Estimating Demand for Utilities in Ghana: An

Empirical Analysis

A thesis presented in partial fulfilment of the requirements

for the degree of Doctor of Philosophy.

School of Economics
University of East Anglia
United Kingdom.

ANTHONY AMOAH (10048076)

JULY, 2016

This copy of the thesis has been supplied on condition that anyone who consults
it is understood to recognise that its copyright rests with the author and that use
of any information derived there from must be in accordance with current UK
Copyright Law. In addition, any quotation or extract must include full attribution.
 ABSTRACT

Using a variety of techniques, this doctoral thesis seeks to estimate the demand for
key utilities such as electricity and residential water supply in Ghana.

This thesis comprises of four chapters that estimate demand for electricity and
residential water supply in Ghana.

Chapter one is a joint paper published in the Renewable and Sustainable Energy
Reviews journal with Justice Tei Mensah and George Marbuah as co-authors.
Although we all worked together from the introduction to the end of the paper; my
principal role was writing literature review, sections of the data and discussion. The
key idea was to disaggregate the energy sector and individually estimate the demand
for each type of energy in Ghana.

Chapter two estimates household demand for electricity in Ghana. We use the
Contingent Valuation Method (CVM) to estimate the demand for a 24-hour
electricity service among households in Ghana. In response to the current CVM
debate, this study investigates critical issues such as hypothetical bias, WTA&WTP
convergence/divergence, and scope sensitivity that can easily invalidate our
estimates.

Chapter three seeks to estimate demand for piped-water services in urban Ghana.
The paper applies three different valuation methods to estimate demand, thus
providing validity checks for our estimates using competing methods.

Chapter four is a single authored paper published in Water Policy Journal. This
chapter seeks to estimate demand for domestic water from an innovative borehole
system in rural Ghana using stated and revealed preference approaches. First, the
study investigates demand for domestic water supply from an innovative borehole
system using the CVM. We further estimate demand for current service of domestic
water supply in residences using the Hedonic Pricing Method (HPM). This is
achieved through a survey from rural districts in the Greater Accra Region, Ghana.
Interval regression and ordinary least squares (OLS) are applied to investigate the
determinants of willingness-to-pay (WTP).

The main findings of this thesis may be summarised as follows:

1. Our results show that energy prices, income, urbanization and economic
structure are significant demand drivers of the different energy types in
Ghana with varying estimated elasticities. We find that there is a high degree

i
 of responsiveness of electricity demand to income changes by mainly the
industrial sector relative to households.
2. Households are willing to pay between 7% and 15% of their income to have
a 24hour supply of electricity in the GAR of Ghana. However, our cost &
benefit analysis show a net cost of GHS567.52million ($146.97million) per
annum.
3. The average amount that a household is willing to pay per month for a
reliable piped-water services is GHS 44.73 or US$14.27 (HPM), GHS 22.72
or US$7.25 (TCM) and GHS 47.80 or US$15.25 (CVM) respectively. These
amounts are equivalent to 3%-8% of households’ income. We find evidence
of a positive net benefit of GHS 486.78million (US$155,49million) per
annum.
4. Finally, regarding water supplied from the innovative borehole system and
current improved water services, we find evidence that monthly WTP values
are GHS35.90 (US$11.45) and GHS17.59 (US$5.61) in the CVM and HPM,
respectively. These values represent approximately 3%-6% of household
monthly income which is consistent with earlier studies.

By way of conclusion, the author follows these empirical findings and prescribe
several policy recommendations to inform policy direction in the utility sector(s) in
Ghana and other developing countries with similar characteristics.

ii
 DEDICATION
I dedicate this work to the Almighty God who has given me the inspiration and
strength irrespective of the difficult times I have been through.

iii
 ACKNOWLEDGEMENTS
Through this tough journey of life, I have come to understand that it takes a little bit
of everybody around you to get to your final destination. Several people have
contributed immensely to this height and I want to cease this opportunity to
appreciate them.
First
I sincerely want to express my profound gratitude to the School of Economics,
University of East Anglia for the professional environment and well-suited logistics
they made available for me to have the soundness of mind to concentrate and
undertake this PhD programme. I also want to thank my employers, Central
University, Ghana for granting me study leave to pursue further studies.

Second
A special acknowledgement goes to my supervisors Professor Peter G. Moffatt and
Dr. Corrado Di Maria. Your guidance and excellent contribution to my work
deserves commendation. Some tasks were so challenging yet, you gradually guided
me through to the end. To me, you were like a father, a brother and sometimes a
colleague. I couldn’t have asked for more!

Also, to all Faculty members especially Prof. Enrique Fatas, Prof. Robert Sugden,
Dr. Silvia Ferrini, Dr. Georgios Papadopoulos, Dr. Emiliya Lazarova, Dr. Katerina
Karadimitropoulou, Dr. Farasat Bokhari, Dr. Joel Clovis etc. who have contributed
to my work in one way or another during my upgrade, internal seminars and personal
consultations. I say a big thank you to you all.

For the excellent administrative support and opportunities I got from Gina Neff,
Shiona Brereton, David Robson, Thomas Cushan and Jessica Pointer, I say another
big thanks to you all.

Again, I appreciate my family at Central University especially Prof. Anthony Panin,

Prof. Adusei Jumah, Paragon Pomeyie, Davis Adu Larbi, Daniel Offei, Dr. Deodat
Adenutsi, Rev. Godson Ahiabor, Rev. Eddie Carboo, Justice Ampiah, Edmond
Kwablah, Juliana Adama and Matilda Wilson.

Third

A very special thanks go to my wife and kids, Sandra Otenewaa Amoah, Anthony
Addo-Amoah Jnr. and Richel Adubea Amoah. You guys have been very supportive
through these years. You sacrificed all for this height to be attained. I say, I owe
you one!
iv
The praying woman in my life Mrs Mercy Addo and the father of wisdom Mr.
Sampson Manukure Addo. Dad and Mum you have been a source of my inspiration
and I’m proud to be your child. To my in-laws, Mr & Mrs Ampofo, I appreciate your
love and do not take it for granted. To my brothers and sisters: Herbert Amoah,
Richard Amoah, Florence Manukure, Joshua Duah, Pastor & Mrs Alamu (UK),
Pastor & Mrs Otoo (UK), Mr & Mrs Ntim (UK) , Mr & Mrs Kinful (UK), Mama
Grace and family, and all the other wonderful CCBC Becton branch members. Carol
Gurajena (UK) thanks for sacrificing your time to read through my work. I count it
as a privilege to be associated with you all.

Fourth

These friends of mine have been there for me through thick and thin. They motivated
me, challenged me and urged me on even when I felt like giving up. To George Adu,
Justice Tei Mensah, George Marbuah, Franklin Amuakwa-Mensah, Edmond Hagan,
Joel Kwabena Frimpong and Jerry Seddor, I say Ayekoo! To my right hand man,
Rexford Kwaku Awuku Asiama, you have been very supportive any time I needed
you. You have been a brother and a colleague. I salute you for your time and
sacrifices through the data collection up until this final stage. I owe you one!

Fifth

A healthy competition amongst PhD students is always a delight. I must appreciate

all past and present colleagues especially Jack Whybrow, Dr. Mike Brock, Dr. Zoe
Bett, Dr. Bing Radoc, Natalia Borzino, Yusuf Kucuk, Carsten Crede, Cameron
Belton, Paul Gorny, Richard Havell, Issa Hijazeen, Haifa Al Hamdani, Anwesha
Mukherjee, Emike Nasamu, Ioannis Pappous, Lina Restrpo Plaza, Balazs Stadler,
Antonios Staras, Mengjie Wang, Lian Xue, Ritchie Woodard, Han Lin etc.

Lastly
For all module convenors who gave me the opportunity to teach, I owe you an
appreciation. To the PGR office: Gilly and Fiona, thanks for the support anytime it
was needed.

v
 TABLE OF CONTENTS

ABSTRACT ...................................................................................................I

DEDICATION ........................................................................................... III

TABLE OF CONTENTS ........................................................................... VI

LIST OF FIGURES ................................................................................VIII

LIST OF TABLES ..................................................................................... IX

ABBREVIATIONS ..................................................................................... X

GENERAL INTRODUCTION ..............................................................XIII

CHAPTER ONE .......................................................................................... 1

ENERGY DEMAND IN GHANA: A DISAGGREGATED ANALYSIS 1

1. INTRODUCTION 1
2. ENERGY DEMAND TRENDS IN GHANA 5
3. EMPIRICAL LITERATURE 7
4. MODEL SPECIFICATION, DATA AND METHODOLOGY 10
5. EMPIRICAL RESULTS 14
6. CONCLUSION AND IMPLICATIONS FOR POLICY 22
APPENDIX A 25

CHAPTER TWO ....................................................................................... 26

DEMAND FOR ELECTRICITY IN GHANA: VALIDITY TESTS FOR

CONTINGENT VALUATION RESPONSES......................................... 26

1. INTRODUCTION 26
3. METHODOLOGY AND EMPIRICAL LITERATURE 34
4. SURVEY DESIGN 38
5. STUDY RESULTS 41
6. CONCLUSION AND POLICY RECOMMENDATION 53
APPENDIX B 55
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CHAPTER THREE ................................................................................... 61

ESTIMATING DEMAND FOR RELIABLE PIPED-WATER

SERVICES IN URBAN GHANA: AN APPLICATION OF
COMPETING VALUATION APPROACHES. ...................................... 61

1. INTRODUCTION 61
2. REVIEW OF PREVIOUS STUDIES 63
3. OVERVIEW AND METHODOLOGICAL FRAMEWORK OF METHODS 66
4. DATA 73
5. ECONOMETRIC MODELLING OF VALUATION METHODS 76
6. ESTIMATION AND DISCUSSION OF SURVEY RESULTS 82
7. CONCLUSION AND POLICY RELEVANCE 99
APPENDIX C 100

CHAPTER FOUR .................................................................................... 117

DEMAND FOR DOMESTIC WATER FROM AN INNOVATIVE

BOREHOLE SYSTEM IN RURAL GHANA: STATED AND
REVEALED PREFERENCE APPROACHES ..................................... 117

1. INTRODUCTION 117
2. EMPIRICAL LITERATURE 120
3. SURVEY DESIGN 122
4. RESULTS AND DISCUSSION 132
5. POLICY IMPLICATIONS AND CONCLUSION 143
APPENDIX D 145

GENERAL CONCLUSION .................................................................... 155

BIBLIOGRAPHY .................................................................................... 159

vii
 LIST OF FIGURES

Fig. 1.1: Energy Demand Shares by Type ________________________________ 6

Fig. 1.2: Consumption of Oil Product Type and Sectoral Demand _____________ 7
Fig. 2.1: Structure of Ghana’s Energy Sector ____________________________ 29
Fig. 2.2: Distribution of WTA-WTP Difference __________________________ 49
Fig. 3.1: Pictorial Description of Market 1 _____________________________ 109
Fig. 3.2: Pictorial Description of Market 2 _____________________________ 110
Fig. 3.3: Map of Ghana in Africa _____________________________________ 111
Fig. 3.4: Map of Greater Accra Region ________________________________ 111
Fig. 3.5: Team Structure for Field Work _______________________________ 116
Fig. 4.1: Pictorial Description of Innovative/Modernized Borehole System ____ 126
Fig. 4.2: Double Bound Dichotomous Choice Format ____________________ 129

viii
 LIST OF TABLES
Table 1.1: Disaggregated Demand for Energy _____________________________ 9
Table 1.2: Unit Root Test: ADF and DF-GLS ____________________________ 14
Table 1.3: ARDL Bounds Cointegration Test ____________________________ 15
Table 1.4: Long Run Elasticities ______________________________________ 16
Table 1.5: Short Run Elasticities from Partial Adjustment Model ____________ 21
Table 2.1: Electricity Generation Sources and Population Trend in Ghana. _____ 30
Table 2.2: Test for Endogeneity_______________________________________ 42
Table 2.3: WTP & WTA Regression Results ____________________________ 43
Table 2.4: Mean WTP&WTA Statistics ________________________________ 46
Table 2.5: Paired Comparison T-Test of WTA & WTP ____________________ 47
Table 2.6: Wilcoxon Signed-Rank Test _________________________________ 48
Table 2.7: Paired-Sample Sign Test ____________________________________ 48
Table 2.8: Cost & Benefit Analysis of Electricity in Ghana _________________ 52
Table 2.9: Descriptive Statistics for both WTP &WTA ____________________ 55
Table 2.10: Cost of Electricity in Ghana ________________________________ 56
Table 2.11: Summary of Literature ____________________________________ 57
Table 3.1: Hedonic Regression Results _________________________________ 82
Table 3.2: Predicted Increase in the Value of a House with Access to Water ____ 85
Table 3.3: Travel Cost Regression Results ______________________________ 86
Table 3.4: Test of Over-dispersion ____________________________________ 87
Table 3.5: WTP Estimate and Share of Household’s Income ________________ 90
Table 3.6: Regression Results-CVM ___________________________________ 92
Table 3.7: Estimated Household WTP Measures _________________________ 95
Table 3.8: Comparison of Valuation Methods’ Results. ____________________ 96
Table 3.9: Cost & Benefit Analysis ____________________________________ 97
Table 3.10: Population by District, Gender and Type of locality in the GAR ___ 112
Table 3.11: Total Population, No. of Households and Sample size per District _ 113
Table 3.12: Descriptive Statistics for HPM _____________________________ 114
Table 3.13: Descriptive Statistics of TCM and CVM _____________________ 114
Table 4.1: Descriptive Statistics on Variables Included in the CVM _________ 133
Table 4.2: CVM Results ___________________________________________ 134
Table 4.3: Predicted WTP Measures for Reliable Water from an IBS† ________ 136
Table 4.4: Descriptive Statistics on Variables Included in the HPM __________ 138
Table 4.5: Hedonic Regression Results ________________________________ 139
Table 4.6: Predicted Increase in the Value of a House with Access to Water __ 141
Table 4.7: A Summary of CVM and HPM Estimates._____________________ 142

ix
 ABBREVIATIONS

ADF Augmented Dickey Fuller

AIC Akaike Information Criterion

AMCOW African Ministers Conference on Water

ARDL Auto-Regressive Distributed Lag

BDM Becker-DeGroot-Marschak

BIC Bayesian Information Criterion

CO2 Carbon dioxide

CVM Contingent Valuation Method

CWSA Community Water and Sanitation Agency

DBDC Double Bound Dichotomous Choice

DF-GLS Dickey Fuller-Generalized least square

ECG Electricity Company of Ghana

ECOWAS Economic Community of West African States

FAO Food and Agriculture Organization

GAR Greater Accra Region

GDM Gravity Driven Membrane

GDP Gross Domestic Product

GHp Ghana Pesewas

GHS Ghana Cedis (¢)

GLSS Ghana Living Standards Survey

GoG Government of Ghana

GPRS Ghana Poverty Reduction Strategy

GSGDA Ghana Shared Growth and Development Agenda

GSS Ghana Statistical Service

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GWCL Ghana Water Company Limited

HPM Hedonic Price Method

IBS Innovative Borehole System

IEA International Energy Agency

ISSER Institute of Statistical, Social and Economic Research

ITCM Individual Travel Cost Method

LPG Liquefied Petroleum Gas

MDG Millennium Development Goals

MIC Middle Income Country

MICS Multiple Indicator Cluster Survey

ML Maximum Likelihood

NED Northern Electricity Department

NOAA National Oceanic and Atmospheric Administration

NSRP National Solar Rooftop Programme

NWP National Water Policy

OLS Ordinary Least Squares

PAM Partial Adjustment Model

RCS Randomized Card Sorting

RFO Residual Fuel Oil

RP Revealed Preference

RQS Randomized Questionnaire Sorting

SDG Sustainable Development Goals

SP Stated Preference

SSA Sub-Saharan Africa

TC Travel Cost Method

TIOLI Take-it-or-leave-it
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TOR Tema Oil Refinery

UNICEF The United Nations Children's Emergency Fund

UPPF Unified Petroleum Price Fund

USA United States of America

VIF Variance Inflation Factor

VRA Volta River Authority

WAGP West African Gas Pipeline

WHO World Health Organization

WTA Willingness to Accept

WTP Willingness To Pay

ZTCM Zonal Travel Cost Method

xii
 GENERAL INTRODUCTION

Under the auspices of the United Nations, countries came together in September
2015 and sanctioned several development goals with the primary aim of ending
poverty, protecting the planet and ensuring prosperity for all over the next fifteen
years. These goals form the new Sustainable Development Goals (SDGs), a
continuum that consolidates the Millennium Development Goals (MDGs), which are
all targeted towards improving human welfare.

This thesis contributes to our understanding of the challenges connected with the
achievement of SDG 6: Ensure access to water and sanitation for all, and 7: Ensure
access to affordable, reliable, sustainable and modern energy for all, and its relevance
to human welfare particularly in developing countries.

The role of key utilities such as electricity and water supply is one of the key drivers
that can account for differences in human welfare across time and space. In as much
as the absence of utilities affect firms’ productivity, Barnes et al. (2011) also argues
that the absence of such utilities have negative implications on general welfare
conditions. By implication, the absence of such key utilities have serious impacts on
the overall development of an economy. It is against this background that developed
countries ensure that such resources are given some degree of priority to serve as the
base to support both firms and households wellbeing.

Ghana is naturally endowed with sizeable amount of resources that can be harnessed
to propel its growth and development agenda. However, not much has been achieved
with these endowments vis a vis electricity and water supply. This is because dating
back to independence until today, such utilities have attracted large subsidies from
the government and donor support. Unfortunately, donor funding mostly delay and
do not come on schedule. Also, successive governments’ inability to honour their
financial obligations towards these sectors have left these utility companies with
huge debt. Based on these challenges, four key research questions are outlined by
this study: what are the key determinants of energy demand particularly electricity
in Ghana? If utilities are adequately and reliably supplied, will households in Ghana
be willing to pay for reliable services without government support? Do these
estimates satisfy internal and external validity requirements? Does the cost benefit
analysis from our estimates support private sector involvement in both electricity
and water sectors?

To the best of our knowledge, there is a paucity of empirical based evidence on such
relevant estimates to influence policy direction. The main purpose of this thesis is to

xiii
fill this gap. This is achieved by providing a valid empirical evidence that will
engender policies in harnessing endowments that can propel growth and
development in Ghana and other developing countries with similar characteristics.

The main contributions of this thesis are as follows: first, it is the first study to
consider a comprehensive set of disaggregated energy demand sources in a single
study to shed light on the key drivers of these energy demand components, especially
electricity, at the macro level in a developing country. Second, at the micro level, it
provides the first estimates of WTP for electricity within the context of addressing
issues such as hypothetical bias, WTP & WTA, and scope sensitivity in a developing
country. Third, it provides the first developing country’s study to compare three
economic valuation methods in a water related study. Lastly, it provides the first
study to design and further estimate WTP for water from an innovative borehole
system for rural communities in a developing country. In short, this study presents
the first cost and benefit analysis study for key utilities in Ghana in a single study to
inform policy direction towards addressing a critical problem currently bedevilling
the country.

This thesis has four chapters with two main themes. The first theme looks at demand
for energy in Ghana. The second theme looks at water supply with an emphasis on
urban and rural residential water supply. In chapter one, we disaggregate and model
types of energy in Ghana, and estimate their elasticities. This chapter is a macro
study which makes use of times series data and applies the Autoregressive
Distributed Lags (ARDL) model for the estimation. The study finds that energy
prices, income, urbanization and economic structure are significant demand drivers
for the different energy types in Ghana with varying estimated elasticities. Specific
to electricity, the study finds that income, urbanization and structure of the economy
are significant factors behind electricity consumption in Ghana, with all drivers
having positive elasticities. Overall, urbanization is shown to have the highest impact
followed by income and economic structure. The results are found to be consistent
with existing studies.

Following on the estimates from our macro study, we further investigated demand
for electricity using a household survey in Ghana. We applied the standard
Contingent Valuation Method (CVM) to estimate demand for a 24-hour electricity
service. This was conducted in line with topical validity issues such as hypothetical
bias, WTP & WTA, and scope sensitivity that can easily invalidate WTP estimates.
Our results show that households are willing to pay between 7% and 15% of their
income to have a 24hour supply of electricity in the GAR of Ghana. However, our
cost & benefit analysis shows a net cost of GHS567.52million ($146.97million) per

xiv
annum. This suggests that a complete removal of subsidies on electricity tariff in
Ghana will hurt household’s electricity consumption.

The second part of the thesis addresses household water demand. This section has
two chapters (i.e. chapters three and four). The third chapter applies three valuation
methods to estimate demand for reliable piped-water services in urban-Ghana. Our
goal is to estimate the economic value of reliable piped-water supply, and provide
validity checks for our estimates. We survey urban households and find that the
average amount that households are willing to pay per month is GHS 44.73 or
US$14.27 (Hedonic Price Method), GHS 22.72 or US$7.25 (Travel Cost Method)
and GHS 47.80 or US$15.25 (CVM) respectively. These amounts are equivalent to
3%-8% of households’ income. This study provides evidence of the economic
viability of private sector involvement in the water sector in Ghana. Our estimates
will inform both managers and policy makers in their decision-making on reliable
piped-water supply.

The last chapter for the thesis investigates demand for domestic water supply from
an innovative borehole system using the CVM. We further estimate demand for
current service of domestic water supply in residences using the Hedonic Pricing
Method (HPM). This is achieved through a survey from rural districts of the GAR,
Ghana. Interval regression and ordinary least squares are applied to investigate the
determinants of WTP. We find that monthly WTP are GHS35.90 (US$11.45) and
GHS17.59 (US$5.61) in the CVM and HPM, respectively. These values constitute
approximately 3%-6% of household monthly income which is consistent with
existing studies. For policy purposes, the study recommends the adoption of this cost
effective technology to help ease the water burden on society.

All in all, the study has shown a positive demand for these key utilities (electricity
and water). This is evidenced by their WTP for improvement in these services
because of its welfare benefits. This methodology satisfies relevant internal and
external validity checks needed to validate our estimates. We argue that a regulated
private provision of water supply could be better for the water sector but definitely
not an immediate option for the electricity sector if consumers are not going to enjoy
their subsidies. For policy purposes, we argue that towards achieving the SDGs
government should ensure that the necessary incentives to attract regulated private
sector for the water sector is put in place within a due diligence framework. Also, in
the absence of the private sector in electricity supply in Ghana, government should
provide incentives for private households to use renewable energy. These
recommendations are crucial as electricity and water are key drivers to Ghana’s
growth and development agenda.

xv
 CHAPTER ONE

ENERGY DEMAND IN GHANA: A DISAGGREGATED

ANALYSIS

1. Introduction
The role of energy resources in meeting the needs of households, industries,
transportation and agricultural sectors among others in any economy cannot be
overemphasized. Different types of energy sources are required to meet demand for
lighting, cooking, electricity generation among many other uses. Global energy
demand is predicted to rise by one-third by 2040, driven higher by growing
populations and expanding economies of India, China, Africa, the Middle East and
Southeast Asia (IEA, 2015). In Africa, natural gas consumption has seen substantial
growth on the back of increased economic activity, new infrastructural investment
and domestic price subsidies (Ackah, 2014; Eggoh et al., 2011).

Demand for energy in Ghana similar to most developing countries exceeds the
available supply. A key challenge to Ghana’s energy sector is inadequate access to
modern and clean energy services such as liquefied petroleum gas (LPG) and
hydro/solar-based electricity. Access to modern energy services in Ghana has been
defined as “…communities /households connected to the grid (i.e. electricity access)
and the number of households using LPG either as their main fuel for cooking or in
combination with other cooking fuels (i.e. access to clean cooking fuels)” (Serwaa
Mensah et al. 2014). It is estimated that almost 50% of Ghana’s population do not
have access to grid-electricity and that about 90% of those who do not have access
to LPG for cooking rely on biomass (i.e. firewood and charcoal) as alternatives
(Kemausuor et al. 2011). Lack of access to these modern and cleaner energy sources
has been attributed to factors including but not limited to income and supply-side
constraints (Mensah and Adu, 2013). This implies that most households depend
heavily on traditional energy sources such as biomass (mainly charcoal and wood
fuel) to meet their energy demand. The impact of continual exploitation of forest
lands and burning of wood fuel by households and industries on environmental
degradation (i.e. deforestation and climate change) continues to engage decision-
makers at the local, national, regional and international levels. Carbon dioxide (CO2)
emissions from primary fuel consumption by the residential sector accounted for
about 18% of global CO2 emissions in 2008 (OECD and IEA, 2010). It is estimated
that about 80% of Ghanaian households depend heavily on wood fuels for cooking

1
and heating water (Energy Commission, 2003). The overreliance on biomass as a
key energy source by Ghanaian households is among the main drivers of the rapid
depletion of Ghana’s forest cover which stands at about 2% loss per annum.
Incessant depletion of the forest to meet primary energy consumption is likely to
derail efforts at ensuring environmental sustainability and inhibit Ghana’s attainment
of Millennium Development (MDG) Goal 7 (Mensah and Adu, 2013). According to
a recent Ghana Multiple Indicator Cluster Survey (MICS) report, more than 3 billion
people worldwide rely on solid fuels (i.e. biomass and coal) for their basic energy
needs (including cooking and heating). Cooking and heating with solid fuels often
generates high levels of indoor smoke, a complex mix of health-damaging pollutants.
The main problem with the use of solid fuels is products of incomplete combustion,
including carbon monoxide, sulphur dioxide, and other toxic elements. This
increases the risk of acute respiratory illness, pneumonia, chronic obstructive lung
disease, cancer, and possibly tuberculosis, low birth weight, cataracts, and asthma
among others (Ghana Statistical Service, 2011).

It is in recognition of the debilitating impact of continued use of primary energy

sources such as biomass on health and climate change that the United Nations has
been advocating for intensification of programs/policy initiatives that encourages a
switch from traditional energy sources to an enhanced access and utilization of
modern and cleaner ones like LPG (Mensah and Adu, 2013). The Government of
Ghana therefore launched a National LPG Programme in 1990 to promote LPG use
as an alternate energy source to charcoal and firewood. Urban households, public
institutions and the informal commercial sector requiring mass catering facilities
were targeted through extensive promotional and educational campaigns (UNDP
Ghana, 2004). The results of these promotional efforts bore some significant fruit
with LPG consumption doubling in 1992 and by 2004, total LPG consumption was
over 50,000 tonnes per annum which is about ten times more than pre-promotional
consumption levels (UNDP Ghana, 2004). Promotion of LPG use among rural
households was also initiated through the Unified Petroleum Price Fund (UPPF).
The idea of this policy was to compensate oil marketing companies that transport
petroleum products like LPG to rural and distant locations outside a radius of 200km
from the Tema Oil Refinery 1 to cover transportation cost (UNDP Ghana, 2004).
Despite these efforts, LPG consumption levels remained low in even urban areas
with high demand for wood fuel. The key mitigating factor identified at the initial
stages of the LPG campaign was the relatively high upfront cost of the LPG cylinder
compared to that of wood fuel. Financial support was given by the UNDP under its

1 Tema Oil Refinery (TOR) is the only oil refinery in Ghana.

2
Rural LPG Challenge in 2004 to support government relaunch of the LPG campaign
in rural areas and especially in the Northern regions of Ghana which were lagging
other regions in terms of access to LPG services (Kemausuor et al., 2011). Another
complementary effort was the completion of the West African Gas Pipeline (WAGP)
project in 2006 under which natural gas is transported from Nigeria to other West
African states2 through to Ghana. This was to provide reliable and adequate supply
of gas for electricity generation in Ghana (Mensah and Adu, 2013). Access to
electricity in Ghana since the establishment of the Volta River Authority (VRA3) has
seen significant improvement over the years. Consumption grew by 9.4% between
1990 and 2001. Access rate of electricity in Ghana was estimated to be about 54%
in 2007 (Kemausuor et al., 2011). However, frequent power crises since 2006 has
almost rolled back most of the gains made in terms of supply for domestic and
industrial use. The high dependence of Ghana on natural gas supply from Nigeria
through the WAGP which is erratic, coupled with inadequate gas storage
infrastructure (due to low investment) and a crippling TOR is among some of the
reasons for the rampant LPG shortages and frequent power outages in Ghana. The
recent discovery and exploitation of oil deposits in Ghana is expected to reduce
importation of crude oil and gas from Nigeria following completion of a gas
infrastructure project (Ghana Gas Company) which is expected to improve access to
various sources of modern energy, especially LPG.

The literature on energy demand has grown rapidly over the years. While some
studies looked at aggregate energy demand drivers (see e.g. Bentzen and Engsted
1993 and Gately and Huntington 2001), others estimate disaggregated or sectoral
determinants of demand for energy (see e.g. Gately and Streifel, 1997; Akinboade et
al., 2008; Pedregal et al., 2009; Sa’ad, 2009; Boshoff, 2010). The results from most
of these studies are often mixed and conflicting. Recent evidence on energy demand
in Ghana includes Adom (2011) who modelled causality between electricity
consumption and economic growth. The evidence was that it is economic growth
that causes electricity demand and not the other way round. Adom et al. (2012) also
find that the main drivers of electricity demand in Ghana are real income per capita,
industrial efficiency, degree of urbanization and structural changes in the economy.
Policy regime changes have also been modelled in the demand for electricity in
Ghana (Adom and Bekoe, 2013). In a more recent study, Ackah (2014) modelled
aggregate, residential and industrial demand for natural gas in Ghana. The study
revealed that demand for natural gas is significantly driven by income, population,

2 WAGP is a 678km offshore pipeline carrying natural gas from Nigeria through Benin to Togo and
Ghana.
3 The VRA is a state agency responsible for generating Ghana’s electricity from installed hydro power

and thermal plants.

3
real price of natural gas, and industrial share of output. Ackah’s study differs from
Mensah (2014) who estimated factors influencing demand for only aggregate LPG
in Ghana. Similar to Ackah (2014), Mensah (2014) identified income and price as
main demand drivers of LPG in addition to rapid urbanization.

The goal of this study therefore is to provide a comprehensive analysis of the drivers
of disaggregated energy demand in Ghana to offer guidance on energy policy
prescriptions towards achieving the overarching aim of becoming an “energy
sufficient economy” to propel the engines of economic growth and development. To
realise this goal, we consider a comprehensive set of disaggregated energy demand
sources – gasoline, diesel, LPG, kerosene, solid biomass, residual fuel oil and
electricity – in a single study to shed light on the key drivers of these energy demand
components. We use the autoregressive distributed lag model approach of Pesaran
et al., (2001) to estimate short and long run disaggregated energy demand
determinants. This is important for purposes of policy planning and implementation
since the estimated coefficients could inform energy demand management as well as
the supply side. Critical policy and sensitive issues such as petroleum price
subsidization, urban planning as well as the need for further investment in energy
infrastructure could benefit from our results.

The rest of the paper is organized as follows. Section 2 gives a brief overview of
energy demand trends in Ghana. A discussion and summary of selected empirical
literature on energy demand is presented in Section 3. Section 4 highlights
methodological and data issues and the empirical results are analysed in Section 5.
We conclude the paper in Section 6 with a discussion of appropriate policy
implications from our results.

4
2. Energy Demand Trends in Ghana
Successive governments in Ghana have over the last two to three decades
implemented various policies aimed at boosting economic growth and poverty
reduction. Policies implemented include inter alia the Economic Recovery
Programme (ERP) and Structural Adjustment Programme (SAP) in the 1980s and
early 1990s, Ghana Poverty Reduction Strategy (GPRS I, 2003-2006), Growth and
Poverty Reduction Strategy (GPRS II, 2006-2009) and recently the Ghana Shared
Growth and Development Agenda (GSGDA, 2010-2013). The last three medium-
term policies sought to pursue pro-poor policies to reduce high poverty incidence in
the country, implement programmes and projects that would ensure attainment of
middle income country (MIC) status by 2015 and accelerate attainment of the MDGs
ahead of the 2015 deadline. The energy sector was duly given priority in these
development policies including actions to ensure sustainable energy use to reduce
the impact on the environment, improve access to modern energy sources such as
LPG and making energy products for most Ghanaians affordable. Ghana has
however managed to reach MIC status ahead of the 2015 target year. By 2007, per
capita GDP crossed the income threshold mark of US$1,000 to qualify for MIC
status. As at 2013, GDP per capita for Ghana was US$1,850 (World Bank, 2014).
Further, overall real GDP has posted positive growth rates since 1984 (8.6%)
reaching an all-time high of 14.05% in 2011 with a corresponding per capita income
growth of 12% in the same year.

Structurally, the economy has undergone rapid transformation over the last three
decades. Agriculture, which hitherto commanded a greater share of total output, has
seen its contribution slump over the years. From about 65% of total GDP with
industry and services sectors accounting for 12.9% and 22% respectively in 1978,
the agricultural sector’s share as at 2013 stood at 22%. The services sector now leads
with 49.5% and industry follows accounting for the remaining 28.6%. It is
noteworthy that this structural change came to light on the back of a rebasing
exercise carried out on Ghana’s national accounts in 2006. The implication of the
sustained economic growth over the years and the changing structure of the economy
is that energy demand is likely go up as more firms expand their plant sizes,
households on average are becoming richer and all sectors particularly the emerging
petroleum subsector’s energy requirements surge. As noted by Duku et al. (2011),
Ghana’s energy demand in recent years has increased significantly due to population
increase (average growth rate of 2% per annum) and rapid urban growth (average
growth of 4% for the period 1980-2013). Unfortunately, this increasing demand for
energy is much more pronounced in the consumption of wood fuel, with wood
charcoal the main choice (Duku et al., 2011).

5
Fig. 1.1 shows the dynamic changes in different energy mix between 2000 and 2012.
Clearly, in 2000, the distribution shows a heavy dependence on energy from biomass
(59%) with electricity the second largest source of total energy consumption (32%).
In terms of petroleum products, consumption of diesel and gas oil mostly for
transportation and industrial purposes leads the energy demand ladder with aviation
fuel (ATK), kerosene and residual fuel oil (RFO), LPG and premix fuel (mostly used
to power outboard motors for fishing) follow in that order. What is worrying though
is the rather low utilization of LPG which is cleaner, portable, and efficient with
multiple uses. As discussed in the earlier section, this could be due to the relatively
high cost of gas cylinders and refilling as well as frequent shortages on the market
which leaves very little option for households and small scale enterprises than to fall
on primary sources such as biomass to meet their energy needs. The trend however,
is changing with deliberate government efforts aimed at reducing heavy reliance on
biomass use.

Gasoline, ATK, 0.6

Premix, Kerosene,
3.1 Premix, 0.3
0.2 Kerosene, 0.3
0.4 Diesel/Gas Gasoline,
oil, 3.9 5.8 ATK, 0.8
LPG, 0.3 LPG, 1.6 Diesel/Gas
RFO, 0.3 oil, 9.8
Biomass, RFO, 0.2
37.8
Electricity,
Biomass, 32.1
Electricity,
59.1 43.3

2012
2000

Fig. 1.1: Energy Demand Shares by Type (2000 & 2012)

By 2012, the share of biomass to total energy had declined significantly to about 38%
while electricity access increased by 11 percentage points over the thirteen year
period. This is very significant and could be explained by the investment in thermal
plants and participation of the private sector in electricity generation (e.g. Asogli
Power Plant) in the last few years. Also, the continued national electrification project
to get the rest of the country that are not connected to the national grid seems to be
bearing some fruits. What is encouraging though is that LPG utilization seems to be
picking up albeit from a low base. From a low of 0.3% in 2000, LPG share of total
energy consumption as at 2012 was 1.6%. We believe this figure could have been
much higher but for the erratic supply of the gas on the market coupled with the high
cost of LPG which most poor households cannot afford in both rural and urban areas.

6
As already discussed, petroleum products constitute a significant source of Ghana’s
energy consumption requirement. The different components of oil products
consumed are depicted in the first panel of Fig. 1.2. The second panel shows sectoral
demand of oil products. The trend shows that since the early 1970s, the most
consumption has come from diesel and gasoline and the trend seems to have been
following an upward trajectory since 1983. LPG though starting from a very base
shows promise of increased usage peaking around 2009 but the upward trend picked
up after a decline in 2010. Expectedly, the transport sector consumes much of the
petroleum products followed by industry. Transportation, especially importation of
heavy duty and luxury vehicles as well as taxis and minibuses has increased
considerably in Ghana in recent years. The residential sector (households) continues
to consume more of petroleum products. It is instructive to note that many
households in the urban areas in recent times have been switching to the use of LPG
and kerosene stoves with further decline in use of electric cookers.

3000 3000
Petrol eum product cons umpti on (Ki l otonnes )

Petrol eum product cons umpti on (Ki l otonnes )

Fig.25002. Consumption of oil products 2500

2000 2000

1500 1500

Fig. 3: Sectoral consumption of oil products

1000 1000

500 500

0 0
1971
1973

1977
1979
1981

1985
1987
1989

1995
1997
1999

2003
2005
2007

2011
1975

1983

1991
1993

2001

2009

1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011

LPG Gasoline Kerosene Diesel Residual Fuel Oil Industry Transport Residential Commercial and public services Agriculture

Fig. 1.2: Consumption of Oil Product Type and Sectoral Demand

3. Empirical Literature
In this section, we present a review of the literature on the determinants of energy
demand. As demonstrated in various empirical studies and for simplicity in our
presentation, we categorise these determinants under economic and non-economic
determinates of energy demand.

Economic determinants of energy demand dates back to the 50s which saw the
pioneering work of Houthakker (1951) in a cross-sectional study that focused on
domestic tariffs. Under the assumption of a stable demand function, he first
considered the relevant theoretically justified variables (such as income, price and
price of related goods) that should enter the demand function for electricity. In
addition, he used the generalized least squares to analyze forty-two British provincial

7
cities for the years 1938/9 and concluded that demand for electricity was sensitive to
changes in both price and income. Several other studies which include Dahl, (1991,
1993, 1994, 2012); Bentzen and Engsted, (2001); Pesaran et al., (2001); Gately and
Huntington, (2001, 2002); Alves and Bueno, (2003); Akinboade et al. (2008);
Webster et al. (2008); Brons et al. (2008); Havránek et al. (2012); Havránek, and
Ondřej (2013); Mensah, (2014), Arzaghi and Squalli (2015), Havranek and Kokes
(2015) have followed this conventional approach in estimating the various
elasticities of their respective demand functions.

Non-economic (macro and micro) determinants include but not limited to

preferences or taste, technical progress, environmental pressures and regulations,
energy efficiency standards, economic structure, age, education, substitution of
labour or capital or raw materials for energy inputs, gender, leisure time, size of the
household, lifestyles, effects of values and norms. Some of the aforementioned
factors have been included in studies such as Hunt et al. (2003); Heltberg (2004,
2005); Ouedraogo (2006); Ackah (2014) and Karimu (2013, 2015). In the most
recent study, Karimu (2015), the study investigated both economic and non-
economic (hybrid) factors influencing the choice of cooking fuels in Ghana. The
dataset used for the study was the fifth round of the Ghana living standards survey
(GLSS 5, 2005/06) conducted in the year 2005/06. This consisted of 8,687
households of which 8,262 contain information regarding household energy use. The
multinomial probit model was estimated and he found that, both economic and non-
economic factors influenced household choice for the various fuels.

In addition, some studies especially most recent ones have also looked at demand-
side challenges and management of energy (see Strbac, 2008; Sorrell, 2015; Wu et
al., 2015. Zhou and Yang, 2015; Ming et al., 2015; Ogunjuyigbe et al., 2015).
However, it is important to acknowledge that for policy purposes the issue of energy
demand management can be well addressed if demand for energy is disaggregated
and holistically analysed. Furthermore, most energy demand studies have focused
on Asia (see Iwayemi et al., 2015), with a paucity of such studies on hybrid
disaggregated energy demand in Africa. This study also contributes to the literature
by providing empirical evidence on disaggregated energy-demand in an African
context.

Overall, literature on energy demand provides a broad empirical evidence of

aggregated and disaggregated energy demand analysis respectively, with papers
mainly differing in the data coverage as regards countries and time periods, variables
selection, the estimation methods and output. These diversities observed in the

8
 literature have had their primary objective of obtaining estimates for price and
income elasticities and these are summarized in table 1.1 below.
Table 1.1: Disaggregated Demand for Energy
Reference Focus/Data Method/Model Results ( Price/Income
Elasticities)
Arzaghi and Demand for gasoline Random Effects Gasoline SR-0.05/0.16
Squalli (2015) for 32 countries over LR-0.25/0.81
the 1998-2010 period
Havranek and Income elasticity of Meta-Analysis Gasoline SR na/0.1 to
Kokes (2015) Gasoline demand using 0.28
Dahl’s (2012) dataset LR na/0.23 to
0.66
Mensah (2014) LPG demand in Ghana SR -0.03/0.06
from 1992-2012 ARDL LPG LR -0.28/0.45
Boshoff (2010) Demand for petroleum
product in South Africa ARDL Diesel LR -0.13/1.51
from 1998Q1-2008Q4
Bhattacharyya Petroleum product Log-linear Gasoline SR -0.079/0.267
and Blake (2009) demand in Middle East Diesel SR -0.026/0.135
and North African Kerosene SR -0.019/0.123
Fuel oil SR -/0.179/0.445
Atakhanova and Residential Energy Dynamic Panel Electricity SR -0.22/0.12
Howie (2007) Demand in Kazakhstan Techniques (two- LR -1.1/0.59
from 1994-2006 steps GMM
estimation)
De Vita et al. Energy Demand in ARDL Electricity LR -0.298/0.589
(2005) Namibia from 1980Q1- Petrol LR -0.858/1.081
2002Q4 Diesel LR -0.109/2.075
Liu, G. (2004) Energy Demand for Dynamic Panel SR -0.030/0.058
OECD Countries from Techniques (One- Electricity LR -0.157/0.303
1978-1999 step GMM Natural Gas SR -0.102/0.137
estimation with LR -0.364/0.303
Strictly Hard Coal SR 0.000/-1.148
exogenous LR -0.001/-
income) 2.243
Gas Oil SR -0.143/0.030
LR -0.318/0.066
Motor Gas SR -0.191/0.196
LR -0.600/0.614
Lundmark et al. Energy Demand in OLS Electricity LR -0.863/-
(2001) Namibia from 1980- 0.512
1996
Hunt et al. (2000) Energy Demand for Cointegration Electricity LR na/0.79
Honduras from 1973- Technique Petroleum LR -0.24/1.58
1995
Espey (1998) Gasoline Demand from Meta-Analysis Gasoline SR -0.000/0.010
1929-1993 (Linear model LR -0.110/-
reported) 0.025
Silk and Joutz Residential Electricity Cointegration Electricity SR -0.62/0.38
(1997) Demand in US. Data Technique LR -0.6/0.82
from 1949-1993
*SR and LR denote short-run and long-run elasticity estimates respectively.

9
4. Model Specification, Data and Methodology
4.1. Model specification and data

Energy is a key ingredient in the demand basket of economic agents in every sector
of the economy due to its important role in production and consumption (Mensah,
2014). Thus, the underlying framework behind demand for energy services stems
from standard economic theory of demand which stipulates demand as a function of
income, prices and a vector of other demand drivers. This can be expressed as

QtE  f ( Pt , Yt , X t ) (1.1)

where QtE represents the quantity of energy services consumed, while Yt and Pt
represents income and a vector of price of the own price and price of related

commodities, respectively. X t on the other hand is a vector of demand drivers such

as economic structure, degree of urbanization, etc. However, the exact functional
form of energy demand equations has been the subject of debate in the empirical
literature ranging from the traditional log-linear to demand systems.

