USE OF ENVIRONMENTAL ACCOUNTING TO ESTIMATE OPTIMAL EXTRACTION LEVELS FOR QUARRIES: CASE OF NAKURU MUNICIPALITY

Lawrence K. Kibet

A Paper Presented to Beijer Institute of Ecological Economics for Teaching Wor shop on Ecological Economics to be held at Addis Ababa on !th " #!th $anuar% &''( Abstract )on*entional accounting s%stems ignore en*ironmental cost of economic acti*ities b% industries. An e+ample of such acti*ities is the mining industr% in ,a uru municipalit%. Accounting for en*ironmental costs can aid in sol*ing for optimal le*els of e+traction in e+tracti*e industries so as to efficientl% manage resources for sustainable de*elopment. Optimal e+traction le*els according to this stud% are le*els at which the cost of reclamation of land from a -uarr% is e+actl% e-ual to the *alue of adjacent land .it assumes that the marginal price of a -uarr% is /ero0. The approach adopted in the methodolog% is a combination of engineering cost techni-ues and *aluation method. In this stud%1 -uarries whose e+traction le*els ha*e reached optimal are identified. 2ne important recommendation that arises out of the e+pected results is that when mining has reached its optimum1 the ne+t immediate acti*it% should be to reclaim the land. If e+traction is be%ond the optimal e+traction le*el1 the firm in*ol*ed in the mining must be penali/ed to partl% cater for the reclamation costs and the go*ernment should ta e possession of the land without an% compensation to the owner of the land. 3and -uarr%ing was found to be en*ironmentall% unsustainable both in the short and long4run and it is recommended that this acti*it% be either banned and ta en o*er b% the go*ernment or ta+ed hea*il% and closel% monitored. In the case of other two forms of -uarries .gra*el and stone0 an important recommendation is each firm in*ol*ed should create sin ing fund5s for reclaiming the land when acti*it% in a site is wound up. The stud% would be useful to managers of resources and en*ironment not onl% in urban areas but also in the countr% as a whole. This stud% can be adopted in other sectors and nations. 2ne main limitation of the stud% is that the data estimates were not collected b% use of a professional sur*e%or but through field obser*ations and inter*iews b% the researcher due to funding constraints.

1.0 I tr!"#ct$! The common aggregate measures of economic performance include 6ross 7omestic Product .67P01 ,ational Income .,I0 and le*el of emplo%ment. 8owe*er1 these indicators ignore natural resources and en*ironmental factors. Though resources and the en*ironment as a whole is not included in the ,ational accounts1 changes in the two items contribute to production and income9 and must therefore be accounted for. The welfare of the nation:s population present and more especiall% in the future will be greatl% determined b% the stoc of natural resources a*ailable and the -ualit% of en*ironment. )urrentl%1 the production processes generall% degrades the en*ironments and depletes natural resources. This implies that the s%stem of national accounting used1 seriousl% under4estimates changes in the stoc of natural resources and the en*ironment of a nation. In this microeconomic stud%1 the case of mining industr% which is a component of the e+tracti*e sector within ,a uru ;unicipalit% is ta en. ,a uru town is situated in the ,orth ;idwest of Ken%a1 at the heart of the great East African <ift =alle% #>' Km from ,airobi. It is the administrati*e head-uarters of <ift =alle% Pro*ince which started as a railwa% outpost in #?''. It is famous for its saline la e which is a breeding site and home of the worlds rare species of Lesser flamingos and has about (!' species of birds.The town is the fourth largest in Ken%a whose population was @>'1''' in #??! growing at an annual rate of about AB it is e+pected to be o*er A''1''' b% the %ear &''! .<ollnic 1 &''#0. The major economic sectors of the town are9 commerce1 industr%1 tourism1 agriculture and tertiar% ser*ices. The central business district is s-uee/ed between ;enengai )rater and the La e ,a uru ,ational Par . The area of its municipalit% .urban0 was AC m & b% #??( and was e+panded to &?' m& in #??> .<ollnic 1 &''#0. The rapid growth of the town has put pressure on the scarce resources and infrastructure. As a means of impro*ing local urban and en*ironmental conditions1 Dnited ,ations )entre of 8uman 3ettlement .D,)83 or 8abitat0 launched a long4term Locali/ing Agenda &# Programme in the earl% #??'s with some pilot projects in three medium4si/ed cities in the worldE ,a uru1 the ;oroccan town of Essaouira and =inh )it% in =ietnam .<ollnic 1 &''#0. The en*ironmental problems facing ,a uru are compounded b% the nature of geological foundations of the town which is related with the *olcanic eruptions and techtonic acti*ities associated with the formation of the 6reat <ift =alle%. 3ituated within the municipalit% is ;enengai )rater which is a dormant *olcano. The structural geolog% of the town is dominated b% faults joints and fissures. The soils are highl% susceptible to erosion because the% are highl% porous1 permeable and of loose structure. 7uring or after hea*% rains cases of land sin ing and fractures are not uncommon. The increasing intensit% of the *arious forms of agricultural1 commercial1

