Theses Tobit Probit
Theses Tobit Probit
By
Medhin Fissha
July 2006
Addis Ababa
Acknowledgements
My special thanks goes to my advisor Dr Mahmud Yesuf for his professional guidance and
helpful comments. I am indebted to Water Aid and African Economic Research Consortium for
financial support through out the study and during the research work.
I would like to express my heartfelt thanks to Ato Essey Takele for his material and moral
support. Finally, I would like to acknowledge my family and friends for their support and
encouragement.
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Table of Contents
Page
Acknlowgment............................................................................................................ i
Table of Content…………………………………………………………………… ii
List of Tables ……………………………………………………………………………..iv
List of Figures.........................................................................................................v
List of Abbreviations ...............................................................................................v
List of Annexes...................................................................................................... vi
Abstract…………………………………………………………………………………….vii
1. INTRODUCTION.................................................................................... 1
1.1. Background...........................................................................................1
1.2. Statement of the problem......................................................................3
1.3. Objective of the study ...........................................................................5
1.4. Scope and limitation of the study…………………………………………. 6
1.5. Significance of the study ……………………………………………………7
1.6. Organization of the paper………………………………………………… 7
ii
3.1.2.2 Direct Method………………………………………………………...17
3.1.2.2.1 Economic Theory and the Contingent Valuation Method ………17
3.2 Empirical Review ................................................................................21
3.2.1. Water Related CVM Empirical Studies............................................21
3.2.1.1 The Ethiopian Experience ………………………………………21
3.2.1.2 Case Studies from Developing Countries……………………..23
3.2.2. CVM on Other Related Resources……………………………………...27
4. METHODOLOGY ..........................................................................................30
4.1 Data Source and Type ...........................................................................30
4.2 Sampling Design and Procedure.............................................................30
4.2.1 Design Survey Questionnaire and Elicitation Format……………………31
4.2.2 The Field Procedure.............................................................................32
4.3 Empirical Model ......................................................................................33
4.3.1 The Probit Model………………………………………………………..33
4.3.2 The Tobit model…………………………………………………………37
4.4 The CV Scenarios......................................................................................39
4.5 Description of Explanatory Variables and Hypothesis……………………….39
iii
List of Tables Page
Connection……………………………………………………….. …………………51
Table 5.5 Marginal Effect Estimates of the Probit Model after Correcting its
Heteroscedasticity………………………………………………………………….. 53
iv
List of Figures Page
List of Abbreviations
WTP-willingness to pay
v
List of Annexes Pages
Annexes 1. AAWSA 5 years Tariff for Water supply and Sewerage Disposal Services…..74
Annexes 2.AAWSA Water Supply Situation Map…………………………………………75
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Abstract
This paper analyzes determinates of households’ willingness to pay for improved water service, using the
contingent valuation method (CVM). The study used cross sectional data collected from 250 households
living in different areas of Addis Ababa, Ethiopia through single bounded elicitation format with an open
ended follow up question using a face-to face interview. The empirical models adopted by this study to
determine factors influencing households’ decisions to connect to the pipe water scheme are Probit and
Tobit models.
Results of the study revealed that respondents’ WTP is affected by a number of explanatory variables
including sanitation facility, water related disease and socio –economic variables like income, age, sex,
marital status, education level and family size of the respondent etc. The mean WTP for private connection
is found 20 cents per Baldi and 15.79 cents per Baldi from closed ended and open-ended question
The following policy implications are derived from the study. First, the positive and significant relation
between sanitation facility and WTP implies that improving sanitation service could not be done alone rather
it has to go hand in hand with improvements in piped water supply provision. Finally, the revenue and
households’ welfare gain in changing the existing policy (low tariff with limited unreliable private service and
hence low level equilibrium) to a new (higher tariff with more and improved private connections) can be
huge.
Key Words: Willingness-to-pay, improved water service, sanitation facility, contingent valuation method,
Addis Ababa, Ethiopia
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Chapter One
Introduction
1.1 Background
Development is the integration of economic growth, social, cultural and political conditions. In
this regard, most of the sub-Saharan African countries are at a very low stage of development.
One of the obvious observations that resulted from the backwardness of those countries is lack of
effective and sustainable utilization of the available natural and human resources. Existing capital
and labor efficiencies are very low. There is a relatively high rate of growth of population, which
decrease the per capita income of countries .The consequence of the very low level of income are
poverty, unemployment, low access for health, education, water and low level of investment in
social services.
Ethiopia is one of the countries that are at the very low stage of development and is currently
facing several social and economic problems .Its cities are confronted mainly with extensive
Addis Ababa, the capital city of Ethiopia, accounting for one third of the country’s urban
population, is experiencing multiple challenges to be addressed. One of which is the provision for
decent life to its residents. Its existing built-up area is characterized by dilapidated structures,
congestion, environmental related problems and poor urban image, shortage of and low quality
1
In addition to aggravating environmental problems of the city, lack of service provision
exacerbates the already poor living and working conditions. It is reported that only less than 65%
of the reachable solid waste generated in the city is collected. The remaining being simply
dumped in open sites drainage channels, rivers and valleys as well as on streets. About 67% of
the people in the city use dry pit latrine and 42 percent of the existing public latrine facilities are
used by 4 to 9 households and are characterized by overflow. Rivers and streams have also
become open sewers where households’ liquid wastes, industrially toxic and hazardous effluents
are discharged without being treated hence, negatively affecting animals and people living along
the valleys. The existing sewerage system is serving only about 15 percent of the city’s
population. Like wise, over 25 percent of the residents are without any kind of sanitation
facilities where by even the existing latrine are not emptied on time. These glaring shortcomings
coupled with low water consumption plus the ever-increasing vehicular traffic posing sever air
pollution and noisy conditions have aggregated the sanitation problems of the city. National
figures show that these problems are leading causes of cute respiratory infections, skin and
parasitic disease, resulting in mortality and morbidity. (Tewodros and Zeleke, 2001)
The existing water price policy in the city concentrate on the supply side and seems to neglect the
effective demand of the majority of people in the city. The implementation of such policy
decisions should also focus on the demand as opposed to supply side there by adjusting pricing
mechanisms and considering the willingness to pay of the residents. Valuation of water service is
the key component of an appropriate incentive for balanced and coordinated investment
development in the different parts of the city. Moreover the need to fill the gap of information on
2
the demand side for policy purpose is timely. Therefore, research on the demand side in order to
Economic infrastructure has substantial impact on economic development and human welfare of
every nation. It is believed to be essential for modernization and diversifying production. It also
helps countries compete internationally and accommodate rapid urbanization. With an attempt to
raise productivity and improve living standards, developing countries have been making
substantial amount of investment in new infrastructure such as transport, water supply, power,
As part of economic infrastructure, piped water supply is among the main elements of public
utilities developing countries are striving to expand .In this regard, millions of people in both
urban and rural areas are confronted with the problem of obtaining sufficient clean water and
decent sanitation. According to UN- Habitat (2003) each year 2.2 million deaths or 4% of all the
death in the world can be directly attributed to inadequate supply of clean water and sanitation.
Poor people in urban slum encounter highly subsidized public water systems due to lack of
maintenance and management and public utilities are unable to supply the promised cheap water
to the poor, who instead are forced to pay high price for dirty water to private venders. The
problem is those politicians do not allow the poor the opportunity to choose to pay the full cost of
public water provision (Stein Hansen and Ramesh Bhatin, 2004). This policy is used as a political
tool that is intended to let the people believe that the government cares for their welfare. One
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additional fact that is overlooked in this policy is that piped water delivery is not a natural
system. It is a man-made infrastructure that needs investment in financial and other resources to
build, operate, maintain and sustain. The investments turn water into an economic good and not
The situation of the water supply in Addis Ababa is very similar to that of other developing
countries where water supply situation in the town has been deteriorating. Both the per capita
quantity and quality of supplied water have decreased over years. Problems associated with
inadequate water supply service in urban areas contribute to urban environmental degradation
and cause damages to public health. Such problems impose higher costs on producers, consumers
and government.
It was indicated that about 96.7% of the housing units of Addis Ababa get their drinking water
from taps. Of these taps, 4.4% are located in housing unit, 22.4% are within a private compound,
25.5% are within a shared compound, and 45.3% are outside of the housing compound (i.e. a
community tap). The reminder of the housing units in the region (3.3%) receive drinking water
from protected wells and springs, as well as unprotected wells, springs, rivers, lakes, and ponds.
Despite the high coverage of the water supply system, there is shortage of water quantity supplied
Although improving water supply service provision is a priority for the rural and urban
development, the strategies of donor organizations and the government so far, have been supply
driven. The fundamental importance of the value the consumers place on the environmental good
has been ignored. If there is no price for improved water supply use, there would be no control
4
system in the economy to check an over use of the resource and a distortion will result in the
water sector. Since water lies between the two extremes of purely public and private good, the
market mechanism cannot be expected to provide these signals in the form of prices. Public
policy must therefore intervene in some form. This study calls for the assessesment of alternative
methods that will elicit the value a typical consumer place on an improved water service. If
households are willing to pay for the improved service then the welfare gain may be
considerable, otherwise, it might indeed be a waste of public resource to improve the service
The main objectives of the study is to explore if demand side information, willingness to pay,
will turn out to be the most important element to improve water supply in Addis Ababa. The
Examine if households are willing to pay for improved water service and identify the
determinants;
Examine the impact of sanitation facility on the respondents WTP for improved water
service;
Draw concluding remarks and policy implications to the existing situations of the city
5
The scope of this study is limited to the analysis of demand side information about water supply
service obtained from inhabitants of Addis Ababa for domestic purposes for a cross-section of
households at a given time. The rationale for selecting this area is because, it is one of the urban
centers in the country with immense water and sanitation problem. There is also a growing
demand for this service as the growth (expansion) of the city is proceeding at an astonishing rate.