Nonetheless, in this study we follow the traditional log-linearized approach as

implemented by De Vita et al. (2006), Zuresh and Peter (2007), Adom et al., (2012)
and Mensah (2014). We specify the disaggregated energy demand functions as:

Gasoline

lnGSt   0  1lnPSt   2lnPDt  3lnPLPGt   4lnYt  5lnU t   t (1.2)

Diesel

lnDt  0  1lnPSt  2lnPDt  3lnPLPGt  4lnYt  5lnU t  t (1.3)

Liquefied Petroleum Gas (LPG)

lnLPGt  0  1lnPSt  2lnPDt  3lnPLPGtt  4lnYt  5lnU t   t (1.4)

Kerosene

lnKt  0  1lnPKt  2lnPLPGt  3lnYt  5lnU t  t (1.5)

10
Solid biomass

lnBEt  0  1lnPKt  2lnPLPGt  3lnYt  4lnU t  t (1.6)

Residual Fuel Oil (RFO)

lnRFOt  0  1lnPRFOt  2lnYt  3lnU t  t (1.7)

Electricity

lnECt   0  1lnYt   2lnUt   2 LnESt  t (1.8)

where lnGS is the log of gasoline consumption; 𝑙𝑛𝐷𝐸 is the log of diesel
consumption; lnLPG is the log of LPG consumption; lnK is the log of kerosene
consumption; lnBE is the log of biomass energy consumption; lnRFO is the log
of RFO consumption; lnEC is the log of electricity consumption. Also; lnPS ,
lnPD , lnPLPG , lnPK , lnPRFO , lnY , lnU and lnES represent respectively
the logs of: real price of gasoline, real price of diesel, real price of LPG, real price of
kerosene, real price of RFO, income, urbanization (as a proxy for demographic shift)

and economic structure. The parameters i , i ,i ,i ,i , i ,  i  measures the

demand elasticities whiles the error terms are captured by   t ,t ,  t ,t , t ,t , t  .

A priori, we expect own price elasticities to be negative in line with demand theory
which predicts reduced consumption in the face of rising commodity prices. Cross-
price elasticities are however expected to be positive since most energy products are
substitutes. Income elasticities are expected to be positive, implying that rising
income increases demand for consumption goods including energy services.
Urbanization is also expected to have a positive elasticity for most fuel types such
as gasoline, LPG, electricity and RFO but negative for kerosene and biomass. This
is because urban drift is expected to induce consumption substitutability from
traditional and less efficient household fuels such as biomass and kerosene towards
modern fuels such as LPG and electricity. Accessibility of these fuels in the urban
centers is a key factor. Economic structure proxied by the share of industrial value
added to service sector value added as used in equation (1.8) is used to capture the
effects of the structural changes in the economy on electricity consumption. Given
the fact that the industrial sector is a major consumer of electricity, we expect a priori
that a rise in the ratio will exert positive impact on electricity consumption. The
descriptive statistics of all variables are presented in Table 1.6 (Appendix A).

11
This study uses annual time series data obtained from the International Energy
Agency, Energy Commission-Ghana, National Petroleum Authority, World
Development Indicators (WDI), UNCTADSTAT and International Financial
Statistics of the IMF. Due to data constraints, demand models for gasoline, kerosene
and biomass energy were estimated using data from 1979-2012; diesel, LPG and
RFO over the period 1979-2010; and electricity over the period 1979-2011. Also,
consistent data on biomass and electricity prices were unavailable over the sample
periods hence their omission from their respective estimated models. Nominal prices
were also deflated to obtain real prices using the consumer price index.

4.2. Econometric Methodology

The econometric strategy for this study is essentially composed of three steps: First,
we examine unit root properties of the series and proceed to test for the presence of
cointegration relationship in the models outlined in equations 1.2-1.8. In the second
step, we proceed to estimate the long run energy demand elasticities using the ARDL
cointegration technique. As a final step, we examine the associated short run demand
elasticities using the partial adjustment model (PAM).

ARDL approach

The ARDL bounds test cointegration approach developed by Pesaran and Shin (1999)
and further extended by Pesaran et al., (2001) is among the well-known cointegration
procedures. The bounds test approach, involves estimating the following unrestricted
error correction model estimated via ordinary least squares method.

p q
lnEt   0   1i lnEt i   2i lnX t i  1lnEt i  2lnX t i   t (1.9)
i 1 i 0

where the parameters,  0 is the drift component; t represents time (years),  is the
white noise error term;  denotes the difference operator; mi for m=1, 2 …4,

represent the short run dynamics in the model whilst the long run relationships are

given by i . Et and X t denote respectively a vector of energy types and their

associated demand shifters.

Determining the long run relationship between Et and Xt via the bounds test

approach requires estimating equation (1.9) and restricting the parameters of the lag
level (long run) variables to zero. Thus, we test the null hypothesis of no-

cointegration ( H 0 : 1  2  0 ) against the alternative hypothesis of cointegration

12
 H1 : 1  2  0  using the F-test. The computed F-statistic is then compared to
the Pesaran et al., (2001) two asymptotic critical value bounds to determine the
existence of cointegration or otherwise. The conclusion of cointegration is derived
if the computed F-statistic exceed the upper bound and vice versa. In the event where
F-statistics lies between lower and upper critical bounds, the decision remains
inconclusive and will require further test to ascertain the true relationship between
the variables.

Partial Adjustment Model (PAM)

To estimate the short run response to changes in exogenous factors in the short run,
we use the PAM which allows for inertia in the reaction of energy users to these
exogenous shocks.

To begin with, let us assume that Et is the actual observed level of energy consumed
while LPGt * is the unobserved desired (equilibrium) level of LPG consumption. At

equilibrium, the energy demand model can be represented as:

lnEt*  0  ilnX t  t (1.10)

However, the actual level of energy consumption/demand takes into account the
inability of economic agents to adjust instantaneously to the desired equilibrium
levels following an exogenous shock. For example, following an unexpected energy
price shock, it may take some time before consumers can alter their consumption
patterns in response to the price change. In other words, the response of economic
agents to exogenous shocks is gradual rather than instantaneous. Therefore the PAM

assumes that the change in the observed value of the dependent variable ( Et )is

directly proportional to the adjustment between the desired value and the actual value
at time t  1 . Thus, the adjustment process is modelled to take the following form:

lnEt  lnEt 1   (lnEt*  lnEt 1 ) (1.11)

where  reflects the speed of adjustment to equilibrium. Now substituting equation

(1.10) into (1.11) and rearranging we obtain

lnEt  0  i lnX t  1    lnEt 1  t (1.12)

where by i measures the short run elasticities. Under the assumption of serially

uncorrelated residuals t , estimating adjustment model (1.12) via ordinary least

13
square approach produces consistent estimates. As a result, we estimate the PAM
using robust standard errors to correct for any potential serial correlation.

5. Empirical Results
We present the empirical results in this section. Prior to estimating the long and short
run elasticities of the different energy demand determinants, we first examine the
unit root properties of the series and test for cointegration in the next step. In the
final step, we estimate the energy demand models with a discussion of the results.

Unit root and Cointegration results

Establishing the long run relationship between energy consumption and its drivers
requires investigating the unit root properties of the variables. Table 1.2 presents the
results of the unit root test using the Augmented Dickey Fuller (ADF) and/or the
Dickey Fuller-Generalized least square (DF-GLS) test(s). Results indicate that the
series used in this study are either integrated of order one [I(1)] or zero [ I(0)].
Table 1.2: Unit Root Test: ADF and DF-GLS
Order of
Variables Levels First difference
integration
LnDE -2.575326 -5.417629*** I(1)
LnEC -2.564648 -4.289797*** I(1)
LnES -0.609529 -4.640873*** I(1)
LnK -4.310815*** -4.733759*** I(0)
LnLPG -3.361511*** -6.090037*** I(0)
LnPDE -4.944385*** -7.904521** I(0)
LnPGS -3.405461** -4.781018*** I(0)
LnPK -4.732180*** -6.075087*** I(0)
LnPLPG -9.851233*** -7.239645*** I(0)
LnPRFO -5.811157*** -3.917668** I(0)
LnRFO -3.156023*** -9.970373*** I(0)
LnU 1.104019 -4.116035** I(1)
LnY -2.265812 -5.480808*** I(1)
LnBEa -1.531815 -3.228868** I(1)
LnGSa -2.054251 -3.278759** I(1)
NB: a = model based on DF-GLS unit root test. All other variables are based on ADF unit root test.
Models were estimated with trend and intercept. *** indicates 1% significance level ; ** indicates 5%
significance level ; * indicates 10% significance level.

Given the results of the unit root test, indicating a mixed order of integration of the
variables, we proceed to test for the long run (cointegration) relationship between
the various disaggregated energy demand and its long run forcing variables using the
ARDL bounds test approach. Results of the bounds test (see Table 1.3), confirm the
presence of long run relationship in the energy demand equations outlined in
equations (1.2)-(1.8), at the 5% significance level. This conclusion of cointegration
in the models estimated is based on the fact that the estimated F-statistic from the
bounds test model exceed their respective upper critical bounds.

14
Table 1.3: ARDL Bounds Cointegration Test
Critical values
95% bound 90% bound
Model F-Stat
I(0) I(1) I(0) I(1)
Fgs ( gs| pgs , pde, plpg , y ,u ) 4.25** 3.09 4.57 2.55 3.84
Fde ( de| pgs , pde, plpg , y ,u ) 7.95** 3.38 4.76 2.76 3.95
Flpg ( gs| pgs , pde, plpg , y ,u ) 5.10** 3.30 4.69 2.73 3.92
Fke ( ke| pk , plpg , y ,u ) 8.20** 3.38 5.32 3.20 4.42
Fbe (be| pk , plpg , y ,u ) 29.25** 3.77 5.13 3.09 4.23
Frfo ( ke| prfo, y ,u ) 8.66** 3.38 4.78 2.77 3.97
Fec ( ec|es , y ,u ) 14.12** 4.65 5.89 3.85 4.96
** Rejection of null hypothesis of no cointegration at the 5% significance level. The critical
value bounds are computed by stochastic simulations using 20000 replications. All variables are in logs.

Long Run Energy Demand Elasticities

Following the establishment of cointegration relationship between the various

demand dissagregates and their determinants, we proceed to estimate the associated
long run elasticities for the various disaggregated energy types, results of which are
shown in Table 1.4.

Gasoline demand

Results of the gasoline demand model reveal that all the variables are significant
with their expected signs except for the price of diesel. According to the results, own
price elasticity for gasoline is estimated to be 0.547 and significantly negative as
well. This implies that for every 1% increase in the price of gasoline, demand for the
product will fall by 0.55% in the long run: hence an “ordinary good”. This result
compares well with findings in the empirical literature on gasoline demand (see:
Polemis, 2006; Alves and Bueno 2003; Belhaj 2002; Ramanathan, 1999; Eltony,
1996; Eltony and Al-Mutairi 1995; Samini 1995, Bentzen , 1994). For instance,
Akinboade et al., (2008) and Iwayemi et al., (2010) finds own price elasticity of
gasoline to be -0.19 and -0.055 in South Africa and Nigeria, respectively. Due to the
degree of substitutability among energy fuels (inter-fuel substitution), we also
estimate the cross price elasticity for diesel and LPG. The choice of the prices of
diesel and LPG in the model is informed by the fact that these fuels are the main
energy types in the transport sector. Over the past two decades, it has been observed
that vehicle owners (especially commercial operators) have made provision for use
of LPG in their gasoline or diesel driven vehicles, thereby enabling them to switch
between these fuels in response to exogenous shocks in price and fuel availability.
This trend is confirmed by our results which show LPG instead of diesel as the main

15
 fuel substitute for gasoline with a positive and significant cross-price elasticity of
0.12. A positive cross-price elasticity implies that demand for gasoline increases with
increases in price of LPG and vice versa. Cross-price elasticity for diesel is however,
statistically insignificant thereby suggesting an insignificant degree of inter-fuel
substitution between gasoline and diesel. It must be emphasized that the estimates
suggest gasoline demand are price inelastic. In other words, changes in price gasoline
and/or its substitutes results in a less than proportionate change in gasoline
consumption.

Table 1.4: Long Run Elasticities

Dependent Variable
Regressors
Gasoline Diesel LPG Kerosene Biomass RFO Electricity
Price of -0.547 -0.782 0.241
Gasoline (-2.682)** (-4.496)*** (1.999)*
Price of Diesel -0.048 0.324 0.127
(0.893) (1.446) (3.409)**
Price of LPG 0.120 0.404 -0.264 0.117 -0.023
(2.333)** (3.802)*** (-2.531)** (1.932)* (1.044)
Price of -0.483 -0.072
Kerosene (-5.796)*** (-0.829)
Price of RFO -0.778
(-4.582)**
Income 1.316 3.562 2.769 -3.633 -0.590 -1.738 2.710
(2.156)** (8.297)** (1.392) (-6.543)*** (-1.889)* (-1.480)** (2.951)***
Urbanization 0.705 21.971 0.246 0.616 1.782 21.737
(1.982)* (2.291)* (0.771) (4.170)*** (3.917)** (8.032)***
Economic 0.590
Structure (1.936)*
Intercept -11.827 -14.641 340.21 27.612 5.995 -15.326 335.215
(-4.405)*** (-5.728)** (-2.189)* (8.753)*** (2.249)** (-3.720)** (-8.156)***
Trend -0.886 -0.980
(-1.994)* (-8.358)***
Data 1979-2012 1979-2010 1979-2010 1979-2012 1979-2012 1979-2010 1979-2011
NB: All variables are in logs. *** indicates 1% significance level; ** indicates 5% significance level ;
* indicates 10% significance level. RFO (refined fuel oil); LPG (Liquefied petroleum gas).

Further, results from the gasoline model reveals that the effect of income on gasoline
demand is positive, elastic and significant at 5%. It shows that a 1% increase in
income level result in a 1.3% increase in demand for gasoline. Similar results were
obtained by Ramanathan (1999), Akinboade et al., (2008), and Huntington (2010)
with income elasticities of 2.682, 0.36 and 0.135 respectively. It has been widely
acknowledged that the rising urban sprawl in developing and emerging economies
is a significant driver of energy demand (Mensah, 2014; Adom et al., 2012). Results
from the gasoline demand model confirm this assertion, as the elasticity of
urbanization is positive and significant, albeit being inelastic. The result suggests
that a 1% increase in urban growth exerts a 0.7% increase in gasoline demand in
Ghana. Thus the rising urban population in Ghana averaging 4.2% per annum
between 1990 and 2012 (WDI, 2013) is expected to exert a significant surge in the

16
gasoline demand as the urban centers accounts for a greater share of vehicular traffic
in the country.

Diesel demand
The diesel demand equation shows interesting results: as it shows insignificant own-
price elasticity. This suggests that diesel consumers in the long run are non-
responsive to price changes. This result is in sharp contrast to theoretical and
empirical expectations. For instance, Barla et al., (2014) show that the price elasticity
of diesel consumption in Canada ranges between -0.43 and -0.42, and statistically
significant at 1%. Cross price elasticities however shows contrasting results.
Estimates suggest cross price elasticities of diesel demand with respect to price of
gasoline and LPG to be -0.782 and 0.404 respectively and significant at 1%. Whereas
the cross price elasticity with respect to LPG is positive and consistent with
consumer theory indicating the presence of inter-fuel substitution, the elasticity with
respect to gasoline predicts otherwise--suggesting the two fuels as complements
rather than substitutes. Perhaps evidence of asymmetric complements. The income
elasticity of diesel demand was however positive, elastic and significant, suggesting
that a 1% increase in income results in 3.562% increase in diesel consumption. Thus
the results indicate that the rising trend in diesel consumption is largely attributed to
increasing income levels.

LPG demand
In terms of LPG demand, our results show robust elasticities with respect to price of
LPG and substitute fuels like gasoline and diesel. As expected, own price elasticity
(-0.264) is negative and significant (at 10% significance level) whereas the cross
price elasticities with respect to gasoline and diesel are positive and significant as
well, estimated to be 0.241 and 0.127, respectively. The implication is that
consumers of LPG respond to price increases by switching to alternative fuels such
as gasoline and diesel. However, it must be emphasized that this holds in the case of
consumers who use LPG as autogas. Estimates from the Energy Commission (2011)
indicate that the use of LPG as autogas constitutes 37% of total consumption of LPG
in Ghana (Edjekumhene, 2011). Moreso, even in terms of household consumption,
there is high degree of inter-fuel substitution between LPG and other biomass based
energy types including charcoal, fuelwood, kerosene, etc. which is often due to price
shocks and most importantly erratic shortages in the supply of LPG in the Ghanaian
market.

Another key factor influencing demand for the product from our results is
urbanization. Estimates suggest a very high elasticity of 21.97, which is statistically
significant at 10%. This indicates that the emerging demographic transition from the
17
hitherto rural dominated settlements and associated rural economy (i.e. agricultural,
crafts, etc) towards urban and peri-urban settlement with an expanding services
based sectors of the economy exerts significant influences on LPG demand in the
country.

Surprisingly, income effect is found to be insignificant in the LPG model, thereby

suggesting that income levels is not a key factor for LPG demand in Ghana. This
result however, is in contrast with findings of Mensah (2014) who finds income,
price and urbanization as significant factors driving LPG demand in Ghana over the
period 1992-2012.

Kerosene
Kerosene use is often associated with lighting and cooking purposes especially in
rural settlements with little or no access to modern energy sources such as electricity.
Among urban settlements however, kerosene is sometimes used as a reserve fuel
often relied upon when access to electricity and LPG is curtailed. Our results confirm
the above assertion as income and price effects are negative and significant:
estimated to be -3.633 and -0.483 respectively. The (negative) income effect is
elastic which suggest that any (slight) increase in income levels results in a
significant reduction in kerosene consumption, and vice versa. Price of LPG is also
found to be positive (0.117) and significant, thus indicating the presence of some
degree of inter-fuel substitution between kerosene and LPG at the household level.

Solid biomass
Biomass used herein refers to energy types such as fuelwood, charcoal, crop residue,
etc. mostly derived from forest and savannah vegetation. It constitutes a significant
source of energy in Ghana as approximately 89% of households in the country in
2006 depended on biomass as the main cooking energy source (Mensah and Adu,
2013). Our results suggest income and urbanization as the main significant drivers
of biomass consumption in Ghana with associated elasticities of -0.59 and 0.616,
significant at 10% and 1%, respectively. In line with our a priori expectation, these
results suggest that a rise in income is associated with reduced consumption of
biomass energy types. In other words, when income levels rise, consumers become
sophisticated and develop preference for modern energy sources such as LPG and
electricity, hence switching to the latter. On the other hand, the results indicate urban
population growth is associated with rising demand for biomass contrary to
theoretical expectations. The possible reason behind this relation is due to the fact
that the high level of rural urban migration witnessed in the country over the past
three (3) decades has resulted in an increase in the number of urban slums, high
unemployment and increase in urban poor. Thus many of low income dwellers in the
18
urban centers depend on sources such as charcoal and fuelwood for cooking. Again,
the incessant shortages in the supply of LPG and electricity nationwide, has impacted
negatively on the transition from biomass energy sources to these fuels despite the
increasing rate in urbanization. Cross price elasticities of kerosene and LPG were
found to be insignificant, hence not an important factor in biomass consumption in
Ghana.

Residual Fuel Oil (RFO)

RFO is mainly used as industrial fuel often for power generation, vessel bunkering
and other industrial applications. Our results suggest price, income and urbanization
as key determinants. The price effect is shown to be negative, inelastic and
significant at 5%, indicating that the price of the commodity is inversely related to
its demand. Urbanization on the other hand is observed to exert a positive impact on
RFO consumption, with a positive elasticity of 1.782. The income effect was
however negative, and estimated to be around -1.738. This implies that rising income
levels is associated with reduced consumption of RFO. The reason behind this
negative income effect can be attributed to the high amount of pollutant emissions
associated with the burning of RFO. Thus in line with the environmental Kuznets
hypothesis, a higher level of income will inherently induce a switch away from high
polluting energy sources towards cleaner alternatives.

Electricity
Electricity is an important component of the energy mix of every economy, as its use
spans from household, services, to the industrial sectors. Results from our model
reveal that income, urbanization and structure of the economy are significant factors
behind electricity consumption in Ghana, with all drivers having positive elasticities.
Overall, urbanization is shown to have the highest impact, with income and
economic structure in that order with elasticities of 21.7, 2.7 and 0.59, respectively.
The result indicates that the rapid increase in urban agglomeration and associated
population is a key factor behind the surge in electricity consumption. This is
enforced by the fact that about 55% of the 72% of total population with access to
electricity live in urban centers (Barfour, 2013; World Bank, 2014). The per capita
consumption in the urban centers is very high relative to rural areas. Again, given
our measure of economic structure as the ratio of the value added of industrial sector
to value added of the services sector, our results imply that an increase in the
industrial output drives up electricity demand. In other words, the industrial
requirement of electricity to generate output is a key driving force behind electricity
demand in Ghana. Our results confirm the findings of Adom et al., (2011) and Adom
and Bekoe (2013), Zuresh and Peter (2007), Lin (2007). For instance, Adom et al.,

19
(2011) showed that income and urbanization have positive income effects on
electricity demand in Ghana, Zuresh and Peter (2007) also found structural change
in the Kazakhstani economy to have a positive income effect on electricity demand,
with an elasticity of 0.28.

Short Run Energy Demand Elasticities

In this sub-section, we focus primarily on the demand response to exogenous shocks
in the determinants in the short run. This will help us in identifying the immediate
response of energy users towards changes in price, income, etc., as well as the rate
of convergence of the respective models to long run equilibrium following shocks in
the energy sector. These short run elasticities are estimated using the PAM.

Overall, the results of the various disaggregated energy demand models showed that
in the short run, demand is mostly responsive to changes in price and income.
Specifically, it shows that a 1% increase in income will induce an increase in demand
for gasoline and diesel by 0.6% and 1.08% respectively, while reducing consumption
of kerosene and biomass by 1.2% and 0.05% respectively in the short run. In terms
of price, demand is significantly responsive to short run changes in own price only
in the case of gasoline kerosene and RFO. The results show that a 1% increase in
price of gasoline, kerosene and RFO will lower consumption by 0.098%, 0.179%
and 0.369% respectively. In terms of inter-fuel substitution in the short run, results
show that gasoline demand is highly responsive to LPG prices, as a 1% fall in it will
induce gasoline demand to increase by 0.044%. Interestingly, LPG demand is not
responsive to its own price in the short run, but instead significantly responsive to
gasoline prices; showing that a percentage increase in gasoline prices in the short run
will induce substitution to autogas thereby increasing LPG consumption by 0.292%.
This can be attributed to the fact that LPG in Ghana is highly subsidized hence
changes in the price may be minimal. The main aim of LPG subsidy in Ghana over
the past two decades is to engender household interest in switching from biomass
energy to the more efficient and cleaner fuels-LPG. However, this has resulted in a
positive spillover effect to vehicle users who have become “un-intended
beneficiaries” as many commercial vehicle owners (especially taxis) have converted
from gasoline/diesel use to LPG which is relatively cheaper, as a result of the subsidy.
The response of households to increases in LPG prices in the short run is to switch
to biomass energy in the short run as evidenced by the positive cross-price elasticity
with respect to price of LPG in the biomass energy equation. It shows that a 1%
increase in the LPG prices will induce biomass consumption to rise by 0.003% in
the short run. The short run LPG demand non-responsiveness to LPG price in Ghana,
is not new in the empirical literature as a similar evidence was obtained by Mensah
(2014).
20
Table 1.5: Short Run Elasticities from Partial Adjustment Model
Dependent Variable
Regressors
Gasoline Diesel LPG Kerosene Biomass RFO Electricity
-0.098 -0.166 0.292
Price of Gasoline
(-1.97)* (-1.73)* [1.80]*
-0.011 0.019 0.102
Price of Diesel
(-0.35) [0.42] [1.37]
0.044 0.012 0.063 0.076 0.003
Price of LPG
(2.44)** [0.45] [1.15] (0.994) [2.13]**
-0.179 0.001
Price of Kerosene
(-3.119)*** [0.88]
-0.369
Price of RFO
[-2.15]**
0.616 1.077 0.616 -1.232 -0.047 0.139 0.043
Income
(3.31)*** [2.71]** [0.68] [-2.159]** [-2.56]** [0.10] [0.08]
0.519 0.756 0.504 0.109 0.048 0.468 0.325
Urbanization
(3.52)*** [2.42]** [1.49] [0.305] [1.05] [0.70] [0.62]
Economic 0.373
Structure [1.09]
Degree of inertia
Lagged dependent 0.295 0.291 0.665 0.190 0.911 -0.098 0.670
variable
(1.64) [1.38] [5.41]*** [0.889] [11.53]*** [-0.53] [3.03]***
-7.66 -13.94 -11.88 9.917 0.624 -4.402 -3.310454
Intercept
[-4.55]*** [-3.07]*** [-1.75]* [2.77]*** [1.95]* [-1.34] [-0.56]
NB: all variables in logs. *** indicates 1% significance level; ** indicates 5% significance level ; *
indicates 10% significance level. RFO (refined fuel oil); LPG (Liquefied petroleum gas).

Further, the results show varying degree of adjustment to long run equilibrium as
evidenced by the coefficients of the lagged dependent variables4 in table 1.5. For
instance, the coefficient of the lagged dependent variable in the biomass equation is
very high (0.911), implying a high degree of persistence and a lower speed of
adjustment-approximately 9%. In other words, there is inertia in the adjustment from
short run deviations to long run equilibrium as only 9% of the divergence between
the actual consumption and equilibrium levels are corrected each year. On the other
hand, the level in inertia in LPG and electricity demand models is also low, with
speed of adjustment around 33%.

4 Note: emphasis is placed on only adjustment coefficient that are statistically significant
21
6. Conclusion and Implications for Policy
This paper presents a comprehensive analysis of energy demand in Ghana by
estimating demand functions for the various energy disaggregates in Ghana, other
than focusing on a single energy type as extant in the empirical literature.
Specifically, we investigate the long and short run forcing variables that drives
demand for energy in Ghana and their accompanying long and short run elasticities
using the ARDL and PAM approaches. In all seven (7) energy types are used in this
study, viz : gasoline, diesel, LPG, kerosene, biomass, RFO and electricity using time-
series data.

Our results show a mix of factors influencing the demand for the various energy
types in Ghana. These factors include energy prices, income, urbanization and
economic structure. Specifically, we show that income, urbanization and prices of
gasoline and LPG are significant factors influencing gasoline consumption in Ghana
in the long run. For diesel: income, urbanization, prices of gasoline and LPG are
significant long run drivers. On the other hand, income was not found to be an
important determinant for LPG demand in the long run, instead, factors such as
urbanization and prices of LPG, gasoline and diesel are key. In terms of kerosene
demand, the key factors to consider include price of kerosene and income; whereas
income and urbanization are the main factors influencing demand for biomass energy
in the long run. Further, our results indicate that price of RFO, income and
urbanization are significant long run determinants of RFO demand in Ghana. Finally,
income, urbanization and economic structure are the main long run determinants of
electricity consumption Ghana. The results unequivocally indicate rising income and
urbanization behind Ghana’s lower middle class status are also significant drivers of
energy demand. Therefore it is important for policy makers to ensure the provision
of stable, reliable and efficient supply of energy services to meet the surging demand.

An interesting observation from the results of the various disaggregates show high
degree of inter-fuel substitution in energy demand in Ghana. This is evidenced by
the significance of the cross-price elasticities in the models estimated. The evidence
from this paper confirms the assertion that there is a high degree of substitutability
from gasoline, diesel and kerosene towards LPG consumption in Ghana. This is due
to the increasing conversion of vehicles especially taxis, from conventional fuels
such as gasoline and diesel to autogas (LPG) largely as a result of the subsidies on
LPG in Ghana. The policy implications stemming from this result is that, there is
evidence of high amount of “un-intended beneficiaries” in the National LPG
campaign program which sought to among others incentivize households in Ghana
to switch from biomass to LPG as main cooking fuel, using subsidies as instruments.
In other words, the increasing rate of autogas use in Ghana is largely motivated by
22
efficiency and economic benefits relative to the conventional fuels like gasoline and
diesel (Biscoff et al., 2012) other than environmental incentives to reduce the
vehicular emissions. This calls for a careful reconsideration of the current policy
subsidizing LPG in the country, as 37% of the subsidized product is consumed by
economic agents (vehicle operators) other than the intended beneficiaries
(households).

As a way forward, given the fact that household consumption of LPG is still low at
approximately 9% (Mensah and Adu, 2013), incentives such as subsidy, removing
supply constraints that often culminated in the erratic shortages in the product is
essential to incentivize household demand. However, measures must be
implemented to ensure that vehicle owners are excluded from enjoying the subsidy.
An alternative means to avoid the unintended beneficiary dilemma will be to redirect
the subsidy from the product to LPG related end use equipment, such cylinders, tubes,
etc. The success of such measures requires a policy on autogas use in the country.
Such a policy must seek to officially recognize and institutionalize autogas as a key
source of energy for motor vehicles. This will ensure that 1). Appropriate institutions
are set up to regulate the conversion from conventional fuel use to autogas by
vehicles; 2). Maintain appropriate standards in conversion kits and offer relevant
training so as to avoid unnecessary accidents/risk attributed to substandard
conversions, as most of the recorded LPG related fires in the country have been
attributed to the use of inappropriate autogas conversion equipment and fabricated
spare parts.

Also, knowledge of the presence of inter-fuel substitution owing to price changes

has implications for energy pricing in the country. In order words, since energy
consumers are not only responsive to price of energy type but also alternative fuels,
energy pricing can be used as an instrument to promote energy switching from
inefficient and environmentally polluting sources to cleaner fuels. Again, our results
suggest that price elasticities are inelastic, implying that the response of consumers
to price changes is minimal. However, given the presence of a high degree of
substitutability and the overall welfare implications of higher energy prices, fuel
price increases must be in moderation with careful consideration to all possible
spillover effects.

Overall, energy access in Ghana is still below desired levels. Also, emphasis of
policymakers should not only be with regard to expanding access to modern energy
sources but also ensuring sustainable and reliable supply of energy services thereof.
As noted by Serwaa Mensah et al., (2014), the establishment of an independent
power trading companies to break the monopoly power of the existing state owned

23
firms especially in the electricity subsector, by facilitating market entry of
independent power producers, however small they may be. This will enhance
competition and ensure high efficiency standards than the status quo. Also, “business
models such as SME based mini-grids and off-grids with respect to electricity and
cylinder recirculation with centralized filling-depots” (Serwaa Mensah et al. 2014),
can be adopted to complement the current utility-based grid supply and fuel station
system, so as to enhance efficient supply of energy services in the country to further
propel the engines of growth and development.

Furthermore, completion of the gas processing plant to harness the vast gas potentials
of the country’s offshore oil fields should be of utmost concern to policymakers since
the supply of locally processed gas will boost electricity generation to fill the current
shortfall and hopefully avert the perennial energy crises in the country. Likewise, the
establishment of gas processing plant to process LPG in Ghana and the revival of the
country’s only oil refinery (Tema oil refinery) will enhance efficiency in the supply
of LPG among other refined petroleum products, as the status quo where almost all
refined petroleum products are imported thereby exposing the energy sector to
external shocks such as currency depreciation and crude oil price volatility.

As a long term measure towards sustainable supply of energy services, reduce

transportation cost of energy especially LPG, and liquid based energy types,
government must make investments into building pipeline infrastructure to cart
energy services from production centers to end users. Whereas, pipeline construction
is known to require high initial capital investments, maintenance and minimum scale
of movements (Matthews, 2014), it has proven to be the most cost effective means
of fuel transport in the long term. Alternative means such as rail transport can also
be explored. On the demand side, in the wake of current demand shortfalls,
intensification of energy conservation programs are necessary. Example of such
programs include the refrigerating efficiency and market transformation project
which is aimed at replacing old and inefficient refrigerators with energy efficient
ones; import ban on second-hand refrigerators; lighting retrofit project- free
distribution of over 6 million fluorescent filament lamps by the Energy Commission,
etc. These programs among others seek to ensure efficiency in energy use and
minimize losses especially in the wake of the current energy crises.

In the next chapter, we focus on economic welfare analysis of households in the

wake of energy crisis particularly electricity to ascertain whether it is worth
attracting the private sector into the sector.

24
 APPENDIX A

Table 1.6: Descriptive Statistics

Variable* Observations Mean Std. Dev. Minimum Maximum
year 43 N/A N/A 1971 2013

bf 43 122726.1 34001.46 67400 173008.8

lpg 43 51.49535 71.48649 3 268.5

gs 43 405.7744 219.052 172 1080.6

k 43 92.86977 30.12833 27.8 141

de 43 562.1302 414.752 193 1722.6

rfo 43 56.62326 25.57921 9 107

pg 35 3696.495 5598.189 1.65 20499.67

pk 35 3041.203 4198.146 0.77 13260

pd 35 3331.946 5532.893 1.21 20754.13

prf 35 1834.15 2868.954 0.009226 10238.28

plpg 35 3002.895 4657.258 0.18 20017.27

u 42 6499887 3282108 2576656 1.33e+07

y 42 447.6875 89.80501 320.7723 724.3497

es 42 0.8137587 0.4326984 0.4230507 1.661383

ec 41 4.91e+09 1.59e+09 1.15e+09 8.53e+09

*Description, abbreviation and a priori signs of variables are as used in section 4.

25
 CHAPTER TWO

Demand for Electricity in Ghana: Validity Tests for

Contingent Valuation Responses.

1. Introduction
Power outages or blackouts in developing countries are still a big problem with
economic and social consequences. Particularly in Africa, the demand for electricity
over the last three decades has been rising significantly resulting in over 620 million
people lacking access to electricity (International Energy Agency [IEA], 2015).
World Bank (2013) reports that twenty-five African countries are still facing
electricity crises. Evidence of some of electricity crisis in most recent times including
but is not limited to Ghana (Mensah et al., 2016), Nigeria (Aliyu et al., 2013), Kenya
(Mukulo, 2014), Uganda (Buchholz and Da Silva, 2010; Gore, 2009), and South
Africa (Inglesi, 2010; Inglesi-Lotz, 2011). In pursuance of the target of the
Sustainable Energy for All (SE4All) initiative by the United Nations, it is projected
that current efforts in tackling electricity problems are set to fall short vis a vis
meeting the goal of achieving universal access by 2030. It follows that by this date,
about 635 million people in Sub-Saharan Africa (SSA) will remain without
electricity (IEA, 2015).

Lack of electricity implies that household’s income levels can significantly

deteriorate and aggravate the general welfare conditions of countries (see Barnes et
al., 2011). Scientific evidence shows that the perceived cost of blackouts is about 3-
10 percent of household income with severe consequences for developing countries
(e.g. Westley, 1984; Gellerson, 1980; Munasinghe, 1979). In more recent evidence,
Praktiknjo (2014) reports that even for a developed country like Germany, the
perceived cost per household of a 1-hour supply interruption is equivalent to €14.88
[WTP] or €33.68 [WTA].

The acute shortage of electricity in Ghana can be attributed to both demand and
supply causal factors. Institute of Statistical, Social and Economic Research (ISSER,
20055) reports that the annual rise in demand for electricity in Ghana is 10-15 percent.
Fifty percent of the electricity demand is by households. This is because electricity
is now very central to social events (parties, marriages, funerals, music, movies,
sports, education etc.), economic activities (hairdressing, tailoring, sachet-water
trade, corn milling, barbering etc.), spiritual activities (individual devotions and

5
To the best of the author’s knowledge this is still considered as the most recent report.
26
meditations, church etc.) and personal uses (lighting, ventilation: i.e. to control
temperature with fan or air conditioner, replenish oxygen, or remove moisture,
odours, smoke, heat, dust, airborne bacteria and carbon dioxide).

Since the early 1960’s, Akosombo hydroelectric plant has been the major source of
Ghana’s energy supply. After the Akosombo hydro power project, one major
electrification project in Ghana has been the National Electrification Scheme in 1989.
Although this was short-lived it saw the expansion in transmission and distribution
of electricity supply in Ghana. There is no doubt that the supply of electricity in
Ghana has been quite a challenge. The Ghana Grid Company Limited’s (GRIDCo)
Wholesale Power Reliability Assessment Report (2010) also acknowledges that the
current plight in electricity shortages has both demand and supply side sources. The
former includes rise in economic growth, urbanization, and industrial activity while
the latter includes chronic underinvestment in generation and transmission
infrastructure. Since 2012, severe erratic electricity supply in Ghana has affected
both households and firms. According to the World Bank Enterprise database
(2013)6, the average number of electrical outages to firms per month in Ghana is 8.4
compared to 8.3 in SSA. In addition, the losses attributed to electrical outages, as a
percentage of total annual sales of firms in Ghana is 15.8 compared to 8.6 in SSA.
The percentage number of firms owning or sharing a generator is 52.1 compared to
49.8 in SSA with its associated huge cost implication to firms. Indeed, contrasting
the National Energy Statistics (2015) for the year 2014 and 2013, we compute from
Table 2.1 and report that the total electricity generated per capita fell by
5.1kWh/capita while total electricity consumed per capita increased by
11kWh/capita. Both demand and supply sides suggest a deficit which gives a cause
for concern hence the need to investigate demand side remedies in this study.

Ironically, Ghana is naturally endowed with adequate resources that can be

harnessed to solve this problem. For example, Ghana has the largest (8,502 sq. kilo.)
man-made lake by surface area in the world with a total capacity of 148 km3. Thus,
making electricity from hydrological stations relatively cheaper per kWh. However,
because hydrological electricity generation is highly dependent on water availability,
the impact of climate change on water resources has severely affected this source of
electricity generation. This has shifted the focus of the country to other sources such
as thermal and solar instead of hydroelectricity. Ghana has relied on thermal power
plants in recent times as a solution to intermittent electricity problems. However,
thermal power generation has not been too impressive as its contribution to the total

6
A survey of business owners and top managers in 720 firms were interviewed from
December 2012 through July 2014.
27
generation mix is not rising steadily as expected, hence Ghana’s current electricity
crisis. For instance, in 2006 to 2007, power generation from thermal sources rose by
15.6% and dropped significantly afterwards by 34.5% from 2007-2008, and dropped
again albeit marginally by 1.4% from 2013- 2014.7 A possible explanation for this
trend is the importance that the Government of Ghana (GoG) attaches to imported
natural gas and light crude oil. The Government of Ghana together with other
neighbouring West African governments under the Economic Community of West
African States (ECOWAS) in 1982, proposed a collaborative approach (amongst
Ghana, Benin, Togo and Nigeria) for solving their common energy problems. A
viability assessment study was confirmed by the World Bank in 1992, which gave
birth to the West African Gas Pipeline (WAGP) and was completed in 2006.
However, Mensah et al. (2016) have observed that the overdependence on Nigeria
for the supply of natural gas is still a major problem confronting the sector. This is
because any failure to comply with agreements due to factors such as unpaid debts,
change in political leadership and policies etc. has huge implications to the entire
energy sector. Ad-hoc measures such as load-shedding have been adopted by the
GoG, yet its associated cost to businesses is enormous. Edjekumhene and Cobson-
Cobbold (2011), argues that frequent outages leading to load-shedding are estimated
to average ten hours per month, costing the Association of Ghana industries several
millions of dollars.

Other possible sources of energy production which have low fuel cost but are
associated with high construction and maintenance costs may include nuclear and
coal fuel plants. However, the GoG is currently focusing its attention on more
sustainable and accessible sources of energy such as solar and windmill. They
present lower level of investment and installation costs than other electricity sources,
their environmental impact is minimal and they may represent a short tem solution
for immediate welfare benefits.

This chapter principally undertakes a cost & benefit analysis of electricity in a

developing country (Ghana). This is achieved by first estimating and testing the
reliability of our WTP estimates by discussing the WTP and WTA
divergence/convergence test. Empirically, this test is achieved using both parametric
and non-parametric approaches. We further discuss other reliability issues such as
hypothetical bias and scope sensitivity that relate to our estimates.

This chapter contributes to an assessment of the welfare impact of electricity outages

and provides an estimate of the household willingness to pay (WTP) for a 24hour
service of electricity supply in Ghana. The objectives of this paper are twofold. From

7 Author computed the changes with data from Energy Commission of Ghana (2015).
28
an applied point of view the results provide useful information to policy-makers who
want to define the optimal level of incentives necessary to promote renewable
resources or to set the appropriate level of tariffs for the electricity sector
(PSEC/GRIDCo, 2010)8. From a methodological point of view the paper tests the
reliability of our WTP estimates with a set of tests. In conclusion the paper aims at
answering the following questions: 1. Are households willing to pay for an
improvement in their utility vis a vis electricity supply? 2. What is the maximum
WTP for 24hours electricity service? 3. Is the amount estimated reliable? 4. Is the
net benefit of this project positive to attract the private sector?

The rest of the paper is organized as follows. Section 2 provides a brief overview of
Ghana’s Electricity Sector. Section 3 discusses the empirical literature review on
electricity demand. Section 4 explains the survey method used in data collection and
other methodological issues. Section 5 discusses the results from our WTP and WTA
models. Section 6 presents the conclusions, and policy recommendations.

2. Brief Overview of Ghana’s Electricity Sector

Figure 2.1 shows the structure of the energy sector in Ghana. The president of the
Republic of Ghana appoints a minister to be responsible for the Ministry of Energy
and Petroleum (MoEP). The ministry is charged with the primary responsibility of
designing appropriate policies to create an enabling environment for efficient
operation and growth of the sector.

Fig. 2.1: Structure of Ghana’s Energy Sector (Adapted from IAEA, 2013;
Original Source: Power Sector Reform and Regulation in Africa)

8This is a joint report produced by Power Systems Energy Consult (PSEC) in collaboration with
GRIDCo in 2010.
29
Volta River Authority (VRA) is known to be a major power generation company,
solely owned by the Government of Ghana. In the most recent structure, VRA makes
the first arm of electricity generation, transmission and distribution chain in Ghana.
Its generation combines hydro, thermal and solar plants to generate electricity for
supply to Electricity Company of Ghana (ECG) and export markets through
GRIDCo’s transmission system. The ECG is responsible for distribution hence deals
directly with customers than any other in the chain.

The Electricity Department in 1947 became the Electricity Division in 1962, and the
Electricity Corporation of Ghana in 1967. This was the only body solely responsible
for distributing and supplying electricity power in Ghana. In 1987, the Northern
Electricity Department (NED) was also established to be responsible for the
distribution and management of electricity in four main regions (namely: Northern,
Upper West, Upper East and Brong-Ahafo) out of a total number of ten. The NED
is a subsidiary of the VRA. In 1997, the Electricity Corporation (a state-owned entity)
was incorporated and became the ECG with responsibility over the other six regions
(namely: Greater Accra, Ashanti, Central, Eastern, Volta and Western) of the country.

