K. A. Choe, C. Turingan, and V. Abiad. 1999. Household Demandfor Improved Sanitation Services: A Case Study of Calamba, the Philippines. In Bateman, I. andK. Willies, eds., Valuing Environmental Preferences: Theory and Practice of the ContingentValuation Method in the US, EU, and Developing Countries. Oxford: Oxford University Press.SUSEA. 2008. Draft Report of the Local Sustainable Plan of Dagupan City.USAID. 2007. Septage Management in the Philippines: Current Practices and Lessons Learned.World Bank. 2003. Philippine Environment Monitor: Water Quality

25. Appendix Table 1. BCA Assumptions for Septage Management Plan Assumed Value Source RemarksInitial Investment PhP 60 M SUSEA Baseline Study Report for Dagupan City, 2008Financing Costs 10 years to pay with 3 year grace period; Interest rate set at 10% per yearDesludging and Php 350/ cu. m. ADB, 2007 These figures are based onTreatment Costs desludging costs; PhP 55/ calculation of Manila Water cu. m. treatment costs operations. Note that we have excluded the Bioapplication Costs which amounts to PhP 644/ cu. m.Annual Operating Salaries 960,000 USAID 2007 These estimates were basedand Maintenance Repairs 300,000 on the LINAW project in(O and M) Supplies 300,000 Dumaguete. The project isExpenses Analysis 30,000 expected to serve 22,000 households and 2,500 Monitoring 120,000 business establishments in Dumaguete City. Since Dagupan is much larger these figures were increased by 39% for the analysisRevenue Base 75% of households have SUSEA Baseline water connection; This Study Report for comprises the paying Dagupan City, 2008 populationServiceable 97% of households have SUSEA BaselineHouseholds septic tanks will be Study Report for eligible for the program Dagupan City, 2008Frequency of 1/3 of eligibleService households will be serviced every year within the three year intervalAverage Size of 10.8 cu. m. SUSEA Baseline Corresponds to a septic tankSeptic Tank Study Report for with a 2x3x1.8 dimension; Dagupan City, 2008 Only 1/3 of this amount (i.e. 3.2 cu. m.) will be left undesludged as per Sanitation Code of the PhilippinesOther assumptions:1. Planning Horizon of 25 years2. Discount rate of 10%3. Annual Household Growth rate of 1.2%

26. Appendix Table 2. BCA Assumptions for Sewerage Plan Assumed Value SourceInitial Investment Php 500 M SUSEA Baseline Study Report for Dagupan City, 2008Financing Costs 10 years to pay with 3 year grace period; Interest rate set at 10% per yearOther assumptions:1 Planning Horizon of 25 years2 Discount rate of 10%3 Annual Household Growth rate of 1.2%