This work has used as one of the most popular methods of economic valuation in developed
countries, i.e., contingent valuation method. There are many constrains and biases in its
application, but it is a first step towards valuation of environmental quality and will allow for
making decisions of investment with more and better information in developing cities such as
Addis Ababa
Further more, time and financial constrains precluded the possibility of a more rigorous approach
for data collection. Therefore, the sample survey carried out for this study is limited in both size
and coverage. The sample size was limited to 250 households and all households in Addis Ababa
were not covered by the primary survey. In this sense, the data generated for the study should be
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The study will impute value to improved water service in Addis Ababa. It will be an additional
contribution to few studies that have been undertaken in the past to evaluate environmental goods
in Ethiopia. Moreover the results of this study will have an impact on the academic community,
governmental and non-governmental organizations, policy makers and the public at large
The rest of the paper is organized as follows. The second chapter reviews the water supply and
demand situations in Addis Ababa. Chapter three deals with theoretical and empirical literature
review followed by the fourth chapter, which is devoted to the data and empirical models.
Chapter five provides descriptive analysis, estimation results and discussion. Finally, the study
Chapter Two
7
Water Supply Situation and Demand in Addis Ababa 1
Addis Ababa started getting piped water supply during Emperor Menilik in 1901. The first
modern water supply system appeared when masonry channel was laid along Kebena River and
an earth dam was constructed around sidist kilio from where water was carried down to the
desired destination in the city. Due to the increase in demand and consequent shortage of water
many springs that originate from Entoto Mountain and other places were developed. Moreover,
many boreholes were dug to improve the water supply until the Gefersa dam was constructed in
1942. Meanwhile, due to deterioration of spring water quality most of them were abandoned.
The water supply system has been gradually extended over the years with the main water supply
1
Source: -Report of AAWSA in 2004 & 2006 and public relations service of Addis Ababa Water &Sewerage
Authority (2001)
8
Implementation year Water supply system component
1942/43 Gefarsa dam1 ,gravity, masonry dam 10m high.15,000m3/day
yield
1955 Gafarsa dam 1 raised by 6m,reinforced concrete pre-stresses
to get additional 15,000m3/day yield
1950/1960 Gafarsa treatment plant completed in two phases, treating
15,000m3/day in each phase
1966 Gafarsa 3 dam constructed, earth fill15m high
1970 Legadadi dam and treatment plant, capacity15,000m3/day
1985 Water IIA Legadadi treatment capacity increased to 150,000
m3/day
1990 Water IIB improvement of distribution system
1995/2001 Emergency Water Supply Project, Akaki Town and Akaki
Ground Water Developed project. Additional 30,000 m3/day
is obtained
1995/1999 Emergency Water Supply Project, Dire dam project, to
supplement Legadai with 40,000 m3/day water
1995/1997 Emergency spring development and borehole drilling project
Source: - AAWSA (2004)
Currently around 294,438.92 m3/day water come from Gafarsa, Lagadadi, and Dire reservoirs;
Akaki ground water scheme and a number of wells and springs (AAWSA, 2006)
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Treatment facilities: the present water treatment plant at Gefersa and Lagadadi have design
Transmission mains: the Gafarsa transmission line consists of two 400 mm steel pipes,
installed in two phases in 1955 and 1960. The length of the pipeline is about 11 Km, most of
which is in a poor condition now. The Legedadi transmission line was built in 1970 and
originally consisted of a 900 mm steel pipeline. The transmission line is now 6.8Km of 14000mm
steel pipe and then 11.5Km of two parallel 900mm and 1200mm steel pipe to convey water from
Pumping stations: There are 17 pumping stations in the distribution system to transfer or boost
Storage facility: The existing water supply has 22 balancing/storage reservoirs ranging in
capacity from 100 to 20,000 m3. Most of the reservoirs are made of reinforced concrete and stone
masonry and were built as part of the different water supply schemes. The total storage capacity
10
It is difficult to determine accurately the actual water demand of Addis Ababa. Due to water
shortages, consumption is below actual demand. Consumption of water in the city is therefore,
driven by the amount supplied rather than the actual demand. Estimates of future demand are
therefore uncertain.
• People with in-house services (about 4% of the population) use on average between 80
and 100 liter/capita per day, while the remaining population with access to safe drinking
water (94%) are served by yard connection and use between 15 and 30 liter/capita/day.
• Non-domestic use, excluding industrial water use is substantial and amount to about 25
liter/capita/day
• The industries use about 7 liter/capita per day of which about 40% is provided by
AAWSA and the remaining amount is produced by the industries themselves (deep wells)
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The recent water supply master plan study estimate the water demand projection as shown in the
Table 2-2
• Water demand for residential use is related to per capita demand in various modes of
supply and housing standards (house connection, yard connection stand alone, yard
• Commercial, public and institutional demand expressed as 30% of the residential demand
• The industrial consumption is related to the area so designated by the master plan and
12
• Un accounted for water is decreasing from the present figures gradually within the project
It can be observed from documents that piped water supply for Addis Ababa City has started in
1901 during the reign of Menilik II. Initially, piped water was supplied to the public free of
charge. It was noted that between 1927 and 1928 a flat rate was fixed and people started to pay
for water service. However, the amount of the then fixed rate is not known.
The history of known water rate and fees of Addis Ababa has started from 1945. Water tariff rate
and fees were levied in the water rule legal notice number 91 of 1945. The schedule that included
water rates and fees was issued in the Negarit Gazeta No.6 of February 28, 1947. The schedule
shows two types of rates for volumetric charges. A fixed rate related to the size of the household
was laid for water supplied without meter and a flat rate of birr 0.50/m3 was set for water
supplied through a meter. The flat tariff rate of birr 0.50 per meter cube had been functional for
Since July 1995 a new tariff structure and rate has implemented. The tariff was based on partial
cost recovery (operational and maintenance cost only): meter reading, bill preparation as well as
collection of bills were done every two months. However it was proved that the tariff has failed
to bear O&M.
2
For further information see Annex 1
13
On the other hand the policy stipulates that the tariff levels should be designed on the basis of
purchasing out total subsidy stages by stage. The policy particularly indicates that the tariff levels
for urban centers should be based on full cost recovery. The above two conditions necessitated
the change of the existing tariff. Accordingly, new tariff was proposed to be implemented starting
from July 2001.One of the important features of the proposed tariff is that meter reading, bill
preparation and collection will be done every month. The tariff rate proposes what each block
recovers and who pays that rate are summarized in the table below
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Chapter Three
Literature Review
3. 1 Theoretical Background
Theory of environmental resources valuation has encouraged economists, both in intensity and
scope, in valuing an increasing number of environmental goods and services around the world.
Increasing complexities, in designing procedures and analytical structure, have enhanced the
people perceive these services and how they value changes on the genetic, species, regional and
Depending on various circumstances, economists place total economic value on either stock or
flow of natural resources. Total economic value (TEV) can be divided into three main
components, namely, the use value, option value, and non-use value. The use value refers to the
direct benefits human beings obtain from environmental resources. The option value reflects the
value individuals give to the future uses of environmental resources. That is, it indicates
individual’s willingness to preserve environmental assets for the future uses even if s/he does not
use these resources currently. The non-use value reflects that people are willing to pay to improve
or preserve environmental resources that they do not use and will never use. Thus, total
willingness to pay for environmental resources is the sum of the use value, option value and non-
15
3.1.2 Valuation Method for Non-Marketed Goods
The relentless effort by economists has brought forth various methods to value non-marketed
goods. According to Mitchell and Carson (1993), classification of methods for estimating values
is based on two characteristics of the methods. The first characteristic is whether the data come
from observations of people acting in real world settings where people live with the
consequences of their choices; or come from people’s responses to hypothetical questions of the
form “Would you be willing to pay…?” The second characteristic is whether the method yields
monetary values directly or whether values must be inferred through some indirect technique
Thus we have two popular ways (methods) of valuing non-marketed goods: indirect and direct
approaches.