industrial and mining acti*ities increasingl% impacts negati*el% on the sustainabilit% of the growth of the town. There are a number of sand1 gra*el and stone -uarries within the municipalit%. The products from these -uarries are not onl% utili/ed in the construction industr% in the town but also e+ported to other regions outside the municipalit%. Though these outputs are not properl% recorded1 the final product thereof is *alued and accounted in form of buildings and other infrastructural facilities. 8owe*er1 the negati*e e+ternalit% caused b% these e+panding -uarries on the *alue of assets within their en*irons is not accounted for. The en*ironmental costs can be so ad*erse that there ma% be no alternati*e use of the land if the mining acti*it% grinds to a halt. The costs of restoring the land b% filling the -uarr% can be economicall% too large. 3uch is the state of some mining pits in *arious parts of the world. The en*ironmental costs of maintaining abandoned open mines can be astronomical. To a*oid this1 there is need of ha*ing a polic% concerning the management of mining industr% worldwide. The premise made here is that the e*aluation of economic performance and progress through gross product or income of the *arious sectors within ,a uru ;unicipalit% grossl% under4estimates the negati*e contribution of the e+tracti*e industr%. For -uarr%ing to be sustainable in the short4run the marginal re*enue from a ton of raw material e+tracted must be greater than the replacement of the ton of raw material. In the long4run the acti*it% will be sustainable if the cost of refilling .reclaiming of the land0 is less than the mar et *alue of the land. These are the minimum conditions for sustainable mining acti*it% assumed in this stud%. Pr!b%&' The e*aluation of economic performance and progress through gross income of the mining sector within the ,a uru ;unicipalit% grossl% under4estimates the negati*e contribution of the mining industr%. 2*er time these cost ha*e accumulated to le*els where costs of reclaiming some of the -uarries is be%ond mar et *alues hence unsustainable in the long4run. It is also a concern that probabl% some -uarr%ing acti*ities are not en*ironmentall% sustainable e*en in the short run1 since the marginal cost of filling up the -uarr% with a ton of soil is more than the marginal re*enue from a ton of raw material e+tracted. Ob(&ct$)&s a " *+,!t-&s$s The objecti*e of this stud% is therefore to estimate the costs of reclaiming land from -uarries and to sol*e for the optimal e+traction le*els of the -uarries. We will also e*aluate the marginal income from a ton of raw material e+tracted relati*e to the marginal cost of filling the -uarr% with a ton of soil. ;ain research h%potheses areE first1 marginal income from a ton of raw material e+tracted is more than the marginal cost of filling the -uarr% with a ton of soil1 and secondl%9 the cost of reclaiming an acre of land from a -uarr% is less than the *alue of the reclaimed land.

