Lawrence K. