Economic Analyses of Policies for Household Water Services in Metro Manila

Abstract

The Philippine Government privatised water services in Metro Manila, the National Capital Region (NCR) of the Philippines, in 1997, dividing the service areas between two water concessionaires-with Manila Water servicing the East Zone and Maynilad covering the West Zone. Since the privatisation, the water services have improved markedly. However, the increases in household population and water connections have resulted in increased water demand, putting pressure on the principal water supply sourced from the Angat Dam. In order to ration scarce water supplies, the water concessionaires have imposed timed water disruptions. The Philippine Government plans to augment water storage by building the Kaliwa Dam and passing on the investment cost to water users.

This thesis provides economic analyses of the social welfare implications of two measures to address water scarcity in Metro Manila, namely, price-measure water-demand management and the proposed water supply augmentation. Both measures are dependent on the sensitivity of households to changes in water prices. Thus, the thesis estimates household water-demand elasticities post-privatisation of the water services in Metro Manila. The results suggest that households in the East Zone are less sensitive to changes in water prices than households in the West Zone, which can be attributed to the different performances of the two concessionaires. The results also suggest that other household characteristics, such as household head gender, household head marital status, household head age, and the household type are endogenous variables that have statistically significant influence on water demand, aside from the family size and income that existing literature has considered.

The thesis considers using the risk-adjusted user cost (RAUC) as an alternative to water rationing in times of water scarcity. This pricing instrument estimates the households' willingness-to-pay to avoid water restrictions and allows households to consume water undisrupted, despite the declining water levels in Angat Dam. The findings suggest that given the current conditions in Metro Manila, households do not require a RAUC. The findings of the sensitivity analyses, however, suggest that if: (i) the Kaliwa Dam is not operational by 2025; and (ii) the concessionaires achieve their goal of 100 per cent service connections for all households in Metro Manila; and (iii) extreme dry weather events occur, then the RAUC would increase the social surplus, or the social net benefit, of Metro Manila households.

To determine the optimal time at which the Kaliwa Dam should be operationalised, a dynamic optimisation model was constructed especially for this thesis. It shows that the optimal time to operationalise the Kaliwa Dam is 2042. The results of the sensitivity analyses further suggest that the optimal time is sensitive to different household growth rates and the very low water inflows scenario from the Angat Dam, but is insensitive to the changes in social discount rates. The Philippine Government currently plans to have this dam operational by 2025, but the model indicates that this is premature and will result in social losses.

Overall, the thesis provides valuable insights for policymakers who are considering either a water-demand management approach or supply augmentation for managing an urban water supply system. Show more