The indirect (inferential) approach (or revealed preference method) involves inferring about the
unobservable demand for and hence value of the environmental goods and services based on the
observable demands for the related marketable goods and services. That is, using information on
market transactions for related private goods and services, economists try to infer the demand for
environmental goods and services (Freeman, 1993 and Tietenberg, 2003). The indirect method
includes travel cost method (TCM), hedonic pricing method (HPM), averting expenditures and
16
The two indirect approaches (TCM and HPM) are not always used to estimate the value of
environmental goods or intangible goods. For example, they are unlikely to estimate non-use
value because they depend on the actual market situations such as buying a house etc
The direct approach (or stated or expressed preference method) refers to the direct expression of
environmental quantities, qualities, or both. That is, direct valuation method involves direct
valuation questions and hence it does not depend on market information. The typical example of
direct valuation method is the contingent valuation method (CVM). (Freeman, III 1993)
According to John A. Dixon (1994) in cases, where markets for environmental goods or service
do not exist, are not well –developed, or where are no alternative markets, it may not be possible
to value the environmental effects of a particular project by using the market or surrogate- market
techniques. A viable alternative in these situations may be the use of contingent valuation
The contingent valuation method enables economic values to be estimated for a wide range of
commodities, which are not marketable. Ever since it is originally proposed by Davis (1963), it
has gone through a great deal of theoretical and empirical refinements. Even now, there are
debates inside and outside the field of economics around this model. The essence of the method
17
is to directly solicit sample consumers’ valuation for a change in the level of environmental
service flow, in a carefully structured hypothetical market. The traditional consumer surplus,
which is the area underneath the Marshallian demand curve, is impractical in such instances. This
is because in almost all cases, environmental goods are found to be unpriced. Thus to come about
a correct measurement for welfare change we have to compensate the income effect by holding
the real income constant. This will give us what is called the Hicksian (compensated) demand
curve.
The final aim of the contingent valuation method is to measure the compensating or equivalent
surplus for the good in question. Asking individuals willingness to pay and willingness to accept
Willingness to pay (WTP) is the amount that must be taken away from the person’s income while
Where V denotes the indirect utility function, Y is income, p is vector of prices faced by the
individual, and q0 and q1 are the alternative levels of the good or quality indexes (with q1>q0,
In the same manner, Willingness-to-accept (WTA) for a good is defined as the amount of money
18
A possible welfare change can result in a gain or loss in welfare. Compensating variation (CV)
asks what payment (that is, an offsetting change in income) is necessary to make the individual
indifferent between the original situation and the change. For compensating variation there is
restriction in quantity. Equivalent variation (EV) measure asks what change in income (given the
original prices) would lead to the same utility change as the change in the price of the good. For
Thus in this framework we can have four welfare measures. When there is welfare gain, CV
shows individuals willingness to pay to enforce the change while EV shows willingness to accept
compensation if the given change is not going to happen. The reverse is the case for welfare loss.
We have to take note that instead of EV and CV, ES (equivalent surplus) and CS (compensating
surplus) are more relevant welfare measures since environmental goods in almost all cases are
According to Nick Hanley (1997), a CVM exercise can be split in to five stages. (1) Setting up
the hypothetical market, (2) obtaining bids, (3) estimating mean WTP and /or WTA, (4)
estimating bid curves, and (5) aggregating data. In the second stage we have several ways to
administer a survey once the survey instrument is set up. Telephone interviewing, mail shot, and
face-to-face interviewing are ways in which it can be done. Survey through the mail is the least
preferred due to the high rate of non-response while face-to-face interview offer the most scope
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The very fact that the method is based on a hypothetical scenario rather than actual behavior is
the source of enormous controversy. Thus there will be biases, which systematically understate or
There are a number of types of biases indicated in the literature, but: The four major potential
biases in the contingent valuation surveys are: strategic bias, starting point bias, hypothetical bias
The basic idea of the strategic bias is that a respondent or groups of respondents may give biased
information (answer) to influence a particular outcome. Such information may not reflect the
The concept of starting point bias refers to survey instruments in which respondents are asked to
check of their answers from a predefined range of possibilities. The problem here is that how the
survey questionnaire designed may affect the resulting answers. For instance, a survey
questionnaire with a range of $0-$100 may produce different result compared to a survey
As the name indicates, in the hypothetical survey questionnaires, respondents are confronted by
an artificial set of alternatives rather than actual choices. Since the respondents are not actually
expected to pay the estimated values, the respondents may treat the survey as providing ill-
considered answers.
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The problem of information bias may arise in the situation where respondents are asked to value
attributes with which they have no or little experiences. Thus, if respondents have no experiences
about attributes of resources they are asked to value, the valuation will be based on an entirely
false perception.
CV Surveys have been widely applicable methods in valuing reduce air quality, water quality
improvement, ecologically important species, etc. Until 1987,the application of CVM was limited
in developed countries but few available works suggest that it can be successfully applied in
developing countries as well (Whittington et .al (1990 and 1998). This sub-section will briefly
summarize water services related CVM studies from developing countries in general and
Ethiopia in particular.
Jonse (2005) using the contingent valuation method (CVM) analyzed determinates of
households’ WTP, estimate of total WTP and derive aggregate demand for non-crop uses of
irrigation water. The study used cross –sectional data collected from 260 households in the
Abbay (Blue Nile) river Basin of the Amhara regional state of Ethiopia through double –bounded
format with open-ended follow up questions .The empirical models adopted by this study are
Probit and bivariate Probit models. Results of the study revealed that respondents’ WTP is
affected by a number of explanatory variables including institutional –related variables and socio-
21
economic factors. The study also finds that using double bounded value elicitation technique does
Terefe (2000) adopted the CV (contingent valuation) method and TC (the travel cost) models to
estimate benefits from establishment of park around Tis Abay waterfalls. Using multiple linear
regression, Probit and Tobit models, the CV responses were analyzed. The results revealed that,
for the visitors’ benefits, the CV produced higher estimates than the TC estimates since CV
estimates consider the non- use value of the commodity to be valued unlike the TC estimates.
The finding showed that successfully conducted CVM and TCM surveys would give useful
Dunffa (1998) adopted a contingent valuation method to estimate the willingness to pay for
improvement in water quality, in Adia Liben district. WTP for improved water has a positive and
significant relation with income, distance to fetch water, quality of current water source and
credit. Education, family size, wealth and female household head have a positive impact on WTP
but insignificant
Assefa (1998) used both the contingent valuation survey (direct method) and indirect (revealed
preference) methods to estimate household’s willingness to pay for improved water service in the
city of Addis Ababa, Ethiopia. The research was based on primary cross-sectional data consists
of 220 sampled households from different locations in the city. The CV approaches with an
iterative bidding game value elicitation format were utilized to investigate the determinants of
households’ willingness to pay for private connection and public taps. The results of the study
revealed that household income, ownership of house, age and education level are significant
22
determinants’ decisions to connect to the piped schemes. The significant variables influencing the
WTP responses include income, education level and sex of the household head, household size,
time for fetching water and household’s attitude towards the responsibility of water provision
Fisseha (1997) used a CV survey to estimate the WTP for better water quality, using 266
respondents, in Maki town. The questionnaire was designed to test for strategic and starting point
biases, and they were not statistically significant. Half of the respondents have been satisfied by
current water quality and need better water quality provision with higher charge than current
price. Income and time spent to fetch water have a significant impact on WTP. Other factors such
The CVM has been successfully applied to a variety of water related issues including sanitation,
water supply, in-stream and off-stream recreation, flow enhancement and health risks. It has also
been used in very different contextual frameworks like lakes and rivers, groundwater, bathing
water, fishing sites, urban water parks, wetlands and marine and coastal areas (Day and Mourato,
1998).
Abdalla (2003) attempted to establish the value of water supply services to the people of
Zanzibar Town by measuring their Willingness to Pay (WTP) for reliable water supply services,
so as to provide basis for change of the financing policy for water supply services management.
This study was conducted using the Contingent Valuation (CV) method; 300 people in Zanzibar
23
Town were interviewed and elicited responses by using the open-ended question. The OLS
model is used to evaluate the effect of the socioeconomic variables and the interview responses
were then analyzed to establish the value of the water supply services to the town’s inhabitants.
The results of this study have shown that contrary to the government's belief, the people of
Zanzibar Town put value in the water services that they receive. Thus, they are willing to pay for
improved water services but will generally be reluctant to pay for the poor services that are
Using multinomial logit model Kaliba et al. (2003) estimated WTP of households’ from 30
villages in two regions of Central Tanzania to improve community-based rural water utilities.
The study reported that households in both regions are willing to pay the fee, which is higher than
the existing tariff charges. WTP is affected by respondents’ socio-economic factors like age,
wealth and household size. WTP for improved water services is negatively affected by age and
wealth as older individuals are not directly involved in water fetching and wealthier households
have their own water sources or they delegate others to collect water for them at lower costs. The
family size is positively related to WTP as households with larger family need more water and
Calkins et al. (2002) estimated WTP of sixty-two households for improved drinking water
delivery systems in semi-urban area of Douentza in Mali using linear regression model and a
logit model. The later model helps to explain the decision to purchase water or not. The authors
asserted that wealth, relative distance to the planned new sources compared to the best existing
sources, land tenure security and family size are major determinants of respondents’ WTP. The
study reported that land tenure insecurity is positively related to WTP implying that tenure
24
insecurity discourages construction of one’s own well and hence households tend to pay more for
Hala (2002) analyzed the impact of better water quality on health improvements using two stated
preference methods: choice experiments and the contingent valuation Method. These methods
were administered to a random sample of 1500 households living in metropolitan Cairo, Egypt.
The format of the valuation question was a referendum question, and the payment vehicle used
was a proposed increase in the water bill. The results indicate that households living in
Metropolitan Cairo have a positive but rather small willingness to pay for reducing Health risks
Day and Mourato (1998) estimated value of water quality improvement in the Beijing
Metropolitan local rivers using the CVM survey analysis. A carefully designed contingent
valuation questionnaire was administered to a random sample of 999 people in the Beijing area.