In West Africa, Nigeria is the largest electricity market in generation capacity and
consumption, followed by Ghana and the Côte d’Ivoire (ISSER, 2005). This suggests
how relevant the electricity market for Ghana is to the national economy and the sub-
region. There are currently nine main operating generation facilities in Ghana. These
can be categorised mainly under hydroelectric and thermal sources, with a total
installed generation capacity of about 2,846.5MW. The VRA operates the
Akosombo hydroelectric plant which is the largest (75%) generation facility in
Ghana.
Table 2.1: Electricity Generation Sources and Population Trend in Ghana.
Energy Source 2012 2013 2014
Hydroelectric Power Plant 67.12% 63.97% 64.70%
Thermal Power Plant 32.88% 36.01% 35.27%
VRA Renewable (Solar) Plant - 0.02% 0.03%
Total 100% 100% 100%
Total Electricity Generated/capita 464.2 485.7 480.1
(kWh/capita)
Total Electricity Consumed/capita 357.5 399.4 410.1
(kWh/capita)
Population, Total 25,544,565 26,164,432 26,786,598
*Author’s construct with data from Energy Commission (2015) & WDI (2015).

Table 2.1 shows that, the proportion of electricity generation mix by the main
energy-sources since 2012 has not been rising impressively to match the growing
population. This is more pronounced in the southern part of the country where the
30
population growth rate is approximately 3.1%9 and demand for electricity is very
high. Although, there is evidence of a slight growth in solar energy, its impacts are
still negligible. This minimal effect is due to the recent approval of the Renewable
Energy Law (Act 832) which has made possible for around fifteen companies to
generate electricity from solar energy. Further, in 2015, the GoG supplied 51,000
solar lanterns at subsidised rate to off-grid communities, and under the National
Solar Rooftop Programme (NSRP) of the Renewable Energy Development
Programme (REDP), 20,000 buildings are expected to have rooftop solar systems by
the end of 2016 to speed-up electricity supply in Ghana (GoG, 2015). The forecast
is that solar energy production might grow considerably and support the country to
satisfy the pressing demand for electricity.

Considering the 2014 energy balance10 reported by Energy Commission (2015) it is

clear that there is a deficit of 395,420 MWh (34 ktoe) in electricity which implies
disruption in the energy services to households and firms. One strategy in dealing
with such deficits is trying to harness and promote the indigenous production of solar
energy. In the past the GoG launched promotional and educational campaigns for
locals and remote communities. In 1990 the National Liquefied Petroleum Gas (LPG)
programme guided the first promotional campaign and by 2004, the level of energy
consumption increased by over 50,000 tonnes (about 357,142,857 barrel of oil [boe]
equivalent) per annum, equivalent to about tenfold over the baseline consumption
levels. In 2005, the GoG launched the Unified Petroleum Fund (UPPF) which
essentially covered the cost of transporting LPG to rural areas so as to increase
supply to meet the increased demand. In 2006, the West African Gas Pipeline
(WAGP)11 project, of which Ghana is a member, was completed to expand supply
of natural gas12 for electricity generation. Although some efforts have been made
towards RES; its impacts are still minimal. The pressures from firms and households
on government are constantly increasing making the government allocate
approximately 11% of her budget to meet increasing demand in the energy sector in
2016 (GoG, 2015). However, it is worth mentioning that a significant fraction of this
funding is expected to come from donors and as in all such cases, such funds are not
absolutely guaranteed (funds are largely characterised by conditionalities which
results in highly variable amounts and timing). Fritsch & Poudineh (2015) report that
the GoG has committed to subsidizing aspects of electricity supply in Ghana for

9 Ghana Statistical Service (2012), 2010 Population and Housing Census

10 Energy Balance here refers to the difference between the Total Energy Supply and Final Energy
Consumption.
11 Four Countries namely Ghana, Bénin, Nigeria Togo signed an agreement for Nigeria to transport

Natural Gas to the other three for power plants companies and heat-using industries.
12 This is considered as being relatively less expensive and climate/environmentally-friendly (cleanest

fossil fuel)
31
about US$1/Month for lifeline consumers. However, this has not been forthcoming
due to limited government resources and overdependence on donors for budget
support. To this, at the end of 2003, the total subsidy owned by the government to
distribution utilities ranged from US$400,000-1,400,000 (ISSER, 2005).

Given this background, it is obvious that the ECG finds it a herculean task in trying
to meet the demands of consumers. The Electricity Company of Ghana (ECG, 2013)
has alluded to the fact that they have incurred the wrath of their customers in the
form of demonstrations due to poor services. This has become so worrisome and
prevalent to the extent that a local description of it can easily be googled and found
in wikipedea as dumsor 13 . A major reason for the persistent, and unpredictable
incidence of electric power outages according to ECG (2013) and ISSER (2005) is
attributed mainly to low revenue-yielding customers who enjoy subsidies from
government’s subsidised tariff policy and therefore pay amounts that are less than
the average production cost, making recapitalisation impossible. This has been a
problem since its inception because of the perception that electricity supply is
government’s responsibility coupled with government’s inability to make regular
and timely remittances to the relevant utility companies.

In most developing countries such as Ghana, all the economic infrastructures are
perceived as social services and this affects the pricing structure and suppliers’
capacity to maintain and sufficiently provide (see Adenikinju, 2005). In addition,
some common challenges which have contributed to the poor supply of electricity
can be summarised under four main headings and these are generation, transmission,
distribution, and administration/management problems. In a broader sense, key ones
are outlined as follows: natural causes (low rainfall), shortage of imported fuels for
thermal plant, obsolete infrastructure, industrial customers subsidizing residential
customers, customers patronising illegal connections, irregular and/or non-payment
of bills, poor maintenance culture, technical hitches etc. These problems have made
the sector relatively ineffective and inefficient.

In recent times, several efforts at managing consumer’s expectations and improving

the sector have been observed. The ECG has been publishing a load shedding guide
to help customers plan their electricity usage. However, the ECG has not been
consistent in sticking to electricity rationing schedules which has attracted lots of

13Dumsor pronounced "doom-sore" or “dum sɔ” ("off and on") is a popular Ghanaian term used to
describe persistent, irregular and unpredictable electric power outages.(See
https://en.Wikipedia.org/wiki/ Dumsor).

32
complaints from customers. In addition, one of the commitments of ECG is to deal
with distributional losses to boost supply. Against this background, an active
taskforce which is made up of the Police, Fire Service and ECG officials has been
commissioned to randomly visit customers to identify illegal connections and, those
who have tempered with meters among others.

In August 2015, ECG through her taskforce recovered GHS1,612,560.37

(USD$514,406.76) 14 from distributional losses connections. Also, the issue of
privatization has been seriously considered following the success story of the two
privately owned generation firms. These firms include Sunon Asogoli power plant
and CENIT Energy’s plant which generate 200MW and 126MW respectively. They
are considered the most reliable plants in the country today. This buttresses the call
by the World Bank for a significant role by the private sector in the distribution of
electricity in Ghana. Guided by the World Bank’s proposal, a decision has been
reached by the GoG regarding a concession agreement. By this agreement, total
responsibility for operating and maintaining ECG and NEDCo assets will be
entrusted into the care of the concessionaire for a period of 20-30 years, while the
state continues to own the assets. This is generally believed to reduce political
interference and adopt innovative solutions to the recurring crisis as well as
promoting efficient revenue enhancement investments. By way of contrast, an
opposing school of thought argues that the private sector is not needed for the sector
to perform well, and that the government should be up and doing for the sector to
get back on its feet. In both cases, more information about consumers’ preference for
electricity services is very necessary.

14 GHS1 = USD 0. 319 as at 15/10/2014

33
3. Methodology and Empirical Literature
A myriad of methods exist in the valuation literature which are used to estimate the
economic value of regular electricity supply (WTP) or infer welfare losses from
irregular electricity supply (WTA). This study uses the well-known and established
Contingent Valuation Method [CVM] (see Mitchel and Carson, 1989; Arrow et al.,
1993) to capture WTP/WTA for electricity in Ghana. This method is considered to
be consistent with consumer demand theory and captures both use and non-use
values of a good. We argue that a market for a 24-hour electricity supply all-year-
round does not exist presently in Ghana, and we rely on the CVM responses to derive
the welfare measures. The CVM is a survey method which relies on respondents’
preferences for a hypothetical market (in this case a 24-hour supply of electricity).
This method’s foundations are in microeconomic welfare theory where individuals
or households maximize their utility under income constraint, or minimize their
expenditure under utility constraint (Spash, 2008; Hanley and Spash, 1993). The
empirical results of a well-designed CV study can produce reliable estimates to be
used in liability claims or design policies (NOAA 1993). A set of methodological
tests have been traditionally used to validate the reliability of CVM estimates and
one of the most important ones is the WTP/WTA disparity or convergence. This test
is guided by the theoretical convergence (Willig, 1976) and systemic empirical
divergence theory (Tversky & Kahneman, 1991; Loomes et al., 2009). The former
claims that WTP and WTA should be similar for the same good. However, the latter
claims that WTP and WTA should be different for the same good.

In line with our aims as earlier mentioned, we test the reliability of WTP estimates
as obtained from of CVM survey. We empirically provide test evidence to support
the WTP and WTA debate. This test is achieved using both parametric and non-
parametric approaches.

Over a decade and half now, one can argue that there is lack of WTP/WTA credible
and economically sound empirical studies on electricity in developing countries.
Generally, there is marked paucity of journal published empirical studies on
WTP/WTA for electricity in developing countries. One observed study which was
conducted in Nepal by Billinton & Pandey (1999) found that WTP values were
significantly less than WTA values as normally found in empirical literature. This
difference is commonly attributed to “loss aversion: losses (outcomes below the
reference state) loom larger than corresponding gains (outcomes above the reference
state).” (Kahneman and Tversky, 1979, p.1047), ‘endowment effect: increased value
of a good to an individual when the good becomes part of the individual's endowment’
(Thaler, 1980; Kahneman et al., 1990, p.1326), and “income and substitution effect:
[Given income], the ease with which other privately marketed commodities can be
34
substituted for the given public good or fixed commodity, while maintaining the
individual at a constant level of utility” (Hanemann, 1991, p.635). Other reasons may
also include “commitment costs and asymmetric beliefs: when agents’ transactional
positions systematically influence their perceived level of difficulty of resale on
secondary markets [i.e. value of a good is uncertain because of reversal difficulty
and delay difficulty]” (Kling et al., 2013, p.920); “differences in attentional biases:
focusing on forgone outcomes, sellers pay close attention to forfeiting the item (or
experience) whereas buyers focus on the expenditure.” (Carmon and Ariely, 2000,
p.361) among others.

Only few studies report WTA estimates for energy production/services in developing
countries. A study by du Preez et al. (2012) focused on WTA for a wind-farm in
South Africa. They found aggregate WTA to be equal to R40, 891.29(US$ 2,638.487)
per month. Another study was conducted by Hosking (2012) where she found that
lower income group and higher income group were WTA reductions in
compensation (otherwise WTP) for locations of the wind turbines farms at greater
distance away from residences. Similarly, Hosking et al. (2015) studied WTA for a
reduction in subsidy (otherwise WTP) for the location of wind turbine farms among
low income residents. They found that the sampled and underprivileged respondents
are WTA R21.38 and R14.25 per month in subsidy reduction respectively, if the
wind farm is moved from 0.5km (base level) away to 2km away from residential
areas. These perhaps are the only seemingly close WTA empirical studies for
electricity in a developing country. Also, for only electricity-related WTP studies,
several publications in developing countries have been identified and these include
India (Gunatilake et al., 2012), Ghana (Taal and Kyeremeh, 2015; Twerefou, 2014),
Nigeria (Adenikinju, 2005), Chile (Aravena et al., 2012), South Africa (Oliver et al.,
2011), Kenya (Abdullah & Markandya (2012); Abdullah & Jeanty, 2011; Abdullah
& Mariel, 2010), China (Zhang and Wu, 2012).

To the best of the author’s knowledge, this is the only developing country study on
WTP for a 24-hour service in a developing country that further evaluates the
reliability of estimates using WTA, hypothetical bias and scope sensitivity analysis.
Considering the relevance in testing the reliability in WTP or WTA studies, we
review some developing countries studies which deal with CVM reliability tests.
Guided by credible and economic sound empirical studies, the National Oceanic and
Atmospheric Administration (NOAA) has set several guidelines to ensure credible
WTP responses. As part of the guidelines, scope sensitivity is a crucial test which is
normally carried out in split subsamples. However, Carson (1997) observes that “if
one accepts the scope insensitivity hypothesis, then one would expect that

35
willingness to pay in general would not vary with respondent characteristics’ (p.24)”.
In line with this, Smith and Osborne (1996) found WTP to be responsive to scope in
their meta-analysis study.

One leading author who has been very prolific in CV studies is Richard T. Carson.
In one of his contributions as found in Carson (1997), he sought to evaluate the scope
insensitivity hypothesis from a much broader picture than generally seen in
publications. He explains that, respondents are said to be scope insensitive, if they
are willing to pay less if more is offered or better still “respondents are not willing
to pay more for more of a particular good” (p.1). He justifies the use of the term
“scope” instead of “embedding” from the recommendation part of the NOAA Blue
Ribbon Panel (see Arrow et al., 1993). The main thrust of Carson’s (1997) work was
to show whether appropriate survey design, pretesting, and administration could help
prevent this counter intuitive behaviour by some respondents. He argues that it is not
likely to be true that surveys in CV studies are prone to scope insensitivity. The
studies that have shown scope insensitivity perhaps have respondents not expressing
economic values but say ideological values. Carson (1997) debunks the views
expressed by Diamond and Hausman (1994) regarding the fact that except studies
by Exxon and Kahneman, there exist only a few tests of scope insensitivity which
use independent samples, and show about thirty literature evidences. Carson
concludes that:
“any hypothesis of generic respondent insensitivity to the scope of the good being
valued should be rejected…. These studies tend to suffer from (a) small sample
sizes, (b) poor survey design (c) shifts in the probability that the good would be
provided between subsamples and/or (d) the use of a mode of survey
administration… which do not encourage respondents to pay close attention to the
questions being asked” (p.31).
Furthermore, within the scope of our knowledge, all the studies cited by Carson
(1997) and Smith and Osborne (1996) as having evidence of scope sensitivity effect
were focused on developed countries. We now discuss such validity test studies that
focused on developing countries.

Vásquez et al. (2009) CVM study estimate households WTP for safe drinking water
in Mexico. They considered scope sensitivity in WTP as a vital test for validation of
results. They found evidence of scope sensitivity for combined improvements in
water quality and reliability water services (nested good). This was demonstrated by
the fact that the nested good exceeded WTP for improvement in water quality alone.
In addition, a measure of construct validity was also considered where water supply
safety and reliability were considered as normal goods because of their positive

36
relationship with household income. They further found evidence of convergent
validity better still described as external validity due to the sign and significance of
key variables (such as water storage facility [“storage”] and perception of quality of
tap water [“quality score”]) which were consistent with earlier studies.

Soto Montes de Oca and Bateman (2006) examined what they described as novel
approaches to scope sensitivity testing in households’ WTP for water services in
Mexico. They indicate that their WTP estimate is intended to provide the information
necessary to promote equitable and economic efficient tariff schemes, identifying
the priorities of heterogeneous groups of households with regard to their varied
income constraints. This was achieved using the CV approach with a total sample
size of 1,424 household responses. The water services were presented under two
scenarios with different sample sizes. Seven hundred and eight (708) of these
responses were presented with the improvement scenario while 716 were presented
with the maintenance scenario. They first estimated a probit model and achieved
theoretical validity when they obtained the right sign relationships between
responses to the bid amounts and several variables that are consistent with economic
theory and empirical justifications (e.g. income). In relation to the novel scope
sensitivity test, they found that higher income groups because of current endowments
of water quality, are willing to pay more to maintain the service or avoid
deterioration in the service rather than for an improvement. On the other hand, lower
income groups who are currently not enjoying the current quality service expressed
lower WTP for maintenance yet higher WTP for improvement in the poor service.

Whittington et al. (1991) used the bidding game format to elicit respondents’ WTP
for water in Nigeria. They found that respondents were generally willing to pay
substantially for water. In fact, respondents were already paying substantial amounts
for water. However, they were not willing to pay more above the price of water
charged by vendors because they felt the quality and reliability could be the same.
Thus, respondents did not value their endowment differently from the perceived or
expected water supply. This gave evidence of consistency in respondents’
preferences for water hence justifying the theoretical and empirical validity as in
standard CVM surveys. They found households WTP for water across different
income levels to lie between 5%-18% of household’s income. Although this was
described as high, the authors justified the external validity of their results with other
studies such as Lin (1983), Fass (1988), and Whittington et al (1989).

To the best of the author’s knowledge, the literature has not provided any evidence
of WTP and WTA study on electricity in any developing country particularly Africa.
We provide one of the first WTP estimates for electricity, while undertaking relevant
37
reliability tests for valid estimates to inform policy decisions. We also present in a
summary of the literature discussed and some other related studies (see Table 2.11
in Appendix A) that consider WTP or WTA but not both. This study contributes to
the literature by filling in the gap in this direction.

4. Survey Design
In order to determine the WTP (WTA) for a reliable electricity service (24hours) a
contingent valuation survey was administered in the Greater Accra Region (GAR),
Ghana. This region was chosen out of the other ten regions because it has the highest
electrification level of 96% (Edjekumhene and Cobson-Cobbold, 2011). This region
has the current highest proportion of urban household of 31.2%. Moreover, GAR has
Accra as its capital city and it has been Ghana’s capital since 1877. It has the highest
population density and is the second most populous region in Ghana. It is also seen
as one of the most populated and fast growing Metropolis in Africa. A sample from
this region reflects better representation because of its associated higher demand for
the good in question.

In the GAR, we randomly selected six communities within the ten districts of the
region. Households within these communities were also randomly selected for the
face-to-face interviews. The survey took place in February 16-March 16, 2015, and
a total of 514 respondents were interviewed. Ten enumerators were well trained and
further evaluated through a pilot survey. The fieldwork was conducted under the
supervision of three survey experienced supervisors who monitored the process of
data collection and data entry.

The structure of the questionnaire (see pg.58) can be categorised under three (3) parts
namely respondent’s bio-data, general utility-related information, and willingness-
to-pay/accept for electricity questions. In part 1: bio-data information presents
information about household socio-economic characteristics Part 2: utility-related
questions presented included access to electricity, current bills and preferences. Part
3: CVM (WTP/WTA) questions were asked using the dichotomous choice and open
ended format. The key WTP question asked was: “Assume your household is
provided with a 24-hour electricity supply, how much would your household be
willing to pay per month ?” In addition, the key WTA question asked was: “Assume
your household is to be provided with a 24-hour electricity supply, however it’s not
reliable. How much will you accept as compensation from the government per month
for the current power shortages [Note: 24-hour off, 12-hours on]? ”.

The initial bid was provided by the researcher based on the range of bills paid by
households per month. These values were obtained from the pilot survey and

38
common knowledge by the researcher. The starting point amounts were randomised
during the face to face interviews to control for starting point bias or anchoring effect.
The initial question was followed by other dichotomous choice questions and
concluded with “state the maximum amount you are willing to pay (willing to accept)
for 24hours electricity service?” Four options are observed so our WTP (WTA)
follows the four definitions outlined as follows:

 First definition: Yes-Yes Response 𝑊𝑇𝑃𝑖∗ ≥ 𝑏 𝑢

For the first definition, if the respondent said yes to the starting bid, we adjusted the
bid upwards by 10 Ghana cedis. If the respondent said yes again, then the respondent
is given the opportunity in an open-ended format to state the maximum amount
he/she is willing to pay. The WTP is therefore expected to be greater or equal to the
upper bid offered (𝑏 𝑢 ).

 Second definition: Yes-No option 𝑏 𝑜 ≤ 𝑊𝑇𝑃𝑖∗ < 𝑏 𝑢

In the second definition, if the respondent said yes to the starting bid, then we
adjusted the bid upwards by 10 Ghana cedis. If the respondent said no to the second
bid (upper bid (𝑏 𝑢 )), then the respondent is given the opportunity in an open-ended
format to state the maximum amount he/she is willing to pay. The WTP will
therefore be expected to be greater or equal to the starting bid (𝑏 𝑜 ) but lower that the
upper bid (𝑏 𝑢 ).

 Third definition: No-Yes option 𝑏 𝑙 ≤ 𝑊𝑇𝑃𝑖∗ < 𝑏 𝑜

Regarding the third definition, if the respondent said no, then we varied it by 5 Ghana
cedis. If the respondent said yes for lower bid (𝑏 𝑙 ), then we asked the respondent to
state the maximum amount he/she will pay for the service. The WTP will therefore
be greater or equal to the lower bid (𝑏 𝑙 ) but lower than the upper bid (𝑏 𝑢 ).

 Fourth definition: No-No option 𝑊𝑇𝑃𝑖∗ < 𝑏 𝑙

In our last definition, if the respondent said no, then we varied it by 5 Ghana cedis.
If the respondent said no for the second time, then we asked the respondent to state
the maximum amount he/she will pay for the service. The WTP will therefore be
lower than the lower bid (𝑏 𝑙 ).

In all definitions, only the final WTP (WTA) values which is the maximum amount
respondents are willing to pay (or accept as compensation) will be used in the
analysis. The interviewers explained to respondents that the survey aimed at
evaluating the 24hours electricity service for management reasons which were not
motivated by any political party or public institution. A brief script, which was
purposefully and carefully worded, was read to all participants before they filled in

39
the questionnaire. The aim of this script was to make the interviewee behave as
making a real world commitment subject to their limited income constraints.

Econometric Approach: WTP and WTA.

With the maximum amount respondents are willing to pay (WTPi ) for the continuous
24-hour service, we use that as our dependent variable and formulate a linear WTP
model. In the same vein, we treated the maximum amount respondents are willing to
accept as compensation ( WTAi ) for not enjoying the 24-hour service as our
dependent variable and formulated a linear WTA model.

Bateman and Turner (1992) provides that in defining elicitation methods, if open
ended questions are asked and a continuous bid variable is obtained, OLS will be
appropriate for estimation. Therefore, the Ordinary Least Squares (OLS) is used to
estimate both WTP and WTA models from final open-ended questions. This
primarily is to evaluate the extent to which respondents’ socioeconomic
characteristics and other contextual characteristics or controls influence their WTP
and WTA. Such multivariate models can also be found in Casey et al. (2006),
Whittington et al. (2002), Briscoe et al. (1990) etc. Similarly, we assume a linear
model expressed as:

Wi = α + 𝐗 𝑖 𝛃 + ui (2.1)

Where 𝐖𝑖 refers 𝑊𝑇𝑃 or WTA , we denote 𝐗 𝑖 as a vector of the household's

characteristics and other controls, β is a vector of all coefficients to be estimated, α
is the constant term, and ui is stochastic term with a standard normal distribution.
This estimated model is expressly presented as:

lnW = α + β1 lnBid + 𝛽2 lnBill + β3 lnY + β4 G + β5 HH + β6 MS + β7 FD

+β8 Cdum + u (2.2)

In models 2.2, lnWTP (lnW) is the log of the final bid expressed by the respondent,
lnWTA (lnW) is the log of the compensation respondent is willing to accept to forgo
a 24-hour service, lnBid is the log of the starting point bids, lnBill is the log of the
current electricity bill paid by respondent in the previous month preceding the
interviews, lnY is the log of monthly take home income of respondent, G is the
gender of the respondent, HH is the household size of respondent, MS is the marital
status of respondent, FD is the household’s financial decision maker, C_dum is the
community specific dummies.

40
5. Study Results
We now present how the data used for the study was segmented and used for our
estimation. First, we dropped two outliers from the WTP responses and three from
the WTA responses. This was to ensure that our data is consistent with rational
behaviour of consumers, as it does not sound intuitive for a household’s income to
be less than their WTP. In addition, to consider the sensitivity of our results to the
selection of the valid responses, we sub-sampled the data considering only the
responses where the WTP/income ratio was less or equal to 100%, 60%, 40% and
20% respectively.

When a missing value was observed in WTP or WTA responses the full record was
dropped in order to have the same sample size for both responses. The number of
observations used and shown in Table 2.3 are 504, 451, 375 and 206 for the full
model, and the sub-samples of 60%, 40% and 20% respectively. We focus the
descriptive statistics on the full sample (see Table 2.9 in Appendix A). The dominant
gender is male constituting about 65% which depicts the characteristics of male
dominated household heads in Ghana. The average household size is approximately
four which is almost the same as the national figure in 2010 (GSS, 2012). About 48%
of respondents are married, which is also close to about 43% at the national level
(ibid). The average monthly income of respondents is about GHS429 which is quite
close to the national estimate of GHS544 for the Greater Accra region (GSS, 2008).

Out of the 504 respondents’ WTP responses, 41% are WTP at most GHS50, 48%
are willing to pay between GHS50- GHS100, while 11% are WTP at least GHS100.
For the WTA responses with same observations as the WTP, 30% are WTA at most
GHS50, 50% are WTA between GHS50- GHS100 and 20% WTA at least GHS100.

The average electricity bill paid in the last month before the survey is about
GHS36.10. In the case of WTP, the mean WTP constitutes about 87% higher than
respondents’ current electricity bill. This shows a substantially positive attitude by
respondents regarding their readiness for improvement in the service. Also, In the
case of WTA, the mean WTA was more than twice higher than the current electricity
bill (approx.148%), suggesting that respondents really do not fancy trading off a 24-
hour supply of electricity. The only way by which they will trade-off is to charge a
higher price as compensation for the loss in welfare. Thus, respondents in the hope
of improving the quality of service and their welfare were generally willing to pay
or accept more than how much they are currently paying for the current erratic
electricity service. This is found to be consistent with consumer’s utility theory
which provides internal validity credence to CVM studies.

41
5.1 Endogeneity Issues
Demand equations such as equations 2.1&2.2 are prone to endogeneity problems
when estimating the parameters. We used the electricity bill as a proxy for electricity
consumption in both WTP & WTA for current electricity service. Thus, this measure
of consumption may be endogenous because people with higher WTP may be
expected to spend more. This can affect the efficient identification of the true causal
effect of electricity bill on WTP & WTA. To proceed in examining the true effects,
we first undertook various tests of endogeneity to authenticate our intuitive suspicion.
We instrumented bill with different instruments such as household size, age and age
squared.

The commonly used tests include Durbin (1954); Wu (1973, 1974); and Hausman
(1978). It is generally known that Instrumental Variable (IV) estimation is always
consistent. However, the consistency in an OLS estimation depends on if all the
regressors are exogenous. The null hypothesis for this test of endogeneity is that the
variables are exogenous and that the difference in coefficients is not systematic.

In table 2.2, we present the various test results with their corresponding test-
decisions. We find evidence to accept the null hypothesis that there is no significant
difference between our IV and OLS. This results of electricity bill being exogenous
in our model is consistent with existing studies such as Arzaghi and Squalli (2015),
and Rietveld and van Woudenberg (2005). These authors argue that there are no
serious identification concerns when prices of the type of energy are pre-set by
government rather than market forces as in our case. In short, both IV and OLS
estimates are the same as the test is based on the difference between IV and OLS (i.e.
no endogeneity in regressors). In this instance, we will prefer the OLS to the IV
because OLS is more efficient.
Table 2.2: Test for Endogeneity
Tests P-Value Test-decision
Durbin (score) Chi-square value= 1.78 0.1823 OLS Preferred

Wu-Hausman F-statistic value = 1.74 0.1879 OLS Preferred

Hausman Chi-square value= 1.44 0.9636 OLS Preferred

42
 Table 2.3: WTP & WTA Regression Results
(1) (2) (3) (4) (5) (6) (7) (8)
Full-sample (100%) Sub-sample (≤60%) Sub-sample (≤40%) Sub-sample (≤20%)
VARIABLES WTP WTA WTP WTA WTP WTA WTP WTA

Bid (Log) 0.563*** 0.269*** 0.546*** 0.279*** 0.490*** 0.252*** 0.448*** 0.136**
(0.051) (0.049) (0.054) (0.046) (0.059) (0.048) (0.077) (0.060)
Electricity Bill (Log) -0.047 -0.003 -0.029 -0.031 -0.011 -0.026 0.077* 0.023
(0.030) (0.029) (0.037) (0.032) (0.042) (0.034) (0.047) (0.042)
Gender (Male) 0.121*** 0.055 0.134*** 0.080* 0.128*** 0.048 0.151** 0.060
(0.039) (0.042) (0.042) (0.042) (0.047) (0.044) (0.060) (0.059)
Household Size 0.011* 0.012 0.008 0.008 0.014* 0.018** 0.015* 0.020*
(0.006) (0.008) (0.007) (0.008) (0.007) (0.008) (0.009) (0.011)
Marital Status (Dummy) 0.082** 0.039 0.079** 0.052 0.080** 0.015 0.072 0.000
(0.034) (0.040) (0.036) (0.041) (0.041) (0.042) (0.053) (0.056)
Monthly Income (Log) 0.174*** 0.143*** 0.224*** 0.231*** 0.295*** 0.326*** 0.409*** 0.520***
(0.028) (0.031) (0.033) (0.035) (0.042) (0.040) (0.066) (0.063)
Household Decision (Dummy) 0.189*** 0.231*** 0.184*** 0.276** 0.185** 0.315** 0.207** 0.475**
(0.062) (0.086) (0.063) (0.118) (0.076) (0.135) (0.095) (0.194)
Constant 0.798*** 2.307*** 0.476 1.675*** 0.134 1.053*** -0.878* -0.209
(0.272) (0.287) (0.297) (0.294) (0.351) (0.327) (0.456) (0.460)
Community Dummies Yes Yes Yes Yes Yes Yes Yes Yes
Observations 504 504 451 451 375 375 206 206
𝜎2 63.96 82.46 61.96 76.82 57.73 70.77 49.16 55.44
Expected Mean (exp(𝜇 + ))
2
R-squared 0.557 0.324 0.564 0.346 0.574 0.408 0.674 0.543
F-test 42.96*** 19.22*** 42.03*** 20.06*** 38.98*** 23.67*** 59.46*** 29.40***
Dependent Variable for WTA models: WTA Amount (Final); Dependent Variable for WTP models: WTP Amount (Final)
Robust standard errors in parentheses.
Note: all models estimated controlled for community specific effects with community dummies (Yes)
*** p<0.01, ** p<0.05, * p<0.1; [ ] Denotes Confidence Intervals

43
We present the results of our econometric estimation in Table 2.3. These models
(Model 1-8) are estimated based on a full sample (100%) and sub-samples: 60%, 40%
20% of WTP or WTA to income ratio. We controlled for community specific effects
with community dummies in all our estimated models. Also, due to the problem of
heteroskadasticity associated with cross-sectional data, all our models are estimated
with robust standard errors. In addition, all estimated models are highly significant
according to the standard F-tests in our regression results.

We find that the starting point bid used in the application of the double-bound
dichotomous choice format is positive and significant in all estimated models.
Although we randomly allocated the bid we still found evidence of starting point
bias in our results. Suggesting that this bias could have been higher hence the
importance in controlling for it in our models. This bias has been reported by Boyle
et al. (1997), Green (1998) and more recently Boyle (2003) to be associated with
dichotomous choice format. Hence our results are not completely free from such bias.

Similar to the case of Casey et al. (2006) who expected a positive relationship
between bills and WTP, we introduced electricity bill in our models to capture
consumer’s behaviour towards utility services in general. In our case, we expect that
if the proportion of consumer’s income spent on services is low, households would
pay more for improved services. The coefficients of electricity bill on both WTP and
WTA in all the models (except model 7) are not statistically significant implying that
electricity bill is not an important determinant of WTP & WTA. However, where a
smaller fraction is spent on services, we find some significance in WTP. This
suggests that, the proportion of income spent by consumers in a developing country
like Ghana matters in determining their WTP for general services. Stated differently,
selecting valid responses of respondents who are willing to spend a reasonable
proportion of their income on say electricity is found to be significant in determining
WTP.

Regarding gender, we find that being a male household head relative to being a
female has a positive and significant coefficient in all the WTP models. Thus, males
have higher WTP relative to females. However, except for model 4 (with a weak
significance) we find that WTA does not vary with gender. This is justified by the
fact that men in general are mainly in-charge of a household’s budget to pay but
definitely not to accept.

Also, the coefficient of household size in the 20% and 40% sub-samples are positive
and significant for both WTP&WTA. This suggests that household size is a

44
determining factor in both WTP & WTA for electricity in Ghana. In the full sample,
we find household size to be influencing WTP but not WTA.

With regards to marital status, we find this to be positive but not a determining factor
of WTA in all our estimated models. Still, in the 20% sub-sample for WTP, marital
status is also found to be positive but insignificant. In contrast, we find significance
in all the other WTP models, thus, respondents who are married are more willing to
pay relative to unmarried respondents.

The most interesting result which further provides evidence for scope sensitivity test
is the income of the respondent. This variable is positive and strongly significant at
1% (p-value <=0.001) in all estimated models. That is, we have evidence that a
percentage increase in income increases both WTP & WTA from as low as about
0.14% to as high as about 0.52%. Stated differently, higher income respondents have
higher WTP & WTA. This implies that income elasticity of demand for electricity
ranges from 0.14-0.52, and that electricity is regarded as a normal good or better still
a necessity. This positive and significant result is consistent with prior studies’
findings in developing countries (e.g. Abdullah & Mariel, 2010; Gunatilake et al.,
2012; Twerefou, 2014; Taal & Kyeremeh, 2015). We acknowledge that, this income
variable should be treated as a lower bound estimate as it is much smaller than the
national estimate for the region under consideration.

Generally, we expect single decision makers to have a higher tendency for taking
risk and joint decision makers to be associated with a lower tendency for taking risk.
This is because single decision makers are certain on who takes the risk however,
joint decision makers need to confer in order to make joint decisions. To evaluate
this relationship, we included a dummy to represent families with single dominant
decision makers and joint household decision makers. This primarily was to find out
the extent to which single financial decision makers are able to influence WTP &
WTA relative to joint financial decision makers. In other words, we expect the
behaviour of high risk probability respondents with respect to WTP & WTA to be
different from low risk respondents. We find the coefficient to be positive and
significant in all models. This means that households where respondents need not
consult other household members or are not constrained by other household
member’s views and take risk by themselves have higher WTP & WTA compared
to households characterised by joint decision making.

45
 5.2 Mean WTP & WTA
This section focuses on the mean WTP and WTA as obtained by the sample means
before the regression and the predicted estimates after the regression. The sample
means represent the observed WTP/WTA for the electricity services whereas the
predicted values are moderated by the effect of relevant socio-economic components.
The empirical estimates of the means as well as their ratio are all reported in Table
2.4
Table 2.4: Mean WTP&WTA Statistics
Sample Obs. Mean WTP Expected Mean WTA Expected Mean Mean
Mean WTP Mean WTA Income WTA/
WTP
Ratio
Full Sample 504 67.48 63.96 89.54 82.46 429.04 1.33
used (36.40) (1.13) (47.40) (1.06) (321.35)
[64.30-70.67] [ 61.52-66.49] [85.40-93.69] [80.33-84.64]
Censored at 451 65.09 61.96 83.13 76.82 461.61 1.28
60% (36.04) ( 1.13) (43.03) (1.06) (326.84)
[61.76- 68.43] [ 59.62-64.39] [79.14-87.11] [74.88-78.81]
Censored at 375 62.42 57.73 79.04 70.77 511.60 1.27
40% (35.26) (1.12) (40.66) (1.07) (334.07)
[58.84-66.00] [55.60-59.95] [74.91-83.17] [68.84-72.74]
Censored at 206 59.91 49.16 74.20 55.44 665.02 1.24
20% (37.90) (1.15) (42.63) (1.11) (364.18)
[54.71-65.12] [47.15-51.26] [68.34-80.06] [53.46-57.48]
†
SD( ) denotes Standard Deviation, and CI [ ] denotes 95% Confidence Intervals

The results shown in Table 2.4 suggest that mean WTP for the full sample is
GHS67.48 which is less than the mean WTA of GHS89.54 with a corresponding
WTA/WTP ratio of 1.33. The further away the subsample is from the full sample the
smaller the mean WTP and WTA values. Nevertheless, the pattern, in terms of WTA
being greater than WTP is consistent for all samples. The standard deviation for the
expected mean values are relatively far smaller with a more compact confidence
interval.

The expected WTP for the full sample, and the 60%, 40% and 20% subsamples
constitute about 15%, 13%, 11% and 7% of household income. Thus, households are
prepared to pay between 7% and 15% of their income to have a 24-hour supply of
electricity in the GAR of Ghana. The fraction of income on electricity is consistent
with earlier CVM studies such as Whittington et al. (1991) and Taal & Kyeremeh
(2015).

46
5.3 Within-subject Test on Continuous Variables
Moffatt (2016), indicates that within-subject test is appropriate to evaluate the effect
of a treatment in a situation where each respondent/subject is observed before and
after the treatment. Alternatively, if the same respondent responds to WTP questions
before the WTA questions as in our case, then it provides the opportunity for a
possible within-subject comparison. Moffatt (2016) argues further that within-
subject test has more statistical power compared to between-subject test.

In this study, we find that all the mean WTA values exceed its corresponding mean
WTP values. Also, the possible within-subject comparison between WTP & WTA
values (continuous variables) make the use of within-subject test on continuous
variables very appropriate. We apply both parametric (paired-comparison t-test) and
non-parametric test (Wilcoxon signed-rank test) strategies.

The parametric paired-comparison t-test gives a strong evidence of statistical

difference between the means of WTA & WTP (see Table 2.5). This is because we
observe that the WTA is higher on average, and the average difference reported (in
Table 2.5) is 22.06.

Table 2.5: Paired Comparison T-Test of WTA & WTP

Variable Obs. Mean Std. Err. Std. Dev. [95% Conf.
Interval] t = 15.25
WTA 504 89.54 2.11 47.40 85.40 - Ho: mean(diff) =
93.69 0
WTP 504 67.50 1.62 36.40 64.30 -70.67 Ha: mean(diff)
!=0
Pr(|T| > |t|) =
Diff 504 22.06 1.45 32.48 19.22-24.90
0.0000

Again, the Wilcoxon signed-rank non-parametric test used here, focuses on the
difference between WTA and WTP for each observation. In Table 2.6, we find that
the sum ranks for positive sign (WTA>WTP) is 111,694 which is far higher than
negative sign (WTP>WTA) of 8,426. Given a (two-tailed) p-value of 0.0000 we have
evidence to reject the null hypothesis that the sum ranks for both WTA and WTP are
equal. This test for statistical difference between WTA & WTP supports the evidence
provided by the parametric test.

47
Table 2.6: Wilcoxon Signed-Rank Test
Sign Observations Sum Expected
Ranks
Positive 355 111,694 60,060 z = 15.902
Negative 30 8,426 60,060 Prob > |z| =
0.0000
Zero 119 7,140 7,140
All 504 127,260 127,260

We further consider the fact that Wilcoxon signed-rank depends on the assumption
that the distribution of paired differences should be symmetric around the median.
In addition, we conducted the paired-sample signed test. This test is very relevant in
our case because it avoids the Wilcoxon signed-rank test assumption. Thus, it is
distribution free. The test results is provided in Table 2.7.
Table 2.7: Paired-Sample Sign Test
Sign Observed Expected P-value for
One-sided tests:
Positive 355 192.5 0.0000

Negative 30 192.5
P-value: 1.0000
Zero 119 119
P-value for
All 504 504 Two-sided test:
0.0000

From Table 2.7, given the huge differences in the observed positive differences than
negative differences as well as the relevant p-value (one-sided test) of 0.0000, we
argue that the difference is significantly different from one half given the binomial
distribution. We conclude from our evidence in Table 2.7 that our results is
consistent with earlier results presented in Table 2.5&2.6. Next, we try to investigate
this relationship further using the difference in their distributions. Here, we apply the
kernel density estimation in the next section.

5.3.1 WTP&WTA Distribution

We use the kernel density estimation, which is a non-parametric technique because
we do not assume any underlying distribution for the variables to investigate the
WTP and WTA distributions. With two distributions, we can observe from the data
that although the means are different the distributions overlaps a lot. So we examine
the distribution of the difference between WTA and WTP because it is paired
comparison.

48
 Kernel density estimate

.6
.4
Density

.2
0

-2 -1 0 1 2 3
WTA_WTP
kernel = epanechnikov, bandwidth = 0.5000

Fig. 2.2: Distribution of WTA-WTP Difference

In Fig. 2.2, we find that the mean of the distribution is different from zero and that it
lies to the right of zero. This suggests that the mean of WTA is significantly different
from the mean of WTP. Indeed, our tests so far establish divergence between WTA
and WTP.

We admit that our results are not “order-effects” free. This problem may be relevant
in our case because of framing. Indeed, we should expect that a respondent’s WTP
behaviour, may somehow influence their WTA behaviour and that the disparity may
be attributed to the order of our elicitation design.

Applying a convolution test as proposed by Poe, et al. (2005) to evaluate the entirety
of both distributions would have been an ideal test. This test is an alternative to the
standard empirical approach to determine the probability that a random variable is
either statistically different to another or not (Loomis and Gonzalez-Caban, 2006).
However, our data is limited by the fact that the WTA and WTP values are not
independent, which is a requirement in undertaking this test.

Contrary to our earlier findings of divergence, we revisit Table 2.4 and find
interesting results with respect to WTA/WTP ratios. We find that all the mean
WTA/WTP ratios range from 1.24 to 1.33. Several studies cited in Alberini and Khan
(2006), including Knetsch and Sinden (1984), Bishop and Heberlein (1986),
Brookshire et al.(1986), Kahneman et al. (1990), Shogren et al. (1994), and Horowitz
& McConnell (2000), found that the WTA/WTP ratio ranged from approximately
three to seven. There are however, studies that have reported WTP/WTP ratio of less
than two (i.e. 1.4-1.8) these include but are not limited to Coursey et al. (1987),

49
Harlow (1988), Kachelmeier and Shehata (1992), Boyce et al. (1992), and
Eisenberger and Weber (1995). Our results are in the lower end of these differences
and seem more in line with the classical utility-maximizing models as posited by
Willig (1976).

The literature has provided several reasons why this WTA/WTP ratio will be smaller.
First, is framing: If the WTP question followed by the WTA question are both asked
to the same respondent during the same time of the interview then one would expect
the WTA/WTP ratio to be smaller. Second, the good being valued: if the good being
valued is considered more as a private good than a public good then WTP and WTA
will converge.

From the ratios, we also argue that there is equality between the two distributions.
Stated differently, there is no statistically significant difference between the WTP
and WTA distributions.

5.4 Discussion
CVM has been criticized in articles published by Diamond and Hausman (1993);
Milgrom (1993); McFadden and Leonard (1993); Diamond and Hausman (1994).
Their core argument according to Haneman (1994) is that CVM results are
inconsistent with economic theory. Haneman debunks this assertion and argues that
a careful examination of their claim shows that, it is either their stance are not
supported by the findings in CVM literature or they are based on unusual notions
about what economic does or does not prescribe.

