What type of financial considerations do you need to make if you want to buy something expensive, like a car? How much money do you have? How much money can you borrow? The cost of borrowing money, like time and interest on a loan. What model? Number of seats? Fuel mileage? Do you buy used or new? What are the maintenance costs? What's the useful lifetime of the car? How long will you own it? And do you plan to sell it afterwards? These are the same types of considerations you need to apply in engineering economics when deciding between different treatment technologies. Following this module, you'll be able to understand the difference between capital and operating cost. Be able to calculate costs of 2 equivalent technologies with annualised capital and operating costs, and explain how to include resource recovery into engineering economics. Capital costs are fixed one time expenses incurred on the purchase of land, buildings, construction, equipment used. So for example, if you wanted to build a treatment plant, it would include the cost of the property, and the construction of the entire facility. But with sanitation, it also includes infrastructure to get waste water or faecal sludge to the treatment plant because there's no point in having a treatment plant without a way to get the waste water there. Operating costs are the expenses which are related to the operation of a business or equipment or treatment facility. With faecal sludge management, this could be collection in transport businesses, vacuum trucks, treatment facilities, or the operations budget of the utility. It is the cost of resources just to maintain their existence. Net operating costs, can be offset by revenues such as the sale of treatment end products. If we think about the wide range of faecal sludge treatment technologies that are available and covered in other modules, it is already apparent that they will all have very different costs of construction, capital costs. But also different operating costs based on the complexity of operation. In addition, they're going to have very different lifetimes. For example, comparing infrastructure costs, for how many years will a vacuum truck work? Compare that to say, what is the operational lifetime of a sewer? <i>For example, the Cloaca Maxima drainage system in Rome <i>is still operating after 2500 years. It's like comparing apples and oranges. When costs and benefits differ over time, between different options, we need to apply equivalent equations for the comparison of the relative economic value. To achieve this, we can apply concepts like annualised costs. If we know the capital costs, operating costs, service lifetime, and real interest rate, we can use this equation to compare the relative equivalent costs of 2 different technologies. As an example, I will walk you through the case study presented in this paper. Comparing existing side by side sewer and faecal sludge management systems in Dakar, Senegal. First, let's compare both of the process flows. For the sewer based system, there are sewer lines and pumping stations, followed by a waste water treatment plant. The process flow has screening and grit removal, <i>primary settling, <i>activated sludge, <i>clarifiers, with the effluent going to tertiary treatment <i>with some water reclamation at a neighbouring golf course, <i>and the remainder discharged to ocean. <i>The solids, go to anaerobic digestion <i>with some of the remaining solids sold to public works <i>for use in green ways. <i>The faecal sludge management chain <i>has septic tanks, with vacuum trucks for collection and transport, <i>with settling tanks, followed by drying beds. <i>The effluent from both the settling and drying beds <i>goes to the activated sludge treatment <i>in the waste water treatment chain. <i>And the solids from the drying beds are also used in green ways. <i>These are the stakeholders and financial flows <i>that we considered in the evaluation. <i>With the sewer based system, we start at the household level user <i>who pays a sanitation tax to ONAS. <i>ONAS is the national sanitation utility. <i>The sanitation tax, is included as a drinking water tariff <i>to fund the sewer based waste water treatment infrastructure. <i>The end user of the reclaimed water <i>and the treated sludge, <i>also pays a fee to ONAS for those products. <i>With the faecal sludge management chain, <i>again starting with the household level user, <i>they have to pay for construction of their septic tank. <i>They still pay the sanitation tax <i>because it's incorporated in the drinking water tariff <i>even though they are not using the sewer. <i>They also then pay emptying services <i>from a collection and transport company. <i>The collection and transport company then pays an unloading fee <i>to ONAS, when they discharge the faecal sludge <i>at the treatment plant. Then again, <i>the end users are paying ONAS for the resource recovery product. All of the calculations, data and assumptions we used are included in the supplemental information of the paper from the spreadsheet. For all calculations, the real interest rate of 5% is assumed for the lending interest rate adjusted for inflation based on values used by the World Bank. To estimate annualised capital cost for the sewer based system, we first had to assume lifetimes. <i>For the household connections, we selected 20 years. For the sewer, we used the relatively conservative estimate based on PVC construction of 30 years. Also 30 years for the pumping station and treatment plant. Then we needed to determine the total capital cost. This information was obtained from ONAS directly from their operating information. And we had to derive a number for the number of household sewer connections. This was based on the original number, the number of people per household, the growth rate to determine a per capita value. We then use annualised cost equation to determine annualised capital value. In addition, we have itemisation of annual operating costs which are also provided in a supplemental information. We then did similar calculations for the faecal sludge management system. <i>Well first, we had to assume lifetimes <i>here, 50 years for a septic tank, 15 years for an emptying truck, <i>and 30 years for the treatment plant. <i>Then we have total capital cost <i>for septic tanks, vacuum trucks, and for the treatment plant. <i>Again, then we have the number of per capita <i>people that are served by the system. <i>We then annualised these capital values <i>and itemised annual operating costs, <i>also presented in the supplemental information. This table from the paper summarises the results. <i>What we see is with the capital costs, <i>the sewer based system, <i>compared to the faecal sludge management system <i>is ten times more expensive. <i>And with operating costs, <i>evaluated annually, <i>1.5 times more expensive. <i>So the overall sewer based system <i>for both capital and annual operating costs <i>was 5 times more expensive. What else we see from the results is that with the sewer based system, the costs are mainly borne by ONAS. Whereas in the faecal service management chain the costs are much more spread out among the stakeholders. It is also important to note that this is not equitable as poor households in the faecal sludge management system <i>are having to pay twice for sanitation. <i>Once with the sewer tariff, included in their drinking water, <i>and 2nd, when they are paying for faecal sludge management services. <i>This is where it is also interesting <i>to think about how resource recovery options <i>could offset costs. <i>In this model, resource recovery <i>is generating almost no income. <i>What if we could find an option <i>to get 10 dollars for a truck load of 5 cubic metres of faecal sludge? <i>And in Dakar, <i>they have 2.2 million cubic metres of faecal sludge produced per year. <i>That would work out as an annualised cost <i>of 8.8 per capita net operating gain <i>because it is something that could be brought in each year <i>to offset operating costs. <i>This could have a significant effect on the financial balance <i>of the faecal sludge management system, <i>making it close to a net zero total cost. <i>Could this be used to reduce the financial burden <i>to poor households? <i>This is where we organising financial flows <i>and thinking about business models comes into play. When applying this type of analyses, you also need to consider other complexities. Like inflation, taxes, depreciation, economy of scale, and salvage value. And also, conduct a sensitivity analysis to evaluate the effect of any assumptions you make. In addition, this example was based on the assumption that both systems are providing the same level of public and environmental health protection. This module provided an introduction of one type of equivalent equation method that can be used to compare costs. There are also many others, like net present value. These type of calculations are also further complicated with faecal sludge management because many technologies that we want to compare have not yet been implemented, so we don't have experience on which to base estimated capital and operating cost, and so we need to make a series of assumptions. These estimates will continue to improve with increased implementations. So, like making a decision about which car to buy, it's not purely about the cost. You also have to include economic analysis with other variables in the design approach. Like environmental and social impacts, local laws and regulations, and regional economic development. In conclusion, in this module you learned the difference between capital and operating costs, how to calculate the equivalent costs of 2 different types of systems and consider how to include resource recovery into the analyses. Thanks for joining, see you next time.