The study reported that annual average WTP per household to maintain water quality in all rivers
Singh et al (1993) used the contingent valuation method to examine willingness to pay for yard
taps or house connections in several rural villages in Kerala state, India. The respondents’ choices
were modeled within a discrete choice random utility framework, in which an individual’s
response is equal to the indirect utility that the respondent receives from choosing to purchase a
yard tap rather than continuing to use existing sources. This choice is influenced by both the
hypothesized water source characteristics and household characteristics, of the variables affecting
water use decisions, water policy decisions makers can control only three: the connection charge,
25
the tariff and the quality of service. An iterative bidding process was used and the results of the
analysis suggest that there is potential for water system to rise out of its low-level equilibrium
trap. A CVM survey of 1,150 households was carried out, and included both connectors and non-
connectors in areas with improved water system, and those living in areas currently without
improved systems. The survey found that the constraint to new connections was the high up-
front connection charge in combination with unfavorable credit market condition. In addition,
once connected, there was a high willingness to pay for improved quality of service
During 1988 and 1989 study carried out to determine households’ willingness to pay for
improved water service in rural Punjab, Pakistan. The result of the study revealed that, it is the
richer and more educated households that demand and are willing to pay for improved rural water
A case study of water vending and WTP for water in a rapidly growing city of Ontisha, Nigeria
(Whittington et al, 1991,) implemented two approaches to estimate WTP for domestic water
supplies. Survey in water purchase was used to define the private distribution system and reveled
demand for potable water. In addition, a CV survey of 235 households is undertaken to estimate
household’s water demand behavior. The data collected from the CV survey seemed consistent
with the data from the water vending surveys and the results appeared sufficiently accurate to be
A discrete choice model was used to determine the household water demand decision in Ukunda,
Kenya. Logit model was employed using data collected by interview method from 69 sample
households. The result of the study suggested that households’ source of water choice decisions
26
were influenced by the time it takes to collect water from different source price of water, and the
number of women in the household. However, household’s income and education level had
statistically insignificant effect and the sign of education level was negative (Mu Xinming, et al.,
1990)
In general the above reviewed CVM studies revealed that, none of them have tried to use the
sanitation facility as an independent variable and use the single bounded elicitation format with
open ended follow up question .As a result this study attempts to have a look at the influence of
sanitation facility used on WTP response and use the single bounded elicitation format with an
CVM has been widely used to estimate economic values for all kinds of ecosystem and
environmental services in both developed and developing countries. Below are summary of
some of the CVM studies on other natural resources and environmental protection in Ethiopia
27
Table 3.1 Summary of CVM studies in Ethiopia
Number
Location
Commodity of Elicitation Econometric
Name Year of the
valued observati Method modeling
study
ons
Biruk 2003 Improved Addis 440 Bidding- Heckman two-
sanitation Ababa game step estimator
service
Tsegabrihan 1999 Small scale Tigray 82 Bidding- OLS and ordered
irrigation game probit
schemes
Shemelis 1997 Economic loss Wolmera 310 Open-ended; OLS;
of Woreda Bidding- Multivariate
deforestation game analysis
Terefe 2000 Economic Tis Abay 300 Open-ended; OLS; Tobit;
value of a site water falls dichotomous Probit
Essey 2000 Improved air Wonji 300 Biding- Tobit;Ordered
quality Town game Probit
Aklilu 2002 Solid waste Addis 430 Dichotomou Probit; Tobit
management Ababa s with
follow-up
Source: own compilation
28
Table 3.2 Summary of CVM studies in Developing Countries
Number of
Commodity Location of Elicitation Econometric
Name Year observation
valued the study Method modeling
s
Belhaj 1998 Improved air Rabat Sale 400 Iterative and Probit and
quality cities, dichotomous generalized
morocco Tobit
In general, these and other CVM empirical studies in developing economies in general and
goods and services imply that the CVM can be successfully applied to low-income countries.
This invalidates the conventional wisdom, which argues that the CVM could not be applied to
developing countries with majority of illiterate individuals who could not understand
29
Chapter Four
Methodology
The study mostly relies on primary cross-sectional data for the time period of 2006 that is
obtained from a contingent valuation survey. Using simple random sampling from three areas
where the problem of water supply is very critical and partly critical, 250 face-to-face personal
interview using CV questionnaire were conducted, out of which 240 of them were found usable.
The study has also used secondary data from Addis Ababa Water and Sewerage Authority, and
The sample for the study was drawn from three3 areas of Addis Ababa. According to Addis
Ababa Water and Sewerage Authority Water Supply Situation Map (2005) report, the population
of Addis Ababa is segregated to the respective water supply situations (see Annex 2). Among the
different areas, three areas were purposively selected where the problem of water supply is
believed to be very critical and partly critical. After selecting these areas, we randomly select 250
numbers of households.
3
Three areas selected include two areas with a critical water shortage problem (kebele 15 &16 in Asko and kebele
18& 19 in kotebe area) where piped water is supplied for one day/week and supplied for 1-6 hrs/day respectively.
The third one refers to partly water shortage area where piped water is supplied for 7-16 hrs/day we have taken
kebele 10 & 11 in Gergi area. Finally we have randomly selected 83,83 and 84 number of households from the three
areas identified
30
4.2.1 Design Survey Questionnaire and Elicitation Format
The design of the contingent valuation questionnaire was done following the recommendations of
international NOAA panel found in Portney (1994). The most important points were: 1) the
interview should be done in person; 2) willingness to pay should be about a future event and not
one that already occurred; and 3) the hypothetical facts provided to the respondents must be
precise, understandable and constant across the sample .It is not important to clearly define the
hypothetical good or service being offered to the people in order to obtain the correct willingness
to pay. It is, therefore, necessary to be specific about the environmental benefits of the new
improved service because that is what the individual is really paying for. Following these
The household interviews included questions about socio-economic characteristics, water-use and
sanitation practises, willingness to pay for water, housing characteristics and household assets,
occupation and monthly cash income. The focus of the questionnaire was on the estimation of the
households’ willingness to pay for improved piped water supply. The single bounded elicitation
format with an open ended follow up question was applied for the elicitation part, as it minimizes
the strategic bias and makes the decision most efficient. Thus using single bounded elicitation
format has the advantage of giving better information on households’ maximum willingness to
pay.
31
4.2.2 The Field Procedure
Before going to the fieldwork we have translated the questionnaire into Amharic, then six
interviewers and one-supervisor were employed based on their educational qualification and their
previous work experience. All of them were college students and all have previous experiences in
both urban and rural surveys. Before going to pre-testing the questionnaire, a day and half long
training was conducted. Areas that were thought to lead to misspecification biases by the
A pilot study was made for two consecutive days. From the three areas 15 respondents were
interviewed. In this phase three interviewers and the researcher herself have participated. The
pre-test has a paramount significance in making appropriate modifications in the content of the
questionnaire. In addition, the main purpose of the pilot survey was to set the starting price in the
elicitation part of the questionnaire. During the pilot survey, the willingness to pay part was open
ended. Of the observed different answers, we took the first quartile, median (second quartile), and
32
10 cents (Q1) 15 cents (median) 20cents(Q3)
The pre-test results were not included as an input in the final analysis. Considering the changes
made in the questionnaire from the pre- test, a final questionnaire was developed. The final
survey was implemented from 1 -20 February 2006. The field survey was successfully completed
Given the nature of the data, two econometric models are used one of which is a Tobit model
used to identify factors determining the amount a household is willing to pay for the improved
water supply service and for dichotomous (yes/no) responses to the initial bid (βi*) the Probit
The main objective of estimating econometric (or parametric) model in WTP survey are to
calculate mean WTP and to allow inclusion of respondents’ socio-economic factors into WTP
functions. Such incorporation of individuals’ socio-economic variables into the CV model helps
the researcher to gain information on validity and reliability of the CV results and increase
confidence in application of results obtained from the CV empirical analysis (Habb and
McConnell, 2002)
33
Hanemann (1984) developed the basic model to analyse dichotomous responses based on the
random utility theory. The central theme of this theory is that although an individual knows
his/her utility certainly, it has some components, which are unobservable from the view of the
researcher. As a result, the researcher can only make probability statement about respondent’s
The indirect utility function for the jth respondent can be specified as follows:
i=1 denotes the final state and i=0 the status quo (or the initial state)
If a payment (also called the initial bid, βi*) is introduced due to changes in measurable attributes
like quality or quantity of environmental goods, the consumer accepts the proposed bid only if
34
For the researcher, however, the random components of preferences cannot be known and s/he
can only make probability statement of ‘yes’ or ‘no’ responses. Thus, the probability that the
respondent says’ yes’ is the probability that s/he thinks that s/he is better off in the proposed
This probability statement provides an intuitive basis to analyse binary responses. Assuming the
Ui(yj,xj, εij) + εij .Given the additive specification of the utility function the probability statement
This probability statement is the point of departure for the linear utility function in income and
Ti = β’Xi +εi
35
Where
• εi (the error term) and is assumed to have random normal distribution with mean zero and
• Ti=unobservable households’ actual WTP for improved water supply service. Ti is simply
a latent variable. What we observe is a dummy variable WTPi, which is defined as:
WTPi=1 if Ti ≥ βi*
WTPi= 0 if Ti∠βi*
In the single bounded elicitation format, the jth respondent is asked if s/he would be willing to
pay the initial “bid”, (βi*), to get, say, a given improvement in environmental quality, quantity or