More recently, Hausman (2012) has revived the debate which he described the CVM
as “From Dubious to Hopelessness”. He builds on Diamond and Hausman (1994)
earlier critical position under three main areas namely: hypothetical bias and upward-
biased results; differences between willingness to pay and willingness to accept;
scope and embedding. However, other authors such as Haab et al. (2013); Kling et
al. (2012); Carson (2012), have offered counter arguments to the assertions made by
the critics. In support of the CVM following the three main points of their criticism,
we have provided evidence to justify the credibility of our CVM application. Indeed,
we provide internal validation of this study following:

 Hypothetical Bias: Rowe et al. (1980, p.6) defines hypothetical bias as “the
potential error induced by not confronting any individual with the real situation”.
The good in question is not a hypothetically market described good. What is
being valued is not new to respondents. They have until recent crisis enjoyed
24hour supply of electricity throughout the year (except for technical faults) in

50
 Ghana. We therefore classify this good being valued not as something new to
respondents hence lacking the possibility of being prone to hypothetical bias.
 WTP & WTA: What is being measured in a CVM study is either WTA or WTP
for especially changes in non-marketed goods. We have applied both WTA and
WTP in this study and tested for possible convergence and divergence between
them. The within-subject tests on continuous variables suggest that there is a
significant difference between the ranks of the medians. This satisfies the
empirical divergence found in some studies. However, the mean WTA/WTP
ratios (Table 2.4) suggests that the two distributions are approximately the same.
This satisfies the theoretical convergence in the two approaches. We are
therefore not conclusive without the convolution test.
 Scope Sensitivity: Morey et al. (1991) acknowledged that, “economic theory
suggests that in general WTP [or WTA] will depend on income, [thus] justifying
the inclusion of income in the utility difference model” (Park and Loomis, p.154).
This study estimated WTA and WTP subject to consumer’s income. This is
consistent with consumer demand theory. We find that WTP and WTA varies
across various income groups. Hence, we can argue that this study satisfies the
scope sensitivity test.

Although CVM is regarded as the most controversial of all environmental valuation

methods (Hanley and Barbier, 2009), it is still a pioneer stated preference method in
estimating both use and non-use values. From our evidence, we support the claim of
Loomis (1989) and argue that CVM is credible and provides accurate estimate of the
respondent’s full nonmarket value of a good, which is demonstrated to be valid and
reliable over time

5.5 Energy supply vs Aggregate WTP estimates

To determine the cost and benefit of electricity supply in Ghana, we first compute
the aggregate annual WTP and WTA for a 24-hour electricity supply. According to
the 2010 Housing and Population Census by the Ghana Statistical Service (2012),
the total population of the GAR with ten districts is 4,010,054 and the total number
of households is 1,036,426. The conditional or expected means from the regression
results are all presented in Tables 2.3 and 2.4 (detailed). Given that the sample was
randomly selected, and the full sample expected mean for WTP and WTA as
GHS63.96 and GHS 82.46, we can now compute the aggregate WTP & WTA per
month as GHS66,289,806.96 and GHS85,463,687.96 respectively. The annual
aggregate WTP & WTA can also be calculated as GHS795,477,683.5
($206.01million) and GHS1,025,564,256 ($265.59million).

51
 Data available for cost of energy production come from National Energy Statistics
final report of the Ghana Energy Commission (2015). From Table 2.10 (see
Appendix A) summarised in Table 2.8, we compute the annual total cost of
electricity to the households in the GAR as GHS 1,363million ($352.98million). This
shows the cost burden on all households for electricity supply in GAR. Using the
year 2014’s cost estimate (lower bound) as the most recent available data, we find
the cost of electricity per household to be GHS1,315.10 per annum or GHS109 per
month.15 This constitute about 25% of household’s income which is 10 percentage
points higher than proportion of expected WTP mean to income (15% for the full
sample). Subtracting the total cost from the benefit (WTP) yields a net cost of
GHS567.52million ($146.97million). This suggests that a complete removal of
subsidies on electricity tariff in Ghana will be very disastrous to household’s
electricity consumption. This probably underlines the reason why the government is
reluctant to fully privatise the sector in spite of the substantial interest shown by both
local and foreign firms.

Now, notwithstanding how huge this burden is on households, it has the probability
of worsening further if the country continues to depend on thermal plants and still
import light crude and natural gas to power the plants. In Ghana, electricity
generation from thermal plants is based on pricing which is subject to the volatility
in the exchange rate, political will by trading partners, cost of transportation etc.
Since electricity pricing is highly subsidised in Ghana, this has the likelihood of
putting more pressure on government’s limited budget which receives donor support
annually. A government that is unable to meet the needs of the people is prone to
demonstrations, riot and political unrest. It is not a surprise that the year 2015
witnessed more strikes and demonstrations than any other year since the country
became democratic.
Table 2.8: Cost & Benefit Analysis of Electricity in Ghana
Year Annual Household Monthly Household Annual Cost/Benefit
Total Cost (Million GHS) Total Cost(Million GHS) Analysis† (Million
GHS)
2010 463.64 38.64 331.84
2011 525.56 43.80 269.92
2012 566.72 47.23 228.76
2013 744.02 62.00 51.46
2014 1,363.00 113.58 -567.52
†
Note: Refer to Table 2.10 (appendix) for detailed cost table. We assume a constant benefit
across the years.

15 Cost per household=cost/household =GHS 1,363million/1,036,426.

52
In Table 2.8, we observe the cost and benefit trend since 2010. We observe a
downward spiral in the trend from 2010 to 2014. It is obvious that the fall was quite
gentle from 2010 to 2012. We however observe a sharp decrease from 2012 to 2013,
and a marked fall thereafter.

Although the sector has not performed impressively over the last decade, the
prospects associated with the sector, evidenced by the positive attitude shown in
households’ WTP for improved service, could be the reason why as of March, 2016,
about forty-two companies16 have shown interest in private sector participation in
ECG. Other reasons that make Ghana a good destination for local and foreign direct
investment in the electricity (energy) sector; are the abundant renewable energy
potential, economic climate, stable political atmosphere, low crime rate, and socially
friendly and hospitable environment among others.

6. Conclusion and Policy Recommendation

The Sustainable Development Goal (SDG 7[1]) provides that “by 2030 [the world
should] ensure a universal access to affordable, reliable, sustainable and modern
energy for all”. The SSA has a responsibility of ensuring that the 635 million people
without electricity have electricity. Ghana has a responsibility of ensuring that the
electricity crisis is permanently over and the about 35.9% of the population without
access to electricity are not just using electricity but are enjoying affordable, reliable,
and modern energy services.

We establish that the current electricity crisis in Ghana has serious socio-economic
and political implications. For example a country with a phenomenal annual
economic growth rate of 14.05% in 2011 and 7.3% in 2013, recorded a growth rate
of 4.2% and estimated 3.4% in 2014 and 2015, respectively (see World Bank, 2016).
In addition, 2015-2016 is observed to have recorded unprecedented demonstrations,
increase public outcry and declining support for the ruling party. Not harnessing the
potential of the country to ensure sustainable economic growth and enhance human
welfare can have serious consequences.

A key reason for this persistent, and unpredictable incidence of electric power
outages, plunging the country into electricity crisis is attributed mainly to low
revenue inhibiting access to sufficient fuel for thermal plants, maintenance and
expansion exercises.

16List of these companies can be found at http://www.myjoyonline.com/news/2016/March-

23rd/scramble-for-ecg-as-42-companies-show-interest-in-concessions.php
53
It is against this background that we sought to estimate demand for a 24hour service.
By this, we investigate whether households will be willing to pay for an
improvement in the current electricity challenges. Some key validity concerns such
as hypothetical bias, willingness to pay and willingness to accept, and scope
sensitivity which have been highly debated in the literature were addressed. Our
results show that estimated mean WTP is GHS63.96 and WTA is GHS 82.46. The
annual aggregate WTP & WTA can also be calculated as GHS795,477,683.5 (795.48
million or $206.01million) and GHS1,025,564,256 (1,025.56 million or
$265.59million). Our estimates constitute between 7% and 15% of respondents’
take-home income. Unfortunately, the cost & benefit analysis showed a deficit of
GHS567.52million ($146.97million) per annum.

We recommend that first, the private sector should not be in a haste to take over the
electricity sector in Ghana if other cheaper sources of electricity supply are not going
to be harnessed. Second, in the event that the private sector is to be considered in
this sector, we recommend that this should be implemented with due diligence
because of the social welfare implication to the poor and vulnerable whose ability to
afford is hugely in doubt. Thus, any move towards removal of subsidies immediately
should not be considered as the amount households are prepared to pay is quite high
yet not sufficient to cover the cost of supply. Third, providing incentives for private
households to go renewable (solar) and managing their sources of electricity could
be the way forward by the government. This has a huge advantage of weaning the
country off overdependence on generation-mix that are not reliable with its
associated huge distributional losses which is also a major concern to ECG. Also,
the electricity subsidy by the government should be made known to customers by
presenting it on electricity bills to raise the awareness and ensure transparency in
electricity pricing in Ghana. Lastly, from the welfare point of view, we recommend
government’s commitment to honouring her subsidy obligations as this is very
crucial to the recovery and development of the sector.

54
 APPENDIX B
Appendix B1: Data and Summary Literature Tables

Table 2.9: Descriptive Statistics for both WTP &WTA

Variable Description A Obs. Mean Std. Min Max

priori Dev.

Bid (GHS) Discrete + 504 54.54 28.66 10 100

Bill (GHS) Continuous + 504 36.10 32.62 5 250

Household Size Continuous + 504 4.00 3.00 1 17

Marital Status Dummy + 504 0.48 0.50 0 1

(Married=1) [48.21%]
Married [51.79%]
Unmarried
Gender (Male=1) Dummy + 504 0.65 0.48 0 1
Male [64.68%]
Female [35.32%]
Take-Home Monthly Continuous + 504 429.04 321.35 100 1750
Income (GHS)

Financial Decision Dummy + 504 0.95 0.23 0 1

(Single Fin. Dec. [94.64%]
Maker=1 [05.36%]
Several Fin. Dec.
Makers=0)
*percentages are provided in square brackets [ ]

55
 Table 2.10: Cost of Electricity in Ghana
Items Year
Index 2010 2011 2012 2013 2014
Annual Residential Electricity Consumption by Households A 2,738 2,761 2,803 3,228 3,223
(Residential Class) (GWh)
Annual Total National Electricity Production (GWh). ∑Bi 10,167 11,200 12,024 12,871 12,963
Annual Generation by Hydrological B1 6,996 7,561 8,071 8,233 8387
Plant (GWh) Thermal B2 3,171 3,639 3,953 4,635 4,572
Solar (VRA) B3 N/A N/A N/A 3 4
Import C 106 81 128 27 51
Export D 1036 691 667 530 522
Distribution Losses E 1,981 2,058 2,067 2,203 2,363
Transmission Losses F 380 531 522 569.7 565.1
Tariff
Annual Electricity End User Tariff (GHS/kWh) G 0.211 0.245 0.232 0.307 0.464
Annual Electricity End User Tariff(GHS/GWh) H 211,000 245,000 232,000 307,000 464,000
Residential Electricity Tariff layers
0 - 50 (Exclusive) I 9.5 9.5 9.5 11.1 18.6
51 - 300 (GHp/kWh) J 14.5 16.5 17.6 21.1 37.2
301 - 600 (GHp/kWh) K 18.5 21.3 22.8 27.3 48.4
600+ (GHp/kWh) L 21.0 23.5 25.3 30.3 53.7
Service Charge (GHp/month) M 100.0 153.5 165.3 197.9 350.1
Service Charge (GHS/Year) N 12.0 18.396 19.836 23.748 42.012
Annual Average Residential Electricity Tariff (GHp/GWh O 15.9 17.7 18.8 22.4 39.5
=Average(I,J,K,L))
Annual Average Residential Electricity Tariff in GHS/GWh P 0.159 0.177 0.188 0.224 0.395
=Average(I,J,K,L)
Number of Households (2010 Census data) Q 1,036,426 1,036,426 1,036,426 1,036,426 1,036,426
Cost of Electricity
Annual Household Total Cost of Electricity ∑𝛾𝑖 463.64 525.56 566.72 744.02 1,363.00
[GHS Million])
∑𝛾𝑖 = ((A ∗ P + M ∗ Q)/1,000,000)
Source: Authors Computation with data from Energy Commission of Ghana (2015). †We have assumed that each household has one electricity meter.
‡The number of households used here suggest that our estimate should be treated as a lower bound (The number of households is assumed
to be constant from 2010-2016 although the population growth rate is estimated at 1.82%).

56
Table 2.11: Summary of Literature
Good/Service Valuation Econometric
No. Author(s) Country Valued Method Technique Results
Electricity Cost to
1 Adenikinju (2005) Nigeria Firms PFA:WTP OLS N19.66-65.83/ kilowatt-hr
Research gap exist that is yet
2 Menegaki (2008) Mexico Renewable Energy Review N/A to be filled
Mean WTP across scenarios
Abdullah and Mariel ranges from KSh. 28.30-
3 (2010) Kenya Electricity services CE Mixed logit 74.91
South Premium priced green
4 Oliver et al. (2011) Africa electricity WTP Logit R44.72- R201.18
Nonparametric
Abdullah and Jeanty Renewable Energy for and a parametric Respondents are WTP more
5 (2011) Kenya rural electrification CVM:WTP model for GE services than PV
South
6 du Preez et al. (2012) Africa wind farm CVM:WTA Logit R40,891.29/M
Gunatilake et al. 24 hour electricity
7 (2012) India supply CVM:WTP OLS/Probit Rs.219/233/M
RES over hydro from large
dams $350m /yr. RES over
8 Aravena et al. (2012) Chile RES CVM:WTP Logit Fossil Fuel is $413m/ yr
PV=$10, GE=($13)
Grid electricity (GE) PV option appear to be a
Abdullah and and solar photovoltaic more fruitful direction for
9 Markandya (2012) Kenya (PV)services CVM:WTP N/A gov’t programs to pursue.
CE:WTA for High Income WTA
reduction in = R1088.28-R4302.44
South Location of Wind subsidy Lower Income WTA
10 Hosking et al. (2012) Africa Turbine Farms (WTP) M-Logit = R21.38-R84.51
Average WTP is RMB
7.91($1.15)-10.30($1. 51)
11 Zhang and Wu (2012) China green electricity CVM:WTP M-Logit yuan/month
12 Twerefou (2014) Ghana Improved electricity CVM:WTP Ordered Probit ȼ0.2734 / kilowatt-hr
Taal and Kyeremeh Average additional WTP
13. (2015) Ghana Reliable Electricity CVM:WTP Tobit amount is GHS6.80
Higher WTP for electricity
from solar
14 Ma et al. (2015) Mixed Renewable Energy WTP Meta-Analysis than wind, hydro or biomass
57
 Appendix B2. Questionnaire
Interviewer: ………………………………. TOPIC: Demand for Electricity in Ghana:
Validity Tests for CV Responses
Supervisor…………………………………..
District………………………………
Region: ……………………………………….
House Number……………………….
Metropolitan Area……………………..
Respondent’s ID…………………….
Locality…………………………............
Language used in the survey:
Interview date :…………/…………/ 2014
1. English

Start Time: Hrs.……../Min……… 2. Twi

3. Ga
End Time: Hrs...……../Min………. 4. Ewe

Survey Price Draw 5. Other

Yes[ ] No:

No[ ] Thanks

A BRIEF BACKGROUND OF STUDENT

My name is [Give Name and show I.D]. I’m part of a team headed by Anthony
Amoah, a PhD student from the School of Economics, University of East
Anglia, UK. He is conducting a survey of people’s opinions about the
electricity situation in Ghana.
I humbly wish to request your kind participation in this research, which aims
at estimating the economic value of electricity in Ghana. The research does
not probe into your private affairs but we are interested in your personal
perception and experience of electricity supply in Ghana. Your answers will
only be used for empirical analysis in the framework of this research. Your
information will not be shared or used for any other purpose. It will be treated
as strictly confidential. Nevertheless, you still reserve the right to refuse or
indicate don’t know to questions where necessary. Completing this survey
automatically enters you into a free rechargeable mobile credit draw (if you
wish) where you could win one of the ten GH¢10 mobile credits.
Thank you very much for your kind cooperation.

NB. Please tick [], underline or write where appropriate.

Part I: BIO-DATA

A. Respondent’s household status:

1. Head 4. Parent of Head
2. Wife of Head 5. Child of Head
3. Husband of Head 6. Other: If other, specify……….
B. Year of birth (If provided skip QC):

58
C. Age range (Age in completed years):
1.18-29 3. 40-49
2. 30-39 4. 50+

D. What is your gender?

0. Male
1. Female

E. How long have you lived in Accra?

1. Whole life
2. More than 10 years
3. 5 10 years
4. 2-5 years
5. Less than 2 years

F. What is your marital status?

1. Single
2. Married
3. Widowed
4. Divorced

G. What is the highest level of education you have completed?

1. No schooling
2. Primary
3. JHSS
4. SHS
5. Polytechnic
6. Professional degree
7. First degree
8. Advanced degree

H. What is your current occupation?

1. Student
2. Unemployed or casual workers
3. Employed
4. Self-employed
5. Inactive (e.g. housewife)
6. Retired
7. Other
I. Do you consider your earnings on a monthly or weekly basis?
0 Monthly
1 Weekly
J. How much do you earn on average per month in Ghana cedis?

1. <160 2.160-599 3.600-999 4.1000-1399 5.1400-1799 6.1800-2199 7.2200-2599

8.2600-2999 9.3000-3399 10.3400-3799 11.3800-4199 12.4200-4599 13. 4600-
5999 14. ≥6000 15. I don’t know 16.I won’t tell you

K. Who usually makes the final financial decisions in your household?

1. Me/Respondent only
2. Spouse only
3. Parent(s) only
4. Other senior relative
5. Joint decisions incl. me
6. Joint decisions not incl. me
7. Other

59
Part II: [Used] Contingent Valuation Questions on Electricity
A: Some Electricity Consumption Questions
L. Do you have electricity supply 24 hours in a day throughout the year? Yes [ ]
No [ ] ; 24hr_ec

M. How much do you currently pay as electricity bill per month? GH¢…………;
ec_bill

B: Willingness-to-pay for Electricity

N. Assuming your household is provided with a 24 hour electricity supply. Would
your household be willing to pay GH¢………… per month?
YES [ ] No [ ]; ec_starting point response

 If No, (NB: decrease it by GH¢5) what about GH¢ ………per Month? ec_first
charge

Yes [ ] No [ ] ec_first charge response

 If No, please specify amount which your household would be willing to pay
GH¢…… ec_final

 If yes (NB: Increase it by GH¢10), continue….

GH¢…………………….. per month. ec_first charge

YES [ ] NO [ ] ; ec_first charge response

If yes, it means your household would be willing to pay more. Please state your
maximum amount per month in GH¢……….. ; ec_final

If no, it means your household would be willing to pay less. Please state your
maximum amount per month in GH¢…………. ec_final

O. Assume your household is to be provided with a 24-hour electricity supply,

however, it is not reliable. How much will you accept as compensation from the
government per month for the current power shortages [Note: 24-hour off, 12-
hours on]? ............................................... ec_compensation

60
 CHAPTER THREE

Estimating Demand for Reliable Piped-Water Services in

Urban Ghana: An Application of Competing Valuation
Approaches.

1. Introduction
Over the past three decades substantial progress has been made towards global
domestic water security. Despite the global success in meeting the 7 th Millennium
Development Goal 17 , several developing countries still suffer from poor water
supply problems and the associated consequences. It is estimated that about 780
million people mainly from developing countries are still without access to clean
drinking water (Salaam-Blyther, 2012). Ironically, some of these countries have
abundant water resources. Ghana, for example, is naturally endowed with a sizeable
amount of renewable fresh water for domestic and other uses. UNICEF and the
World Health Organization (UNICEF/WHO, 2012) report that, an estimated 91% of
urban Population in Ghana have access to improved water supply while 33% have
piped-water on their premises. This is, however, highly erratic and undependable.
Taylor et al. (2002) confirm the erratic nature of water supply, and indicate that less
than 10 percent of the population enjoy a reliable in-house potable water connection.
Most (87%) of these people are either officials in the public service or high income
individuals in the private sector (Owusu and Lundehn, 2006). Water rationing and
low quality storage systems, however, leave large portions of the population without
adequate potable water (see Stoler et al. 2012).

This situation has since the early 1990s been attributed to high operational costs and
low revenue returns (Water Aid, 2005). World Bank (1991), and Brookshire and
Whittington (1993) have proposed full cost recovery programmes in the water sector
as a way of bridging the cost-revenue gap, in an attempt to solve the supply-deficit
gap. They suggest government and donor exclusion but full consumer inclusion in
the payment of water supply in Ghana.

However, due to information asymmetry among agents, these suggestions have been
disattended. According to Ghana’s National Water Policy (2007), one major
challenge in the water sector is realistic pricing, the main uncertainty relates to how

17To halve, by 2015, the proportion of the population without sustainable access to safe drinking water
and basic sanitation. Currently, more than 2.1 billion people have gained access to improved drinking
water sources since 1990, exceeding the MDG target (88%) by 1%. This makes 6.1 billion (89%) having
access to improved drinking water sources (see UN Dept. of Public Information, September 2013).
61
much consumers would be actually willing to pay for improved water services. This
study seeks to fill this informational gap.

This study aims to inform policy making and provide useful guidance for reliable
piped-water supply. This is achieved by estimating households’ willingness to pay
and undertaking a cost & benefit analysis for reliable piped-water supply. The choice
by researchers on preferred method is sometimes subjective, therefore application of
several methods to same choices provide some degree of neutrality (see Carson et
al., 1996) and validate estimates.

This study applies and compares three different valuation techniques, namely the
Hedonic Price Method (HPM), the Travel Cost Method (TC) and the Contingent
Valuation Method (CVM), to estimate the willingness to pay (WTP) for a reliable
piped-water supply. Thus, the main contribution of this paper is its application of
three independent valuation methods to provide robust estimates of the WTP to
inform policy. The estimates seek to bridge the information asymmetry gap in this
market by providing evidence for investment in the water sector. In line with
providing information to inform policy, we find WTP to constitute 3-8% of
households’ income. In addition, our cost & benefit analysis show a positive net
benefit for investing in reliable piped-water supply in Ghana. Our results are
consistent with existing studies on WTP for piped-water as seen in the literature such
as Van Den Berg and Nauges (2012), and Choumert (2014b).

The rest of this study is structured as follows: Section 2 reviews previous studies
relevant to the study. An overview of the methodological framework used in the
study is presented in section 3. The data collection processes are presented in section
4. Section 5 shows the econometric modelling of the various valuation methods used.
The estimation and discussions of results are presented in section 6. Section 7
presents the conclusion and policy relevance of the paper.

62
2. Review of Previous Studies
Here, we discuss empirical studies on residential water demand in both developed
and developing countries. We also discuss single and multiple valuation methods
used in general valuation studies.

Empirical studies on residential water demand dates back to notable works by the
likes of Metcalf (1926), Seidel and Baumann (1957), Fourt (1958), Renshaw (1958)
and Gottlieb (1963). Since then, more studies have taken place in developed
countries than in developing countries. Evidence from the literature shows that there
have been more studies in the USA on this than any other country. Further evidence
in a study by Worthington and Hoffman (2008) shows that since the 1980s there
have been more published studies in this area in the USA than in any other country.
Metcalf (1926) studied the relationship between water rates and growth in population
based on per capita consumption. Here, a cross-sectional study of 30 cities was used
and the findings show that city size affects per capita water consumption positively.
The study obtained a price elasticity of -0.65. Gottlieb (1963) also estimated
residential water demand for Kansas in the USA where he found income elasticity
of 0.28 to 0.58 and price elasticity of -0.66 to -1.24. A similar country study was
done by Howe and Linaweaver (1967) using a cross-sectional analysis, they
estimated demand using ordinary least squares and concluded that the demand for
residential water is price inelastic (-0.23) for off peak periods. Some of the earlier
studies in the literature which include Metcalf (1926) and Gottlieb (1963) are
reported by Barkatullah (1999) for using average prices rather than marginal prices
as it led to exaggeration of their prices. Also, different elasticities observed in the
literature have been acknowledged by Dalhuisen et al. (2003) in their meta-analysis
with 64 studies to be attributed to functional forms, aggregation levels, data features
and other estimation issues.

Other notable contributions in this area of research have sought to investigate the
cost-benefit analysis of having improved water services or projects. Gramlich (1977)
in his study on the demand for clean water, the case of the Charles River in the USA
used the CVM and concluded that the project will not have a positive net benefit as
the benefit is of the same order as the cost. Similar findings is seen in Carson et al.
(1993) in their study on the value of clean water with focus on the public’s WTP for
boatable, fishing and swimmable quality water. Pattanayak (2006) used 1800
households in a WTP study in Sri Lank and found that demand for piped services
was low and private sector involvement would fail. These evidence suggest that net
benefit for WTP studies is not always positive.

63
Contrary to the studies by Gramlich (1977), Carson et al. (1993) and Pattanayak
(2006) where the net benefit was found not to be positive; Briscoe et al. (1990),
Whittington et al. (2002), and Soto Montes de Oca et al. (2003) found net benefits
to be positive. In the case of Briscoe et al. (1990) who worked on ensuring equitable
and sustainable rural water supplies in Brazil, they found that major increases in
tariffs for yard taps can attract the private sector and reduce subsidies. Also, with the
first evidence from South Asia, Whittington et al. (2002) looked at only piped water
services in Nepal unlike Nauges and Van den Berg (2009) who investigated both
piped and non-piped. Using the CVM and Probit model they found that households
WTP for improved services are much higher than their current water cost.

The first developing country water demand study was undertaken by White et al.
(1972). In their study on drawers of water; with focus on domestic water use, they
used interviews which were obtained from 1966-1968 and observations at 34 study
sites in Kenya, Uganda and Tanzania. They found that piping spring is not feasible
for urban high density but ideal for houses in dispersed highland humid areas.
Subsequent to this is the study on income and price elasticities of demand for water
by Katzman (1977). This cross-sectional study was based on a random sample of
1400 households in Malaysia. He found an income elasticity of 0.2 to 0.4 and a price
elasticity of -0.2 to -0.1. It is observed that studies in developing countries have
mainly used cross sectional data because of the challenges of obtaining secondary
data in these countries. A more recent study by Nauges and Van den Berg (2009)
using cross-sectional household data in Sri-Lanka estimated price elasticity with
Probit and Tobit models and found price elasticity of -0.15 for only piped-water and
-0.37 for piped and other sources.

In the area of water demand and valuation methods in developing countries, studies
have mostly used the CVM followed by the HPM and the TCM. It is observed that
mostly, single method studies use CVM or HPM with few considering the TCM.
Single CVM studies include Whittington et al. (1990a), Briscoe et al. (1990),
Whittington et al. (2002), and Soto Montes de Oca et al. (2003). Whittington et al.
(1990a) used CVM and Ordered Probit econometric approach in estimating demand
for water services in developing countries, with Haiti as a case study. They found
CVM to be a feasible method in estimating individuals’ WTP for improved water
services. Single HPM studies include Anselin et al. (2008), Nauges and Van Den
Berg (2009) and Vásquez (2013a, 2013b). Single TCM studies include Smith &
Desvousges (1985), and Hedonic Travel Cost also includes Brown & Mendelsohn
(1984) and Bockstael et al. (1987). Current trend of research prefer the other single
methods to TCM in water demand studies.

64
Application of several methods in a single study dates back to the work of Knetsch
and Davis (1966) where they compared the CVM and TCM for forest recreation
evaluation. 185 users were interviewed in Maine-USA. They found that CVM
estimates are greater than TCM estimates. They observed however some degree of
closeness (12%) in the two estimates. Similarly, Choe et al. (1996) estimated the
economic benefits of surface water quality improvements in developing countries
using CVM and TCM methods. They found that these methods provide close
estimates and are quite low, both in absolute terms and as a percentage of income.
In addition, Brookshire et al. (1985) investigated a test of the expected utility model
with evidence from earthquake risks in Los Angeles and San Francisco using the
CVM and HPM. They found that CVM and HPM are quite similar. In both cases,
similar findings are also found in Cummings et al.(1986), Carson et al. (1996),
MacNair and Desvousges (2007). With TCM and HPM, Bateman (1993)
acknowledges the closeness of these methods however he observes that both
methods do not capture non-use values yet with strong assumptions they produce
valid and similar welfare estimates. It is also observed by Carson et al. (1996) and
Devicienti et al. (2004) that CVM estimates are averagely smaller but not grossly
smaller than revealed preference (RP) estimates. However, Carson et al. (1996) were
quick to acknowledge that it is not in all cases that stated preference (SP) estimates
are smaller than revealed preference estimates. This suggests inconclusiveness in
empirical studies on the method that provides relatively greater estimates. Albeit,
most studies agree on the similarity in SP and RP estimates.

Regarding water valuation studies in Ghana, there has not been a single study that
combined more than one of the valuation methods. There are a few single-method
“weak” studies that focused on water demand such as Quartey (2011) and Botchway,
(2013). These studies are flawed to a certain extent as their sample sizes are not
representative of the total population of the study area. Botchway (2013)
acknowledges that his sample is not representative due to time and financial
constraints hence their results are handled with caution. In contrast, other notable
studies found in the literature which include Boadu (1992), Whittington et al. (1993)
and Berry et al. (2012) had different focus other than domestic water demand. In
broader sense, Boadu (1992) looked at the case of rural households, Whittington et
al. (1993) investigated sanitation services and Berry et al. (2012) examined WTP for
household water filters. It is important to state that the cost of such valuation studies
especially using large samples is quite high hence not much has been done in Ghana.
Whittington and Pagiola (2012) while reviewing CVM studies in developing
countries have observed that quality and usefulness of CVM studies could be
improved at only a modest increase in costs.

65
These empirical studies are important because they show the possible valuation
methods useful for this study and their expected results. Also, it highlights significant
gaps in the studies, especially in the case of Ghana and other developing countries
as already mentioned, which need to be bridged.

3. Overview and Methodological Framework of Valuation Methods

This section presents an overview of all the three valuation methods and their
methodological frameworks used in the study.

3.1 The Hedonic Price Method (HPM)

The HPM is an indirect valuation method for non-market goods which follows the
RP theory. This method has been applied to several valuation areas or markets which
include but is not limited to estimating the economic value of characteristics of say
property (e.g. Palmquist, 2003; Blomquist and Worley, 1981; Rosen, 1974); wine
(e.g. Nerlove,1995); food (e.g. Wilson and Preszler, 1993); automobile (Court, 1939);
computer (e.g. Triplett, 1989); housing (e.g. Bartik and Smith, 1987); prostitution
(e.g. Moffatt and Peters, 2004), Marriage (e.g. Rao, 1993); quality changes(e.g.
Muellbauer, 1974); pollution, noise/quite (e.g. McMillan et al., 1980 ); road traffic
(e.g. Bateman et al., 2001); Water (e.g. Choumert, 2014a,b; Vásquez, 2013a; Van
Den Berg and Nauges, 2012). For environmental and natural resource valuation
studies (such as access to water, access to publicly supplied amenities, noise, air
quality, etc.), the housing market approach is widely used. In this study, the HPM is
based on the presumption that real rental values are a function of the characteristics
of the area and the house. For example, rental values are formulated as a function of
structural characteristics (e.g. dwelling age, number of rooms, size of living space,
number of stories; access to water, toilet, electricity in residence etc.),
neighbourhood characteristics (e.g. mean-neighbourhood income, crime rate,
distance to school, work, market, transportation, other public services), and
environmental characteristics (e.g. aesthetic view, noise/air pollution or quietness,
etc.) (see Choumert et al., 2014b; Van den Berg and Nauges, 2012; Birr-Pedersen,
2008; Rosen 1974).

The basic intuition of this approach in this study is that a house can be fully
characterised by its attributes (structural, neighbourhood and environmental), and
that price differentials reflect the values associated with the different attributes of the
house in question. Thus, the valuation of piped-water is based on the presumption
that the rental value of a house is a function of the house’s attributes which include
piped-water. This relationship has its foundations in the consumer demand theory.
Following Birr-Pedersen (2008), Zabel (2004), Malpezzi (2002), Day (2001) and
Sheppard (1999), we assume a rational household with a fixed income, M, and the
66
price function P(z) that obtains utility by consuming vector z of different attributes,
plus consumption of a composite good x which is normalised to take a unit price of
one. These vectors explain variations in household preferences. This expression can
be presented by the utility function:
ui = u(𝐳, x, 𝛂) (3.1)
Thus, the household’s level of utility is conditioned on the vector (𝜶). Where 𝜶 is a
vector parameter captured in the model to explain both observable and unobservable
household characteristics. We further assume that a household faces a static setting
in preferences which is conditioned on his budget constraint. The household
maximises utility subject to his budget constraint specified as equation 3.2.
max: u(𝐳, x; 𝛂) s. t P(𝐳) + x ≤ M (3.2)
z,x

L = u(z, x, α) + λ(M − x − P(𝐳)) (3.3)

We obtain equation 3.4 which shows the implicit price function or implicit marginal
price for the property attribute zi from the partial derivatives of equation 3.3.
∂P
P(𝐳i ) = ∂z (3.4)
i

This method was formalised by Rosen (1974). He assumes perfect competition and
perfect observability of attributes. However, this assumption is not applicable in this
study considering the fact that the property market is heterogeneous. We consider a
property market that is described by n attributes,
P(𝐳i ) = P(z1 , z2, … . . zn ) (3.5)
…and denote 𝐳𝑖 as measuring amount of 𝑖 𝑡ℎ attribute in the property, 𝐳. The houses
in this market are assumed to be unique intrinsically and extrinsically. Following the
processes of the HPM as presented by Choumert et al. (2014b), we determine the
implicit marginal price of the different attributes from the aggregate price of the
property, P(𝐳). The partial derivative of the aggregate price function relative to an
attribute ( 𝐳i ), yields the implicit marginal price, 𝑝𝑖 , herein referred to as the marginal
willingness to pay for the attribute 𝑖.

In short, two stages can be applied in determining the marginal willingness to pay
for an attribute. First, determine implicit prices of attributes associated with the good,
and then the summation of the implicit prices, multiplied by the measure of the
attribute will equal the market price of the good (see Devicienti et al., 2004). In our
case, we generate the implicit marginal price by regressing the monthly rental values
on the various attributes which include access to reliable piped-water supply in
residence. Then in the second stage, we multiply this implicit value by the average
house value to yield the marginal willingness-to-pay for reliable piped-water supply
in residences.

67
3.2 The Travel Cost Method (TCM)

As in the case of the HPM, TCM is also an observed indirect non-market valuation
method which follows the RP theory. This method is recognised in literature as the
oldest method of all economic valuation methods. It mainly uses consumption
behaviour in related markets to determine economic values (Fleming and Cook,
2008). In 1947, this idea was first conceived and proposed by Harold Hotelling18 in
response to the director of the US National Park Service’s request on how economic
methods could be used to determine recreational benefits (Smith and Kaoru, 1990).
Hotelling’s idea was based on a possible inverse relationship between travel
distances (price or direct and/or indirect cost of travel) and rates of visit (quantity or
number of travel). This was achieved my measuring the differential travel rates and
the associated travel distances that visitors had to cover in reaching the park (Ahmad,
2009).

This concept and methodology was first implemented individually by Trice and
Wood (1958), Clawson (1959) and Clawson and Knetsch (1966). These authors
together with Garrod and Willis (1999) have by way of application demonstrated the
consistency of this method to economic theory. That is, all else constant, as the price
of accessing a recreational site (cost of travel) rises, the rate of site visits falls
(quantity). This method has been used extensively in outdoor recreational demand
studies such as national parks, fishing, hunting etc. Albeit, some studies which
include Bockstael et al. (1987) have applied it to value water improvement.

In spite of its shortcomings, Smith (1993, p.3), still recognises it as “…one of the
‘success stories’ of nonmarket valuation and occupies a major place in the applied
research programmes of resource and environmental economists”. This has been
explained by Zanderson (2005) as being the case because estimates are generally
consistent with consumer demand theory. She further argued that TCM offers a
utility consistent and robust methodology which explains factors that significantly
explain variance in valuation outcomes.

18 Hotelling’s (1949) letter - which was dated 1947 - originally described the method as follows: Let
concentric zones be defined around each park so that the cost of travel to the park from all points in one
of these zones is approximately constant. The persons entering the park in a year, or a suitable chosen
sample of them, are to be listed according to the zone from which they came. The fact that they come
means that the service of the park is at least worth the cost, and this cost can probably be estimated with
fair accuracy. . A comparison of the cost of coming from a zone with the number of people who do
come from it, together with a count of the population of the zone, enables us to plot one point for each
zone on a demand curve for the service of the park. By a judicious process of fitting, it should be
possible to get a good enough approximation to this demand curve to provide, through integration, a
measure of consumers’ surplus.. .(See Smith and Kaoru, 1990, p.267)
68
Given individual household’s income, Mi , the 𝑖 𝑡ℎ individual household chooses Vij
round-trips to haul for water assuming a single location or site (j) at a travel cost Cij .
The individual household’s utility function can be expressed as

Ui = u(Vij , zi ) (3.6)

Where z is described as the Hicksian composite good. Here we assume that the
location household’s travel to haul for water is separable from all other locations.
The individual household maximises utility subject to his budget constraint specified
as equation (3.7):

max: u(Vij , zi ) s. t. Ci Vij + z ≤ Mi (3.7)

V,z

In the words of Garrod and Willis (1999, p.55), TCM is usually estimated as a trip
generating function. This is simply presented as:
𝑉 = 𝑓 (𝐶, 𝑺) (3.8)

Here; V is the visit rate, C is the cost of travel to the site and S is a vector of travel
cost to substitute sites. This function is presented by Garrod and Willis (1999); and
Bateman (1993) in two main forms namely the Zonal Travel Cost Method (ZTCM)
and the Individual Travel Cost Method (ITCM). The main difference between the
two methods is that the dependent variable of ITCM is defined as 𝑉𝑖𝑗 , the number of
visits made per period by individual 𝑖 to site 𝑗 (See Brown and Nawas, 1973; Gum
and Martin, 1975 and Bateman, 1993) while ZTCM is defined as 𝑉ℎ𝑗 /𝑁ℎ which
represents visits per capita for zone ℎ to site 𝑗 (See Garrod and Willis, 1999 and
Bateman, 1993). By way of comparison, according to Garrod and Willis (1999), the
ITCM is observed to have a distinct advantage over the ZTCM in that while the latter
depends on zonal aggregate data which does not take into account inherent variation
in the data, the former does. Moreover, the ITCM is regarded to be statistically more
efficient. We focus on the ITCM which allows the specification of a number of
individual (household)-specific explanatory variables. This can be modelled as:

𝑉𝑖𝑗 = 𝑓 (𝐶𝑖𝑗 , 𝑇𝑖𝑗 𝑿𝒋, 𝑺𝑗, 𝑸𝒊 ) (3.9)

Again, 𝑉𝑖𝑗 is the number of round-trips made by individual household 𝑖 to site𝑗; 𝐶𝑖𝑗
is the travel cost incurred by individual household 𝑖 when visiting site 𝑗; 𝑇𝑖𝑗 is the
time cost incurred by individual household 𝑖 when visiting site 𝑗; 𝑿𝒋 is a vector of
the perceived qualities of the site 𝑗; 𝑺j is a vector of characteristics of available
substitute sites, 𝑸𝒏 is a vector of socioeconomic characteristics of individual
household 𝑖.

69
3.3 The Contingent Valuation Method (CVM)

Following the work of Hotelling (1947) and Ciriacy-Wantrup (1947), Robert Davis
(1963) also initiated and formalised the basic foundation of bidding methods or
bidding games as a way of describing the iterative question regarding respondent’s
maximum amount they would pay for a specified commodity. This was an attempt
by researchers to put values on non-market goods unlike market goods. One useful
technique proposed is the stated preference method. The contributions in the 70s
which include Randall et al. (1974), Hammack and Brown (1974) and Brookshire et
al. (1976) saw the earnest development of stated preference method. This method
includes contingent valuation method, and choice experiments19.

These methods follow the idea that individual’s behaviours are observed as they
provide responses to hypothetical questions. The theoretical basis for such an
approach to valuing environmental assets relies on microeconomic welfare theory
where individuals or households maximize their utility under income constraint, or
minimize their expenditure under utility constraint (Spash, 2008; Hanley and Spash,
1993). This is what the neoclassical theorists refer to as neoclassical rationality
which is understood to imply ‘maximization and individualist’. Vatn (2004) explains
‘maximization’ to be based on the assumptions of completeness, transitivity and
continuity 20 . In addition, ‘individualist’ is taken to mean that the consumer is
autonomous and that his acts are independent of social contexts. Thus, consumers
are assumed to make rational decisions or choices if preferences are rational. For
example, holding all else constant, a consumer would be expected to behave
rationally if he is provided with an improved version of an unimproved drinking-
water.

The CVM is described by Garrod and Willis (1999) as an essential tool in resource
valuation because revealed preference, or behaviour in markets, cannot be used to
determine the economic value of all commodities. A chapter by Stewart and Kahn
in Alberini and Kahn (2006) presents the CVM as a survey-based approach for
estimating the value of non-market commodities based on how a subject responds to
a question about his/her WTP or WTA compensation to obtain or forgo a change in
quantity or quality of the commodity. The main theory underlying CVM is based on
the assumption that individuals are equally strategic in their behaviour. In as much

19 Sometimes referred to as conjoint analysis or choice modelling (see Hanley and Barbier, 2009;
Stewart and Kahn in Alberini and Kahn, 2006)
20 According to the formal definitions (See Gravelle and Rees, 2004) preferences are complete if for all

x and y in X : x ≥y or y ≥ x. They are transitive if for all x, y, and z in X where x≥ y and y ≥ z, then also
x ≥ z holds. Finally, preferences are continuous if x is preferred over y and z is sufficiently close to y,
then x is also preferred over z.

70
as the CVM is acknowledged to have become the most widely used technique for
monetary valuation of especially environmental assets (Spash, 2008; Hanley and
Barbier, 2009); it is also regarded as the most controversial of all environmental
valuation methods (Hanley and Barbier, 2009).

However, the advantages of the CVM cannot be overemphasized. Mitchel and

Carson (1989) provides some strengths of this method and this include flexibility of
the hypothetical methods. This implies that the method is flexible to the extent that
the researcher in his design can provide a variety of states of the good being valued
and its associated conditions. They further cited Sen (1977, 339-340) to have
observed that, “once we give up the assumption that observing choices is the only
source of data on welfare, a whole new world opens up, liberating us from the
informational shackles of the traditional approach”. A second advantage is it helps
to obtain ex-ante judgements. This allows WTP amounts for existence values to be
obtained which is not possible with just observed behaviours. Thus, both use and
non-use values are estimable by this method. Lastly, the problem of wrong
assumptions leading to potential bias vis a vis the form of individual utility functions
is avoided. This is because the CVM is able to directly measure specific points of
the individual’s compensated demand curve. As part of their conclusion, they
indicated that CVM is a method “simultaneously capable of obtaining option price
estimates in the presence of uncertainty, valuing goods not previously available or
marketed, estimating all existence class-benefits, and obtaining in a direct manner
the relevant Hicksian demand curves” (p.90).