.#st$/$cat$! !/ t-& St#"+ En*ironmental costs are obscured in con*entional accounts and %et the% are real costs that should be accommodated b% all firms and industries. ;anagement of the en*ironmental costs will result in impro*ed en*ironment1 production and generall% wealth of the urban population in the stud% area. This stud% would also argue for a clearer polic% of the management of e+tracti*e industries and an% other industr% that largel% tends to e+ploit natural resources. This will also contribute to the sustainabilit% of the growth and de*elopment of not onl% the urban regions but also the rural. Being a pioneering stud% on one of the industries in an urban centre1 other studies co*ering the *arious industries and regions will be encouraged. It is the ultimate purpose of this stud% to ha*e other studies e+panded to include all firms and sectors in the econom%. To arri*e at aggregates for the whole econom% it is important to begin with the microeconomic production units. Sc!,& a " L$'$tat$! s In this stud%1 focus is made on en*ironmental costs whose effect is reflected on the pricing of rents and sale price of the fi+ed properties around the -uarries in ,a uru municipalit%. The -uarries sur*e%ed will be relating to sand1 gra*el and building stones onl%. This implies that other en*ironmental costs other than those reflected on prices will not be addressed in this stud%. 2ther mining acti*ities will also not be a subject of the stud%. A major limitation of the stud% is that the data estimates were collected through field obser*ations and inter*iews b% the researcher and not a professional sur*e%or. ;ore precise estimates b% professional sur*e%ors would enhance the authenticit% of the stud%.

0.0 L$t&rat#r& R&)$&1 In the coming decades1 the continued urban population growth and especiall% the continued growth of the urban poor is e+pected to immensel% challenge global sustainabilit%. As at &''#1 there were (@ cities in Africa with populations of more than one million and it is e+pected to increase to almost A' b% &'#! .D,P71 &''#0. ,a uru would be among these cities. ;ore problems of o*ercrowding1 informal settlements1 inade-uate housing1 poor infrastructure etc. are bound to increase. Infrastructural de*elopment has been slow in eeping pace with burgeoning needs of the urban population. 3ince most urban en*ironmental problems result from poor management1 poor planning and absence of coherent urban policies .8assan1 #??>09 it is important that these dimensions be addressed in all sectors of the urban domain. The con*entional national accounting s%stems1 e+cludesE domestic production9 products directl% e+tracted from communal resources for household consumption and not traded in the mar et1 and9 benefits from ecological ser*ices1 cultural1 aesthetic1 etc. Though 67P includes income from e+tracted resources corresponding *alue of these assets lost to the econom% is omitted. 7epletion of natural and human capital is e+cluded from total national wealth of a nation and hence the measures of economic performance is wrong and misleading .8assan1 &''@0. To correct the measures of change in wealth .asset accounts0 the definition of capital is e+panded to include natural and human capital. The resulting sa*ing would ha*e accommodated mineral depletion. .8assan1 &''@0 The price of a good or ser*ice should relate to the marginal social cost of its pro*ision. 3uch price which is also called full cost pricing is necessar% as part of initial steps towards sustainable de*elopment .=eeman1 &''#0. =eeman1 though short of gi*ing case e+amples1 recommended that the most important polic% measure for sustainable de*elopment in*ol*es the implementation of safe minimum standards of resource use which is particularl% useful for flow resources with critical /ones in*ol*ing threats of irre*ersibilit%. 3ustainable de*elopment see s to meet the needs of the present without compromising the needs of future generations. In other words1 the present generation must lea*e the air1 water and natural resources as pure and unpolluted as when it found it. 3trong sustainabilit% clarifies that in the case of renewable resources annual off4ta e must be ept e-ual to the annual growth increment while in the case of non4renewals depletion should be at a rate e-ual to the de*elopment of renewal substitutes .7al%1 #??>0. This means that stoc of natural capital should not be reduced below a le*el that generates sustained %ield unless good substitutes are currentl% a*ailable. 3ustainable de*elopment therefore1 has to be financed in such a manner as to compensate for future depletion of e+haustible resources .8assan1 &''@0. An e+ample where policies ha*e ensured sustainabilit% is of mining in 3outh Africa1 where the capital component .))0 was full% rein*ested in alternati*e forms of capital .Blignaut and 8assan1 &''&0. According to 7asgupta and ;aler1 the correct inde+ of chec ing if de*elopment is sustainable is wealth. When accounting prices that reflect trade4offs among present and