both. The probability of a “yes” response, or a “no” response,pYor N (βi*) can be cast in terms of
random utility maximization chosen by the respondent. It is clear from the random utility
framework that the individual’s WTP is a random variable from the point of view of the
researcher. Thus, while the individual knows his/her own maximum WTP, Ti to the observer is a
random variable with a given cumulative distribution function (cdf) denoted by G (Ti;θ) where θ
represents the parameters of this distribution, which are to be estimated on the basis of the
36
responses to the CV survey. Then, following the work of Hanemann (1984), the response
The resulting log-likelihood function for the responses to a CV survey using the single –bounded
format is
Where diY=1 if the ith response is yes and 0 otherwise, while diN=1 if the ith response is no and 0
otherwise
One of the main objectives of estimating empirical WTP model based on the CV survey response
is to derive central value (or mean) of the WTP distribution (Hanemann, Loomis and Kanninen,
1991)
Mean WTP (µ) using the model for the single –bounded probit model format is defined as
follows:
µ = -α/β
37
4.3.2 The Tobit Model
Alternative method to OLS when the dependent variable response is zero for a significant
Let MWTP be a latent variable which is not observed when it is less than or equal to zero but is
observed if it is greater than zero. Following Long (1997), the Tobit model for observed MWTP
is given by
Where
• α= Intercept
• εi = Disturbance term which is independently and normally distributed with mean zero
38
Then, the estimable model with censored data is:
In our survey questionnaires, we provided respondents with detailed description of the good
being valued (i.e. piped water) in terms of its uses, reliability, volume and quality .The single-
bounded CV questions were asked with open –ended follow up question under the given
scenario, respondents were asked to pay for domestic uses of piped water after an improvement is
proposed in quality and reliability for domestic uses. The respondent is asked at first whether s/he
is interested in the suggested improvement or not and an initial bid (βi*) will be proposed if the
respondent is interested. The next inquiry after the yes/no answer to the proposed bid is, what is
39
The payment vehicle for the proposed improvement is based on volume charge of water
consumed and folding the initial costs of connection in the volume charge, which is distributed
RESX: The sex of the respondent. It is assumed that women would express more preference for
improved water services and would be more willing to pay than men for the reason that
women are often around the house with a higher burden of fetching water for domestic
uses. A dummy variable for sex will be specified as 1 for female and 0 for male with a
REED: The education level of the respondent. It is expected that, households with higher
educational level are more aware of the different benefits that could be gained from an
specified for formal education (primary, secondary and tertiary) and 0 otherwise.
REAG: Age of the respondent. This is a continuous variable with a negative expected sign. This
is because older people, who used to live with more free water supply and less prices,
may be reluctant to prefer new improved and less willing to pay for it.
REIN: Monthly income of the household. This continuous variable is a sum of the head’s
income and the income of other members of the family. The available literature
40
suggests that there is a positive relationship between income and improved water
service. Theory also supports this intuition that income and quantity demanded are
positively related in the case of normal goods. As a result a positive sign is expected on
REMS: Respondents Marital Status. This is a dummy variable taking 1 if the respondent is
married; 0 otherwise. This variable is expected to have a positive sign since married
people are more cautious of the health and other risk involved in poor water supply
service due to family responsibility in the future than the single ones.
REFS: Respondents family size. There are two different views concerning the impact of family
size on willingness to pay. One study has shown that as the number of family size
increases, willingness-to-pay for improved water services will also increase. The
households will be more aware of the risk involved with poor water supply provision.
Thus crave for a better service by giving high willingness-to-pay. But in our case with
very limited job opportunities in Addis, increase in family size will also increase the
expenditure and a growing need to match with one’s income. Thus a negative
REPL: Respondents perception level of quality of the existing supply. Without any theoretical a
priori, if households perceive a good quality then there will be no incentive for them to
41
prefer the improved system and vice versa. A dummy variable 1 will be specified for
REYS: Respondents years of stay in the area. It is hypothesized that the more households stay in
a particular area, the more they would be willing to pay for the proposed improvements
since they will know more about the benefits. In addition, there will be sentimental
IB: Initial bid. This is done whether to see if households’ responses are very much affected
by the initial bid. The relationship is due to be known in the course of the study.
WRD: Respondents or members of the household who suffer from water related disease are
expected to be more willing to pay in order to improve piped water service in the city. A
RESF: Respondents sanitation facility. Based on Addis Ababa water supply and sewerage
authority data three sanitation facilities (flush toilet, pit latrine, and public toilet) were
selected, which were believed to represent the sanitation facilities available in the city
(Addis Ababa). A dummy variable one is given to flush toilet and, 0 otherwise. A
positive sign is expected because flush toilet requires the use of water for its function as
compared to other sanitation facilities and hence makes households to be more willing
42
Chapter five
This chapter deals with the empirical findings and discusses the results obtained. The data from
the contingent survey is analyzed in two ways. The first part used descriptive analyses with the
help of cross tabulation between WTP and socio-economic characteristics of the respondents and
As previously stated a total of 250 households responses were obtained from different areas of
Addis Ababa. Of all the sample population, 5 responses were dropped because some of them
lacked the required information and others gave unreliable and inconsistent answers. There were
5(2%) protest answers with willingness to pay zero and they were eliminated from the data set
during the analysis of valuation answers. As a result 240 questionnaire were found usable of
these, 117(48.7%) of the respondents are female respondents. The average family size is 4.03
with a minimum of 1 household member and a maximum of 9 household members. The data on
age reveals a wide range of responses where the average is found to be 39.75 years. The
The education figure reveals that 5% can’t read and write while 10.8% have attended primary
level education, which includes those respondents that can read and write up to those who have
attended sixth grade. The majority of the interviewed respondents 46.2% have attended
secondary level where 38% have attended higher education. The marital status figure reveals that
43
62.9% of the respondents are married while the rest are not. Concerning the employment
structure in the area, 22% run their own business, 33.7% are government employees, and 15 %
are employed in private companies, while the rest reported that they are unemployed, housewives
or students. In relation to the years of stay by a specific household, a number of responses were
observed. From one-month stay up to 50 years of stay in a particular house were seen. The
average year of stay is 11.23 years. Regarding the housing situation of the survey area, the data
indicated that at least 64% are currently living on government/kebele, 10% are rented from
The most difficulty was the inquiry on the level of income the household earns. Most respondents
were not keen to state their earnings and others don’t really know their average monthly income.
But due emphasis was given in the training session to this part and the enumerators were able to
come up with a fair estimate of households’ average monthly earnings. The average monthly
income of the sample household is birr 1319. The income level ranges from a minimum of birr 50
To cross check the income figure, respondents were asked to state their major average
expenditures in a month. The data shows that, food expenditure constitute the major expenditure
Tape recorder is currently owned by almost all of the respondents’ household. Data for
possession of television show that 45% of the respondents own TV set. Most of the households,
even with a visible antenna on rooftop of their compartment, said that they don’t have a TV set.
The reason is they are very skeptic about the confidentiality of the information they give, and
44
may be required to pay taxes for the government. Thus the above percentage figure is believed to
Car seems to be the least owned by households. Of the interviewed households only 32.8% have
Car.
To explore households’ preferences in terms of priority, they were required to rank different
social services in accordance to their need. Seven different social services were listed: education,
health, water, sanitation, electricity, road and telephone. The survey result shows that, 56.2% of
the respondents reveal Water supply as their first priority. Then comes Health with 25.4% of the
interviewed respondents saying that it is their first need. 8.3% said that Sanitation is their prior
need. Education, road, electricity, and telephone were ranked from fourth to seven respectively.
Total (%)
Variable Rank
st
Health 1 25.4
st
Water 1 56.20
st
Sanitation 1 8.30
st
Road 1 2.90
st
Education 1 3.20
st
Electricity 1 1.00
st
Telephone 1 3.75
Source: survey result
In an overall assessment, we can clearly see that, respondents in Addis have consistently ranked
45
5.1.3 Current Water Use Patterns and Problems
Almost all of the households surveyed (97%) used piped water as the main source of water for
domestic purpose. Only (3%) of households used dug well as a source of water. Sources of piped
water in the survey area consisted of house connected, private tap in compound, pipe shared in
compound, from private venders and public taps. The table below indicates that 28 % of the total
households obtain piped water purchasing from private vendors who have connection to the
existing piped water system. Those who have private connection to the system (in the house or in
compound) account only about 30 percent while 22% have Pipe in compound (shared). And 17
Households average monthly water consumption is about 113.85 baldi (a 20 liter bucket) with
average per capita consumption of 18.97 liter per capita per day using the average family size
obtained from the survey. Price per baldi of water ranges from three cents (official tariff) to those
connected up to fifty cents to those buying from private vendors. The above table shows that
46
private connection (in house or shared connection) constitutes a high share. This only indicates
the existence of facility (pipe line connection), even those households who are privately
connected are buying water from private vendors due to unreliability of the existing supply. As a
result we will conclude that though households are actually connected, the majority are using
private vendors.
The level of satisfaction of respondent with the existing level of water service is extremely low.
Only ten percent of the respondents said they are satisfied with the existing service. Cross-
tabulating the results confirmed that those who have dissatisfaction are seeking more improved
Unreliability of supply, higher costs of water, poor quality and quantity of water and higher
connection charges are mentioned by different respondents as the most serious problem with the
current water service in the city. More than half of the respondents (70%) mentioned unreliability
of water supplies as the most serious problem. In addition 35% of the respondents reported that
they have encountered disease of family members in relation to deficiency of water quality in the
past one-year
Another important variable concerns household’s attitude towards the responsibility of improved
water provision, 82% of the respondents expresses that the government should provide free or
subsidized improved water service to the citizens, while the rest 18% said that either the
47
The subsidized tariff, and the recurring shortage of water would have encouraged those
connected households to sell water at higher price to those who have no access to the system.
Other important opinion variables are the intensity of current water problems and the efforts
made by government in solving them. All most all of the respondents have opined the current
water problem as a very serious one. And sixty seven percent said that the government paid not
The data shows that, 35.4 % of the respondents are currently using flush toilet, while the majority
47.9% are using pit latrine the corresponding figure for users of Off-site sanitation (Public toilet
and forest) shows 16.66%. The data seems to support the information we have from AAWSA
that the majority of the city’s population is currently using pit latrines for their sanitation needs.
48
5.1.5 WTP and Starting Bids
In the final survey, three starting bid prices for the corresponding valuation question were given.
These were set following what we have obtained from the pilot survey. Starting from respondents
who were asked for willingness to pay for the improved system, the data revealed that 63.7%
have said “yes” to the first price that they have been given and the rest have refused and gave a
analysis puts us in a broader framework, as to which factors are responsible for the willingness to
pay for improved water service. The WTP question for private connection is presented for all
respondents (for both who have a private access to the existing pipe system and those who have
not). The general approach of this technique is to estimate a valuation function that relates the
hypothesized determinants with the WTP responses. The variables to be included in the models
were mainly based on the degree of theoretical importance, and their significant impact on WTP.
But before estimation was done, data exploration is an important step. To start with, whether
multicollinearity is present or not a simple correlation coefficient matrix was conveyed. Gujarati
(1995) establishes a rule of thumb, which says that multicollinearity is a serious problem when
the correlation coefficient is 0.8, or above. Thus though correlation is present, multicollinearity is
not a serious problem in our data. The asset of the respondent is omitted because multicollinearity
problem was observed between income and asset of the respondent (See Annex 3)
49
Econometric theory tells us that we are likely to encounter heteroscedastcity frequently in
econometric data, particularly with cross-sectional data. Before passing in to the analysis of the
result of the estimation of the models, test on the possible existence of heteroscedaticity is
important for this study. The violation of the homoscedaticity assumption in the general linear
model, OLS estimates are consistant but inefficient. However the problem for non-linear models
such as Tobit is more sever, i.e. the resulting estimates are not even consistant (Maddala 1983).
Since our data is cross sectional by its nature we are likely to encounter with the problem of
heteroscedaticity. One of the important methods used to test the existence of heteroscedasticity in
Tobit model is the log–likelihood ratio (LR) test (see Annex 4). This test shows that the null
hypothesis of homoscedasticity is rejected, i.e. heteroscedasticity is the problem for the model.
Because of this we cannot use a simple Tobit model for this study rather we use heteroscedastic
Tobit model.
Goodness of fit of the Tobit model is measured using Likelihood ratio index (LRI) (see Annex 4).
The estimates of the heteroscedastic Tobit model (result corrected for heteroscedasticity) using
50
TABLE 5.4 Heteroscedastic Tobit estimate of determinates of
WTP for private connection
with economic theory that says income is positively related with demand in the case of normal
goods.
Education is highly significant at 1% level of significance. It has also the expected positive sign.
This suggests that education increases the awareness of the health dangers involved in poor
The other significant variable at 1% is age of the respondent. With negative sign showing that
older people, who used to live with more free water supply and less prices, may be reluctant to
51
The initial bid, which is used to test for the existence of starting point bias, showed that it is
insignificant but has positive sign. The positive sign implies that respondents’ willingness to pay
amount is upwardly biased but in this study it is found insignificant this phenomenon partly
reflects the efficiency of using single bounded elicitation format than iterative bidding which
The variable perceived existing water quality is found to be significant at 10%. Its negative sign
shows that, households who perceive the quality of existing supply as low will be more willing to
The variable water related diseases has unexpected sign and is significant at 5%. This implies that
households members who suffered from water related disease have a negative and significant
impact on WTP in the Tobit model. This is surprising since they were expected to understand the
• Those who are affected may expect some compensation from the authority
The last variable sanitation facility of the respondent is also positive and significant at 10% level
of significance. As expected, those households who use a better quality of sanitation facility i.e.
flush toilet are more willing to pay than those who use pit latrine and public toilet.
In order to analyze the effects of each explanatory variables on the probability that respondent
accepts or rejects the initial bid (β*), the partial derivatives of discrete responses to the initial bid
52
with respect to explanatory variables must be taken (Greene, 1993). These partial derivates give
us the marginal effect of independent variables on the dependent variable (i.e. the probability that
a household will connect to the new improved system). The marginal effects of the probit model
Table 5.5 Marginal Effect Estimates of the Probit Model after Correcting its
Heteroscedasticity
Equivalent to R2 in a conventional OLS regression model the likelihood ratio index is used to
measure the goodness of fit for probit model. The computed ratio shows that the model seems
53
The marginal effects of the probit model indicate the change in the probability of an event due to
a unit change in the continuous explanatory variables and the change of dummy variables from 0
The variable income of the household is positive and significant at 1% while the reason is
mentioned in the Tobit model, the marginal effect show that a one Birr increase in income will
increase the probability of accepting the initial bid proposed after the improvement is introduce
by 25.5%, citrus paribus. This implies that a household with higher income is willing to pay more
The education level of the respondent is significant at 5% level of significance. Holding other
things constant, change in education level of the respondent from illiterate to formal education
(primary, secondary and tertiary) increases the probability that respondents are willing to pay for
the proposed bid by 18.4%. This indicates that as people get more educated their awareness for
the environment and health impacts of improved water system will also increase.
The variable marital status is positive and significant at 1%. As hypothesized, married people are
more cautious of the health and other risk involved in poor water supply service due to family
responsibility in the future than the single ones. Looking at the marginal effect, being married
Unlike the Tobit model the variable water related disease has the expected sign and is significant
at 5% indicating that those households members who are affected by disease are more willing to
connect to the improved system. The marginal effect reveals that being affected by water related
54
disease will increase the probability of saying yes to the initial bid by 19.5% while the other
The variable year of stay in the area is again positive. It is significant at 5% level of significance.
The reason is that the more households stay in a particular area the more they would be willing to
pay for the proposed improvements since they will know more about the benefits. In addition,
there will be sentimental attachments to that area. The marginal effect reveals that staying long in
the area will increase the probability of saying yes to the initial bid by 1% while the other factors
The initial bids showed that it is significant at 1% level of significance with negative sign
implying that an increase in the initial bid reduces the likelihood that respondents are paying the
The main objective of using the probit model is to roughly compare the results of the two
willingness to pay elicitation methods (dichotomous and open –ended). The results of the two
willingness to pay elicitation methods as indicated in the above two tables, the direction of the
effect of the explanatory variables (income, education, perceived water quality, quality of
sanitation facility, family size and age of the respondent) on the dependent variable is the same
but there is a difference in the magnitude and significance level of the effects. The variables year
of stay in the area and water related disease have a negative sign in the Tobit model however the
sign of these variables is as expected in the Probit Model. Marital status of the respondent has a
negative sign and is insignificant in the Tobit model while it is positive and highly significant in
55
the Probit model which implies that marital status only affect the probability of saying yes to the
initial bid and did not affect the actual willingness to pay of respondents.
The important explanatory variable in our model is sanitation facility of the respondent .It has
positive sign in both models but insignificant in the Probit model and significant in the Tobit
model. Which implies that respondent who use a better sanitation facility (i.e. flush toilet) are
more willing to pay for the improved water service than those using pit latrine and off site
sanitation.
private rented houses are affected by their socio-economic and environmental characteristics in
The overall results of the valuation indicated that respondents took the interview seriously and
well understood the single bounded elicitation technique. The enumerators evaluation revealed
that more than 95 percent of the respondents have well understood the valuation process and have
In the previous section we have seen the factors that are influential for willingness-to-pay if there
is improvement in water supply service. So theoretically, what comes next is aggregation, which
is the last part of the CV survey. In this section, total households willingness to pay and total
56
revenue at various prices for a 20 liters container (Baldi) in the selected areas is calculated below.
It shows, if improvements are underway the possible benefits that could accrue.