We present the theoretical framework of the CVM for chapter three of the thesis
following Irvin et al. (2007). We assume that consumers maximize their
consumption preferences subject to their income and prices (budget constraint). This
is presented as:

max 𝑈(x, 𝑞) 𝑠. 𝑡. 𝑦 = 𝑞 + 𝑝𝑥 (3.10)

x,𝑞
Where 𝑦 represents the income of respondent, 𝑞 is a composite of all other goods
and services, 𝑝 and 𝑥 are the marginal price and quantity of piped-water respectively.
From the maximisation problem specified in equation 3.10, we obtain the indirect
utility function as:

𝑣(𝑝, 𝑦) = max{𝑈(𝑥, 𝑞)|𝑝𝑥 + 𝑞 = 𝑦} (3.11)

𝑥,𝑞
We specify the respondents WTP as a proportion of his income spent on reliable
piped-water. We show the reliable piped-water as an increment in respondent’s
expenditure, 𝑥 1 > 𝑥. This is shown in equation 3.12.

𝑣(𝑝, 𝑥, 𝑦) = 𝑣(𝑝, 𝑥 1 , 𝑦 − 𝑊𝑇𝑃) (3.12)

71
The respondent’s utility is assumed to change from 𝑢0 𝑡𝑜 𝑢1 which we show as

𝑢0 = 𝑣(𝑝, 𝑥, 𝑦) < 𝑢1 = 𝑣(𝑝, 𝑥 1 , 𝑦)

The inverted utility maximisation is expenditure minimisation, so we specify the
expenditure function as:

𝑒(𝑝, 𝑢) = min{𝑝𝑥 + 𝑞| 𝑢1 (𝑞, 𝑥 1 ) > 𝑢0 (𝑞, 𝑥 0 )}

𝑥,𝑞
WTP is shown as the difference between the expenditure functions specified as

𝑊𝑇𝑃 = 𝑒(𝑝, 𝑥, 𝑣(𝑝, 𝑥, 𝑦)) − 𝑒(𝑝, 𝑥 1 , 𝑣(𝑝, 𝑥 1 , 𝑦)) (3.12)

We also obtain the compensating surplus function where WTP is a function of
some factors,
𝐶𝑆(𝑥, 𝑥 1 ) = 𝑊𝑇𝑃 = 𝑒(𝑝, 𝑥 1 , 𝑣(𝑝, 𝑥 1 , 𝑦)) − 𝑦 (3.13)
Equation 3.13 (compensating surplus function) represents a measure of WTP for the
reliable piped-water as a function of quantity of water and income of households.
Thus, it shows how much each household is willing to sacrifice and yet remain on
the same utility level (u0) before the change. For empirical purposes we rewrite the
structural economic function given by equation 3.13 into an econometric function.
Here we assume that the WTP function in equation 3.13 takes the following
parametric linear form:

𝑊𝑇𝑃𝑖 = 𝛾 + 𝜑𝑝𝑖 +∝ 𝑞𝑖1 + ∂𝑦𝑖 + 𝜀𝑖 (3.14)

We rewrite equation 3.14 assuming that the maximum amount household 𝑖 is willing
to pay for reliable piped-water is posited as 𝑊𝑇𝑃𝑖 . The error term is represented as
𝜀𝑖 which follows a normal distribution function with mean zero and standard
deviation (𝜎). In addition to the regressors in equation 3.14, factors such as fence
type, number of households, other family members (family size), age, age squared,
knowledge of local and international environmental issues have the potential to
explain household’s WTP for reliable piped-water. Furthermore, these factors are
more likely to correlate with income and quantity hence omitting them from the
model is likely to lead to omitted variable bias. To ensure consistent and efficiency
of the parameters in the WTP function we account for these additional factors in our
empirical specification. We specify our explicit a linear functional relationship as:

𝑊𝑇𝑃𝑖 = 𝛾 + 𝜑𝑝𝑖 +∝ 𝑞𝑖1 + 𝜕𝑦𝑖 + 𝐗 𝑖 𝛃 + 𝜀𝑖 (3.15)

Where X is a vector of household characteristics, 𝛃 is a vector of parameters to be
estimated. All other variables remain as already defined.

From the theoretical point of view we expect the CVM which captures both use and
non-use values to be greater than the HPM and TCM methods which captures on use
values. In short, we expect the SP method to be greater than the RP methods.

72
4. Data
This section presents a description of the study area and population, data collection
process, sampling frame, sampling technique and sample size computation.

4.1 Study Area and Population

The Republic of Ghana is a sovereign state endowed with a broad range of natural
resources, which include but are not limited to crude oil, water resources, gold,
diamond, and timber. The population of Ghana is over 25million. Politically, it has
consolidated democratic rule and it is described by experts as having made giant
strides in democratic rule especially after their 2012 elections. Economically, until
most recently, it was regarded as one of the best performing economies in Africa.
Ghana’s Gross Domestic Product (GDP) growth reached a record high of 14.05% in
2011. From 2008 up until 2013 it recoded an average annual GDP growth of about
8.6% which is more than twice that of the average of the whole sub-Saharan Africa
which recoded about 4.1%. Ghana attained a lower middle income status in 2007
with a GDP per capita of (current US$) 1,099 and still is (World Bank, 2014).

The study focuses on the Greater Accra Region (GAR) of Ghana on grounds that it
is one of the hardest hit regions regarding acute water shortages and has since 1970s
dominated in the percentage increase in the share of households21. This region has
the current highest proportion of urban household of 31.2%. Moreover, GAR has
Accra as its capital city and has been Ghana’s capital since 1877. It has the highest
population density and is the second most populous region in Ghana. It is also seen
as one of the most populated and fastest growing Metropolis in Africa (AMA,
2006)22. GAR is made up of Metropolitan/Municipal and/or District Assemblies.
23
Until recently that new districts have been created, it consisted of ten
administrative regions. According to the 2010 Housing and Population Census (GSS,
2012), the total population of the GAR with ten districts is 4,010,054. The population
in households is 3,888,512 with male and female distributions as 1,938,225 and
2,071,829 respectively. The total number of households is 1,036,426 with an urban
household population of 766,955 and a rural household population of 269,471. Since
this study focuses on the urban household, the reference population is represented
by the 766,955 urban households.

21 1970-1984 stood at 66.9%, 1984-2000 also stood at 74.6%, and 2000-2010 recorded 65.4%. (Source
GSS, 2012 P.71)
22 Accra Metropolitan Assembly (AMA, 2006) accessed @http://ama.ghanadistricts.gov.gh on
23 The new districts as of the time of the study was constrained by complete population and household

data. Therefore the data as of the last population census was used for this study.
73
4.2 Data Collection Process
This study used a sample size of 1,650 household heads who were interviewed in the
survey using a questionnaire. The study designed a structured questionnaire (see
appendix B) which included the personal data of the respondent, besides general
water, sanitation and environmental questions; hedonic valuation questions, travel
cost questions; and contingent valuation questions. The questionnaires were
administered by 20 fieldworkers and 4 coordinators under the overall supervision of
the researcher. They were first trained, and were made to undertake a pre-pilot survey
before the actual pilot survey so as to build their experience with the questionnaire.
The data was collected between March and May, 2014. This period represents a
balanced season for the South so we do not expect the seasons to influence our data.

The in-person survey method which has been described as the method of choice in
surveys by Mitchel and Carson (1988) was used to control for sampling problems
and low response rate associated with telephone and mail surveys. They further
acknowledged that in the case of moderately lengthy valuation surveys as in this case,
it is highly recommended to use the in-person technique so as to maintain
respondents’ interest to control for fatigue and boredom effects.

4.3 Sampling Frame

Mitchel and Carson (1988) suggest that after a properly defined population, one
important factor that can affect the generalisation of results is how the sampling
frame is structured. They argue that when there is a divergence between population
of the study and the sampling frame, sampling frame bias occurrence is possible.
They recommended that the area should be geographically-defined with occupied
dwelling units. In this study, the sampling frame was mainly housing units within
each district. The district should be one of the ten districts in the GAR of Ghana
ensuring sufficient geographical coverage and spatial variation. The unit of analysis
were household level respondents mainly household heads who are 18years and
above, and of sound mind. They should have worked within the last five years and
are currently employed or unemployed within the last seven days of the month of the
interview. They should be living in the district and not be visitors. All potential
respondents reserved the right to either accept to participate or decline participation.

One problem observed in valuation studies is the intra-household allocation issues.

According to Whittington and Pagiola (2012) this has been acknowledged by several
other studies such as Adamowicz et al., 2005; Whittington et al., 2008; and Prabhu,
2010. To control for intra-household allocation issues, the simplest recommended
approach is to consider the entire household as the sampling unit but interview
whoever the household considers as the household head or decision maker

74
(Whittington and Pagiola, 2012). This they argue could either be the husband or the
wife. However, in the cooperative bargaining case, this approach would be
inadequate. In this study, the interviewers were made to find out who the head of the
household was. The head was described as prescribed by the GSS (2012). That is
one who is economically and socially responsible for the entire household. In the
event of cooperative bargaining, the interviewers asked who bears majority of the
household water cost and decision. Such a person was interviewed in this case.

4.4. Sampling Technique and Sample size computation

A valid application of valuation methods require an appropriate sampling survey
technique and sample size computation. This sub-section discusses how both of them
were determined in this study. Experts have recommended the use of probability
sampling for valuation studies against the background that each economic agent
(household) will have equal probability of being selected. Inappropriate sampling
technique could lead to a substantial threat to WTP estimates (Mitchel and Carson,
1988). It is important to observe that drawing a probability sample at household level
could be quite challenging in cases where there exist improper listing of houses and
planned housing units as in most developing countries. Indeed, some researchers are
therefore forced to use a smaller sample (see Whittington, 1998) which perhaps may
not be representative enough. It is recommended that in such cases interviewers
cover every house or every other house (FAO, 2000). This is quite problematic in
developing countries like the GAR of Ghana where houses are not properly planned
coupled with inappropriate listing. Although, the government is putting measures in
place to ensure proper listing but this was not until the study. However, with the
unplanned settlements in urban GAR, a multistage quota sampling technique was
applied (see Whittington, 1998). This was achieved by clustering the region into ten
districts, then into their respective communities. Then we listed these communities
in each district following the Town and Country Planning list of communities and
randomly selected the houses from these communities within the districts of the
region. According to our quota, we interviewed all households in the sample houses
within the randomly selected communities in the districts. In sum, we applied the
multi-stage quota probability sampling technique in drawing our sample of 1,650
from the population.

Here, respondents are observed to have equal probability of being selected in the
sample. Further, fieldworkers’ task was to interview urban households in residences
distributed around GAR at any time between 8am to 6pm (time hired) within the
localities of all ten districts. This study adopts a simplified formula to calculate
sample size as developed by Yamane (1967[see Appendix B Table 3.11]). This
yielded a sample size of 400 households. However, the study used a sample size of
75
1,650 households from 10 districts. This is important because valuation studies of
this nature require large sample sizes to control for large variance in respondents’
responses (Mitchel and Carson, 1989). This helps to obtain from respondents
responses that yields the desired level of precision (Boyle, 2003).

5. Econometric Modelling of Valuation Methods

Following the theoretical framework (sub-section 3.1) and the econometric
proposition by Rosen (1974), the proposed model for HPM is stated as:

𝑃(Z) = P(S, N, Q) (3.16)

Z = f(S, N, Q) (3.17)
Where dependent variable is the rental rate, 𝑃(Z), S represents a vector of structural
(or residential) characteristics, N denotes a vector of neighbourhood attributes
/accessibility variables, and Q is neighbourhood socio-economic characteristics. S
include access to reliable piped-water supply in residence(𝐴𝑅𝑃), access to toilet
facility in residence(𝑇), access to installed water reservoir in residence(𝑅), number
of garages(𝐺), and number of storeroom(𝑆𝑅). The priori expectation of the effects
of these variables on rental rates are all positive. Thus, higher valued structural
characteristics should influence rent values positively. N include distance to
highway(𝐷𝐻), distance to financial institution(𝐷𝐹𝐼), and distance to school(𝐷𝑆).
More public neighbourhood characteristics should influence rent values positively.
However, neighbourhood characteristics associated with negative externalities are
expected to be negative on rent values.

The economics literature has provided little theoretical guidance on the specific
functional forms of hedonic pricing and housing characteristics (see Lisi, 2013;
Malpezzi, 2003; Taylor, 2003). Halvorsen and Pollakowski (1981) proposed a
flexible functional form commonly used in empirical studies known as the Box-cox
function. This however has been made unpopular by the likes of Cassel and
Mendelsohn, 1985; Cropper et al., 1988, Sheppard, 1999; Choumert et al., 2014b.
Their justification is based on the sensitivity of the data to small variations and
difficulty in interpreting parameter estimates. Following Choumert et al. (2014b)
who argue that simpler functional forms produce more stable parameter estimates,
this study uses ordinary least squares with a log-lin and log-log functional forms. We
re-write equation (3.17) in a more explicit form and specify our preferred log-lin
econometric model as equation 3.18. We tweak it to include a proxy for wealth as
shown in equation 3.19 and present results in model (1&3[see Table 3.1]).

𝑙𝑛𝑉 = 𝛽0 + 𝛽1 𝐴𝑅𝑃 + 𝛽2 𝑇 + 𝛽3 𝑅 + 𝛽4 𝐺 + 𝛽5 𝑆𝑅 + 𝛽6 𝐷𝐻 + 𝛽7 𝐷𝐹𝐼 + 𝛽8 𝐷𝑆 +

𝛽9 Dum + 𝑢 (3.18)
𝑙𝑛𝑉 = 𝛽0 + 𝛽1 𝐴𝑅𝑃 + 𝛽2 𝑇 + 𝛽3 𝑅 + 𝛽4 𝐺 + 𝛽5 𝑆𝑅 + 𝛽6 𝐷𝐻 + 𝛽7 𝐷𝐹𝐼 + 𝛽8 𝐷𝑆 +
𝛽9 lnQ + 𝑢 (3.19)

76
5.1 The Travel Cost Method (TCM)
The most common model employed for travel cost estimation is the single-sight
model (Parsons, 2003). This is a demand model that seeks to estimate number of
trips by a household to say a source of water supply over a period of time. Since
demand is expressed as quantity demanded over price, the quantity demanded is
represented by the number of trips a household make to the source of water supply.
The price is also represented by cost per trip in reaching the source of water supply.
Generally one would expect an inverse relationship between these two variables as
in the case of its analogous demand form. From equation 3.9, we now follow Parsons’
(2003) specification and present the estimated non-linear model as:

Vi = (lnCMi , lnCOi , ARPi , 𝑅𝑖 , OFM𝑖 , lnYi , Si ) (3.21)

Where 𝑙𝑛𝐶𝑀𝑖 is the log of the amount it cost per round-trip for an individual
household to visit the main source of water supply. We expect this to be negative.
𝑙𝑛𝐶𝑂𝑖 is also the log of the cost per round-trip for an individual household to access
other sources of water supply which accounts for substitution effect. This is expected
to be positively related to 𝑉𝑖 . 𝐴𝑃𝑅𝑖 denotes household access to reliable piped-water
in residence, 𝑅𝑖 represents household alternative source of water supply in residence
such as boreholes and wells. This is represented as reservoir in residence, 𝑂𝐹𝑀𝑖 is
the other family members in household, 𝑙𝑛𝑌𝑖 represents log of monthly income of
the household, and 𝑆𝑖 is household savings behaviour.

As in the case of the HPM discussed earlier, economic theory is not emphatic on the
exact theoretical and appropriate functional form of travel cost models. However, it
is important to note that in the case of the non-negative integer feature of round-trip
or count data, truncation of data at zero visits, and some over-dispersion problems
OLS is inappropriate and should be replaced by procedures such as maximum (ML)
estimation (Shrestha et al., 2002; Bateman 1993).

It is against this background that studies (such as Creel and Loomis, 1990;
Hellerstein, 1991; Feather et al., 1995; Hausman et al., 1995, Englin and Shonkwiler,
1995; Grogger and Carson, 1991; Cameron and Trivedi, 1998; Winkelmann, 2000;
Shrestha et al., 2002; Ahmad, 2009 etc.) have used count data ML estimation
techniques models such as Poisson and Negative Binomial. We therefore estimate
the Negative Binomial model because of evidence of over-dispersion and use OLS
and Poisson model for robustness checks.

77
5.2 The Contingent Valuation Method (CVM)
We simplify equation 3.15 to yield equation 3.22 following Whittington et al. (1990),
and assume that the maximum amount an individual household (𝑖) is willing to pay
for a proposed service is given as 𝑊𝑇𝑃𝑖 . Given the traditional consumer theory
which suggests a relationship between price and quantity demanded or supplied, we
presume a linear functional relationship between 𝑊𝑇𝑃𝑖 and household’s
characteristics and attributes of the water sources. This is specified as:

𝑊𝑇𝑃𝑖 = 𝛼 + 𝐗 𝑖 𝛃 + 𝑢𝑖 (3.22)

Where 𝐗 𝑖 is a vector of household’s characteristics and attributes of the water

sources, 𝛼 and 𝛃 are parameters of the model, 𝑢𝑖 is the error term with a standard
normal distribution. To determine 𝑊𝑇𝑃, the NOAA Panel Guidelines requires an
“Accurate Description of the Program or Policy” or [Project] and for “adequate
information” to be provided to respondents about the program being offered (Arrow
et al. 1993, p.10). In this case, NOAA requires an accurate description of the
(hypothetical) market.

Market Description of Commodity

 As part of the guidelines prescribed by NOAA in CV studies, (hypothetical)
market description is one essential key that cannot be underestimated. In a
simplified context, our market is an imaginary situation respondents are asked
to demonstrate what they think they will do assuming they are behaving
rationally. In this study, we describe the piped-water services that could be made
available to households and their corresponding market values. An estimation of
the demand for piped water is contingent upon the existence of our described
market. Thus, households’ WTP responses are based on how the market was
described. The (hypothetical) market was to urge households to reveal their
maximum WTP for an uninterrupted (reliable) pipe water. This study describes
the target commodity to the household in a market-like situation in two phases
(see appendix B) as: First, “I would want to find out from you, if you value the
provision of an improved water supply system in Ghana particularly in the
Greater Accra Region. By improvement we mean you are connected to the
Ghana Water Company Limited (GWCL) main lines, water flows directly in your
residence at all times, and the quality of the water is up to an acceptable
international standard…” In the Second phase, a picture (see Fig 3.1 & Fig 3.2)
representing the scenario described in the first phase is shown and narrated to
the respondent.

This is also a preferred approach to describe a hypothetical market. Its

implementation is to use visual aids such as pictures, maps, diagrams, figures, and
78
tables (see Whittington and Pagiola, 2012; Labao et al., 2008; Boyle, 2003, 1989;
Ahearn, et al., 2003). This helps the respondent especially in areas where the
illiteracy level is quite high to appreciate the CV scenario being described. The
clearer the market description the better position the buyer could express his
preference. Whittington and Pagiola (2012) have argued that the use of visual aids
during presentation of hypothetical CV market scenarios is an indicator of a high-
quality CV study.

In this regard, the two phases were put together and the question asked was:
“Generally, we know that every good thing comes at a cost and you may be required
to pay a permanent amount that will be factored into your water bills provided by
GWCL. Suppose you are supplied with an uninterrupted (reliable) piped-water as
orally and pictorially described, how much would your household be willing to pay
to fetch a 34cm bucket of water?”

5.3 Bidding Mechanisms

There are several bidding mechanisms or elicitation mechanisms used in survey
studies for determining WTP. These include bidding game format, payment card,
open ended question, close ended question, single-bounded referendum, double-
bounded referendum, and triple-bounded referendum.

The double bound design approach (Carson et al., 1986; Carson and Mitchell, 1987;
Welsh and Bishop, 1993) with open ended is used in this study. According to
Whitehead, J. (2000), “Estimation of the double-bounded willingness to pay data
with the interval data econometric model improves the statistical efficiency of WTP
estimates relative to single bound models (Hanemann et al., 1991). However, this
approach is prone to starting point and anchoring effect biases.

To control for this, Bateman et al. (2002) have suggested the use of randomized card
sorting procedure (RCS). This was modified and we used randomized questionnaire
sorting (RQS) procedure which applies the same principle as the card. The only
difference is that one uses questionnaires while the other uses cards yet all are
randomized to achieve the same purpose. In sum, this study used the dichotomous
choice double-bound format plus open ended with RQS.

79
5.4 Obtaining Respondent’s Bid
Against the background that Ghana is a developing country, it was prudent to control
for large number of non-responses which could arise if the study had adopted
interactive computer medium, mail questionnaire with follow ups, and telephone
interview as a result of illiteracy and incidence of poverty rates. The in-person or
face-to-face approach was used by this study because it provides a stronger
engagement with respondents which has the advantage of reducing questionnaire
misunderstanding and making spontaneous questions and answers possible.

In obtaining bids, WTP is determined when an individual in the household herein

the household head who represents the entire household indicates through a bidding
mechanism the maximum amount he/she is willing to pay for a reliable piped water
services. The double bound with open ended format used in this study provides two
options. A yes/no response data, an interval data and the maximum amount
respondents state on how much they are willing to pay.

Responses from this question were used as the dependent variable subject to the
model type. The Ordinary Least Squares (OLS: log-log) uses the open ended final
WTP amount stated by the respondent. For the Ordered Probit (Oprobit), the final
WTP values were ordered into four different categories. In the case of the Interval
Regression (Interval) there were four different expectations from respondents’
responses. The yes-yes responses, yes-no responses, no-yes responses and no-no
responses. Where the option yes-yes was given by the respondent, the upper limit is
positive infinity and the lower limit is the second higher bid. In case of yes-no option,
the upper limit is the second higher bid and the first bid the lower limit. For no-yes
options, the upper limit is the first bid and the second lower bid was the lower limit.
In the last no-no options, the upper limit is the second lower bid given and the lower
limit is negative infinity (see Carson et al. 2003; Krishna et al. 2013). Equation 3.22
is explicitly formulated and presented for estimation as:

𝑙𝑛𝑊𝑇𝑃𝑖 = 𝛽0 + 𝛽1 𝑀𝑆𝐷𝑖 + 𝛽2 𝑀𝑆𝐺𝑈𝑖 + 𝛽3 𝐸𝑖 + 𝛽4 𝐹𝑖 +𝛽5 𝑁𝐻𝐻𝑖 + 𝛽6 𝑂𝐹𝑀𝑖 +

𝛽7 𝑙𝑛𝑌𝑖 + 𝛽8 𝐴𝑔𝑒𝑖 + 𝛽9 𝐴𝑔𝑒𝑖2 + 𝛽10 𝐾𝐿𝑖 + 𝛽11 𝐾𝐼𝑖 + 𝛽12 𝑙𝑛𝐵𝑖𝑑𝑖 + 𝑢𝑖 (3.23)

Where 𝑀𝑆𝐷𝑖 is households’ reliable main current source of water for drinking,
𝑀𝑆𝐺𝑈𝑖 is households’ reliable main current source of water for general use, 𝐸𝑖 is
average households’ expenditure on current water sources per month, 𝐹𝑖 household
residence fence type, 𝑁𝐻𝐻𝑖 is number of households in residence, 𝑂𝐹𝑀𝑖 is Other
family members in the household, 𝑌𝑖 is household heads’ income, Age and Age
squared in years of respondent are denoted as 𝐴𝑔𝑒𝑖 and 𝐴𝑔𝑒𝑖2 , 𝐾𝐿𝑖 is knowledge of
domestic or local environmental issues, 𝐾𝐼𝑖 is knowledge of international
environmental issues, 𝐵𝑖𝑑𝑖 is the starting point bid/amount, and the error term (𝑢𝑖 ).
80
5.5 Descriptive Statistics for HPM, TCM and CVM
The average rent paid by households the last month before the survey used for the
study was GHS 138.23, with the minimum rent being GHS 10 and the maximum
being GHS 1,000. The mean district monthly take-home income was GHS 636.18,
almost the same as the household take-home income of GHS636.37. Both are quite
close to the national estimate of GHS544 for the GAR (GSS, 2008). The average
rental value constitutes 22% of the district income. We described reliable piped-
water supply as those who have daily supply of piped-water (except for technical
fault). About 29% of respondents have access to reliable piped-water supply, which
is quite close to the 33% reported by UNICEF/WHO (2012). This provides evidence
of the severity of access to piped-water in Ghana. Also, about 91% do not have
access to garage facilities in their homes followed by about 7% having at least a
garage and the rest having about two or three garages in their residence. A significant
fraction constituting over 72% have access to toilet facilities while over 52% do not
have access to reservoirs (such as wells and boreholes) in their residences. This
supports the rationale for households demanding reliable supply of water in
residences. The average distance from residences to the nearest highway, financial
institution and school were 0.65km, 0.67km, 0.25km respectively.

Households make an average of approximately 100 round-trips to their main water

sources per month. This constitutes an average of three round-trips per day. About
83% have other family members staying with them. This reflects the communal
living nature of the study area. The average age of respondents was about 39 years.
It cost household GHS 2.29 per round-trip to main source of water supply and
GHS13.99 per round-trip to other sources of water supply. The responses to the
question on who bears household hauling burden revealed that about 48% of the
burden on water lies heavily on children.

The mean WTP for a 34cm bucket of water from piped-water sources in residence is
approximately GHS 0.40 which is greater than the average GHS 0.35 they currently
pay in GAR. The ordered responses had approximately 52% in the lowest or first
category followed by the 43% for the second category, then about 4% and 1% in the
third and fourth categories respectively. With the interval WTP responses, we
observed that the lower WTP amounts and the upper WTP amounts recorded
averages of about GHS 32 and approximately GHS 53. The starting point bid were
in four discrete values: 0.20, 0.30, 0.40, and 0.50 (all in GHS). The number of
average households in a house was about 5. About 97% and 75% affirmed that their
main source of drinking water and water for general use is not reliable. Average
expenditure by households per month on water was about GHS 52.22. This
constitutes approximately 8% of households take-home income which is almost
81
 within the approximately 3%-8% estimated by this study. About 59% of houses had
fence. Lastly, Respondents who had knowledge about local and international/global
environmental (climate change) issues comprises of 55% and 61% respectively.

6. Estimation and Discussion of Survey Results

This section presents the results from the three valuation approaches employed in
this chapter.
6.1 Hedonic Price Valuation Results
Table 3.1: Hedonic Regression Results [with and without Localization]
(1) (2) (3) (4)
VARIABLES Lin-Log Lin-Lin Log-Log Log-Lin

Access to Rel. Piped Water in Residence 37.7175*** 35.1151*** 0.2946*** 0.2803***

(10.619) (10.990) (0.058) (0.059)
Access to Toilet Fac. in Residence 52.1381*** 56.2479*** 0.5017*** 0.5174***
(8.156) (8.253) (0.051) (0.051)
Reservoir in Residence 29.0835*** 22.9241*** 0.1996*** 0.1744***
(8.890) (8.840) (0.049) (0.050)
Number of Garage 52.4993*** 47.9972** 0.2477** 0.2315**
(19.715) (19.895) (0.096) (0.097)
Number of Storeroom 37.2483*** 36.8579*** 0.1878*** 0.1874***
(13.067) (13.021) (0.068) (0.068)
Distance to Highway (Km) -4.9820*** -5.1941*** -0.0272*** -0.0301***
(1.461) (1.487) (0.010) (0.010)
Distance to Financial Institution (Km) -8.1965** -7.9263* -0.0276 -0.0317
(4.136) (4.124) (0.031) (0.030)
Distance to School (Km) -20.4648*** -16.9776** -0.1129** -0.0992**
(7.083) (7.089) (0.046) (0.046)
Mean District Income (Log) 90.8318*** N/A 0.5253*** N/A
(30.116) - (0.168) -
Constant -512.4415*** 69.9812*** 0.4304 3.8304***
(191.040) (9.442) (1.069) (0.057)
District Dummies No Yes No Yes
Observations 1,375 1,375 1,375 1,375
R-squared 0.114 0.130 0.167 0.177
Adjusted R-squared 0.108 0.120 0.162 0.167
Akaike Information Criterion (AIC) 17,923.42 17,911.98 3,585.99 3,584.166
Mean Variance Inflation Factor (VIF) 1.12 1.12 1.12 1.12
Dependent Variable: Rent per month in Ghana cedis (1GHS= 0.319 US$ as at 15/10/2014)
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
To commence with the discussion, this study conducts some diagnostic tests on the
models in Table 3.1. First, we acknowledge the fact that the models are susceptible
to heteroscadasticity. This is against the background that housing markets are
heterogeneous which can cause the variance not to be homoscedastic. Also, the
cross-sectional data being used by this study is generally prone to heteroscadasticity.
24
The Breusch-Pagan /Cook-Weisberg test rejected the constant variance

24 Chi2(10)= 67.56 and Prob > chi2 = 0.0000. We rejected Constant variance for model 4.
82
(homoscedastic) hypothesis in favour of the alternative. To control for this, all the
models are estimated with robust standard errors. Our preferred model is model 4
because it reports the highest coefficient of variation of approximately 18%, and a
relatively lower AIC test value of 3,584.166. More so, it is estimated with district
dummies which allows for differences in the average level across districts in addition
to adjusting the standard errors to take into account specific intra-group correlations.
This helps to control for unobserved heterogeneity making it much more likely that
the coefficients of the variables do change across districts (see Englin and Cameron,
1996). For robustness purposes, we observe that all the variables, irrespective of
model, kept their respective signs with marginal changes in some of their
significance levels as well as their coefficients. The variance inflation factor (VIF)
is used to test for the severity of multicollinearity in the models. A Mean VIF of 1.12
is not even significantly greater than 1 hence we can conclude that multicollinearity
is not a serious problem in these models shown in Table 3.1 (See Chatterjee and Hadi,
2006; Choumert et al., 2014b).

The results support the a priori expectation of a positive and significant relationship
between structural characteristics (access to reliable piped-water supply in residence,
access to toilet facilities in residence, existence of reservoir in residence, number of
garage(s) in residence) and rental values. Focusing on the main variable of interest,
houses with reliable piped-water supply and/or other water-related basic attributes
are associated with higher rental values. That is, holding all else constant, households
with access to reliable piped-water in their residence are willing to pay 28.03% more
in rental rates than those without it. By implication, access to these water-related
facilities or services in residence are very relevant in Ghana and probably other
developing countries with similar characteristics. Other recent African context
studies had similar findings, (e.g. Choumert et al., 2014a,b; Gulyani and Talukdar,
2008; and Knight et al. 2004), as well as studies focussing on other developing
countries (e.g. Vásquez (2013a, b) and Van Den Berg and Nauges (2012)). Therefore,
relatively lower rental values are expected to be associated with houses without basic
structural characteristics.

As earlier mentioned, neighbourhoods with better socio-economic and

environmental amenities attracts higher rental values. In effect, the closer a house is
to quality neighbourhood characteristics that represent education, peace, safety, and
wealth (i.e. brisk business activities), one would expect higher rental values. Our
results is consistent with a priori expectation. It shows that neighbourhood
characteristics have negative signs, with most of the variables being significant as
expected. This suggests that the closer a residence is to a highway, financial

83
institution and/or school the higher its associated rental values. Distance from
financial institutions which are normally clustered in the central business district had
the right negative sign yet insignificant in the preferred log-lin model.

In addition, we included a new variable, mean-district-monthly-income to represent

neighbourhood socio-economic characteristics while excluding district dummies
(see models 1&3 in Table 3.1). We found this to have a positive effect on rental
values. This socioeconomic characteristic in the neighbourhood is used as a proxy to
describe the level of wealth, knowledge, awareness and perception of the
neighbourhood (see Van Den Berg and Nauges, 2012). Holding other factors
constant, higher levels of education are normally associated with good jobs, higher
earnings and property ownership. Generally, informed and wealthy household will
prefer staying in a house with essential services that improves their quality of life,
signifies prestige and honour in society to a house without essential services. It is
important to acknowledge that, one main conclusion from this investigation is that
differences in income between districts is one principal cause of differences in rents
between districts in Ghana.

6.1.1 Marginal WTP for Piped-Water in Residence

This section focuses on the derivation of the marginal willingness-to-pay for having
access to reliable piped-water in residence. This is achieved by using the results in
Table 3.1 (Model 4). Thus, we re-introduce our preferred log-lin model which is
presented as:
𝑙𝑛𝑉 = 𝛽0 + 𝛽1 𝐴𝑅𝑃 + 𝛽2 𝑇 + 𝛽3 𝑅 + 𝛽4 𝐺 + 𝛽5 𝑆 + 𝛽6 𝐷𝐻 + 𝛽7 𝐷𝐹𝐼 + 𝛽8 𝐷𝑆 + 𝑢
(3.24)

Since this study is interested in the marginal effect of access to reliable piped-water
in residence on rental values and not the proportional change in rental values (lnV),
we transform equation 3.24 using anti-log to yield the conditional expectation and it
is presented as:
𝑙𝑛𝑉 = exp(𝛽0 + 𝛽1 𝐴𝑅𝑃 + 𝛽2 𝑇 + 𝛽3 𝑅 + 𝛽4 𝐺 + 𝛽5 𝑆 + 𝛽6 𝐷𝐻 + 𝛽7 𝐷𝐹𝐼 + 𝛽8 𝐷𝑆 +
𝜎𝑢2 ) (3.25)

Here, 𝜎𝑢2 is the population variance of the error term in equation 3.25. Further, to
2
show that 𝐸[𝑒 𝑢 ] = 𝑒 𝜎𝑢 /2 , we assume that the error term (𝑢) is normally distributed,
with zero mean and a constant variance. Also, access to reliable piped-water in
residence which is a dummy variable takes two values (ARP = 1 and ARP = 0).
Now, forming the conditional expectation with respect to ARP = 1 and ARP = 0
yields:
E[V|ARP = 1] = β0 + β1 + β2 T + β3 R + β4 G + β5 S + β6 DH + β7 DFI + β8 DS
(3.26)

84
 E[V|ARP = 0] = β0 + β2 T + β3 R + β4 G + β5 S + β6 DH + β7 DFI + β8 DS (3.27)

The difference between the two expectations [3.26 & 3.27] gives [3.28]:
E[V|ARP = 1] − E[V|ARP = 0] = β1 (3.28)
Given that the variable of interest is dummy, we compute the relative change in
rental values
𝐸[𝑉|𝐴𝑅𝑃 = 1] − 𝐸[𝑉|𝐴𝑅𝑃 = 0]
𝑉 𝐴𝑅𝑃 =
𝐸[𝑉|𝐴𝑅𝑃 = 0]
𝜎2 𝜎2
exp (𝛽0 + 𝛽1 𝐴𝑅𝑃 + 𝛽2 + 𝛽3 + 𝛽4 + 𝛽5 + 𝛽6 + 𝛽7 + 𝛽8 + 2𝑢 ) − exp(𝛽0 + 𝛽1 𝐴𝑅𝑃 + 2𝑢 )
=
𝜎2
exp(𝛽0 + 𝛽1 𝐴𝑅𝑃 + 2𝑢 )

= exp(𝛽̂ ) − 1 (3.29)
From Table 3.1 (Model 4),𝛽̂ = 0.2803 depicting the difference in access to reliable
piped-water in residence and absolute increase in rental values. Thus, relative change
in rental values shows the additional amount in rent that households with access to
reliable piped-water in residence are willing to pay.

Relative change: 𝑉 𝐴𝑅𝑃 = exp(0.2803) − 1 = 0.3235 × 100 = 32.35%

2
The standard error: √(exp(𝛽̂ )) × 𝜎𝑢2 = exp(0.2803) × 0.060 = 0.017

This study finds that the average amount households will be prepared to pay per
month for access to pipe-water in residence is GHS 44.73 which constitutes 7.03%
of the mean-district-income (see Table 3.2). This according to Bartik (1988) and
Choumert et al. (2014b) should be interpreted as an upper bound values because the
utility dummy may include unobserved attributes and utilities.

Table 3.2: Predicted Increase in the Value of a House with Access to Reliable
Piped-Water
Marginal implicit Current average HH Increment as a % of Increment as a % of
house value per expenditure on water monthly district-income Monthly Household
month(GHS) per month (GHS) Income
Mean25 Mean Mean26 Mean27
44.73 52.22 7.03% 7.03%
[23.69-65.76] [50.34-54.09] [3.72%-10.34%] [3.72%-10.33%]
95% Confidence Interval in square brackets [ ].

25 Relative change (water dummy)×Average House Value=44.73 per month

26 Marginal Implicit house value/Average district- income=0.07031×100≈7.03%
27 Marginal Implicit house value/Average Household income=0.07029%≈7.03%

85
 6.3 Travel Cost Results
Six models are estimated and the results are presented in Table 3.3. We evaluate the
relevance of district dummies by excluding them from the first three models while
including it in the last three.
Table 3.3: Travel Cost Regression Results
(1) (2) (3) (4) (5) (6)
VARIABLES OLS Poisson Neg-Bin OLS Poisson Neg-Bin
Cost to Water Source (Log) -3.662*** -0.037*** -0.039*** -4.094*** -0.040*** -0.044***
(0.341) (0.004) (0.003) (0.345) (0.004) (0.003)
Cost to Other Source (Log) 4.562** 0.068*** 0.051*** 5.930*** 0.085*** 0.066***
(2.144) (0.020) (0.020) (2.193) (0.020) (0.020)
Access to Rel. Piped-Water -13.038*** -0.118*** -0.152*** -9.125** -0.085* -0.104**
(4.372) (0.044) (0.046) (4.600) (0.045) (0.046)
Reservoir in Residence -13.071*** -0.125*** -0.137*** -10.140** -0.099** -0.110**
(4.449) (0.043) (0.045) (4.516) (0.044) (0.045)
Other Fam. Mem. HH 16.518*** 0.168*** 0.166*** 16.463*** 0.172*** 0.152***
(5.084) (0.053) (0.058) (5.001) (0.053) (0.056)
HH Income(Log) -5.717* -0.058* -0.053* -5.414* -0.052* -0.057*
(3.028) (0.031) (0.030) (3.051) (0.031) (0.030)
Savings_dum -14.329*** -0.136*** -0.173*** -15.190*** -0.145*** -0.164***
(5.382) (0.048) (0.052) (5.219) (0.046) (0.050)
Constant 147.206*** 4.934*** 5.001*** 149.766*** 4.911*** 5.037***
(20.716) (0.205) (0.197) (21.233) (0.208) (0.201)
District Dummies No No No Yes Yes Yes
Observations 1,243 1,243 1,243 1,243 1,243 1,243
R-squared 0.19 0.24
Adjusted R-squared 0.18 0.23
AIC 14,366.89 73,944.49 13,732.2 14,298.51 69,739.43 13,664.43
Dependent Variable: Number of Round-Trip to Water Sources per Month
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Before the discussion, we admit the possibility of practical estimation problems
associated with TCM. Bateman (1993) acknowledges among other things
inappropriate functional forms and estimation technique, truncation bias,
heteroskedascity and multicollinearity as potential problems in practical TCM
studies. To control for these potential problems we first test for the presence of
multicollinearity using the VIF test on the OLS model. The mean VIFs is reported
as 1.56 (model 1) and 1.34 (model 4) which suggests that the VIFs are even not
significantly greater than 2. This implies that multicollinearity is not a severe
problem in this model. (See Chatterjee and Hadi, 2006; Choumert et al., 2014). It is
argued in Literature that although the “economic theory of constrained optimisation
with complementarity provides no particular functional form for trip generation
equations” (Wattage, 2002, p.13), [yet functional forms have] “non-trivial
implications on results obtained” (Perman et al., 2003, p.442). We may not have a

86
 particular functional form for trip generation equations, yet, Bateman (1993) has
argued that the appropriateness of a functional form can be evaluated using the
relative degrees of explanation. An R-squared of 24% and an adjusted R-squared of
23% which is also seen in Creel and Loomis (1990) as generally not bad to discredit
the model’s appropriateness. The models are estimated with robust standard errors
to control for evidence of heteroscadasticity 28 . The OLS is estimated alongside
Maximum Likelihood (ML) estimations for robustness checks. The latter is highly
recommended for TCM studies to control for truncation bias (see Bateman, 1993).

The OLS is used in this study as a baseline model for robustness checks as it is not
suitable for count data of this nature. The next appropriate model is the Poisson
model. However, a test of over-dispersion provides evidence that the conditional
variance is higher than the conditional mean. These differences suggest that over-
dispersion is present and that a Negative Binomial model (Neg-Bin) would be more
appropriate to use (see Table 3.4). This is further supported by the Akaike
information criterion (AIC) tests (Table 3.3).

Table 3.4: Test of Over-dispersion

Variable *N Mean Std. Variance C. I. [95%]. Remark
Dev.
Poisson Model Test
29
**No. of Trips 1243 105.487 43.858 1,923.551 103.046-107.927 Evidence of
Over-dispersion
Negative Binomial Model Test
alpha S.E C.I. [95%] Remark
**No. of Trips 0.532933 0.022 0.500-0.568 Reject 𝛼=0
Likelihood-ratio test of alpha (𝛼)=0
chibar2(01) = 6.000 Prob.>=chibar2 = 0.000
*Where N is the number of observations. **Number of Round-Trips to Water Sources.
From Table 3.4, we obtained a chi-squared value of 6.000 with one degree of
freedom and a p-value of 0.000. With this, we have evidence to reject the null
hypothesis that alpha is zero (𝛼=0) and strongly suggest that alpha is non-zero (0.53)
and the Neg-Bin model is more appropriate here than the Poisson model because of
its appropriateness for over-dispersed count data.

Due to the different characteristics of the districts regarding their sources of water
supply, this study introduced district dummies to control for district specific effects
on the number of round-trips to various water sources (see Table 3.3, Models 4-6).

The results vis a vis the coefficients, significance and standard errors after
introduction of district dummies did not significantly change. They produce similar

28Chi2(7)= 81.52 and Prob > chi2 = 0.0000. We rejected Constant variance.
29 Poisson assumes that the conditional mean and the conditional variance are the same. Thus,
((Var(y|X)=E(y|X)) However, the conditional variance (1,923.551) is far greater than the conditional
mean (105.487), ((Var(y|X)>E(y|X)), hence an evidence of over-dispersion.
87
results as obtained without the district dummies. Here also, the introduction of the
district dummies, given the same number of observations, the Adjusted R-squared
increased from about 19% (model 1) to 24% (model 4) for the OLS model. Also, the
AIC falls from 13,732.2 (model 3) to 13,664.43 (model 6). This suggests that the
model assumes a better fit with the district dummies than without them.

As earlier mentioned, we estimate a Neg-Bin model (Table 3.3), with the other two
models (OLS and Poisson) used as robustness checks. The variables we are most
interested in are the cost related variables therefore we discuss them first followed
by all other variables.

As suggested by economic theory, we expected a negative relationship between the

cost of the good itself (i.e. cost per round-trip to the main source of water supply per
month) and the number of round-trips households make per month to their water
sources. The results confirmed our theoretical priors, suggesting that for each
percentage increase in the cost of round-trips to the main source of water supply, the
expected count decreases by 0.044, holding all else constant. This suggests that
households who spend more money in traveling to their water sources make fewer
trips per month. Alternatively, we expected a positive relationship between the cost
of substitutes (i.e. cost per round-trip to other sources of water supply per month)
and the number of round-trips households make per month to their water sources.
This also means that for each percentage increase in the cost of round-trips to the
other sources of water supply, the expected count increases by 0.066, holding all else
constant. This implies that in the absence of the main source, households who make
more trips per month spend more money in traveling to the alternative water sources
relative to the main source. These cost related variables are highly significant in all
estimated models.

We find that access to reliable piped-water in residence is negative and significant.

This suggests that the probability of having access to reliable piped-water supply in
residence decreases the expected count to haul for water by 0.104, holding all else
constant. In addition, households with access to reservoir in their residence were not
expected to have behaved differently in terms of signs as it would have been an
irrational behaviour on the part of the household or consumer. We again find a
negative and significant effect of reservoir in residence on number of round-trips
households make per month. This means that the probability of having access to a
reservoir in residence also decreases the expected count to haul for water by 0.110,
holding all else constant. These suggest that households with a source of water
supply in their residence are expected to make fewer trips to haul for water. Having

88
a reliable piped-water supply and/or a reservoir in residences in the form of wells
and boreholes as source of water supply do not warrant making trips to alternatives.
This provides some evidence on how piped-water is very important to urban Ghana
and in its absence households depend on other more expensive sources for survival.

It is evident from Table 3.3 that households with larger family size as a result of
other family members in the household has a positive and highly significant effect
on number of round-trips to the water sources. We find that the probability of having
other family members in the household increases the expected count to haul for water
by 0.152, holding all else constant. This implies that, by summing up all the trips by
individual household members, we see this to be influencing the number of round-
trips per month. It can be inferred that if all members are being tasked with household
water responsibility, it means that children will definitely not be spared in this with
its associated effects on their academic and personal development. As mentioned
earlier, we find that 48% of the water burden lies on children.

This study also finds household income variable to be negative and significant,
meaning that a percentage increase in household income, decreases the expected
count to haul for water by 0.057, holding all else constant. Also, saving is negative
and highly significant. This implies that the probability of a household saving some
of their income, decreases the expected count to haul for water by 0.145, holding all
else constant. Thus, relatively wealthy households (characterised by higher earnings
and positive saving behaviour) who can afford not to travel yet have access to potable
water supply through tanker services which most poor people cannot afford were
seen to have been making less trips to water sources. This inverse relationship
between household wealth levels and number of round-trips to water sources is as
expected and it is significant in all estimated models.

89
6.4 TCM WTP Estimate (Marginal WTP)
Information on TCM survey defines the demand curve and therefore helps to
determine point estimate of consumers’ surplus (see Bateman, 1993; Freeman 1979).
In order to estimate consumer surplus and determine the WTP for reliable piped-
water supply, we now use the estimated function provided by the Neg-Bin model as
shown below:

𝑉𝑖 = 5.037 − 0.044(𝐶𝑀𝑖 ) (3.30)

According to Creel and Loomis (1990) point estimate of consumers’ surplus (CS)
per predicted trip (𝑉̂ ) is given as:
̂
CS 1 1
=− = = GHS 22.72 [19.89 − 26.62]
̂i
V β̂i 0.044
It is possible that our cost to main source of water supply variable may captured not
only piped-water supply but also other improved sources in some cases. Nonetheless,
we do not expect this to be many though as majority (over 64%30) in GAR prefer and
depend on piped-water sources. Therefore our estimate of consumers’ marginal WTP
is for improved water supply and not necessarily piped water supply. Also, it is not
out of place to use improved source as a proxy for piped-water supply in this study
as all piped-water supply are improved. In short, the point estimate of consumers’
marginal WTP to have access to improved water supply (piped-water) is GHS 22.72
which constitutes 3.57 % of households’ income (see Table 3.5).

In spite of the fact that our model captured improved water supply, this should be
interpreted as a lower bound because we used only the opportunity cost of travel time
to determine the cost per round-trip made by households. By this, we do expect
results from the CVM and HPM to be greater than TCM. Some studies which include
but are not limited to and Czajkowski et al. (2015), Hill et al. (2013) and Shrestha et
al. (2002) have all used this same method in obtaining point estimates of consumers’
surplus per predicted trip.
Table 3.5: WTP Estimate and Share of Household’s Income
Measure WTP Mean(GHS)/Month
Estimate
(GHS)
HH Income 22.72 636.37
[19.89-26.62] [607.90-664.84]
3.57%
% Share of HH Income in CS (WTP) [3.13%-4.18%]
*95% Confidence Interval in square brackets [ ].

30 GSS (2012)2010 Population and Housing Census, pg.30

90
6.5 Contingent Valuation Results

To determine how much households are willing to pay for reliable piped-water under
this CV approach, we first investigate whether households’ WTP determinants are
consistent with demand theory. This section present results of five models used for
the CVM. These are presented in Table 3.6 and subsequently discussed.

Series of multivariate regression analysis presented in Table 3.6 were estimated

using test characteristics of access to water variables and some household level
characteristics as controls in the models. For simplicity in our discussion, the
independent variables are further put under five different categories following Lauria
et al. (1999). First, respondents’ personal characteristics (age, age 2 and income),
respondents and other households’ characteristics in residence (number of
households in residence, other family members in respondents’ household, average
household expenditure on water per month and household residential fence type),
characteristics of administered questionnaire to respondent (starting point amount),
main variable describing respondents’ household water situation (main source for
drinking and main source for general use) and respondents’ knowledge or awareness
and attitudes about environmental issues (knowledge of domestic environmental
issues and knowledge of international environmental issues).

As already explained in section 5 (Obtaining Respondent’s Bid), the dependent

variable used depends on the structure of the model. For example, Models 1&4
(Oprobit) ordered the final WTP amount into four different categories, Model 2&5
(Interval[log]) transforms the lower and upper WTP bids into natural logs and Model
3&6 (OLS[log]) uses the final bid or maximum WTP amount. Overall, the OLS
model provided the best results. This is based on the fact that, in addition to its
simplicity for analysis, it has the best AIC test value of 587.568. It is important to
note that the adjusted R-squared of 20% for the our preferred model is above the 15%
proposed by Mitchel and Carson (1989) as the minimum for reliable CV studies. The
mean VIF is 6.06 for our preferred model. This is quite high because of age and age
squared yet it does not invalidate our results because multicollinearity is deemed not
severe. Our preferred model is also estimated with robust standard errors and
controls for district specific effects using district dummies. Table 3.6 below shows
the regression results for all the six models presented, however, discussion is based
on our preferred model 6.

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 Table 3.6: Regression Results-CVM
(1) (2) (3) (4) (5) (6)
VARIABLES Oprobit Interval (Log) OLS (Log) Oprobit Interval (Log) OLS (Log)
Main Source for Drinking Reliability Index 0.574*** 0.088** 0.136** 0.564*** 0.081** 0.129**
(0.188) (0.039) (0.053) (0.189) (0.039) (0.052)
Main Source for General Use Reliability Index 0.263** 0.047* 0.069** 0.312*** 0.050** 0.068**
(0.114) (0.024) (0.029) (0.119) (0.024) (0.029)
Average HH Expenditure on Water/Month (Log) 0.103 0.023* 0.041** 0.090 0.021 0.034**
(0.065) (0.013) (0.016) (0.068) (0.013) (0.017)
Residence Fence Type 0.252*** 0.042*** 0.061*** 0.198** 0.038** 0.052***
(0.078) (0.016) (0.020) (0.081) (0.016) (0.020)
Number of Households 0.034*** 0.008*** 0.007** 0.034*** 0.007*** 0.007**
(0.011) (0.002) (0.003) (0.011) (0.002) (0.003)
Other Family Members in HH 0.278*** 0.022 0.072*** 0.302*** 0.024 0.076***
(0.107) (0.022) (0.024) (0.110) (0.022) (0.024)
Household Income(Log) 0.437*** 0.087*** 0.130*** 0.433*** 0.084*** 0.128***
(0.052) (0.010) (0.014) (0.053) (0.010) (0.014)
Age (Years) -0.052** -0.012** -0.018*** -0.050** -0.012*** -0.018***
(0.022) (0.005) (0.006) (0.022) (0.005) (0.006)
Age-Squared (Years) 0.001** 0.000*** 0.000*** 0.001** 0.000*** 0.000***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Knowledge of Domestic. Environmental Issue 0.197** 0.021 0.045** 0.230*** 0.022 0.041**
(0.079) (0.017) (0.020) (0.083) (0.018) (0.020)
Knowledge of International. Environmental Issue 0.164** 0.024 0.025 0.142* 0.027 0.030
(0.082) (0.018) (0.022) (0.085) (0.018) (0.022)
Starting Point Amount (Log) 0.242** 0.391*** 0.231*** 0.241** 0.389*** 0.231***
(0.111) (0.020) (0.028) (0.113) (0.020) (0.028)
Constant 1.785*** 2.290*** 1.838*** 2.330***
(0.142) (0.182) (0.144) (0.184)
District Dummies No No No Yes Yes Yes
Observations 1,014 1,014 1,014 1,014 1,014 1,014
R-squared (Adjusted R-squared) 0.20(0.19) 0.22(0.21)
Log-Likelihood (LR-test statistic), [F-statistic] 137.96*** 368.12*** [18.97***] 167.37*** 390.73*** [12.69***]
Akaike Information Criterion (AIC) 1,725.88 2,093.79 454.00 1,712.463 2,087.177 441.36
Dependent Variables: OLS (log)-MWTP; Oprobit- cat_MWTP; Interval (log)-LWTP UWTP, Robust standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1

92
We commence the discussions with the main variables of interest (i.e. water related
variables). There is an evidence that reliable source of drinking water supply has a
positive and significant effect on WTP. This implies that households with access to
reliable drinking water supply are WTP approximately 13% more than households
without access, all else held constant. Furthermore, there is evidence that reliable source
of water for general use has a positive and significant effect on WTP. This also suggests
that households with access to a relaible source of water for general use are WTP
approximately 7% more than households without access. It can be inferred that
households who have reliable source of piped-water supply for drinking and general use
in their residence have a higher probability to pay more for a service they are already
enjoying. This shows that households with a reliable piped-water supply would be
willing to pay more to keep enjoying what they have been enjoying. Moreover,
households that are currently spending huge sums of money in their quest to access
reliable potable water are still indifferent with respect to their spending behaviour to
access potable water. Thus, household average expenditure on water per month is
positive and significant to willingness-to-pay.This provides evidence that a percentage
change in a household’s average expenditure on water per month will change WTP by
3.4%, all else held constant. In short, we find evidence of an endowment effect with
respect to reliable piped-water supply.

Second is respondents’ personal characteristics. Krupnick et al. (2002) argue that theory
cannot predict exactly the relationship between age and WTP. The age variables (age
and age2) which are highly significant, together depict a U-shaped relationship with
WTP. This gives a minimum turning point of approximately 40 years, which lies in a
95% confidence interval of 35-45 years. This U-shaped relationship according to De Oca
et al. (2003) demonstrates the essential nature of the good in question with changing
priorities in the lifetime of respondent. Cameron and Englin (1997) in their study on
“respondent experience and CV of environmental goods”, strongly recommend age as a
very crucial variable in WTP studies as it provides an upper bound on respondent’s
experience.

Third, respondents’ household characteristics. Economic demand theory suggests that,

all else held constant, wealthy households will pay more for enhancement in their utility.
Here, take-home income of the household heads is used as a proxy for household income
and wealth. It met the a priori positive and significant expection. This suggests that a
percentage change in household income level is expected to yield approximately 13%
change in their WTP for piped-water supply. Thus, water is a normal good and that

93
households with larger income sizes are willing to pay to have reliable piped-water in
their residences. Similar findings are found in Elnagheeb and Jordan (1997), Lauria et
al. (1999) and Soto Montes de Oca et al. (2003). Moreover, from a general perspective,
larger household sizes are expected to use more water relative to smaller household sizes
and are therefore expected to pay more for quantities used. Number of households in a
residence was observed to be positive and significant. This means that there is evidence
that a unit increase in the number of households in a residence will increase WTP by
0.7%, all else held constant. This perhaps could be explained by the communal living
effect which is a characterisic of most districts in Ghana. However, it is important to
acknowledge that people are quite careful when the free riders are not from the same
residence but unwanted guest. More so, we used households with other family members
to capture household size. This is also positive and significant, providing evidence that,
all else held constant, larger household sizes are WTP 7.6% more for reliable piped-
water than those with relatively smaller household sizes. Thus, the probability of having
other family members in the household increases respondents’ WTP. Similar findings
are found in Soto Montes de Oca et al. (2003). Also, household fence type is positive
and highly significant. This provides evidence that fenced households are 5.2% more
likely to pay for reliable piped-water relative to unfenced households. The intuition
underlying this result could mainly be attributed to the free riding associated with
communal living societies.

Regarding respondents’ awareness and knowledge of environmental issues, we used

knowledge of both domestic and international environmental issues to determine
households behaviour towards having access to reliable piped-water supply in residence.
Thus, will households who are aware of the implications of a poor environmental
community be prepared to pay more for improvement? All the models had the right signs
signifying that informed households appreciate the good in question and would be
willing to pay for it. However, this was significant for only domestic but not international
environmental issues.
Lastly, the starting point bid31 results show a positive and significant effect on WTP.
This suggests that there is an evidence that an increase in the starting point bid by 1%
will induce about 23% increase in WTP values, all else held constant. Although this
study adopted the RQS as suggested in the literature to control for starting point point
bias and anchoring effect, the models still show some evidence of starting point bias. It

31 The starting point bids were GHS 0.2, GHS 0.3, GHS 0.4, GHS 0.5. These values were noted during the
fieldwork before the first pilot survey and they represent ranges of how much a 34cm bucket of piped-water
is sold within the Greater Accra Region of Ghana.
94
 should be noted that dichotomous choice questions are not completely free from
anchoring problems (see Boyle et al., 1997; Green et al., 1998; Boyle, 2003). This
implies that the starting point bias could have been higher without the controls.

6.5.1 CVM WTP Estimates

Table 3.7 presents the WTP estimates as well as the share of households WTP to income
from the CVM.
Table 3.7: Estimated Household WTP Measures
Measures Max. WTP for a 95% Max. WTP *HH Max. WTP
34cm bucket of Confidence for reliable for reliable
reliable piped-water Interval (CI) piped-water piped-water
(GHp) (GHS) (GHS)/Month
Mean 39.86 38.83-40.90 1.59 47.80
Median 35.00 30.00-40.00 1.40 42.00
% share of HH monthly Income 0.25% 7.51%
Note: Computation used a Mean Household (HH) Income of 636.372 and a CI of 607.90-664.84.
*0.3986×4×30(days)

Available evidence from the literature in developing countries as shown by the likes of
Whittington et al.(1990a,b); Whittington et al.(1991); Altaf et al.(1992); Briscoe et al.
(1993); Whittington et al.(1993); Whittington et al.(1998); Soto Montes de Oca et al.
(2003) indicates that the percentage of Household income to WTP ranges between
almost 2% to 18%. This suggests that our results fall within the range estimated in
literature.

We concur that the objective of suppliers is important in determining prices. For example
a profit maximizing supplier will set price to be greater than average variable cost in
order to achieve his objective. Generally, setting lower prices increases demand, “other
things held constant”. Alternatively, setting higher prices for a good with less or no
alternatives will generate the highest expected revenue. From Table 3.7 it is evident that
households are prepared to pay 39.86 pesewas (approx. GHp0.40) for the 34cm bucket
of piped-water in their residence. From the survey, this is marginally high because it is
greater than the average of what they are currently paying (GHp0.35) in the region for
the same service. So by GHS1.59, the highest expected revenue per day of about
GHS1,514,202.03 (US$483,030.45) is realised for the maximum reliable piped-water
for a household per day. This implies that the price option for the supplier to expand
coverage by providing reliable piped-water in residences and maximize revenue at the
same time is approximately GHp0.40.

95
 Also, by the CVM, we indicated that piped-water is a normal good to the people of
Ghana and that households have expressed high WTP to have such a good or service in
their homes to increase the quality of their lives. This constitutes 7.51% of their incomes.

6.6 Comparison of Willingness-to-Pay Estimates

The results from the competing valuation methods are presented in both Ghana cedis
(GHS) and in United States dollars (US$) as shown in Table 3.8 below for easy
comparison and comprehension.

Table 3.8: Comparison of Valuation Methods’ Results.

Method WTP(GHS)/M* 95% CI WTP US$/M* % of Income Index
CVM 47.80 [46.60-49.08] 15.25 7.51%
HPM 44.73 [23.69-65.76] 14.27 7.03%
TCM 22.72 [19.89-26.62] 7.25 3.57%
*M=Month (GHS=US$0.319 as at 15/10/2014)

Table 3.8 compares the three valuation methods and finds that the value from the CVM
(GHS47.80 or US$15.25) is greater than the HPM (GHS44.73 or US$14.27) which is
also greater than the TCM (GHS22.72 or US$7.25). These values fall within household
income ranges of 3.57-7.51%. Similar findings where stated preference method
estimates are greater than estimates from revealed preference methods have been found
in studies by Knetsch and Davis (1966), Brookshire et al. (1985), Cummings et al., (1986)
as summarised in the literature of this study. In addition, as mentioned earlier
Whittington et al.(1990a,b); Whittington et al.(1991); Altaf et al.(1992); Briscoe et al.
(1993); Whittington et al.(1993); Whittington et al.(1998); De Oca et al. (2003) have
also found that the percentage of household income to WTP ranges between almost 2%
to 18%.

It is imperative to observe that the comparisons must however, be interpreted carefully.

This is because the estimates of willingness to pay from the valuation approaches are not
measuring precisely the same thing. Whilst the HPM is an upper bound which is
measuring use value of current reliable piped-water service in residence, the TCM is a
lower bound measuring improved water supply which includes piped-water. The CVM
is upper bound measuring use value of the proposed reliable piped-water supply. Thus,
TCM is interpreted as lower-bound because it used only the opportunity cost of travel
time. However, HPM is upper-bound because the utility dummy may include
unobserved attributes and utilities. Although the CVM is designed here to capture only
use values however, we cannot rule out the possibility that some respondents may have

96
 other values in mind whiles stating their WTP values. In sum, the CVM and HPM are
upper bounds and are expected to be greater than the lower bound TCM. In addition,
CVM is expected to be greater than HPM because while both include use values, HPM
does not capture non-use values but CVM does.

6.7 Cost & Benefit Analysis

United Nations (2004) has indicated in their study on Freshwater Country Profile for
Ghana that it costs the country US$0.80 per one m3 (1,000 litres) to produce, transport
and distribute potable water. Table 3.9 shows the cost benefit analysis using the
equivalent cost of US$0.06 for 75litres as a proxy for the required amount of piped-water
needed per household/day.

Table 3.9: Cost & Benefit Analysis

*Cost Total Urban Total HH Expected Revenue Net Benefit
(HH/day) HH (Urban and Rural) (Uban HH/day) (Urban HH/day)
Cost/day Cost
(No. of HH 950,336) (No. of HH 1,036,426)
GHS US$ GHS US$ GHS US$ GHS US$ GHS US$

0.19 0.06 180,563.84 57,020.16 196,920.94 62,185.56 1,514,202.03 483,030.45 1,333,638.19 426,010.29

Note: We assume that the cost of efficient production, transportation and distribution of 75 litres is
US$0.06 of piped-water to households in Ghana per day.

From Table 3.9, given the total number of urban households in the ten districts as
950,336. We assume the cost of efficient production, transportation and distribution of
75litres (US$0.06) of potable piped-water to households in Ghana per day is
approximately GHS180,563.84 (US$57,020.16). Again, our computed expected revenue
for supplies per day is approximately GHS 1,514,202.03 (US$483,030.45). Therefore
the difference between the expected revenue and the expected cost per day yields
GHS1,333,638.19 (US$426,010.29). This provides evidence of a positive net benefit of
the project. Similar results are found in Briscoe et al. (1990), Whittington et al. (2002),
and Soto Montes de Oca (2003) as discussed in the literature. We still find evidence of
net benefit for both urban and rural households cost together at the same expected
revenue.

The cost-benefit analysis provides evidence that, it is possible to successfully implement

a full cost recovery programme in the water sector in Ghana without government subsidy.
Thus, it is economically feasible to improve the supply of water in Ghana by providing
reliable piped-water in residences and making the once inefficient GWCL to be
managerially and technically efficient.
97
Also according to African Ministers Conference on Water (AMCOW, 2011), an
estimated US$237million in capital investment is required annually to meet the water
supply rural and urban subsector targets of the then MDGs target (now SDGs). With this,
the government is expected to contribute about 50% and still leave a deficit of about
US$118.5 million per year. With the estimated revenue, it implies that even with the
revenue from the Greater Accra Region alone, it will take less than two years to cover
the capital investment required as estimated by AMCOW. This will save the government
all annual expenditures into the water sector which could be reallocated to other sectors.

In sum, this section presents how viable this project is to the private sector and the extent
to which piped-water can be supplied to urban and if possible rural households while
they pay the full cost of their consumption without government or donor support.

98
7. Conclusion and Policy Relevance
In our quest to provide empirical evidence towards implementing the full cost recovery
programme in Ghana’s water sector, we follow the guidelines and valuation design
processes as recommended by NOAA Blue Ribbon Panel Committee (see Arrow et al.,
1993). Here, three valuation methods are employed namely the HPM, TCM and CVM
to satisfy internal validity checks. A household sample of 1,648 is used from the GAR
of Ghana.

In the CV survey, the double-bound dichotomous choice formats which were followed
by open-ended questions were used to elicit households’ maximum WTP bids. Also, in
the Hedonic survey, monthly rental values paid in the last month before the survey was
used as a proxy for the market value of properties. For the TC survey, the number of
round-trips to and from the water sources were used in this study. This study finds that
household WTP for a reliable piped-water supply per month is GHS 44.73 or US$14.27
(HCM), GHS 22.72 or US$ 7.25 (TCM) and GHS 47.80 or US$ 15.25 (CVM)
respectively. These amounts are equivalent to say 3%-8% of households’ income. These
results are observed to be consistent with existing studies in the literature. This study
further provides evidence of the economic viability of private sector involvement in the
water sector as proposed by the World Bank (1993). Overall, our results satisfy
internal and external validity check criterion, and thus to a large extent we are
confident of our estimates for policy decisions.

To the best of the author’s knowledge, this is the first study to use three valuation
methods on a water related survey data in Africa. It complements existing studies
that have combined more than one method in developing countries.

99
 APPENDIX C
Appendix C1.1: QUESTIONNAIRE

Interviewer: ………………………………. TOPIC: Estimating Demand for Reliable Piped-

Water Services in Urban Ghana
Supervisor…………………………………..
District………………………………
Region: ……………………………………….
House Number……………………….
Metropolitan Area……………………..
Respondent’s ID…………………….
Locality…………………………............
Language used in the survey:
Interview date :…………/…………/ 2014
6. English

Start Time: Hrs.……../Min……… 7. Twi

8. Ga
End Time: Hrs...……../Min………. 9. Ewe

Survey Price Draw 10. Other

Yes[ ] No:

No[ ] Thanks

A BRIEF BACKGROUND OF STUDENT

My name is [Give Name] from Central University College [show I.D] and I’m part of a
team headed by Anthony Amoah, a PhD student from the School of Economics,
University of East Anglia, UK. He is conducting a survey of people’s opinions about the
water situation in Ghana.

I humbly wish to request your kind participation in this research, which aims at
estimating the economic value of domestic water supply in Ghana. The research does
not probe into your private affairs but we are interested in your personal perception and
experience of water supply in Ghana. Your answers will only be used for empirical
analysis in the framework of this research. Your information will not be shared or used
for any other purpose. It will be treated as strictly confidential. Nevertheless, you still
reserve the right to refuse or indicate don’t know to questions where necessary.
Completing this survey automatically enters you into a free rechargeable mobile credit
draw (if you wish) where you could win one of the ten GHS10 mobile credits.

Thank you very much for your kind cooperation.

NB. Please tick [], underline or write where appropriate.

100
 SECTION A: Personal Data of Respondent (Household Head)
A.1. Respondent’s household status: A.2. Gender:
1. Head 4. Parent of Head 1.Male
2. Wife of Head 5. Child of Head 2.Female
3. Husband of Head 6. Other: If other, specify……….

A.3. Year of birth (If provided skip A.4): A.5. Marital Status:
A.4. Age range ( Age in completed years): 1. Single 4. Separated
1.18-29 3. 40-49 2. Living with partner 5. Divorced
3. Married 6. Widowed
2. 30-39 4. 50+

A.5 Which of the following life-cycles describe your household? A.6 a. Number of people in your household?
1. Single Adult 2. New Couple (≤1yr) 3. Family with Children
4. Family with Teenagers 5. Family with launching(ready for self-dependence) children
6. Family in later life (Retired i.e. ≥60 with or without children) b. Number of household’s in your residence?
7. Several Adults living together ( with or without children )
A.7 Highest level of educational qualification achieved/completed: A.8 What is your employment status?
1. None 4. Professional 1.Unemployed (during the last 7-days)
2. Primary/Middle/J.S.S 5. Second Degree 2. Full time employee of private firm 7. Apprentice
3. Secondary/Vocational/Technical/Training College. 6. Doctorate (PhD) 3. Full time employee of public firm 8. Domestic employee
4. First Degree/Diploma 7. Others (specify)…........ 4. Self-employed without employee(s) 9. Contributing family worker
5. Self-employed with employee(s) 10. Retired
6. Casual worker 11. Other (specify)…………….
A.9 What is your monthly take-home income in Ghana cedis (GHS): A.10 How much do you save per month?
(GHS)
1. <160 2.160-599 3.600-999 4.1000-1399 5.1400-1799 6.1800-2199 7.2200-2599 8.2600-
2999 9.3000-3399 10.3400-3799 11.3800-4199 12.4200-4599 13. 4600-5999 14. ≥6000 A.11 Are there other people in your household who work?
15. I don’t know 16.I won’t tell you 1. Yes 2.No

A.12 If yes, how much on the average is their monthly take-home income in GHS: SECTION B: General Water Supply and Environmental Questions
1. <160 2.160-599 3.600-999 4.1000-1399 5.1400-1799 6.1800-219 7.2200-2599 8.2600- B.1. Which of the following water systems is installed in your residence?
1. Piped water 2. Non-piped water 3. None
2999 9.3000-3399 10.3400-3799 11.3800-4199 12.4200-4599 13. 4600-5999 14. ≥6000 15. (NB: Skip B.2 if None)
I don’t know 16.I won’t tell you
B.2. Is the installed water in your residence reliable?
(Reliability means it flows or you can fetch at least once a day)?
1. Yes [ ] 2. No [ ]
Select any of the SOURCE DESCRIPTION CODES to answer questions B.3 and B.5 B.3. What is the main source of water supply for your household?
01……….….Indoor plumbing 09………….…Borehole
02…………..Inside stand pipe 10………….…Protected well (Use source description codes)
03………….Water truck/tanker service 11.…………….Unprotected well DRINKING GENERAL USE
04………… Water vendor(gallons) 12……………..River/Stream/lake/dam
05………….Pipe in neighbouring household 13…………..Rain water/spring
06………… Private outside standpipe 14…………...Dugout pong
07………… Public Stand pipe 15..……….. Other (specify)…………
08…………Sachet/bottled water/packaged

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Select any of the TIME UNIT CODES for B.4 and B.6 to answer questions B.4 and B.6 B.5. What is (are) the other source(s) of water supply for your household?
4………………..Quarterly
1………………..Daily 5……………..…Half Yearly (Use source description codes)
2………………..Weekly 6………………..Yearly DRINKING GENERAL DOMESTIC USE
3………………..Monthly 0………………..Not Applicable

B.4. How frequently (regular) do you receive drinking water supply from your main
source? B.6. How regular (reliable) is your water supply for GENERAL domestic use?
Time unit (see time unit codes) Number of times Time unit (see time unit codes) Number of times

B.7. If NOT piped water, why do you use these other sources of water supply? B.8. Do you have any home water treatment system?
1. No access to private piped water 3. Other sources are more reliable 1.Yes 2. No
2. Other sources are less expensive 4. Other (specify]……………….....
NB: If No, skip question B.9
B.9. Identify the rate at which is it cleaned/repaired/replaced? B.12. In your last five years, which of the following is true? After purchase of water for general domestic
1. Frequently 2. Sometimes 3. Not at all 4. don’t know use (not including drinking), you….…
1. Use immediately 2. Treat (Chemical, settling, boiling, filtering etc.) before use
B.10. In your last five years, which of the following is true? After purchase of water for
other sources, you can…
1. Use immediately 2. Treat (Chemical, settling, boiling, filtering etc.) before use B.13. Have you ever felt the need to have had an improved quality of the water you use?
1. Yes
2. No
B.11. In your last five years, which of the following is true? After purchase of water for NB: If No, it means you are satisfied with the quality of your domestic water. Please skip question B.12,
drinking, you …..… B.13 and B.15.
1. Use immediately 2. Treat (Chemical, settling, boiling, filtering etc.) before use
B.14. What could you have done to improve it? B.15. In the last five years, which of the following have you done before to improve water quality before
1. Apply Chemicals. Identify the type of chemicals use?
2. Allow water to settle. How many minutes would it take to get settled? 1. Boiling- On the average, how many minutes does it take?
3. Boiling. How long would it take to be ready? 2. Applying chemicals- How much do you spend on this per month?
3. Allowing debris to settle- On the average, how many minutes does it take?
4. Filtering. How long does it take to filter your water?
4. Filtering. How much do you spend on filters per year/ how long does it take?
5. Other. Specify and indicate how….. 5. Other- Specify and identify either the time or amount spent on it…………

B.16. How much would you spend or do you spend on average to make this source B.18. Who is mainly responsible for ensuring that your household has enough water?
potable for use per week? 1. Husband 2. Wife 3. Children

B.17. How much do you spend (on average) on water per month irrespective of source? B.19. Do you promote good environmental practices? (e.g.: promoting good sanitation, cleaning
environment, weeding compound etc.)
1. Yes
2. No (If No, Skip question B.18)

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B.20. If yes, rank the extent of your promotion to the indicators listed in the table B.21. If No to B.17, briefly give your reason(s) ……………………………
below. (Yearly(Y) , Monthly(M), Weekly (W), Daily(D) Every Purchase(E)) …………………………………………………………………………………….………………………………
Factors/Indicators All the Some- Not at …………………………………………………….
time times all
Green Environment/ afforestation e.g.: planting trees B.22. Which of the following international environmental issues do you know of?
(M) 1. Global warming/Green House Effect [Yes] [No]
Cleaning of Environment (D) e.g.: sweeping 2. Climate Change[Yes] [No]
Efficient Water use by preventing waste(D) 3. Kyoto Protocol [Yes] [No]
4. I don’t know any
Indiscriminate waste disposal(D)
Use of Eco-product (E)
:Identify as Eco-product before purchase
Good sanitation(W) e.g.: regular collection of refuse

Other…………………
B.23. Mention any National/District/Local environmental law/practice you know of? B.26. In your view, is water a major problem in your district? 1. Yes [ ] 2. No [ ]
…………………………………………………………………………………………………
B.27. How is the water supply system operated and managed?
………………………………………………………………………………………………
B.24. How important is protecting the environment to your household? 1.Self 2.Community operated and managed
1. Very Important 2. Important 3. Fairly Important 4. Not important 3.Community Watered Sanitation Agency 4.NGO
5. Ghana Water Company Ltd 6.Other (Specify) ………
7. Not Applicable 8. Don’t know
B.25. Is your locality dusty enough to pollute your water? 1. Yes [ ] 2. No[ ]
B.28. In your view, which of the following are some of the water problems in your B.29. In your view, who in your district is mainly responsible for your water problems?
district? 1. Colonial Administration] 2. Government 3. GWCL 4. Consumers
1. Cost 4. Poor quality 5. Don’t know Give reason for your choice?
2. Lack of flow 5. Poor Management …………………………………………………………………………………………….
3. Difficult to access 6. Other [ ] If other, specify……………………………….
SECTION C: Hedonic Valuation Questions C.2. Nature of residence?
1. Compound house 5.Shanty town/slum
C.1. Who owns your residence?
2. Separated house 6. Flat/Apartment
1. You 2. An Organisation (Property Company)
3. Landlord 4. Your employer 3. Duplex 7. Other [ ] Specify………
5. Government(Municipal, District, Local, Assembly) 4. Traditional (mud/hut/wooden)
6. Other (If other, specify)………………………………
C.3. Residence outer wall (fence/ boundary/perimeter) type C.4. Residence Roofing type
1. No wall 5 .Stone 1. Mud/Mud bricks/Earth 5. Slate/asbestos
2. Mud bricks/Earth 6 .Cement/Concrete 2. Ceramic/marble/Vinyl Tiles 6. Cement Concrete/Terrazzo
3. Wood 7 .Bamboo/Palm leaves/thatch (grass) 3. Wood 7. Bamboo/Palm leaves/thatch (grass)
4. Metal sheet/slate/asbestos 8 .other. Specify………………….. 4. Metal/Aluminium sheet 8. If other. Please specify………………….
C.5. Complete the number, size and nature of the facilities in your residence provided below: C.6. Do you have access (at least electricity within the last one month) to electricity in your residence?
1. Yes [ ] 2. No [ ]
C.7. . What is the main source of lighting for your household?
1…………………….National Electricity Grid
2…………………….Kerosene
3…………………… Gas lamp
4……………Candles/Touches (flashlights)
5……………………Solar energy

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 Facility Number Average Size(Square feet) 6……………………Generator
Bathroom 7……………………No light
Toilet 8……………………Other
Garage C.8. If Electricity, what type of electricity bulbs do you use?
Storeroom 1. Energy saving bulbs 2. other (such as incandescent light bulbs)
Kitchen 3. Both

C.9. Do you have access to a toilet facility in your residence? Yes [ ] No [ ]

Bedroom Nature: cemented/ wool/ rubber/ tiled/paved/ grass /none C.10. Do you have a poly tank (reservoir) in your residence? Yes [ ] No [ ]

Plot or floor Size(Sq. ft) Nature: cemented/tiled/paved/grass/none

space of your
residence
C.11. Question for non-owners only: How much did you pay as rent last month C.12. Question for Owners only: If you are the owner of the house, assuming you decide to leave your
residence for a new residence. How much would you charge if you were renting your old residence out per
GHS…………………… month?
GHS.............
.....................
C.13. What is the distance (measured in meters) from your C.14. In making your current residential decision how important were the following factors?
residence to the following:
1. School [ ] Determinants On the scale of 1 to 5 where 1=very important and 5 =Very unimportant Don’t Know
Rental rate 1 2 3 4 5

2. Coal tar road [ ] Water Supply 1 2 3 4 5

Electricity Supply 1 2 3 4 5
3. Financial Institution [ ]
Family and Friends 1 2 3 4 5

4. Health centre [ ] Workplace 1 2 3 4 5

Proximity
Security 1 2 3 4 5
5. Market [ ]
Public Services 1 2 3 4 5

6. Transport Station [ ] Prestige 1 2 3 4 5

Noise pollution 1 2 3 4 5
7. King’s Palace [ ]
Air pollution 1 2 3 4 5
8. Hotel [ ] *DK means Don’t Know or DR means Don’t Remember

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SECTION D: Travel Cost Questions D.3. How far is your household’s main source of water supply from your dwelling?
NUMBER(see water codes in page 3) DISTANCE UNIT (Meters)
D.1. Do you need to spend some time looking (hauling) for water DRINKING
in your district?
1. All the time
2. Sometimes GENERAL USE NUMBER(water code) DISTANCE UNIT(Meters)
3. None of the above
D.2. If NONE, does that mean you have no problem with potable D.4. How far is your household’s other sources of water supply from your dwelling?
water from Ghana Water Company Limited (GWCL)? NUMBER(see water codes in page 3) DISTANCE UNIT (Meters)
DRINKING
True
GENERAL USE NUMBER(water code) DISTANCE UNIT(Meters)
False

D.5. Indicate in the table below the of mode water is transported to your household
Mode of water transportation Number of round trip per Travel cost per round trip(Ghs)
household/ week
Main Source Other Sources Main Source Other Sources
Walking

Private car

Commercial car/bus/truck

Commercial manual truck

Tanker services

Other

D.6. Are you satisfied with the following:

1. Source of water? Yes [ ] No [ ]. If No, would you want a change? Yes [ ] No [ ].

2. Quality of water? Yes [ ] No [ ]. If No, would you want a change? Yes [ ] No [ ].

3. Mode of transporting water to your residence? Yes [ ] No [ ]. If No, would you want a change? Yes [ ] No [ ].

4. Number of trips made for water to get to your residence? Yes [ ] No [ ]. If No, would you want a change? Yes [ ] No [ ].

105
E. SANITATION QUESTIONS E2.Does your household pay for the disposal of refuse?

E1. How does your household dispose of refuse? Yes ………………………………………. 1

1…………………Collected
2…………………Public Dump No ……………………………………….. 2 >>> >>SKIP >>E4
3…………………Dumped elsewhere
4…………………Burned by household
5…………………Buried by household
6…………………Other specify
TIME UNIT CODES 4………………..Quarterly E3. How much does this household pay for refuse?
1………………..Daily 5……………..…Half Yearly
2………………..Weekly 6………………..Yearly Amount in GHS and P
3………………..Monthly 0………………..No Applicable GHS p

Time Unit see codes

E4. What type of toilet is used by your household? E5. The last time your youngest child under 5 years passed stools, what was done to dispose
1…Flush Toilet 6…Toilet in another house it?
2….Pit latrine 7. .No toilet facility (bush, beach) 1……...Child used toilet latrines 5.………Left it in the open
3…KVIP 8……other , specify 2……...Put/rinsed into drain or ditch 6. ……..…Other , specify _________________
4…………Pan/bucket 3……...Thrown into garbage 7 ………...Don’t know
5…………Public toilet(flush, bucket, KVIP) 4………….Buried 8. No child under 5 years in Household

E.6 Does your household pay for the disposal of refuse? E.7. How much does your household pay for the use of the toilet facility?
Amount in GHS and P
Yes ………………………………………. 1
GHS p
No ……………………………………….. 2 >>> >>SKIP E.7 to E.8
E.8 Are you aware of any water borne disease? E.9. Which of these sicknesses was last experienced by any member of your household?
1. Malaria [ ] 2.Cholera [ ] 3.Diahorrea [ ]
1. Yes [ ] 2. No [ ].If yes, specify…………
4. Typhoid [ ] 5. Diabetes [ ] 6.None[ ]
Other [ ] If other, please specify………………………………………………………
E. 10 Do you think toilet or/and refuse gets into your domestic water? 1. Yes 2. No.
Briefly explain your answer in E.10………………………………………

E. 11 What are the likely HEALTH effects of unclean domestic water on your household?

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SECTION F: Contingent Valuation Questions
F.1. Assuming the associated cost of an improved water service in Ghana is manageable.
Would you like an improved service in Ghana’s water service delivery?
1. Yes
2. No
(If yes, continue with hypothetical market scenario on the next page).

F.2. If no, give reason.........................................................................................................

……………………………………………………………………………………………

………………………………………………………………………………………End

Hypothetical Market Scenario:

 I would want to find out from you, if you value the provision of an improved water
supply system in Ghana particularly in the Greater Accra Region. By improvement
we mean you are connected to the Ghana Water Company Limited (GWCL) main
lines, water flows directly in your residence at all times, and the quality of the water
is up to an acceptable international standard. Generally, we know that every good
thing comes at a cost. You may be required to pay a permanent amount that will be
factored into your water bills provided by GWCL.
 Refer to pictorial description for further understanding of oral/written description

Willingness-To- Pay Questions

F.3. Would you prefer another medium of payment other than GWCL monthly bills?

Yes [ ] No [ ] If yes, how would you want to pay it? ……………

A: Willingness-to-pay (WTP)

F.4. Suppose you are supplied with an uninterrupted (reliable) piped-water as orally and
pictorially described, how much would your household be willing to pay to fetch a
34cm bucket of water?” Would your household be willing to pay
 GHS………… (for the household not entire residence) YES [ ] (if yes, skip to

B-WTP)

 If NO, What about GHS …………………………………………...? YES [ ]

 If No, please specify amount which you would be willing to pay less than

GHS………..….

107
 Briefly explain why...............................................................................................

……………………………………………………………………………………

……………………………………………………………………………..END

B: Willingness-to-pay (WTP)
If yes, continue….

 GHS……………………. YES [ ]

If yes, it means you will be willing to pay more. Please state how much you would be

willing to pay which is more than the GHS………………….

GHS………..………………………….

If no, it means you will be willing to pay less. Please state how much you would be

willing to pay which is less than the GHS…………………

GHS ……………………………

E.6. How did you find the survey questions?

1. Very difficult 4. Very Easy

2. Difficult 5. Don’t know

3. Easy 6. Refuse

END OF QUESTIONNAIRE

THANK YOU FOR YOUR ASSISTANCE!

108
Fig. 3.1: Pictorial Description of Market 1

109
Fig. 3.2: Pictorial Description of Market 2

110
APPENDIX C1.2: STUDY AREA, POPULATION AND SAMPLE SIZE

Fig. 3.3: Map of Ghana in Africa

Source: Adapted from Fuest and Haffner (Originally from Haffner)

Fig. 3.4: Map of Greater Accra Region

111
Table 3.10: Population by District, Gender and Type of locality in the GAR

Source: Ghana Statistical Service (GSS), 2012

112
Table 3.11: Total Population, No. of Households and Sample size per District

Total No. of Total

District Urban Sample Rural Sample
Population Households Sample

485,643 118,846 87,946 172 30,900 69 241

Weija

262,742 66,706 49,362 97 17,344 39 135

Ga West

259,668 66,286 49,052 96 17,234 38 134

Ga East

1,848,614 1,779,165 371,447 726 130,509 291 1017

AMA

78,215 76,601 15,154 30 5,324 12 41

Adenta

227,932 221,757 45,036 88 15,823 35 123

Lezokuku

190,972 185,804 36,953 72 12,983 29 101

Ashaiman

402,637 391,537 72,222 141 25,375 56 198

Tema

122,836 118,542 19,602 38 6,887 15 54

Danbge
West

130,795 128,216 20,182 39 7,091 16 55

Danbge
East

Total 4,010,054 1,036,426 766,955 1500 269,471 600 2100

Sample Size Computation (Yamane 1967)

𝑁 1,036,426 950,336
𝑛= 1+𝑁(𝑒 2 )
, 𝑛 = 1+1,036,426(0.052 ) ≈400; 1+950,336(0.052 ) ≈400
N=population size (Total Number of Households) and e=margin of error 0≤e≤1

113
APPENDIX C1.3: DESCRIPTIVE STATISTICS FOR HPM TCM AND CVM
Table 3.12: Descriptive Statistics for HPM
Type of Obs. Mean Variable Description:
Variable Name (Std. Dev.) Type/Codes
Rent Per Monthly in Ghana cedis 1648 138.23 Continuous
(GHS) (174.23) 10 (Min) 1,000(Max)
Average-district monthly Take- 1648 636.18 Continuous
Home Income in GHS (89.65) 463.62 (Min) 842(Max)
Access to Reliable Piped-Water in 1376 0.29 Dummy
Residence (0.45) Yes=1, No=0
Number of Garage 1646 0.10 Dummy
(0.36) Yes=1, No=0
Access to Toilet in Residence 1648 0.722 Dummy
(0.45) Yes=1, No=0
Reservoir in Residence 1648 0.48 Dummy
(0.50) Yes=1, No=0
Distance to Nearest Highway (km) 1648 0.65 Continuous
(1.64) 0.10 (Km)- 32.14 (Km)
Distance to Nearest Financial 1648 0.67 Continuous
Institution (km) (0.81)
0.015 (Km)- 12 (Km)
Distance to Nearest School (km) 1648 0.25 Continuous
(0.46) 0.01(Km)- 9.29 (Km)
*Hypothesised on WTP
Table 3.13: Descriptive Statistics of TCM and CVM
Type of Obs. Mean Variable Description:
Variable Name (Std. Dev.) Type/Codes
No. of Round-Trips to Water 1648 99.58 Continuous/Count
Source(s) per month (89.975) 0(Min)- 592(Max)
Monthly Take-Home Income 1604 636.37 (581.35) Continuous
in Ghana cedis 160 (Min) 4,400(Max)
Other Family Members in 1648 0.83 Dummy
Household (0.38) 1-Yes, 0-No(Single
Adult Only)
Age of Respondent (Years) 1648 39.29 Continuous
(11.86) 18yrs-72yrs
Age of Respondent Squared 1648 1685.04 Continuous
(Years) (986.86) 324yrs-5184yrs
Access to Reliable Piped- 1376 0.29 Dummy
Water in Residence (0.45) Yes=1, No=0
Cost per Round-Trip to Main 1648 9.16 Continuous/Count
Water Source per Month (M) (11.95) 0(Min)-1308 (Max)
in Ghana Cedis
Cost per Round-Trip(s) to 1648 55.52 Continuous/Count
Other Sources of Water per (27.32) 0(Min)- 1540 (Max)
Month (M) in Ghana Cedis
Saving Behaviour 1648 0.73 (0.45) 1-Yes, 0-No

114
 Type of Obs. Mean Variable Description:
Variable Name (Std. Dev.) Type/Codes
Maximum WTP Amount 1648 39.86 Continuous
(Ghana Pesewas) (21.42) 0 (Min )-200 (Max)
Categorical WTP 1648 1.55 Categorical
(0.61) 1 ,2, 3, 4
Lower WTP Amount 1648 31.93 (13.42) Continuous
-5 (Min)-60 (Max)
Upper WTP Amount 1648 52.93 (18.24) Continuous
20 (Min)-210(Max)
Starting Point Amount 1648 34.95 (11.18) Discrete
20,30,40,50
Number of Households 1646 4.71 Continuous
(3.79) 1 (Min )-32(Max)
Main Source of Household 1110 0.03 (0.18) Dummy
Water for Drinking Yes=1, No=0
Reliability Index
Main Source of Household 1589 0.25 Dummy
Water for General Use (0.43) Yes=1, No=0
Reliability Index
Knowledge of Local 1648 0.55 (0.49) Dummy
Environmental Issues Yes =1, No=0
Knowledge of International 1641 0.61 Dummy
Environmental Issues (0.49) Yes =1, No=0
Average Household 1612 52.21 Continuous
Expenditure on water/month (38.35) 4 (Min )- 400(Max)
Residence Fence Type 1648 0.59(0.49) Dummy
1=Fenced, 0=No
Fence
*Hypothesised on WTP

115
APPENDIX C1.4: FIELD WORK ISSUES

Fig. 3.5: Team Structure for Field Work

Fieldwork Processes
Process 1 Process 2
1. Survey designed 1. Input from Faculty/School
2. Inputs from Supervisors 2. Focus group discussion
3. Inputs from individual experts from 3. Training of Coordinators
other Schools 4. Training of Interviewers
4. Focus group discussion 5. 1st Pilot Survey
5. Most comments reviewed 6. Signing of field agreement form
6. Ready for presentation at School’s 7. Pilot survey data analysis
internal seminar 8. Modification of questionnaire
7. Ready for process 2 9. 2nd Pilot survey (on a relatively smaller
sample)
10. Analysis of last pilot survey
11. Fieldwork commences

116
 CHAPTER FOUR

Demand for Domestic Water from an Innovative Borehole

System in Rural Ghana: Stated and Revealed Preference
Approaches

1. Introduction
In the Millennium Development Goals (MDGs), one of the first targets to have been
declared met was the Drinking Water Target. However, rural areas across the world
especially in developing countries still lag behind in access to clean drinking water.
UNICEF/WHO (2014) reports that, 97 out of every 100 people from rural areas in
developing countries do not have piped-water, with 14% depending on surface water
such as rivers, ponds, or lakes. Sub-Saharan Africa (SSA) needs more attention as it has
a worse case relative to other developing regions. It is estimated that only 61% of people
in SSA have access to improved water supply relative to over 90% in Latin America and
Caribbean, Northern Africa, and large parts of Asia. Indeed, SSA lags behind the other
developing regions in terms of development towards water supply targets.

Towards meeting MDG 7 which has further been consolidated into Sustainable
Development Goal 6 [1], groundwater is considered a reliable improved source for
domestic use in SSA. MacDonald et al. (2002) provide some insights into groundwater
as a reliable improved option especially in low permeability areas in Africa. They argue
that groundwater is a “well suited” source for rural water supply in SSA. It possesses
some resilience to the impacts of drought and is relatively cheap to develop and maintain.
One major challenge is the kind of improved groundwater (borehole and wells) being
provided. These are generally the traditional manual types, which require a lot of
physical strength from water haulers (mainly women and children) to pump and it’s
mostly without filters hence quality is sometimes compromised because of
environmental conditions. The water is further exposed to contamination from the point
of access to the point of usage. It is important to acknowledge that recent evidence
indicates that many improved water supplies suffer from poor reliability (Hunter et al.,
2009), and that not all improved water is safe (Levisay and Sameth, 2006). In the view
of MacDonald et al. (2002), some proportion of trace constituents in groundwater can
make it unsafe and can give rise to health problems. Yet such sources can erroneously
be described as improved or safe sources of water. This, to some extent, brings doubts
117
as to whether what is described as ‘improved’ by the international community is the
same as ‘safe32’.

In Ghana, the Community Water and Sanitation Agency (CWSA) is the national
institution responsible for the provision of safe drinking water and related sanitation
services to rural communities. Unfortunately, these communities depend primarily on
water from traditional borehole systems which can at best be described as ‘improved’
but not ‘safe’. Another key challenge of the CWSA enshrined in the National Water
Policy (NWP, 2007) is how to set tariffs to ensure the sustainability of operations as
information on consumers’ consumption behaviour is unknown to agents in this market.

In order to avoid future uncertainties regarding the supply of safe drinking water to rural
dwellers in a more effective and efficient way, this study primarily aims at estimating
household’s demand for an innovative borehole system given that piped-water systems
are not available. This is a completely new kind of borehole system. It uses water pump
and it is connected to a solar source of energy supply. The pump generates and supplies
water through a filtered-pipe into a communal water tank, which supplies the generated
water through a second filtered-pipe(s) to surrounding homes. Thus, we use cost
effective resources such as abundant sunshine and ground water which is properly
filtered for the design of this innovative system. Water supply from this innovative
system can be described as safer and cheaper water relative to what is currently being
offered. It has the advantage of easing the water burden on women and children with its
associated consequential benefits. In addition, it is particularly useful in developing
countries where water supply infrastructure is a major problem. We propose this
innovative system to the rural community and provide information about households’
willingness-to-pay (WTP).

The competing independent valuation approaches generally accepted and used in

literature for determining the economic value of non-market goods and services are
either based on the revealed/indirect approaches (such as hedonic pricing method [HPM],
travel cost method [TCM], take-it-or-leave-it method [TIOLI] etc.) or stated
preference/direct approaches (such as contingent valuation method [CVM], choice
experiment method [CE]) (see Adamowicz et al., 1994). These valuation approaches

32 “Safe drinking water is water with microbial, chemical and physical characteristics that meet WHO
guidelines or national standards on drinking water quality” (WHO, 2015@
www.who.int/water_sanitation_health/ mdg1/en). In this study safe water is referred to as water supply
from piped system or treated borehole water etc., and improved water is defined as water supply from
boreholes, wells etc. not necessarily treated.
118
also provide economic measures of social benefits needed to inform policy direction.
These methods have been used by prominent institutions such as The World Bank, and
applied in both developed and developing countries’ contexts (see Briscoe et al., 1990;
Bateman et al., 1994; Nauges and Whittington, 2009 etc.). Indeed, it goes without saying
that these methods are useful in both settings.

In this paper, we use the CVM through a hypothetical market design, and the HPM
using rental values of housing units, to measure different aspects of water supply in the
rural Greater Accra Region (GAR) of Ghana. We use the CVM to estimate household’s
marginal WTP for domestic water supply from the proposed innovative borehole system
which captures access to safe water supply whilst the HPM is used to estimate
household’s marginal WTP for the current service which also captures access to current
improved water supply in residences. Results from both methods suggest that,
households place higher value on water from the innovative borehole system than the
traditional systems. We find that household’s monthly marginal WTP estimates are
GHS35.90 (US$11.45) and GHS17.59 (US$5.61) in the CVM and HPM, respectively.
In line with the MDGs and Sustainable Development Goals (SDGs), this study provides
information to assist policy makers locally and internationally in their decisions for rural
water supply in Ghana. This will help evaluate the socio-economic and health potential
of the project as well as determine appropriate tariffs for rural communities which can
help design socially equitable fiscal policies.

The rest of the paper is structured as follows. Section 2 presents the empirical review of
literature. Section 3 describes the survey design used in carrying out the research.
Section 4 presents results and discussions while section 5 concludes with relevant policy
recommendations.

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2. Empirical Literature
In this section, we review studies on WTP which relate to introducing innovative or new
products in developing countries and shed light on how studies have been empirically
conducted using non-market based valuation methods.

Brouwer et al. (2015) assessed urban and rural demand for gravity-driven membrane
(GDM) filter for improved drinking-water supply in Kenya. This was a new technology
that had not yet been introduced to the market. Respondents had knowledge about other
filters and their associated benefits. However, this technology with its benefits were
altogether new to respondents. The new technology was based on an extensively tested
ultra-low pressure filtration and flux stabilisation technique. This by design does not
require filter cleaning, yet it produces sufficient amount of water to meet 10-40 Lday-1as
required by the WHO and reduces diarrhoea occurrence among children to a maximum
of once a year per child. The study combined two stated preference methods namely the
CE and the CVM and found the latter to produce conservative and statistically more
efficient estimates. The study found that respondents value the new technology
positively relative to their current situation. The marginal WTP values in absolute terms
were observed to be consistently higher in urban areas than rural areas because of income
effect. They concluded that a differentiated marketing strategy is key to a successful
introduction of the product in Kenya.

Berry et al. (2012) sought to estimate the WTP for a new product (Kosim filter, a ceramic
water filter) introduced to some selected villages in Northern Ghana. This product was
not totally new to the entire region as it had been introduced and sold by Pure Home
Water33 to some areas but not the areas understudy. The respondents were randomly
assigned to be offered a water filter applying either the Becker-DeGroot-Marschak
(BDM)34 or TIOLI offer. This represented a more typical market transaction because
prior to the original survey, demonstrations were made and respondents were further
educated about the health benefits of the new product. The respondents saw how the new
product worked, tasted the water generated from the new product and asked questions.
They were given two weeks to discuss WTP for the new product with their families
before participating in the original experiment. The study found evidence that
respondents were generally willing to pay for the new product. In addition, they found
strong evidence that the WTP implied by the TIOLI was consistently greater than the

33A Ghana-based Non-profit Organisation.

34BDM is a method for measuring utility by a single-response sequential method. It is considered to be an
incentive-compatible procedure used in experimental economics to measure willingness to pay.
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BDM mechanism. This was justified on two accounts. First, respondents felt they could
influence the future price by bidding low. Second, the TIOLI may anchor respondents
to higher valuation bids.

In addition, the absence of bathrooms with flush toilets and its health consequences in
rural communities and the need for such new facilities within Northern Vietnam
motivated Van Minh et al. (2013) to assess WTP for improved sanitation. The economic
valuation technique employed was the CVM. Responses were elicited through the
iterative bidding game format which involved two stages. First, a sequence of
dichotomous choice questions, second, final open-ended questions. The sample size used
was 370 households. The unit of analysis for the survey were people not having toilets
in their residences as of the time of the interview, and were primary income earners as
well as decision makers of their respective households. The hypothetical market used
comprises descriptions of the good in question (bathroom with a flush toilet and possible
benefits). The study found that about two-thirds were willing to pay for an improvement
in their current sanitation situations. The economic status of respondents (poor or non-
poor) and health knowledge of respondents were the principal influential factors of
respondents’ WTP.

Another developing country study by Clasen et al. (2004) investigated household

demand for water filters with the purpose of reducing diarrhoea in Bolivia. In a six-
month trial, water filters were distributed randomly to half of the 50 participating
households in the community. The respondents were categorised into controlled group
and intervention group. The respondents generally use customary practices for collecting,
storing, and drawing drinking water. Half of the respondents were given filters at the
inception of the study, and the other half six months later. Information on WTP were
elicited by means of a questionnaire, and they obtained a sample of the pre-intervention
drinking water for their baseline data analysis. Participants were randomly allocated by
lottery. Half allocated to an intervention group and half allocated to a control group. The
study used the CVM to assess WTP for the intervention. The mean response for the
maximum amount participants would pay for the filter, was equivalent to U.S. $9.25.

Most WTP studies on introducing a new product, have generally followed field
experiments and/or hypothetical survey (CVM) methods. However, to the best of our
knowledge there is only one study by North and Griffin (1993), which used the HPM to
estimate willingness-to-pay for rural water supply. These authors further confirmed the

121
paucity of studies in this area by indicating that HPM has not yet been applied to WTP
for water sources by rural households.

The main contribution of our study to this literature is that, it is, to the best of our
knowledge, the first study that has applied both CVM and HPM to water supply for rural
households. Also, as demonstrated by the various authors in this literature, the relevance
of proper description of an innovative product is very critical when dealing with non-
market goods. To this end, we used both pictorial and oral approaches for proper
description of our innovative borehole system. We observed from our fieldwork that
combining both pictorial and oral approaches gave better understanding to respondents.
This and other methodological issues are presented in the next section.

3. Survey Design
Household survey data from all the seven districts in rural areas of the GAR was used in
this study. We used household responses for the CVM, and housing attributes from the
same survey data for the HPM. The total population and number of households in the
rural areas of the GAR as reported by the 2010 Population census are 379,099 and 86,090
respectively. We used Yamane (1967) 35 sample size approach to compute the sample
size. We oversampled this to 610 households for higher representation of the population.
One response was dropped due to significant missing responses, hence a sample size of
609 households is used in this study.

Standard non-market valuation requires that relevant sampling issues (such as technique
and sample size) are properly addressed. It is widely known that inappropriate sampling
technique could lead to biased estimates. However, with the unplanned settlements in
rural GAR, a multistage quota sampling technique was applied (see Whittington, 1998).
This was achieved by clustering the region into seven districts, then into communities.
We listed these communities in each district following the Town and Country Planning
list of communities and randomly selected the households from these communities
within the districts of the region. We sampled one in every two houses. According to our
quota, we interviewed all households in the sample houses within the randomly selected
communities in the districts. In sum, we applied the multi-stage quota probability
sampling technique in drawing our sample of 610 from the population.

35 𝑁 86090
Yamane (1967) sample size determination approach: 𝑛 = = = 398. Where n is
1+𝑁(𝑒)2 1+86090(0.05)2
the sample size, N is the size of the population, e is the error level or level of precision.
122
A large fraction of rural households in the GAR reside in compound houses together
with other households. Communal living effects (where resources are shared) in such
compound houses cannot be completely ruled out yet, individual household decisions
are mostly the responsibilities of the respective household heads. We therefore
considered the entire household as a sampling unit and interviewed whoever the
household considers as the household head or decision maker. By Ghana Statistical
Service 36 definition, the household head is one who is economically and socially
responsible for the entire household. The unit of analyses were household heads who
lived in the district, were 18 years old and above, and of sound mind. They should have
worked within the last five years and were employed at the time of the survey. However,
we also allowed in our sample those who have not worked within the last seven days of
the month of the interview. All potential respondents reserved the right to either accept
to participate or decline participation.

The questionnaire was designed based on two standard national survey questionnaires
from Ghana and the United Kingdom. This was subsequently reviewed by survey experts,
economists and legal practitioners. The questionnaire was pre-tested in a pilot survey on
two different occasions during in-person or face-to-face interviews. This made it
necessary for additional amendments to be made to the questionnaire to suit what was
practically feasible during this period. The final version of the questionnaire after
amendment can be categorised into six sections. For brevity, we summarise them under
three main headings: personal data of respondent which comprises all socio-economic
and demographic questions; general water, sanitation and environmental questions
which includes sources of water supply, water use and reliability, types waste disposal
forms, and their general knowledge about local and international environmental issues
relating to water supply; and environmental valuation questions which consists of the
various market designs and WTP questions.

The questionnaire was administered by twenty-five fieldworkers during April-May,

2014, which also includes the training of interviewers and coordinators, pilot survey and
data entry.

36Government of Ghana, Ghana Statistical Service (2012): 2010 Population and Housing Census, Summary
Report of Final Results, Sakoa Press Limited, Ghana.

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3.1 Valuation Approaches and Econometric Models Applied
3.1.1 The Contingent Valuation Method (CVM)
According to Portney (1994, p.1), “[t]he contingent valuation method involves
the use of sample surveys (questionnaires) to elicit the willingness of respondents
to pay for (generally) hypothetical projects or programs”. The first CVM survey
was designed and implemented by Davis (1963). Unlike the revealed preference
methods, the CVM has the advantage of capturing both use and non-use values.
The CVM follows the conventional consumer demand theory, which has it that
the quantity demanded of a good is a negative function of price, all else being
equal. Respondents in our survey, were asked to place value on the innovative
borehole system by answering WTP questions. We define respondent’s value in
line with a standard household utility function which is convenient with cross
sectional data. Following Whitehead and Blomquist (2005), we specify a
standard consumer’s utility maximization function subject to income and prices
as:
max 𝑈(𝑞, 𝑧) 𝑠. 𝑡. 𝑦 = 𝑧 + 𝑝𝑞 (4.1)
𝑞
Where 𝑦 denotes the income of respondent,
p and q are the marginal price and
quantity of water from the traditional borehole system respectively, and z is a composite
of all other goods and services. The solution to the maximization problem in equation
(1) leads to the indirect utility function, 𝑣(𝑝, 𝑦). Alternatively, the minimisation of
consumer’s budget, given their utility constraints is shown in equation 4.2.
min 𝑒(𝑧 + 𝑝𝑞) 𝑠. 𝑡. 𝑈 = 𝑈(𝑞, 𝑧) (4.2)
𝑞
Similarly, solution to the problem in equation 4.2 yields the consumer’s expenditure
function, 𝑒(𝑝, 𝑢) . This can be inverted to obtain the indirect utility function by
recognizing that 𝑣 = 𝑢, and 𝑒 = 𝑦.

We demonstrate the entire impact upon a household’s welfare by the Hicksian

compensating surplus, which essentially shows the amount of income that an individual
would be willing to pay for water from the innovative borehole system and, as a result,
continue receiving the level of utility (u0) received before the changes. Now the change
in the borehole system by introducing the innovative borehole system should be seen as
an increment in consumer’s expenditure, 𝑞1 > 𝑞. Indeed, WTP for the increment arises,
and this is shown in equation 4.3.
𝐶𝑆(𝑞, 𝑞1 ) = 𝑊𝑇𝑃 = 𝑒(𝑝, 𝑞, 𝑣(𝑝, 𝑞, 𝑦)) − 𝑒(𝑝, 𝑞1 , 𝑣(𝑝, 𝑞1 , 𝑦)) (4.3)

124
We also obtain the compensating surplus function where WTP is a function of some
factors,
𝐶𝑆(𝑞, 𝑞1 ) = 𝑊𝑇𝑃 = 𝑒(𝑝, 𝑞1 , 𝑣(𝑝, 𝑞1 , 𝑦)) − 𝑦 (4.4)
Equation 4.4 (compensating surplus function) represents a measure of WTP for the
innovative borehole system as a function of quantity of water from the innovative system
and income of households. Thus, it shows how much each household is willing to
sacrifice and yet remain on the same utility level (u0) before the change. For empirical
purposes we rewrite the structural economic function given by equation 4.4 into an
econometric function. Here we assume that the WTP function in equation 4.4 takes the
following parametric linear form:
𝑊𝑇𝑃𝑖 = 𝛾 + 𝜑𝑝𝑖 +∝ 𝑞𝑖1 + ∂𝑦𝑖 + 𝜀𝑖 (4.5)
We rewrite equation 4.5 assuming that the maximum amount household 𝑖 is willing to
pay for water from the innovative borehole system is posited as 𝑊𝑇𝑃𝑖 . The error term is
represented as 𝜀𝑖 which follows a normal distribution function with mean zero and
standard deviation (𝜎). In addition to the regressors in equation 4.5, factors such as
gender, marital status, and household decision type of respondent have the potential to
explain household’s WTP for safe/improved water. Furthermore, these factors are more
likely to correlate with income and quantity hence omitting them from the model is likely
to lead to omitted variable bias. To ensure consistent and efficiency of the parameters in
the WTP function we account for these additional factors in our empirical specification.
We specify our explicit linear functional relationship as

𝑊𝑇𝑃𝑖 = 𝛾 + 𝜑𝑝𝑖 +∝ 𝑞𝑖1 + 𝜕𝑦𝑖 + 𝐗 𝑖 𝛃 + 𝜀𝑖 (4.6)

Where X is a vector of household characteristics, 𝛃 is a vector of parameters to be
estimated. All other variables are as already defined.
Hypothetical Market Description
One essential requirement of CVM studies as outlined by the National Oceanic and
Atmospheric Administration (NOAA) is a clear description of the hypothetical market.
We describe the innovative borehole system which provides the target commodity as:

Hypothetical Market Scenario:

 Stage 1:
I would want to find out from you, if you value the provision of an improved water
supply system in Ghana particularly the rural part of the Greater Accra Region. By
improvement it means you are connected to an uninterrupted supply of safe and
sufficient water. We have designed an innovative/modernized borehole that is not
manual but powered by solar energy so you do not have to pay electricity bills for
water generation. This borehole water is filtered, piped and connected directly to
125
 your residence. Thus, water flows directly into your residence at all times, the
quality is up to acceptable national standards. Generally, we know that every good
thing comes at a cost. You may be required to pay a permanent amount that will be
factored into your water bills to be provided by the Community Water and Sanitation
Agency (CWSA).
 Stage 2 (Refer to pictorial description for further understanding of oral/written
description)
In the second stage, a picture representing the scenario described in the first stage
was shown and narrated to the respondent (See Fig 4.1). This is also a preferred
approach to just describing a hypothetical market (see Whittington and Pagiola,
2012).

Fig. 4.1: Pictorial Description of Innovative/Modernized Borehole System

In this regard, the two stages were put together and the question asked for the double
bound dichotomous choice game was: “Suppose you are supplied with this
innovative/modernized borehole system as orally and pictorially described, how much
would you be willing to pay to fetch a 34cm bucket of water from this improved system?”

3.1.2 Double Bound Approach

The double bound design with open ended approach is used in this study. According to
Whitehead (2000, p.2), “Estimation of the double-bounded willingness to pay data with
the interval data econometric model improves the statistical efficiency of WTP estimates
relative to single bound models”. However, this approach is prone to starting point and
anchoring effect biases. To correct such biases, Bateman et al. (2002) have suggested
the use of randomized card sorting procedure (RCS). In this study, we used randomized
questionnaire sorting (RQS) procedure which in principle is very similar in approach to
the card sorting method. In a nutshell, this study used the dichotomous choice double-
bound format with RQS.

126
3.1.3 Respondents’ Bids
We determined marginal WTP through the maximum amount respondents were willing
to pay for safe water from the innovative borehole system. The double bound
dichotomous choice format used in this study provides three options. A yes or no
response data, an interval data and the maximum amount respondents have stated as their
WTP for the good in question. Respondents’ responses from the WTP question are used
as the dependent variable using different model specifications. The OLS uses the final
bid amount stated by the respondent. In the case of the interval regression there were
four permutations in the responses from respondents. The yes-yes responses, yes-no
responses, no-yes responses and no-no responses. This approach is presented in section
3.1.4 (model 2).

3.1.4 Econometric Models Applied

The double bound dichotomous choice format provides midpoints and interval WTP
information. We use two econometric models namely interval regression and OLS
regression as robustness checks.

Model 1: The Ordinary Least Squares

In this study, the OLS is applied in both valuation methods namely CVM and HPM. We
consider a method in which attention is restricted to the final bid for CVM and monthly
rental values for HPM. From a broader perspective, we first consider a multiple
regression model, using "𝑖" subscript to index the cross-sectional observations and “n”
to denote the sample size. We represent the multiple regression with 𝑘 + 1 parameters
and present it as:

𝑦𝑖 = 𝛽0 + 𝛽1 𝑥𝑖1 + 𝛽2 𝑥𝑖2 + ⋯ +𝛽𝑘 𝑥𝑖𝑘 + 𝑢𝑖 𝑖 = 1, 2, … … . , 𝑛. (4.7)

From equation (4.7), given our variables of interest to represent some population, we
represent 𝑦𝑖 as the dependent variable for observation 𝑖, and 𝑥𝑖𝑗 , j=1, 2,…… k, are the
independent variables. The intercept is 𝛽0 , and 𝛽1 , … 𝛽𝑘 represent the slope parameters
in the model. We rewrite equation (4.7) in a full matrix notation and define 𝐱𝑖 as a row
vector. We represent y as the 𝑛 × 1 vector of observations and the 𝑖 𝑡ℎ element of y as 𝑦𝑖 .
Also, X is denoted as the 𝑛 × (𝑘 + 1) vector of observations on the explanatory
variables. Thus, the 𝑖 𝑡ℎ row of X consists of the vector 𝐱𝑖 . With 𝑢 denoting the 𝑛 × 1
vector of unobservable errors, we rewrite for all 𝑛 observations as:
𝐲 = 𝐗𝛃 + 𝐮 (4.8)
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This model assumes 𝑢𝑖 to be distributed normally with mean zero and standard
deviation(𝜎). Thus, it is in conformity with the Gauss-Markov37 assumptions underlying
the OLS model. This is estimated in both valuation methods used with different
functional forms.

Model 2: Interval Regression

The interval regression model is presented following the double bound dichotomous
choice (DBDC ) format of individual’s WTP which is generally estimated using
maximum likelihood methods (Cameron and Trivedi, 2005). This is achieved by first
assuming that the WTP function has a linear functional form and is represented as:

𝑊𝑇𝑃𝑖∗ = 𝑥𝑖′ 𝛽 + 𝑢𝑖 (4.9)

Where 𝑊𝑇𝑃𝑖∗ represents the interval within which the true WTP for individual
household 𝑖 can be found. 𝑥𝑖 denotes a vector of explanatory variables and 𝑢𝑖 a random
term which follows a normal distribution function with mean zero and standard deviation
(𝜎).

The DBDC format suggests that there should be a starting bid (𝑏 𝑜 ). If the respondent
says yes, then a second higher bid (𝑏 ℎ ) is offered. For this Yes-Yes option, the lower
limit is treated as the second higher bid and the upper limit as positive infinity (+∞).
Also, in the case of Yes-No option, the lower limit is the starting bid (𝑏 𝑜 )and the upper
limit is the second higher bid(𝑏 ℎ ). However, if the respondent says no to the starting
bid, then a second lower bid is offered (𝑏 𝑙 ). For this No-No option, the upper limit is
the second lower bid (𝑏 𝑙 ) and the lower limit is zero or negative infinity (−∞). Also,
for No-Yes options, the lower limit is the second lower bid (𝑏 𝑙 ) and the upper limit is
the starting bid (𝑏 𝑜 ) (See Carson et al. 2003).

37 For simplified discussions of the Gauss Markov assumptions see Wooldridge (2014, p. 93; 2006)
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Fig. 4.2: Double Bound Dichotomous Choice Format

The 𝑊𝑇𝑃𝑖∗ follows the following definitions. For the:

Yes-Yes option 𝑊𝑇𝑃𝑖∗ ≥ 𝑏 ℎ i.e. [𝑏 ℎ − (+∞)]

Yes-No option 𝑏 𝑜 ≤ 𝑊𝑇𝑃𝑖∗ < 𝑏 ℎ i.e. [𝑏 𝑜 − 𝑏 ℎ ]

No-Yes option 𝑏 𝑙 ≤ 𝑊𝑇𝑃𝑖∗ < 𝑏 𝑜 i.e. [𝑏 𝑙 − 𝑏 𝑜 ]

No-No option 𝑊𝑇𝑃𝑖∗ < 𝑏 𝑙 i.e. [𝑏 𝑙 − (-∞)]

Taking the cumulative distribution function (CDF) as F, the log likelihood function for
the DBDC model is represented in Cameron and Trivedi (2005), and Alberini et al. (1997)
as

𝑙𝑜𝑔𝐿 = ∑𝑛𝑖=1 log[𝐹(ℎ𝑖 ; 𝑥𝑖 , 𝛽, 𝜎) − 𝐹(𝑙𝑖 ; 𝑥𝑖 , 𝛽, 𝜎)] (4.10)

Where ℎ𝑖 and 𝑙𝑖 are defined as the upper and lower limits or bounds of the interval
around WTP. Equation 4.10 is explicitly formulated and presented for estimation as:

𝑤𝑡𝑝𝑖 = 𝑓(𝑌, 𝐴𝑔𝑒, 𝑀𝑎𝑙𝑒, 𝐻𝐻, 𝑀𝑆, 𝑀𝑆𝐷, 𝑅, 𝑇, 𝐹, 𝐸𝑐𝑜, 𝑠𝑡𝑎𝑟𝑡_𝐵𝑖𝑑) (4.11)

The explicit interval regression model presented in equation 4.11, is used as the preferred
model because of the following two reasons. First, after controlling for district specific
effects and starting point bias, we found no evidence of starting point bias or anchoring
effect in our results unlike the OLS models (see Table 3). Second, the interval regression
model relative to the OLS estimated in this study, provides the lowest standard errors
which suggest a relatively higher level of precision in our estimates. In addition, the
parameters in interval regression can be interpreted same way as in an OLS regression.
The “Maximum Likelihood (ML) interval technique in log-linear models is
unambiguously more reliable than OLS used on interval midpoints” (Cameron and

129
Huppert, 1989, P.242). We therefore transform equation 4.11 and present it as an
interval regression function.

𝑙𝑛𝑤𝑡𝑝𝑖 = 𝛽0 + 𝛽1 𝑙𝑛𝑌𝑖 + 𝛽2 𝐴𝑔𝑒𝑖 + 𝛽3 𝑀𝑎𝑙𝑒𝑖 + 𝛽4 𝐻𝐻𝑖 +𝛽5 𝑀𝑆𝑖 + 𝛽6 𝑀𝑆𝐷𝑖 + 𝛽7 𝑅 +

𝛽8 𝑇𝑖 + 𝛽9 𝐹𝑖 + 𝛽10 𝐸𝑐𝑜𝑖 + 𝛽11 𝑙𝑛𝑠𝑡𝑎𝑟𝑡_𝐵𝑖𝑑𝑖 + 𝑢𝑖 (4.12)

Where 𝑙𝑛𝑤𝑡𝑝𝑖 is a continuous variable that denotes log of the lower bound and upper
bound of respondent’s WTP per month for safer water from the innovative borehole
system, 𝑙𝑛𝑌𝑖 is log of household head’s take-home monthly income in Ghana cedis,
𝐴𝑔𝑒𝑖 represents Age in years of respondent, 𝑀𝑎𝑙𝑒𝑖 is a dummy variable representing
respondent’s gender status, 𝐻𝐻𝑖 is the household size of respondent, 𝑀𝑆𝑖 is a dummy
variable [1, married and 0, unmarried], 𝑀𝑆𝐷𝑖 is a dummy variable [1, main reliable
source of drinking water is improved source and 0, otherwise], 𝑅𝑖 is a dummy variable[1,
access to reservoir in respondent’s residence and 0, otherwise], 𝑇𝑖 is a dummy variable
[1, existence/access to toilet facility in respondent’s residence and 0, otherwise], 𝐹𝑖 is a
dummy variable [1, household residence has fence and 0, otherwise], 𝐸𝑐𝑜𝑖 is a
categorical variable (All the time=1, Sometimes=2, Not at all=3) representing the extent
to which respondents use ecologically friendly products. This is used as a proxy to
capture respondent’s knowledge of environmental issues, 𝑙𝑛𝑠𝑡𝑎𝑟𝑡_𝐵𝑖𝑑𝑖 is log of the
starting point bid to test for starting point bias or anchoring effect in the model, and the
error term (𝑢𝑖 ).

3.2.1 The Hedonic Price Method (HPM)

HPM helps to obtain WTP values through the housing market based on rental values or
property sale values and attributes of the property. These attributes are generally
presented to include structural characteristics (number of stories, number of rooms,
nature of floor space, dwelling age etc.), neighbourhood amenities (distance to public
services, distance to work etc.), and environmental amenities (air and water quality or
proximity to open space (see Van Den Berg and Nauges, 2012).

The HPM was first formalised by Rosen (1974). This method is based on the perfect
competition and perfect observability of attributes assumption. This assumption is
inapplicable in heterogeneous markets such as the property market. Again, all attributes
are assumed unrelated and individually evaluable. For a simple modelling of the property
market, we assume that, how much a household is willing to pay in rental values (P(Z)),
is conditional on the attributes such as improved source of water in the property. The
heterogeneous nature of this market is represented by n attributes. This is presented as:

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 𝑃(𝑍) = 𝑝(𝑧1 , 𝑧2, … . . 𝑧𝑛 ) (4.13)
We denote 𝑧𝑖 as measuring amount of 𝑖 𝑡ℎ attribute in the property, 𝑍. The houses in this
market are also assumed to be unique intrinsically (e.g. nature of bedroom, number of
bedroom, number of bathroom) and extrinsically (e.g. fence or walls, garden etc.).
Estimating marginal willingness to pay for an attribute includes determining implicit
prices of attributes associated with the good, summing the implicit prices obtained, and
multiplying by the measure of the attribute to yield the market price of the good (see
Devicienti et al., 2004).

We re-write Z in an explicit form: Z = S, N, Q (4.14)

Where S represents a vector of structural (or residential) characteristics (access to water
in residence(R), access to toilet in residence(T), access to electricity in residence(E),
residence with fence (F), number of bathroom facilities(NBF), number of toilet
facilities(NTF). N denotes a vector of neighbourhood attributes (Water as a district major
problem (WDP), distance to nearest hotel or guest or rest house(DNH), distance to
commercial transport station(DTS), and 𝑸 is neighbourhood socio-economic
characteristics (mean district savings (MDS).

In line with Rosen’s model, we represent our equations (4.13 & 4.14) as:

P(Z) = f(S, N, Q) (4.15)

Where all variables in equation 4.15 are as defined. Choumert et al. (2014) argue that
simpler functional forms produce more stable parameter estimates, hence this study uses
OLS (see model 1 in section 3.14) with log-log functional form. We re-write equation
(4.15) following an OLS approach in a more explicit form and specify the econometric
model for estimation as:

ln𝑃(𝑍) = 𝛽0 + 𝛽1 𝑅 + 𝛽2 𝑇 + 𝛽3 𝐴𝐸𝑅 + 𝛽4 𝐹 + 𝛽5 𝑁𝐵𝐹 + 𝛽6 𝑁𝑇𝐹 + 𝛽7 𝐷𝐹𝐼 +

𝛽8 𝑊𝐷𝑃 + 𝛽9 𝐷𝑁𝐻 + 𝛽10 𝐷𝑇𝑆 + 𝛽10 𝑙𝑛𝑄 + 𝑢 (4.16)
Following the two stage processes of the HPM as presented by Choumert et al. (2014)
we determine the implicit marginal price of the different attributes from the aggregate
price of the property, 𝑃(𝑍). The partial derivative of the aggregate price function relative
to an attribute ( 𝑧𝑖 ), yields the implicit marginal price, 𝑝𝑖 , herein referred to as the
marginal WTP for the attribute 𝑖. In the first stage, we obtain the implicit marginal price
by regressing the monthly rental values on the various attributes which include access to
improved water supply in residence. In the second stage, we multiply this implicit value
by the average house value to yield the marginal WTP for access to improved and safer
water supply per month.
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4. Results and Discussion
We present the descriptive statistics, results and discussions each from the CVM and
then the HPM. Also, we attempt to evaluate whether the two competing methods can
be compared.

4.1 CVM Results and Discussion

Here, four different models are estimated for the CVM and all results are presented in
Table 4.2. The dependent variable for the: OLS is log of final bid (WTP), interval
regression is log of WTP interval (lower and upper limits). The double bound
dichotomous choice format provides an interval within a specific range of true WTP.
Based on the assumption that respondent’s final bid could either be overstated or
understated, the interval regression intuitively will provide more information on the
Household’s WTP relative to the OLS. In addition, as indicated earlier, the interval
regression results show no evidence of starting point bias and produced lower standard
errors. Therefore, in the CVM, the most preferred model for our study is the interval
regression model where the true WTP is assumed to lie within a certain range of
monetary values.

In interpreting our results, we ignore the marginal effects as it does not represent the
monetary values associated with WTP, and focus on the estimated regression
coefficients. Generally, the estimated models (see Table 4.2) are observed to provide
quite consistent estimation results especially with respect to signs of the coefficients
across all models. The calculated mean VIF values which range from 1.12 to 1.42
provide evidence of the absence of severe multicollinearity in our models. The goodness
of fit (LR chi statistic and R-squared/Pseudo R-squared) support our choice of model 4.
All variables to be interpreted assume that “all else are held constant”.

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Table 4.1: Descriptive Statistics on Variables Included in the CVM
Variable Type Description Obs. Mean Std. Dev. Min Max Sign
[percent]
Household income Continuous Household monthly income in Ghana 583 591.36 655.85 160 4400 +
(Y) Cedis (GHS)
Age (years ) Continuous Respondent’s Age in years 609 39.31 11.23 21 67 +/-

Male Dummy Gender status of respondent 609 0.52 0.50 0 1 +/-

Household size (HH) Continuous Household size of respondent 609 4.54 2.28 1 17 +
Marital Status (MS) Dummy Marital Status of respondent 609 0.63 0.48 0 1 +

Main Source (MSD) Dummy Respondent’s main reliable source of 553 0.11 0.32 0 1 +
drinking water is improved source
Reservoir (R) Dummy Access to water/ reservoir(borehole or 609 0.42 0.49 0 1 +
well etc.) in residence
Toilet Access (T) Dummy Access to toilet facility in residence 609 0.59 0.49 0 1 +
Fence Access (F) Dummy Access to fence in residence 609 0.23 0.42 0 1 +
Eco Product (Eco) Categorical Use of ecologically friendly products 609 n/a n/a 1 3 +
-All the time 229 [37.60%]
-Sometimes 326 [53.53%]
-Not at all 54 [8.87%]
Start Bid Discrete Starting point bid 609 25.03 11.24 10 40 +
[25% appx]a
Lower Limit Continuous Lower WTP 609 22.09 11.33 -5 50 n/a
Upper Limit Continuous Upper WTP 609 42.40 18.90 10 110 n/a
Mean and Std. Deviation are rounded off to two decimal places. Not Applicable (n/a). [ ] square bracket means figures are reported in percentages. aPercent for each of
the four bids.

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Table 4.2: CVM Results [with (Yes) and without (No) Localization]

(1) (2) (3) (4)

VARIABLES OLS Interval OLS Interval
(Log-Log) (Log) (Log-Log) (Log)
Household Income (Log) 0.2135*** 0.1211*** 0.2063*** 0.1149***
(0.030) (0.020) (0.031) (0.021)
Age in Years -0.0031 -0.0038** -0.0030 -0.0036**
(0.002) (0.002) (0.002) (0.002)
Male dummy 0.1045** 0.0587* 0.1313*** 0.0770**
(0.047) (0.032) (0.047) (0.032)
Household Size 0.0099 0.0111* 0.0072 0.0103*
(0.009) (0.006) (0.009) (0.006)
Marital Status dummy 0.0592 0.0192 0.0685 0.0224
(0.048) (0.035) (0.047) (0.035)
Main Source of Drinking Water 0.4732*** 0.2270*** 0.4843*** 0.2360***
(0.079) (0.053) (0.075) (0.049)
Reservoir in Residence dummy 0.0539 0.0171 0.0501 0.0191
(0.048) (0.033) (0.047) (0.033)
Access to Toilet in Residence dummy 0.0122 0.0796** 0.0093 0.0769**
(0.046) (0.033) (0.048) (0.033)
Residence Fence-Access dummy -0.0549 -0.0248 -0.0628 -0.0319
(0.059) (0.039) (0.060) (0.038)
Use of Eco-product = 2, Sometimes -0.0451 -0.0161 -0.0642 -0.0252
(0.051) (0.036) (0.051) (0.036)
Use of Eco-product = 3, Not at all -0.1425* -0.1105* -0.1397* -0.1057*
(0.075) (0.057) (0.073) (0.058)
Starting Point Amount (Log) 0.0888** 0.0402 0.0906** 0.0441
(0.044) (0.029) (0.043) (0.029)
Constant 1.6679*** 2.5354*** 1.7571*** 2.5898***
(0.220) (0.159) (0.215) (0.156)
District Dummies No No Yes Yes
Observations 521 529 521 529
R-squared[Pseudo R-squared] 0.254 [ 0.11] 0.294 [ 0.12]
LR chi(12&18 respectively) 121.11*** 136.27***
Mean VIF (1/1- R-squared) a 1.34 1.12 1.42 1.14
Dependent Variable: WTP, Robust standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1, †Exchange Rate (GHS1=US$0.319 as at
15/10/2014. aPseudo R-squared was used for models 2&4.

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We start our discussion with variables capturing the demographic characteristics of
respondents. To begin with, the variable Household monthly income was found to be
positive and highly significant, implying that a one percentage increase in household’s
income will increase their WTP for safer water supply from the innovative borehole
system by 0.1149%. Thus, household’s income elasticity is approximately 0.12 with a
confidence interval of 0.07 to 0.16. This suggests that the good in question although a
normal good, is definitely a necessity. Age was expected to be positive and significant
due to experience with different water sources, water use and associated health
consequences. However, we found age to be negative and significant. This implies that
a one year increase in respondent’s age decreases his/her WTP by 0.36%. This suggests
that older people are less willing to pay for improved water supply from the innovative
borehole system relative to younger respondents. This could be attributed to free rider
effect or cohort effect on the part of older people who would expect younger people to
pay for them to enjoy. Better still, it may suggest that younger people have different
expectation regarding their taste and preferences. This can also be explained by the
theory of innovation diffusion where some studies have found that earlier adopters of
innovation are younger (Rogers, 1995). Negative effect of age on WTP has also been
found by Carson et al. (2001). The variable Male was positive and significant. It further
shows that males are willing to pay 7.7% more than females in adoption of the new
technology. Again, household size is found to be positive and marginally significant.
Thus, a unit increase in household size, increases WTP for improved water supply from
the innovative borehole system by 1.03%. Marital status was found to be positive but
insignificant.