future well4beings and among contemporaries are used to determine well4being1 wealth becomes a good inde+ for showing whether de*elopment is sustainable or not. Po*ert% causes a societ% to el out li*ing through ad*erse e+ploitation of resources and this is the state of the populations in the Less 7e*eloped )ountries .L7)s0 .7asgupta G ;aler1 #??!0. In economics1 the centre of the en*ironmental sustainabilit% problem lies within the pricing of en*ironmental consideration and that en*ironmental degradation results from limitations of the price mechanism. 3ince prices are wrong it is important to now how we can correct them. ;ar et based instruments can pla% *ital roles in en*ironmental polic% since the% can reconcile en*ironmental concerns and de*elopment needs. A prime objecti*e of go*ernment polic% to finance and promote en*ironmental sustainabilit% is to establish a right incenti*e structure .de ;oor1 #??>0. The paper b% de ;oor was howe*er theoretical and not applied. Economic incenti*es are ideal for shifting both beha*iour and patterns of both production and consumption towards sustainabilit%. E+isting polic% distortions in form of subsidies or ta+ wai*ers must first be remo*ed .more specificall% go*ernment inter*entions that subsidi/e waste and en*ironmental degradation0. 3econdl%1 the go*ernment can inter*ene through ta+ation or -uota restrictions to increase prices of low4priced commodities whose production contribute towards en*ironmental degradation or depletion of non4renewable resources. Ad*erse e+ternalities .which are not accounted for01 in the production process or .consumption0 of a product9 results in a distorted low price. ;arginal anal%sis refers to the comparison between incremental benefit and incremental cost of an economic action and is fundamental to the economic approach for efficient allocation of resources. ;ost efficient outcomes are achie*ed b% e-uating marginal gains to marginal costs assuming that the prices of outputs and inputs are correctl% *alued .Allen1 &''&0. Accounting for e+ternalities has been adopted in the microeconomic le*el within the firm in h%droelectricit% .EPA1 #??>01 health sector .EPA1 &'''01 chemical and oil companies .3hields1 #??Aa0 and electroplating operations .EPA1 #??Ab0 among others. The studies sampled1 applied *arious en*ironmental accounting techni-ues to e*aluate en*ironmental costs of economic acti*ities in an industr%. The results showed e+istence of positi*e en*ironmental costs in all cases with an implication that most economics acti*ities ha*e en*ironmental costs which are %et to be accounted for.

2.0 M&t-!"!%!3+ Theoretical Framewor There are a di*erse number of *aluation tools that emplo% one or more approaches to *alue en*ironmental liabilities. Among the tools are9 actuarial techni-ues1 professional judgment1 engineering cost estimation1 decision anal%sis techni-ues1 modeling1 scenario techni-ues and *aluation methods .;cLaughlin1 #??>0. In this stud%1 engineering cost estimation techni-ue and *aluation method is used in combination. ;arginal anal%sis is also emplo%ed. The cost of reclaiming the land .restoring it to it former state0 is estimated and compared with the mar et *alue it would fetch. A wa% of lea*ing -uarr%ing grounds as pure and unpolluted as when it was found is b% refilling it with material that is a close substitute to the material e+tracted. This is a step *er% necessar% in the log4run. The feasibilit% of this reclamation depends on the *alue of the land. 7iagram #E <eclamation )osts1 Land =alue and 2ptimal Le*el of E+traction =olume of e+traction )ost of reclamation =alue of land ' 2ptimal le*el of e+traction In the short4run it would be wise to ensure that marginal net social gains should at least be e-ual to marginal costs of restoration of the en*ironment. Financing of sustainable de*elopment would re-uire that a sin ing fund be created in an% e+tracti*e industr% to restore depleted resources. 7iagram &E ;arginal <eclamation )osts1 ;arginal <e*enues and 2ptimal Le*el of E+traction =olume of e+traction ;arginal cost of reclamation ;arginal re*enue from e+traction

' 2ptimal le*el of e+traction

7ata collection 7ata of interest include9 si/e of acreage of -uarr%1 *alue of land around the -uarr%1 *alue of rental housing around the -uarr% per *alue of house. Huantit% of raw material .H<0 e+tracted .depleted0 will be measured as the *olume of the -uarr% while the -uantit% of final product .HF0 will be H< less waste .HW0. =alue of waste and b% products .apart from bric 4stone -uarr%ing0 is assumed /ero which in practice is not sold. )osts of restoring the -uarr% will be measured as costs of bu%ing and transporting soil from other areas to fill up the -uarr% .assuming that the soils are of the same te+ture and densit%0. The cost of importing soil is estimated from an a*erage of the transportation cost of the products from the said -uarr% to *arious destinations. To get the opportunit% cost for the use of land1 the *alue of land occupied b% the -uarr% will be estimated from an a*erage price of the neighboring land. )osts and prices adopted are current since we are e*aluating the stoc at a gi*en date. Price of the final product

will also be current to reflect the real price assuming it to be constant o*er time. The price being a simple a*erage incase of e+istence of *arious -ualities of the final product. A primar% data collection schedule was used and data was collected from the -uarr% sites through obser*ations and inter*iews. && sand -uarries1 ( gra*el and A bric 4stone -uarries were *isited. Their si/es ranged from I 4 @! acres1 # " (' acres and I 4 ! acres for sand1 gra*el and bric 4stone -uarries respecti*el%. 4.0 5ata S#''ar+ a " A a%+s$s 3and -uarries 3and is sold at the -uarries within the range of KE3 &'' " KE3 ('' per ton. The a*erage price is therefore estimated at KE3 @'' .J (0 per ton. Labor costs per ton of sand a*erages KE3 #!'. The a*erage cost of importing one ton of soil to the -uarr% site ranges from KE3 #!' " KE3 (!'. A*erage cost is hence estimated to be KE3 @'' .appro+. J (0. The net re*enue to the -uarr% owner is therefore appro+imatel% KE3 #!' .J &0. Ta ing these as the marginal re*enue b% -uarr% owners from sale of sand and the marginal cost of replacing the e+tracted material9 we easil% see that the marginal cost far e+ceeds the marginal re*enues. This is interpreted to mean that -uarr% owners are not in a position of meeting the costs of not onl% reclaiming the -uarr% but also replacing a marginal raw material e+tracted. 3and -uarries in ,a uru municipalit% ha*e therefore1 not onl% e+ceeded optimal e+traction but are also not en*ironmentall% sustainable. The *alue of land around the sand -uarries a*erages KE3 A!'1''' .J #'1'''0 per acre. This means that the costs of reclamation should not e+ceed KE3 A!'1''' per acre. According to estimates1 all sand -uarries ha*e reclamation costs e+ceeding this. 6ra*el -uarries 6ra*el is sold at the -uarries within the range of KE3 #1@'' " &1!''. The a*erage price is KE3 #1?'' .appro+. J &!.@0 per ton. Production costs per ton of gra*el ranges from KE3 A!' " #&'' and a*erages KE3 ?A!. The a*erage cost of importing one ton of soil to the -uarr% site is also estimated to be KE3 @'' .appro+. J (0. The net re*enue to the -uarr% owner is therefore appro+imatel% KE3 ?&! .J#&.@0. 3ince marginal costs are less than the marginal re*enues9 the acti*it% is en*ironmentall% sustainable. The gra*el -uarries in ,a uru municipalit% are relati*el% shallow and ma% not ha*e e+ceeded optimal e+traction. The *alue of land around the gra*el -uarries a*erages KE3 !''1''' .J >1>>A0 per acre. According to rough estimates1 onl% one gra*el -uarr% has reclamation costs e+ceeding this1 though its land *alue is greater .estimated at KE3 C''1'''0. 3tone5hardcore -uarries Bric 4stones are sold at the -uarries at a range of KE3 C'' " #1>'' per ton and an a*erage price of appro+imatel% KE3 #1&'' .J #@.@0 per ton. A*erage cost of importing one ton of soil to the -uarr% site being KE3 @'' .J (0. )ost of labor per ton of stones ranges from KE3 &!' " A!' and a*erages KE3 !''. For e*er% ton of bric 4stones produced1 a ton of b% product of hardcore is produced. 8ardcore fetches a range of KE3 #'' " @'' per ton with an a*erage price of KE3 &'' per ton .J &.A0. The net re*enue to the -uarr% owner per ton of raw material e+tracted is therefore appro+imatel% KE3 ?'' .J #&0. 3ince marginal costs are less than the marginal re*enues1 bric 4stone mining in

,a uru ;unicipalit% can be said to be en*ironmentall% sustainable. The *alue of land around the bric 4stone -uarries a*erages KE3 @''1''' .J (1'''0 per acre. From data estimates1 all bric 4stone -uarries ha*e reclamation costs less that the abo*e *alue cost. Interpreting the results we can conclude that pri*ate de*elopers will find it economicall% feasible to fill up the stone -uarries and hence bric 4stone e+traction in ,a uru ;unicipalit% is also en*ironmentall% sustainable in the long"run. This stud% recommends creation of sin ing fund5s at a rate of KE3 @'' .&''@ prices0 for e*er% ton of material e+tracted for land reclamation b% firms in*ol*ed in stone -uarr%ing. 6.0 C! c%#s$! s a " R&c!''& "at$! s 3and -uarries 3ince marginal re*enue b% -uarr% owners from sale of sand is less than the marginal cost of replacing the e+tracted material9 we easil% see that the marginal cost far e+ceeds the marginal re*enues. This means that the costs of reclamation of land .filling up the -uarries with roc or soil0 in each sand -uarr% e+ceed re*enues thereof and the acti*it% is therefore an en*ironmental disaster. 3and har*esting in ,a uru ;unicipalit% is hence en*ironmentall% not sustainable both in the short and long4run and should either be totall% banned or a ta+ of not less than KE3 @'' per ton be imposed b% the go*ernment to co*er reclamation costs. 2ut of the e+pected *alue of reclaimed land1 it is implied that no pri*ate de*eloper will find it economicall% feasible to fill up the -uarr% and thus1 most of the sand -uarries will ne*er be filled unless the go*ernment or local authorities inter*enes to meet the costs or subsidi/e pri*ate de*elopers. An alternati*e is to turn the sand -uarries into garbage pits so that the% can be reclaimed in the future. 6ra*el -uarries 6i*en that the marginal costs are less than the marginal re*enues9 through en*ironmental accounting and creation of sin ing fund for reclamation1 -uarr% owners can meet the costs of reclaiming the -uarr%. The gra*el -uarries in ,a uru municipalit% are relati*el% shallow and ma% not ha*e e+ceeded optimal e+traction. 6ra*el mining in ,a uru ;unicipalit% is hence en*ironmentall% sustainable in the short4run and needs to be properl% managed and monitored. Interpreting the results from land *alue1 we can conclude pri*ate de*elopers will find it economicall% feasible to fill up the gra*el -uarries and hence gra*el -uarries are en*ironmentall% sustainable also in the long"run. This stud% recommends that firms in*ol*ed in gra*el -uarries should create sin ing funds1 at a rate of KE3 @'' .&''@ prices0 for e*er% ton of material e+tracted for future land reclamation. 3tone5hardcore -uarries 6i*en that the marginal costs are less than the marginal re*enues1 b% creating sin ing fund for reclamation1 -uarr% owners can meet the costs of reclaiming the -uarr%. Bric 4 stone mining is en*ironmentall% sustainable in the short4run and needs to be properl% managed and monitored. From the *alue of land around the bric 4stone -uarries we can conclude that pri*ate de*elopers will find it economicall% feasible to fill up the stone -uarries. 8ence bric 4stone e+traction in ,a uru ;unicipalit% is also en*ironmentall% sustainable in the long"run. This stud% recommends creation of sin ing fund5s at a rate of

KE3 @'' .&''@ prices0 for e*er% ton of material e+tracted for land reclamation b% firms in*ol*ed in stone -uarr%ing. It is interesting to note that owners of sand -uarries are relati*el% poor compared to the other forms of mining. 2wners of other -uarries are relati*el% wealthier that those of sand -uarries. This supports the argument b% 7asgupta and ;aler .&''#0 that the correct inde+ for chec ing if de*elopment is sustainable is wealth.

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<ollnic 1 <. .&''#0 N)leaning a town1 from the ground upE 8abitat Project on Locali/ing Agenda &#O in Africa <eco*er% =ol. #! ,o. #4& pg.@>. D,7P1 ,ew Kor . D,P7 .&''#0 5orl' 4rbani6ation Prospects: !"e ,... evision - 7e& 0in'ings . Dnited ,ations Population 7i*ision .D,7P0 =eeman1 T.3. and $. Polit%lo .&''#0 !"e ole of /nstitutions an' Polic& in En"ancing Sustainable Development an' En"ancing *atural 2apital. A paper presented at the ;un )I31 )onference on ,atural )apital1 Po*ert% and 7e*elopment1 on ! " C th 3ept &''#1 at Dni*ersit% of Toronto1 7e*onshire.