According to Addis Ababa Water and Sewerage Authority water supply situation map (2005)
report, the population of Addis Ababa is segregated to the respective water supply situations (see
Annex 2). The estimated population of areas supplied for one day/week, supplied for 1-6 hrs/day
and supplied for 7-16 hrs/day is 89,671, 419,914 and 1,408,865 respectively. Since the sample is
drawn from these areas, aggregation is made to the sum of these areas population, which is
1,918,450. And from the survey we have found that the average family size is 4 in the selected
areas. Dividing the population by average family size and after rounding, we found that there are
Table 5.6 Total WTP and Total Revenue for Improved Water Service (cents per
Baldi)
57
One of the main objectives of estimating empirical WTP model based on the CV survey response
is to derive central value (or mean) of the WTP distribution (Hanemann, Loomis and Kanninen,
1991)
Mean WTP (µ) using the model for the single –bounded format is defined as follows:
µ = -α/β
Then mean WTP (µ) can be computed using this formula and the results from the single
bounded model. Thus mean WTP for private improved water connection is 20 cents per Baldi,
With a Std.error of 5.05, which is more than 6 times the existing authority’s tariff rate. The mean
We can see that the mean WTP from the open-ended format is 15.79 cents per Baldi and is
lower but closer to the closed ended format with Std.error of 11.9.Generally respondents are
58
The study also used the survey to estimate the demand curve for the proposed improved water
service in terms of the total number of households and their associated maximum WTP. The
following figures were used to estimate consumers’ surplus and revenue at different tariff rates.
Figure 5.1 shows the possible revenue and consumers surplus obtained if the service authority
improves the water service and uses the existing tariff rate (3 cent per Baldi) and the number of
connections unchanged.
80
70
60
50
40 Revenue
30
20 Consumer Surplus
10
0
0 50000 100000 150000 200000 250000
Total number of households
59
Expected number
100 of private connection
90
Tariff(cents per Baldi)
80
70
60
50
40
Revenue
30
20 Consumer Surplus
10
0
0 50000 100000 150000 200000 250000
Total number of households
However, as illustrated in figure 5.2, if the tariff rate for the improved water is set at 10 cents per
Baldi (which is just half of the mean WTP from the single –bounded Probit model) with supply
left unrestricted, the study suggested that the number of households subscribing to the proposed
improved private piped water service will substantially increase. And the increase in the
consumers surplus as a result of the large increase in the number of private connections by far
The result of this CVM application show that the tariffs for improved water can be increased
choose to an improved system. The revenue and households’ welfare gains in changing the
existing policy (low tariff with limited unreliable private service and hence low level equilibrium)
to a new policy (higher tariff with more and improved private connections) can be huge.
60
Chapter Six
Most developing countries are entangled by acute shortage of basic infrastructure facilities.
Especially, urban centers of these nations are facing multi-dimensional problems due to the
immense population pressure and poor urban planning. As supply side problems are in fact
eminent, demand side issues have revealed of much significance. Lack of knowledge about
people’s preferences and WTP for public services has been deemed a major obstacle. Coming to
water supply service in Addis Ababa, capital city of Ethiopia, again the above-mentioned
problem is highlighted. The alarmingly increasing population coupled with the increasing urban
poverty and poor living standard shows that the current deteriorated condition will be even
unbearable in the future. Recognizing the poor current condition of water supply service, the
implementing its water three project with the help of donors and other NGOs through
encouraging alterative means to piped water such as Rain Water Harvesting. As supply side
features seems to be overdone, there is almost nothing that is being done to study the demand
side. Therefore, this paper is intended to bridge the gap in information for policy initiatives.
Therefore, this study aims to analyze households’ valuation of improved water supply service in
specific areas of Addis Ababa. The study used both primary and secondary data. A contingent
valuation survey was conducted to obtain data from 250 sample households. Other relevant
secondary data are also used as a source of information. The elicitation method used was single
bounded format with an open-ended follow up question, and we administered the survey using an
in-person interview. We used both a descriptive and econometric analytical technique. We used
61
probit and Tobit model to analyze the determinants of households’ willingness to pay for
The descriptive analysis shows that only 30% of the respondents reported that they do have
private connection to the existing water service. About 70% of the respondents said that the
existing service is not reliable. These facts imply that the main problem of the existing service are
unreliability of supply, higher connection costs, poor quality and quantity of the existing piped
Multivariate analysis using Tobit and Probit model were estimated for the WTP scenario. The
software. In summary there were eleven explanatory variables included in the final regression
models based on the degree of theoretical importance, and their significant impact on WTP. In
general, except for water related disease, the sign of the coefficients of the explanatory variables
are in the expected direction. Income, education, perceived water quality, sanitation facility, age,
and water related disease have significant impact on WTP. The variables Years of stay in the area
and marital status of the respondent have negative sign and are insignificant or seem to have less
Concerning the Probit model, income, education, marital status, water related disease; years of
stay in the area positively affect the probability of responding to the initial bid. The value of the
initial bid has a negative and significant effect on the probability of saying yes to the proposed
bid implying that an increase in the initial bid reduces the likelihood that respondents are paying
62
The mean WTP is found to be 20 cents per Baldi (20 liters container) from single-bounded Probit
model estimates and 15.79 cents per Baldi from the open-ended format This implies that,
respondents are willing to pay in the range of 15 to 20 cents per Baldi for improved water service
which is well above the existing official tariff for piped water.
The positive and significant relation between sanitation facility and willingness to pay in the
Tobit model as well as the positive sign of sanitation facility in the probit model shows that there
The possibility of driving demand schedule for improved water model clearly reveals that raising
tariff with unconstrained supply could lead to increased connection, higher consumer surplus and
The overall results demonstrate that the WTP responses from the CV survey using the single
bounded elicitation technique are not adhoc but they are systematically related to the independent
variables suggested by theory. Hence, it is possible to suggest the CV survey as a feasible method
63
Based on the findings that we have, we can draw the following policy implications:
Since the existing water supply system can not satisfy the existing demand, which lead to
the availability of water only for some hours per day or makes the availability
unpredictable, people of the town are forced to buy water from vendors or waste time in
fetching water. However if improved water services are supplied to the households, and
the water utility install meters or increase its connections, it can increase its revenue by
increasing the water tariff, since households are willing to pay more than the existing
tariff.
One of the major problems indicated by respondents is the higher cost of connection to
the existing pipe system. From the WTP bids, households are willing to pay higher than
the current tariff if the costs of connection are distributed in the tariff and if more reliable
and high quality water is provided.. Therefore, folding the connection costs in tariff could
lead to a potential for revenue and opportunities for financing new water supplies as the
number of connection rises, if the WTP bids and payment conditions are considered.
The strong positive relation between sanitation facility and willingness to pay implies that
improving sanitation service could not be done alone rather it has to go hand in hand with
a broad urban development framework of the city. If not it will inhibit effective and
64
An important policy implication from the strong positive relation ship between
educational level and willingness to connect to the improved water service is that there is
a need to educate people about the benefits associated with improved water services, in
general, and having private connection to the new improved water supply, in particular. .
The strong positive relation between the income of the household and the willingness to
have private connection to the improved water service imply that tariff setting should
consider the poor income group not to be devoid of from access to the minimum water
programs that address the poor households can help to sustain the system to function well.