Next, we discuss variables that are water related. Reliability of the improved main source
of drinking water represented as main source of drinking water was found to be positive
and highly significant. Sachet-water is the main source of drinking water within the study
area. An increase in respondent’s reliable main drinking water source, increases WTP
for safer water supply from the innovative borehole system by approximately 24%. This
implies that those respondents who have access to reliable main drinking water source
and would still want to have either a safer version or have something similar to what
they are used to expressed very high WTP. Stated differently, respondents value what
they already have (endowment effect). This inevitable reference point shows how
important reliable drinking-water is to the people in rural GAR. Reservoir in residence
was found to be positive as expected but not significant. Access to toilet was positive
and significant. An increase in respondent’s access to toilet, increases WTP by

135
 approximately 7.7%. This implies that those who have access to toilet and know the
relevance of reliable water supply in improving their sanitation and health expressed
high WTP as compared to those who do not. In other words, higher expectations in
improving sanitation through access to safer water supply could explain respondent’s
WTP. Residence Fence determines the extent to which neighbours can easily have access
to each other’s house. This was found to be negative as expected but not significant.

Furthermore, the degree of environmental knowledge is generally important in

determining WTP for natural/environmental resources. Use of Eco-product which is a
categorical variable (all the time [reference category], sometimes, and not at all) was
introduced to capture the degree of environmental knowledge. One would expect that
respondents who are environmentally informed would express a high WTP to access
safer water supply from the innovative borehole system due to health concerns. We
found that respondents who do not use ecologically friendly products, express
approximately 0.11% lower WTP values relative to those who use ecologically friendly
products all the time.

We further introduced log of the starting point amount in the model to capture for
possible existence of starting point bias or anchoring effect. We found this to be positive
but insignificant in our preferred interval model. This implies that this bias is less
important in this model, however, it is important in the OLS model. In short, our
preferred model is not being influenced by the randomised starting point amounts used.
As shown in Table 4.3, we proceed to determine the marginal WTP for improved water
supply from innovative borehole system per month using the predicted command in
Stata 13.

Table 4.3: Predicted WTP Measures for Reliable Water from an IBS†
Measures Max. WTP for a 34 cm Max. WTP reliable Max. WTP for reliable &
bucket of water from a & sufficient water sufficient water from a IBS†
IBS† (GHp) from a IBS† (GHS) (GHS)/Month
Mean 29.92 1.20 35.90
[95% CI] [29.44-30.39] [1.18-1.22] [35.33 - 36.47]
Median 28.88 1.16 33.50
[95% CI] [28.35-29.36] [1.13-1.17] [32.89-34.06]
% of HH Income 0.20% 6.07%
[95% CI] [5.97%-6.17%]
Note: Computation used the Mean Household (HH) Income of 591.36 and a CI of [538.01-644.70].
*0.2992×4×30(days) †IBS implies innovative Borehole System.

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4.2 HPM Results and Discussion

We now turn to the HPM. We estimate WTP for improved water supply from housing
units with current borehole/well system as an attribute using OLS under the assumption
that improved water supply has a perfectly inelastic demand in all the districts within the
study area.

We first present the summary descriptive statistics of the HPM in Table 4.4 and the
regression results in Table 4.5. In the latter case, we present four different models. In
model 4 (Table 4.5), the R-squared and the adjusted R-squared are about 32.4% and 30.3%
respectively, higher than all the other models. In addition, the mean VIF value of
approximately 1.5 for all models show the absence of severe multicollinearity. We admit
that the models are different, nonetheless, apart from controlling for district specific
heterogeneous effects, the coefficient of variation and the mean VIF values make model
4 our preferred model.

We also observed that all the explanatory variables had the expected signs. However,
except for three variables: Access to toilet in Residence, Access to Electricity and
Distance to Transport Station (KM), all estimated coefficients are found to be
statistically significant at various levels of significance. In interpreting our variables, we
further assume that “all else are held constant”.

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Table 4.4: Descriptive Statistics on Variables Included in the HPM
Variable Type Description Obs. Mean Std. Dev. Min Max Sign

Mean District Savings (Q) Continuous Neighbourhood socio-economic 609 33.10 10.52 10.28 50.92 +
characteristics (mean district
savings)
Transportation(KM) Continuous Distance to nearest commercial 576 1.22 5.26 0.005 60 -
transport station
Hotel (KM) Continuous Distance to nearest hotel 543 6.13 14.84 0.001 120 -

No. of Toilets (NTF) Continuous Number of toilet facilities in 609 0.74 0.73 0 4 +
residence
Bathrooms (NBR) Continuous Number of bathrooms in residence 609 1.36 0.74 1 7 +

District Problem (WDP) Dummy Water as district major problem 609 0.79 0.41 0 1 -

Reservoir(R) Dummy Access to water/ 609 0.42 0.49 0 1 +

reservoir(borehole or well etc.) in
residence
Toilet Access (T) Dummy Access to toilet facility in 609 0.59 0.49 0 1 +
residence
Fence Access (F) Dummy Access to fence in residence 609 0.23 0.42 0 1 +

Electricity (E) Dummy Access to electricity in residence 609 0.91 0.29 0 1 +

Rent/Month Continuous Rental rate per month 609 61.23 42.56 10 200 n/a
Mean and Std. Dev. Are rounded off to two decimal places. Not Applicable (n/a).

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 Table 4.5: Hedonic Regression Results [with (Yes) and without (No) Localization]
(1) (2) (3) (4)
VARIABLES Lnmonth-rent Lnmonth-rent Month-rent Lnmonth-rent

Access to Water in Residence_dum 0.2390*** 0.2439*** 21.3914*** 0.2525***

(0.048) (0.048) (3.741) (0.047)
Access to Toilet in Residence_dum 0.1221 0.1356* 4.4465 0.1013
(0.076) (0.077) (6.044) (0.078)
Water as a District Major Problem_dum -0.1493** -0.1592*** -10.2999** -0.1501***
(0.059) (0.059) (4.465) (0.058)
Access to Electricity_dum 0.0778 0.0744 1.8761 0.0919
(0.085) (0.086) (6.042) (0.086)
Residence Fence-Type_dum 0.2187*** 0.2213*** 17.1129*** 0.2038***
(0.059) (0.059) (4.875) (0.060)
Number of Bathroom Facilities 0.0490 0.0441 4.2062 0.0666**
(0.034) (0.033) (2.649) (0.033)
Number of Toilet Facilities 0.1356** 0.1398** 9.9502** 0.1315**
(0.056) (0.056) (4.951) (0.059)
Distance to nearest Hotel (KM) -0.0053*** -0.0055*** -0.4154*** -0.0061***
(0.001) (0.001) (0.095) (0.001)
Distance to Transport Station (KM) -0.0052* -0.0053* -0.4507* -0.0025
(0.003) (0.003) (0.232) (0.003)
Mean_District_Savings 0.0072***
(0.002)
Mean_District_Savings(Log) 0.1266*
(0.069)
Constant 3.3807*** 3.1924*** 55.3405*** 3.8047***
(0.141) (0.268) (8.103) (0.111)
District Dummies No No Yes Yes
Observations 529 529 529 529
R-squared 0.285 0.277 0.286 0.324
Adjusted R-squared 0.271 0.263 0.264 0.303
Mean Variance Inflation Factor(VIF) 1.49 1.49 1.48 1.48
Dependent Variable: Rent per month in Ghana cedis, Robust standard errors in parentheses, *** p<0.01,
** p<0.05, * p<0.1
Our discussion is presented under water related Residential and Neighbourhood
characteristics, other Residential/Structural characteristics, and other Neighbourhood
characteristics. The water related explanatory variables presented in our model include:
Reservoir in Residence, Access to toilet facility in Residence, Water as a district major
problem. The other Residential/Structural characteristics include: Access to Electricity,
Residence Fence, Number of Bathrooms, and Number of Toilet Facilities. Lastly, the
other Neighbourhood characteristics include: Distance to nearest hotel (KM), Distance
to Transport Station (KM) and Mean_District_Savings.

139
In a broader sense of our discussion, the study finds that regarding the water related
variables, all of them had the expected a priori signs. To discuss these variables
individually, we begin with Access to Water in Residence which was proxied with
Reservoir in Residence. There is a strong evidence that Access to Water in Residence has
a significantly positive effect on rental values relative to residences without access to
water in residence. This is true for all estimated models. The preferred model 4, suggests
that houses with Access to Water in Residence pay 25.52% more in rent relative to those
without. Moreover, Access to toilet in Residence is found to be insignificant. This could
be attributed to the fact that a lot of people in rural GAR do not have toilets in their
residences but rather depend on publicly used and other forms of toilet facilities.
Evidence is provided by Apt and Amankrah (2004) who report that 43.5% of households
in rural areas of the GAR do not have toilets in their homes. Also, the study provides
evidence that the variable Water as a district major problem has a negative and highly
significant effect on rental values relative to districts within the region with water not as
a major problem. Thus, households located in districts with water supply as a major
problem pay 15.01% less in rental values relative to districts with water supply not as a
major problem.

Next is the Residential/Structural characteristics. The study finds that all the variables in
the preferred Model 4 (Table 4.5) relating to Residential/Structural characteristics had
the expected a priori signs (see Sirmans et al. 2005). First, Access to Electricity is found
to be positive albeit insignificant. This could be explained by the fact that 79% of rural
people are without access to electricity in their homes (ibid). Second, Residence Fence
was introduced to capture possible free-riding effect in areas characterised by communal
living. This provides a positive and very high statistically significant effect on rental
value. That is, fenced residences pay 20.38% more in rental values relative to unfenced
residences. Third, Number of Bathrooms had the expected positive sign on rental values.
Although this is seen not to be significant in the other models except the preferred model
4. The result suggests that if the number of bathrooms in a residence increase by one,
households will pay 6.66% more in rental values. In addition, Number of Toilets is
positive and significant in all estimated models. It therefore implies that if the number
of toilets in residence increase by one, households will pay 13.15% more in rental values.
In effect, better residential characteristics evidenced by quantity and quality of
residential characteristics are seen to increase rental values.

The quality of neighbourhood characteristics is expected to affect rental values. For

example: Distance to nearest hotel (KM) which captures some degree of prestige,
140
 environmental quality, security, affluence etc. definitely will increase rental values. This
variable is seen to provide evidence of a negative and highly statistically significant
effect on rental values. This implies that residences that are located within a kilometre
range, closer to a hotel, increase rental values by 0.61%. More so, we find Distance to
Transport Station (KM) variable to be negative and significant in all models except in
our preferred model.

To further evaluate the potential effect of district wealth heterogeneity on rental values,
we introduced the Mean_District_Savings variable models 1&2 as a proxy for income
and wealth. This could not have been included in models 3& 4 because of severe
collinearity with district dummies. We find evidence of a positive and significant effect
of the Mean_District_Savings on rental values in both models. It can be inferred that
districts with high income and savings (or wealthy households) tend to pay more in rental
values. This satisfies the scope sensitivity test commonly found in valuation studies.

We now turn our attention to the computation of the marginal WTP for having access to
reliable water supply which is proxied with access to improved water supply in residence.
Given that the variable of interest is dummy, we compute the relative change in rental
values with results from Table 4.5 (Model 4) using the delta method. This study finds
that the average amount households will be prepared to pay per month for access to water
in residence is GHS 17.59 which constitutes 2.98% and 2.68% of the mean-district-
income and mean-household-income per month respectively (see Table 4.6). According
to Bartik (1988) and Choumert et al. (2014), this should be interpreted as upper bound
values because the utility dummy may include unobserved attributes and utilities.

Table 4.6: Predicted Increase in the Value of a House with Access to Water
Supply
Marginal implicit house Current average HH Increment as a % of Increment as a % of
value per month(GHS) expenditure on water monthly district- Monthly Household
per month (GHS) income Income
38 39
Mean Mean Mean Mean40
17.59 41.554 2.98% 2. 68%
[10.34-24.85] [39.41-43.69] [1.75%-4.20%] [1.58%-3.79%]
[.] Denote confidence intervals estimated at 95%.

38 Relative change (water dummy)×Average House Value=0.28724×61.23064=17.59≈GHS18 per month

39 Marginal Implicit house value/Average district- income=17.59/591.3551=0.0298×100=2.98%
40 Marginal Implicit house value/Average Household income=17.59/655.85=0.0268×100=2.68%

141
 4.3 WTP Estimates: Can we directly compare our estimates?
The CVM and HPM are valuation methods employed to estimate WTP for improved
supply of rural water. However, it needs to be pointed out that in application, they could
capture different things yet provide relevant estimates that are worthwhile for policy
purposes. The estimated results presented in in Tables 4.3 and 4.6 are summarised in
Table 4.7. In Table 7, the results are presented in both Ghana Cedis (GHS ¢) and in
United States dollars (US$) for easy understanding.

Table 4.7: A Summary of CVM and HPM Estimates.

Method WTP(GHS)/M* 95% CI WTP US$/M* % of Income Index

CVM 35.90 [35.33 - 36.47] 11.45 6.07%

HPM 17.59 [10.34 – 24.85] 5.61 2.68%

Note: CI denotes Confidence Interval. *M=Month (GHS=US$0.319 as at 15/10/2014)

From Table 4.7, it is important to acknowledge that the CVM used here seeks to measure
how much respondents are willing to pay per month for improved and safer water supply
from an innovative borehole system. The values captured by this method include use
values of an improved system over what is currently being used. In the case of HPM, it
seeks to measure the economic value of improved water supply from an amenity
(reservoir i.e. traditional borehole or well) in residence per month through house prices,
or how much households with access to water are willing to pay per month. Stated
differently, the HPM provides estimates of the additional amounts households with
access to water supply in residence are willing to pay per month in rental values. This
captures only the use values of the current service only. Therefore we expected the CVM
to be greater than the HPM. The results show that CVM estimates are much more precise
than the HPM at 95% confidence interval.

The HPM estimate of GHS17.59 (US$5.61) per month and the CVM of GHS35.90
(US$11.45) per month constitute approximately 3%-6% of household income. Paying
this by potential beneficiaries represent a sensible trade-off that people might make
towards policy implementation (See Carson, 2012). However, it is important to reiterate
that these estimates are capturing entirely different things and cannot be directly
compared in our case. According to McPhail (1993, p.1), “…most utilities and donors
assume that, as long as the cost of potable water to the household falls below 5% of
household income, then it is “affordable” and the household will make a connection to
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the system and be able to pay the subsequent recurrent charges”. Similar assertions have
also been made by Whittington et al. (1990) to that effect. In view of this, we may
conclude that our estimates are within a reasonable range of affordability and that
respondents have shown a positive attitude towards the services.

5. Policy Implications and Conclusion

Towards achieving MDG 7(now consolidated into SDG 6), this study focuses on
providing information on household’s WTP for sustainable, safe rural water supply in
Ghana. This study is important against the background that unsustainable planning and
management have largely been attributed to absence of information on consumer’s WTP
for water supply services.

Indeed, policy makers are not fully informed about consumer’s WTP to have access to
their current state of water supply as well as improvement in water supply. This has
triggered a myriad of studies in this area with the primary motive of contributing to
policies relevant to sustainable safe water supply. To this end, we use the HPM to capture
WTP for the current service, and CVM to also capture WTP for improvement in the
service through introduction of an innovative borehole system. We therefore provide
policy recommendations as follows:

We recommend that to achieve SDG 6(1) of safe and affordable drinking water supply,
either an innovative and affordable system with relevance to women and children like
this should be considered. Alternatively, the GWCL and CWSA should consider using
our estimates for a cost benefit analysis of this project to extend piped water services to
the rural areas. Also the estimated WTP may be used to encourage households to adopt
such safe appliances across the country and elsewhere.

Currently, the world is full of praise for meeting access to improved water target as
enshrined in the MDGs 7. However, we argue following Hunter at al. (2009), and
Levisay and Sameth (2006) that not all improved water supply are safe. In order to ensure
that the current SDG is achieved with safe water for rural Ghana, this study proposes an
innovative borehole system and estimate the demand for water from this system. This is
achieved by using the HPM to capture the economic value of an existing system (i.e.
marginal WTP for access to improved water from the traditional borehole and well) in
residences and CVM to capture the same for improved and safer water from the
innovative borehole system. Our results suggest that households support the
improvement in their water supply and are willing to pay about 3%-6% of their income.

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In short, we present one of the first estimates of the economic values for rural water
supply using both the HPM and CVM to capture for current service (improved water)
and improvement in current service (safer-water) through a proposed innovative
borehole system in a developing country. These results may be applied to other
developing countries with similar characteristics without any loss of generality.

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 APPENDIX D
APPENDIX D1:1 QUESTIONNAIRE
Interviewer: ………………………………. TOPIC: Demand for Domestic Water from an
Innovative Borehole System in Rural Ghana:
Supervisor………………………………….. Stated and Revealed Preference Approaches
Region: ……………………………………….

Metropolitan Area…………………….. District………………………………

Locality…………………………............ House Number……………………….
Interview date :…………/…………/ 2014 Respondent’s ID…………………….

Start Time: Hrs.……../Min……… Language used in the survey:

11. English
End Time: Hrs...……../Min……….
12. Twi
Survey Price Draw 13. Ga
Yes[ ] No:
14. Ewe
No[ ] Thanks
15. Other

A BRIEF BACKGROUND OF STUDENT

My name is [Give Name] from Central University College [show I.D] and I’m part of a
team headed by Anthony Amoah, a PhD student from the School of Economics,
University of East Anglia, UK. He is conducting a survey of people’s opinions about the
water situation in Ghana.
I humbly wish to request your kind participation in this research, which aims at
estimating the economic value of domestic water supply in Ghana. The research does
not probe into your private affairs but we are interested in your personal perception and
experience of water supply in Ghana. Your answers will only be used for empirical
analysis in the framework of this research. Your information will not be shared or used
for any other purpose. It will be treated as strictly confidential. Nevertheless, you still
reserve the right to refuse or indicate don’t know to questions where necessary.
Completing this survey automatically enters you into a free rechargeable mobile credit
draw (if you wish) where you could win one of the ten GHS10 mobile credits.
Thank you very much for your kind cooperation.

NB. Please tick [], underline or write where appropriate.

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 SECTION A: Personal Data of Respondent (Household Head)
A.6. Respondent’s household status: A.7. Gender:
1. Head 4. Parent of Head 1.Male
2. Wife of Head 5. Child of Head 2.Female
3. Husband of Head 6. Other: If other, specify……….
A.8. Year of birth (If provided skip A.4): A.10. Marital Status:
A.9. Age range ( Age in completed years): 4. Single 4. Separated
1.18-29 3. 40-49 5. Living with partner 5. Divorced
6. Married 6. Widowed
2. 30-39 4. 50+

A.5 Which of the following life-cycles describe your household? A.6 a. Number of people in your household?
1. Single Adult 4. Family with Teenagers
2. New Couple (≤1yr) 5. Family with launching(ready for self-dependence) children
3. Family with Children 6. Family in later life (Retired i.e. ≥60 with or without b. Number of household’s in your residence?
children)
7. Several Adults living together ( with or without children )
A.7 Highest level of educational qualification achieved/completed: A.8 What is your employment status?
5. None 4. Professional 1.Unemployed (during the last 7-days)
6. Primary/Middle/J.S.S 5. Second Degree 2. Full time employee of private firm 7. Apprentice
7. Secondary/Vocational/Technical/Training College. 6. Doctorate (PhD) 3. Full time employee of public firm 8. Domestic employee
8. First Degree/Diploma 7. Others (specify)…........ 4. Self-employed without employee(s) 9. Contributing family worker
5. Self-employed with employee(s) 10. Retired
6. Casual worker 11. Other (specify)…………….
A.9 What is your monthly take-home income in Ghana cedis (GHS): A.10 How much do you save per month? (GHS)
1. <160 2.160-599 3.600-999 4.1000-1399 5.1400-1799 6.1800-2199 7.2200-2599
8.2600-2999 9.3000-3399 10.3400-3799 11.3800-4199 12.4200-4599 13. 4600-5999 A.11 Are there other people in your household who work?
14. ≥6000 15. I don’t know 16.I won’t tell you 1. Yes 2.No

A.12 If yes, how much on the average is their monthly take-home income in GHS: 1. <160 SECTION B: General Water Supply and Environmental Questions
2.160-599 3.600-999 4.1000-1399 5.1400-1799 6.1800-219 7.2200-2599 8.2600-2999 B.30. Which of the following water systems is installed in your residence?
2. Piped water 2. Non-piped water 3. None
9.3000-3399 10.3400-3799 11.3800-4199 12.4200-4599 13. 4600-5999 14. ≥6000 15. I (NB: Skip B.2 if None)
don’t know 16.I won’t tell you
B.31. Is the installed water in your residence reliable?
(Reliability means it flows or you can fetch at least once a day)?
1. Yes [ ] 2. No [ ]

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Select any of the SOURCE DESCRIPTION CODES to answer questions B.3 and B.5 B.32. What is the main source of water supply for your household?
01……….….Indoor plumbing 09………….…Borehole
02…………..Inside stand pipe 10………….…Protected well (Use source description codes)
03………….Water truck/tanker service 11.…………….Unprotected well DRINKING GENERAL USE
04………… Water vendor(gallons) 12……………..River/Stream/lake/dam
05………….Pipe in neighbouring household 13…………..Rain water/spring
06………… Private outside standpipe 14…………...Dugout pong
07………… Public Stand pipe 15..……….. Other (specify)…………
08…………Sachet/bottled water/packaged
Select any of the TIME UNIT CODES for B.4 and B.6 to answer questions B.4 and B.34. What is (are) the other source(s) of water supply for your household?
B.6
4………………..Quarterly (Use source description codes)
1………………..Daily 5……………..…Half Yearly DRINKING GENERAL DOMESTIC USE
2………………..Weekly 6………………..Yearly
3………………..Monthly 0………………..Not Applicable

B.33. How frequently (regular) do you receive drinking water supply from your main B.35. How regular (reliable) is your water supply for GENERAL domestic use?
source? Time unit (see time unit codes) Number of times
Time unit (see time unit codes) Number of times

B.36. If NOT piped water, why do you use these other sources of water supply? B.37. Do you have any home water treatment system?
3. No access to private piped water 3. Other sources are more reliable 1.Yes 2. No
4. Other sources are less expensive 4. Other (specify]……………….....
NB: If No, skip question B.9

B.38. Identify the rate at which is it cleaned/repaired/replaced? B.41. In your last five years, which of the following is true? After purchase of
1. Frequently 2. Sometimes 3. Not at all 4. don’t know water for general domestic use (not including drinking), you….…
1. Use immediately 2. Treat (Chemical, settling, boiling, filtering etc.) before use
B.39. In your last five years, which of the following is true? After purchase of water
for other sources, you can…
1. Use immediately 2. Treat (Chemical, settling, boiling, filtering etc.) before use B.42. Have you ever felt the need to have had an improved quality of the water
you use?
1. Yes
B.40. In your last five years, which of the following is true? After purchase of water 2. No
for drinking, you …..…
1. Use immediately 2. Treat (Chemical, settling, boiling, filtering etc.) before use NB: If No, it means you are satisfied with the quality of your domestic
water. Please skip question B.12, B.13 and B.15.

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B.43. What could you have done to improve it? B.44. In the last five years, which of the following have you done before to
1. Apply Chemicals. Identify the type of chemicals improve water quality before use?
2. Allow water to settle. How many minutes would it take to get settled? 1. Boiling- On the average, how many minutes does it take?
3. Boiling. How long would it take to be ready? 2. Applying chemicals- How much do you spend on this per month?
3. Allowing debris to settle- On the average, how many minutes does it take?
4. Filtering. How long does it take to filter your water?
4. Filtering. How much do you spend on filters per year/ how long does it take?
5. Other. Specify and indicate how….. 5. Other- Specify and identify either the time or amount spent on it………………

B.45. How much would you spend or do you spend on average to make this source B.47. Who is mainly responsible for ensuring that your household has enough
potable for use per week? water? 1. Husband 2. Wife 3. Children

B.48. Do you promote good environmental practices? (e.g.: promoting good

B.46. How much do you spend (on average) on water per month irrespective of sanitation, cleaning environment, weeding compound etc.)
source? 1. Yes
2. No (If No, Skip question B.18)
B.49. If yes, rank the extent of your promotion to the indicators listed in the table below. B.50. If No to B.17, briefly give your reason(s) …………………………..
(Yearly(Y) , Monthly(M), Weekly (W), Daily(D) Every Purchase(E)) ………………………………………………………………………………..
Factors/Indicators All the Some- Not B.51. Which of the following international environmental issues do you know of?
time times at all 5. Global warming/Green House Effect [Yes] [No]
Green Environment/ afforestation e.g.: planting 6. Climate Change[Yes] [No]
trees (M) 7. Kyoto Protocol [Yes] [No]
Cleaning of Environment (D) e.g.: sweeping 8. I don’t know any
Efficient Water use by preventing waste(D)
Indiscriminate waste disposal(D)
Use of Eco-product (E)
:Identify as Eco-product before purchase
Good sanitation(W) e.g.: regular collection of
refuse

Other…………………
B.52. Mention any National/District/Local environmental law/practice you know of? B.55. In your view, is water a major problem in your district? 1. Yes [ ] 2. No [ ]
……………………………………………………………………………………………
B.56. How is the water supply system operated and managed?
……………………………………………………………………………………………
1.Self 2.Community operated and managed
B.53. How important is protecting the environment to your household? 3.Community Watered Sanitation Agency 4.NGO
1. Very Important 2. Important 3. Fairly Important 4. Not important 5. Ghana Water Company Ltd 6.Other (Specify) ………
7. Not Applicable 8. Don’t know
B.54. Is your locality dusty enough to pollute your water? 1. Yes [ ] 2. No[ ]

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B.57. In your view, which of the following are some of the water problems in your B.58. In your view, who in your district is mainly responsible for your water
district? problems?
1. Cost 4. Poor quality 1. Colonial Administration] 2. Government 3. GWCL 4. Consumers
2. Lack of flow 5. Poor Management 5. Don’t know Give reason for your
3. Difficult to access 6. Other [ ] If other, specify………………………………. choice? …………………………………………………………………………………
SECTION C: Hedonic Valuation Questions C.15. Nature of residence?
C.2. Who owns your residence? 1. Compound house 5.Shanty town/slum
1. You 2. An Organisation (Property Company) 2. Separated house 6. Flat/Apartment
3. Landlord 4. Your employer 3. Duplex 7. Other [ ] Specify………
5. Government(Municipal, District, Local, Assembly) 4. Traditional (mud/hut/wooden)
6. Other (If other, specify)………………………………
C.16. Residence outer wall (fence/ boundary/perimeter) type C.17. Residence Roofing type
1. No wall 5 .Stone 1. Mud/Mud bricks/Earth 5. Slate/asbestos
2. Mud bricks/Earth 6 .Cement/Concrete 2. Ceramic/marble/Vinyl Tiles 6. Cement Concrete/Terrazzo
3. Wood 7 .Bamboo/Palm leaves/thatch (grass) 3. Wood 7. Bamboo/Palm leaves/thatch (grass)
4. Metal sheet/slate/asbestos 8 .other. Specify………………….. 4. Metal/Aluminium sheet 8. other. Specify………………….

C.18. Complete the number, size and nature of the facilities in your residence provided C.19. Do you have access (at least electricity within the last one month) to
below: electricity in your residence?
Facility Number Average Size(Square feet) 1. Yes [ ] 2. No [ ]
Bathroo C.20. . What is the main source of lighting for your household?
m 1…………………….National Electricity Grid
Toilet 2…………………….Kerosene
Garage 3…………………… Gas lamp
Storeroo 4……………Candles/Touches (flashlights)
m 5……………………Solar energy
Kitchen 6……………………Generator
7……………………No light
Bedroo Nature: cemented/ wool/ rubber/ tiled/paved/ grass /none 8……………………Other
m C.21. If Electricity, what type of electricity bulbs do you use?
Plot or Size(Sq. ft) Nature: cemented/tiled/paved/grass/none 1. Energy saving bulbs 2. other (such as incandescent light bulbs)
floor 3. Both
space of
your C.22. Do you have access to a toilet facility in your residence? Yes [ ] No
residenc [ ]
e
C.23. Do you have a poly tank (reservoir) in your residence? Yes [ ] No [ ]
C.24. Question for non-owners only: How much did you pay as rent last month C.25. Question for Owners only: If you are the owner of the house, assuming you
decide to leave your residence for a new residence. How much would you charge
GH¢…………………… if you were renting your old residence out per month?
GH¢.............
.....................

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C.26. What is the distance (measured in meters) from your C.27. In making your current residential decision how important were the following factors?
residence to the following:
9. School [ ] Determinants On the scale of 1 to 5 where 1=very important and 5 =Very Don’t
unimportant Know
Rental rate 1 2 3 4 5
10. Coal tar road [ ]
Water Supply 1 2 3 4 5

11. Financial Institution ] Electricity 1 2 3 4 5

Supply
Family and 1 2 3 4 5
12. Health centre [ ] Friends
Workplace 1 2 3 4 5
Proximity
13. Market ] Security 1 2 3 4 5

Public Services 1 2 3 4 5
14. Transport Station [ ]
Prestige 1 2 3 4 5

15. King’s Palace [ ] Noise pollution 1 2 3 4 5

Air pollution 1 2 3 4 5
16. Hotel [ ]
*DK means Don’t Know or DR means Don’t Remember

SECTION D: Travel Cost Questions D.7. How far is your household’s main source of water supply from your dwelling?
NUMBER(see water codes in page 3) DISTANCE UNIT (Meters)
DRINKING
D.3. Do you need to spend some time looking (hauling) for water
in your district?
4. All the time
GENERAL USE NUMBER(water code) DISTANCE UNIT(Meters)
5. Sometimes
6. None of the above

D.4. If NONE, does that mean you have no problem with potable D.8. How far is your household’s other sources of water supply from your dwelling?
water from Ghana Water Company Limited (GWCL)? NUMBER(see water codes in page 3) DISTANCE UNIT (Meters)
DRINKING
True
GENERAL USE NUMBER(water code) DISTANCE UNIT(Meters)
False

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 D.9. Indicate in the table below the of mode water is transported to your household
Mode of water transportation Number of round trip per Travel cost per round
household/ week trip(Gh¢)
Main Source Other Sources Main Source Other
Sources
Walking

Private car

Commercial car/bus/truck

Commercial manual truck

Tanker services

Other

D.10. Are you satisfied with the following:

5. Source of water? Yes [ ] No [ ]. If No, would you want a change? Yes [ ] No [ ].

6. Quality of water? Yes [ ] No [ ]. If No, would you want a change? Yes [ ] No [ ].

7. Mode of transporting water to your residence? Yes [ ] No [ ]. If No, would you want a change? Yes [ ] No [ ].

8. Number of trips made for water to get to your residence? Yes [ ] No [ ]. If No, would you want a change? Yes [ ] No [ ].

E. SANITATION QUESTIONS
E1. How does your household dispose of refuse? E2.Does your household pay for the disposal of refuse?
1…………………Collected
2…………………Public Dump Yes ………………………………………. 1
3…………………Dumped elsewhere
4…………………Burned by household No ……………………………………….. 2 >>> >>SKIP >>E4
5………………..Buried by household
6………………..Other specify

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 TIME UNIT CODES 4………………..Quarterly E3. How much does this household pay for refuse?
1………………..Daily 5……………..…Half Yearly
2………………..Weekly 6………………..Yearly Amount in GHS and P
3………………..Monthly 0………………..No Applicable GHS p
Time Unit see codes

E4. What type of toilet is used by your household? E5. The last time your youngest child under 5 years passed stools, what was
1…Flush Toilet 6…Toilet in another house done to dispose it?
2….Pit latrine 7. .No toilet facility (bush, beach) 1……...Child used toilet latrines 5.………Left it in the open
3…KVIP 8……other , specify 2……...Put/rinsed into drain or ditch 6. ……..…Other , specify _______
4…………Pan/bucket 3……...Thrown into garbage 7 ………...Don’t know
5…………Public toilet(flush, bucket, KVIP) 4………….Buried 8. No child under 5 years in Household

E.6 Does your household pay for the disposal of refuse? E.7. How much does your household pay for the use of the toilet facility?
Amount in GH¢ and P
Yes ………………………………………. 1
GH¢ P
No ……………………………………….. 2 >>> >>SKIP E.7 to E.8
E.8 Are you aware of any water borne disease? E.9. Which of these sicknesses was last experienced by any member of your
household?
1. Yes [ ] 2. No [ ].If yes, specify…………
1. Malaria [ ] 2.Cholera [ ] 3.Diahorrea [ ]
4. Typhoid [ ] 5. Diabetes [ ] 6.None[ ]
Other [ ] If other, please
specify………………………………………………………

E. 10 Do you think toilet or/and refuse gets into your domestic water? 1. Yes 2. No.
Briefly explain your answer in E.10………………………………………

E. 11 What are the likely HEALTH effects of unclean domestic water on your household?

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SECTION F: Contingent Valuation Questions
F.5. Assuming the associated cost of an improved water service in Ghana is manageable.
Would you like an improved service in Ghana’s water service delivery?
3. Yes
4. No

(If yes, continue with hypothetical market scenario).

F.6. If no, give reason(s)……………................................................................................

……………………………………………………………………………………………
………………………………………….…………………………………………End

Hypothetical Market Scenario:

 I would want to find out from you, if you value the provision of an improved water
supply system in Ghana particularly the Greater Accra Region. By improvement it
means you are connected to an uninterrupted supply of water. We have designed an
innovative/modernized borehole system that is not manual but powered by solar
energy so you do not have to pay electricity bills for water generation. This borehole
water is filtered, piped and connected directly to your residence. Thus, water flows
directly into your residence at all times, the quality is up to acceptable national
standards. Generally, we know that every good thing comes at a cost. You may be
required to pay a permanent amount that will be factored into your water bills
provided by the Community Water and Sanitation Agency (CWSA).

 Refer to pictorial description for further understanding of oral/written description

Willingness-To- Pay Questions

Would you prefer another medium of payment other than CWSA monthly bills?

Yes [ ] No [ ] If yes, how would you want to pay it? ……………

A: Willingness-to-pay (WTP)
F.7. Suppose you are supplied with an innovative/modernized borehole system as orally
and pictorially described, how much would your household be willing to pay to
fetch a 34cm bucket of water from this system?” Would your household be
willing to pay

 GHS………… (for the household not entire residence) YES [ ] (if yes, skip to B-

WTP)

 If NO, What about GHS …………………………………………...? YES [ ]

 If No, please specify amount which you would be willing to pay less than

GH¢………..…
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 Briefly explain why……………………………………............................................

………………………….………………………………………………………………

………….…………………………………………………………………………..END

B: Willingness-to-pay (WTP)

If yes, continue….

 GHS……………………. per month, YES [ ]

If yes, it means you will be willing to pay more. Please state how much you would be

willing to pay which is more than the GHS…………………

GHS ………………………………

If no, it means you will be willing to pay less. Please state how much you would be

willing to pay which is less than the GHS…………………

GHS ………………………………

E.6. How did you find the survey questions?

1. Very difficult

2. Difficult

3. Easy

4. Very Easy

5. Don’t know

6. Refuse

THANK YOU FOR YOUR ASSISTANCE!

154
 GENERAL CONCLUSION

In this thesis, we acknowledge that Ghana is a resource rich country, however, key
utilities such as electricity and water supplies have for some time now been a major
challenge affecting both firms’ efficiency and households’ wellbeing.41 The challenges
over the last decade have grown from bad to worse with 24-hour supply being a miracle.
Almost every sector in Ghana today has had a fair share of this menace with its obvious
negative impact on economic growth. For example, Ghana’s annual GDP growth rate
rose up to 14.05% in 2011, one of the best growth rates recorded worldwide. However,
severe challenges associated with our key utilities may be explained to be a major causal
factor of the downward spiral in Ghana’s economic growth rates which slowed for the
fourth consecutive year to an estimated 3.4% in 2015 (see World Bank, 2016). Several
attempts have been made towards combating this menace but desired results are far from
reached. A fundamental cause of this problem is the imbalance between operational cost
and revenue from these sectors. Some experts have proposed a full cost recovery
programme for such sectors. However, holistic empirical evidence to support policy
decisions is lacking.

The challenges to the utility sector can be addressed either from the demand side or the
supply side. The thesis principally focuses on demand side management as a panacea to
the major challenges confronting the utility sector in Ghana.

The thesis consists of four main chapters (or papers), two on the subject of electricity
demand, and two on water demand. The main objective of this thesis is to apply a variety
of established techniques to estimate demand for energy (electricity) and residential
water in Ghana. We address this objective by applying a myriad of macro (ARDL) and
micro (CVM, HPM, TCM) techniques. Regarding the macro technique, we first
modelled energy demand and disaggregated it by energy type. We estimated the
elasticities for these types which includes electricity. Focusing on only electricity, we
find an income elasticity of 2.7. This is consistent with existing studies.

Also, regarding our micro technique applications, we first used the CVM only on a
household survey data to determine WTP for a 24-hour supply of electricity in Ghana.

41 Firms’ efficiency: Firms’ machines, man-hours, and water and electricity dependent production are
either lost or at best come at a huge cost. Households’ wellbeing: Apart from losing out on quality
leisure hours, households’ appliances constantly break down because of electricity crisis. In addition,
absence of water forces households to waste man-hours trying to access water and also compromise
on good hygiene and healthy living.
155
This is achieved in line with providing evidence to address highly debatable issues such
as hypothetical bias, WTP & WTA disparity, and scope sensitivity.

Our study finds no evidence of hypothetical bias, yet there exist an evidence that satisfies
our scope sensitivity test. Thus, contrary to our macro estimates with income elasticity
being elastic, our micro level (household survey) data also shows that income elasticity
is inelastic. This difference can be explained by the fact that households are not as
responsive to electricity changes because of income constraints unlike other agents such
as firms who may budget for shocks and uncertainties. In response to WTP & WTA
debate, several tests were conducted to establish a convergence or divergence between
WTP & WTA estimates. Based on our evidence, we cannot be conclusive and requires
a further test (convolution test) on the entire distribution which our sample does not
permit at this stage. The main findings show that households are willing to pay between
7% and 15% of their income to have a 24hour supply of electricity in the GAR of Ghana.
However, our cost & benefit analysis shows a deficit of GHS567.52million
($146.97million) per annum. This suggests that a complete removal of subsidies on
electricity tariff in Ghana will be very disastrous to household’s electricity consumption
especially lower income brackets.

The second micro level application used the CVM, HPM and TCM to estimate demand
for piped-water supply in Ghana. This chapter provides the first developing country’s
study to compare three economic valuation methods in a water related study. The
purpose of this chapter was to provide robust estimates to influence policy. Standard
practices were followed throughout the design stages, data collection and application of
econometric techniques. We surveyed 1,648 urban households and find that the average
amount that households are willing to pay per month is GHS 44.73 or US$14.27
(Hedonic Price Method), GHS 22.72 or US$7.25 (Travel Cost Method) and GHS 47.80
or US$15.25 (Contingent Valuation Method) respectively. We find our estimates to be
equivalent to 3%-8% of households’ income. Evidence from our cost &benefit analysis
show a positive net benefit of GHS1,333,638.19 (US$426,010.29) per day or
GHS486.78million (US$155.49million) per annum. Similar positive net benefit results
are found in Briscoe et al. (1990), Whittington et al. (2002), and Soto Montes de Oca
(2003). We still find evidence of net benefit for both urban and rural households cost
together at the same expected revenue. This evidence shows the economic viability of
the sector which supports the proponents of full cost recovery for the water sector in
Ghana. Thus, an initiative towards the complete removal of subsidies should be
considered rigorously irrespective of past practice.
156
The third micro level application which focuses on rural water supply, designs an
innovative borehole system and elicit household’s WTP for improved and safe water
from this system. We surveyed 610 urban households and applied both CVM and HPM
in this single study. Interval regression and OLS are applied to investigate the
determinants of WTP. We find that monthly WTP are GHS35.90 (US$11.45) and
GHS17.59 (US$5.61) in the CVM and HPM, respectively. These values constitute
approximately 3%-6% of household monthly income which is consistent with existing
studies.

In short, this thesis presents the first cost and benefit analysis study for key utilities in
Ghana to inform policy direction towards addressing critical problems currently
bedevilling the country’s electricity and water sectors. In general, the results of this
thesis provide the first evidence from Ghana regarding households’ willingness to pay
for improved utility services such as electricity and water. Moreover, our results suggest
that households are positively inclined toward having improved utility services in Ghana.
We may infer public support gearing towards a privatization plan that would improve
utility supplies and require all participants to pay regular and relatively higher monthly
bills. Our estimates provide the needed information that may help persuade
policymakers of the economic viability of private sector involvement and guide the
design of a new tariff structure.

Summary of Key Findings and Policy Recommendations.

1. Our results show that energy prices, income, urbanization and economic structure
are significant demand drivers of the different energy types in Ghana with varying
estimated elasticities. We find that there is high degree of responsiveness of
electricity demand to income changes by mainly the industrial sector relative to
households. This provides evidence of a clear link between national income and
demand for electricity by the industrial sector for their growth prospects. Indeed,
this study recommends that policy makers should ensure that long-term sustainable
renewable energy sources are harnessed to sustain Ghana’s industries because of the
nexus between industries energy demand and national income growth.

2. The net cost of electricity supply in Ghana is GHS567.52million ($146.97million)

per annum. Thus, we discourage any policy towards the complete removal of
subsidies on electricity tariff in Ghana. We recommend that any move towards

157
 privatisation of the sector should not be sanctioned if removal of subsidies will be
immediately considered.

3. Also, the net benefit of piped-water supply for urban households in Ghana is
GHS486.78million (US$155.49million) per annum. Interestingly, extending the cost
to include the rural households still yield a net benefit of GHS1.13million
(US$363,824.73) per annum. This provides evidence for proponents of full cost
recovery programme in the water sector to consider its implementation. This study
recommends that a regulated private sector should be considered within the context
of proper due diligence before carrying out full implementation plan.

In sum, any policy attempt at removal of subsidy especially for lifeline consumers
in Ghana for now, is not recommended by this study. This is mainly attributed to the
fact that removal of subsidy from the electricity sector will hurt both poor and non-
poor. Also, implementing a full cost recovery programme in the water sector looks
more ideal and we highly recommend this. That is, a regulated private provision of
water supply could be a better option. This recommendation should be implemented
with recourse to proper due diligence.

Directions for Further Research

1. A holistic welfare analysis that is not limited to only economic cost & benefit is
recommend for further studies.
2. We provide evidence of WTP for an innovative borehole system for rural
communities, however, we fail to provide the entire cost estimates of the entire
system due to several technical aspects that need to be considered first. We
recommend further research into the cost of the innovative design. We further
recommend an appraisal of the cost of connecting piped-water to rural areas in
Ghana. Evidence from the appraisal will be very useful to the private sector.
3. Based on our recommendation that government should provide the needed
incentives towards household use and management of their own renewable
sources of energy, we recommend further cost benefit analysis research into
renewable sources of energy in Ghana as done in other countries.

158
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