Given that what people say today remained the same for tomorrow, an important policy
implication of the high amount of WTP we obtained in our study is that the existing tariff
Finally, the WTP bids could be used to predict the level of private connection demanded
by households. This information is vital for relating standards of services and design
criteria. This will undo what may come from misuse of resources by over design or
relevant authority could use approaches such as CVM to emanate information on the level
of demand especially in the design of the master plan. The possibility could help to get
out of the current supply dominated policy and set out design criteria for improved water
65
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73
Annex 1
Addis Ababa Water and Sewerage Authority 5 years Tariff for Water supply
and Sewerage Disposal Services
BLOCK First year Tariff Second year Tariff Third year Tariff Fourth year Tariff Fifth year Tariff
July 8,2002 to July July 8,2003 to July 7,2004 July 8,2004 to July 7,2005 July 8,2005 to July 7,2006 July 8,2006 to July
7,2003 7,2007
Tariff / M3 Tariff / M3 Tariff / M3 Tariff / M3 Tariff / M3
(In Birr) (In Birr) (In Birr) (In Birr) (In Birr)
Water Sewe Total Water Sewerage Total Water Sewerage Total Water Sewera Total Water Sewera Tota
rage ge ge l
Public 1.15 - 1.15 1.30 - 1.30 1.45 1.45 1.60 - 1.60 1.75 - 1.75
fountain
Domestic customers (Monthly water Consumption in Cubic meter)
3
0-7M 1.15 - 1.15 1.30 - 1.30 1.45 - 1.45 1.60 - 1.60 1.75 - 1.75
1.60 0.35 1.95 1.85 .40 2.25 2.10 0.45 2.55 2.35 .50 2.85 2.60 0.55 3.15
3
8-20M
2.30 0.35 2.65 2.60 .40 3.00 2.95 0.45 3.40 3.25 .50 3.75 3.25 0.55 3.80
>20M3
Non 2.30 0.35 2.65 2.60 .40 3.00 2.95 0.45 3.40 3.25 .50 3.75 3.25 0.55 3.80
Domestic
customers
74
Addis Ababa Water and Sewerage Authority Water Supply Situation Map (2005) report
75
Annex 3
WRD REYS IB REAG REIN REFS RESX REMS REPL RESF ASST REED
WRD 1 -0.15219 -0.02473 -0.15371 0.31582 0.17522 0.15043 0.23745 -0.044 0.182 0.3249 0.2169
REYS 1 -0.00366 -0.10242 0.14417 0.14754 0.14543 0.01827 -0.1558 0.15 12984 0.131
IB 1 -0.1028 -0.22006 -0.06839 -0.08735 0.06839 -0.0375 -0.13 -0.202 -0.1507
REAG 1 -0.13996 -0.0941 -0.36955 -0.1479 20011 -0.21 -0.183 -0.2579
REIN 1 0.42978 0.2974 0.30395 -0.1488 40371 0.8676 35289
REFS 1 0.23865 0.29056 -0.2326 0.423 0.2944 0.3918
RESX 1 0.15137 -0.2093 0.341 0.2322 0.2294
REMS 1 -0.3121 0.336 0.2565 0.3016
REPL 1 -0.28 -0.119 -0.0566
RESF 1 0.4774 0.3247
ASST 1 0.351
REED 1
76
Annex 4
λLR=2[Log Lu-LogLr]
Where log Lu is the value of unrestricted log-likelihood function and Lr is the value of restricted
λLR has a Χ2(n) distribution with n degrees of freedom where n is the number of independent
restriction. If the data do not support the null hypothesis (homoscedasticity assumption), then the
value of the test-statistic became large and null hypothesis is rejected λLR ≥Χ2 (n). The result of
λLR=2[Log Lu-LogLr]
=2[-853.3735 – (-934.4304)]
=2[81.0569]
=162.1138
The critical value of the chi-square at 11 degree of freedom is 19.68 at 95% level. Comparison of
the results (test statistics) with critical table value shows that all of the test statistics (computed
77
1.2 Test for Goodness of fit
Equivalent to R2 in a conventional OLS regression model the likelihood ratio index is used to
measure the goodness of fit for probit model. It is computed using the formula
LRI = 1-lnLr/lnLo
Where lnLr is the value of unrestricted log-likelihood function and lnLo is the value of
loglikehood function. Its value lies between 0 and 1. If it is one implies” perfect” fit. According
to Green (1993) values between zero and one have no natural interpretation but as LRI
a) Then the computed value of LRI for our probit model is:
=0.50
The computed ratio shows that the model seems adequate it explains 50%of the variation, which
=0.086
The LRI is 0.086 this means that the model explains about 8.6%of the variation in explained
variable.
78
Annex 5
QUESTIONNAIRE
Code_______________
Interviewer________________
Date of interview___________
Length of interview________Minutes
Supervisor_________
fulfillment of her M.Sc degree at Addis Ababa University. We are talking to selected sample
79
First, let me begin by saying that most of the questions have to do with your attitudes and
opinions, and there are no correct or wrong answers. This interview is completely confidential
and strictly for academic purposes. And your name will never be linked with your answers.
A1.what is the main source of water for the members of this household?
A3.how many households use the shared tap in the compound? ______Households
A4.how much water do you consume per day on the average? _____Baldi/insira (or a 20-liters
bucket)
A5.how much are you charged per month, on the average, for using this source?
_______Birr/month
80
A6.For what purpose (s) is the water from this source used? IDENTIFY AND RANK
1. . _____Drinking
2. ______Housekeeping
3. ______Washing clothes
4. _____Others (specify)_____
A7.In relation to its quality, amount and reliability, how do you rank the current status of water
A8. Are you satisfied with the arrangement of the existing water service?
1. ___Yes
2. ___No GO TO Q. A9
A9.What is (are) the cause(s) of your dissatisfaction? IDENTIFY AND RANK STARTING
1. ___Poor quality
2. ___Unreliability
5. ___Others (specify)______
81
A10.From which sources do you get water currently?
A11.From what major purpose(s)do you use water collected from public tap? DENTIFY AND
RANK
1. _____Drinking
2. _____House keeping
3. _____Washing clothes
4. _____Other (specify)_______
3. ____Its reliability
5. ____Other (specify)_____
A13.How much time do you spend to collect water from this source at a time? ___Minutes
A15.How many persons from your household go to fetch water at a time? _____Persons
82
A16.Who goes to the public tap?
1. ____Girls
2. ____Boys
3. ____Both
4. ____Others (specify)____
A19.How much money do you spend per month to collect water from this source? ______Birr
per month
1. ____Yes
2. ____No
1. . __Poor quality
2. ___Unreliability
5. ___Others (specify)_____
83
A22.From where do you get water?
1. ___Private vendors
3. ____Its reliability
5. ____Other (specify)
A24.How much time do you spend for collecting water at a time? _____Minutes
1. ___Girls
2. ___Boys
3. ___Both
4. ____Others (specify)_____
84
A30.how much do you spend per month on the average for buying water from this source?
1. ___Yes
2. ___No
1. ___Poor quality
2. ___Unreliability
5. ___Others (specify)_____
A33.To what extent do you perceive the current provision of piped water is an issue worth
discussion?
1. __Critical
2. __Very serious
3. __Series
4. __Less serious
5. __Not important
85
A34. Who do you think is responsible for water supply?
1. __Government
2. __Community
3. __Private
4. __Others (specify)_____
A35. So far, has the administrative body done enough in solving the problems in the provision of
A36.Do you think that leaving a better environment to future generation is some thing
1. _____Very important
2. _____Important
3. _____Less important
A37.Has any one of your household members suffered from disease caused by deficient water
1. _____Yes
2. _____No
86
SECTIONB: THE EXISTING SANITATION PRACTICE
a. Facility in house
b. No facility in house
b.2. Bush
b.3. Streets
ONLY FOR THE HOUSEHOLD USING PIT LATRINE AND FLUSH TOILET
B2.Do you share the pit latrine/flush toilet with other in the house?
1 .Yes
2. No
B3.If yes, how many households use the pit latrine/flush toilet?
B4.How satisfied are you with the pit latrine/ flush toilet you have?
1. Very satisfied
2. Satisfied
87
B5.How would you describe the relationship between the use of pit latrine and availability of
water?
1 Very related
2 Related
1 Yes
2 No
B4.How satisfied are you with the public latrine you use?
1. Very satisfied
2. Satisfied
B5.How would you describe the relationship between the use of public toilet and availability
of water?
1. Very related
2. Related
88
SECTIONC: WILLINGNESS TO PAY QUESTIONS
BACKGROUND INFORMATION
In the next section of the questionnaire, I would like to ask you how much it is worth to you in
The provision of improved water service among other things means, good quality of water which
is safe for health and an increased amount of water available for use .It also means a highly
reliable source at any time (7 days a week, 24 hours a day) moreover; the family need not have to
spend its time and effort in fetching water from distant sources
Now, let us assume that you have an option for a private connection to such an improved piped
water supply scheme. The improved system will provide you with as much water as you wish at
any time of the day, through out the year .Let us also assume that you will be charged a monthly
water fee based on the volume of water your household consume in a month (the tariff is
progressive), the more you consume the higher will be your monthly bill. The tariff per volume
will be the same for all consumers. You may not be required to pay initially the costs of
connection to the new scheme. In stead, it will be distributed over several years in your monthly
C1. Are you willing to pay any amount to the proposed scheme?
1 __ Yes GO TO Q.C2
2.__ NO
89
C2. If the price (tariff) your household pays for obtaining water from this system is ____cents per
baldi/insira (20 liters), would your household choose to connect or prefer using other sources of
water?
1____ Yes
2____ NO
C3. What is the maximum price (tariff) you are willing to pay per baldi/insira for the mentioned
scheme?...........................(cent)
ASK Q.C4 ONLY IFA ZERO BID WAS RECORDED FOR Q.C3
C4. Are you totally not willing to pay because you believe that:
3____I would not have enough money to pay for the new system
4____Others (specify)_______
ASK Q.C5 AND Q.C6 ONLY IF A ZERO BID WAS RECORDED IN Q.C3
2___ NO
C6.If yes, let us assume that a new scheme of improved water system using a public tap will be
provided to you. The public tap will be in your kebele as near as possible to your house. You will
be provided a good quality water as much as you wish at any time of the day through out the year
.You will be charged per volume charge based on the volume of water you consume at a time if
90
the price you pay for use of water from this source is 5 cents per baldi will you be willing to use
this source?
1____ Yes
2____ NO
C7. What is the maximum price (tariff) you are willing to pay per baldi/insira for the mentioned
scheme?...........................(cent)
C8. If respondent’s WTP for such improved water for domestic uses is zero, ask for reasons not
to pay like:
91
SECTION D: HOUSING CHARACTERISTICS AND HOUSEHOLD INCOME
3 for secondary
92
D1.How long have you been staying in this house? ___________________Years.
D2.Please list the following services in order of importance (list as first, second, etc.)
7) Telephone _____
D3. What is your opinion for improved water services and sanitation practice in the future?
___________________________________________________
93
SECTION E :INTERVIEWER’S EVALUATION
INTERVIEW
E1.in your judgment, how well did the respondent understand what s/he was asked the above
questions?
1. ____Understood completely
2. ____Understood somewhat
3. ____Understood a little
5. ____Others (specify)_____
E2. Which of the following describe best the degree of efforts the respondent made in the
valuation process?
2. ____Some consideration
94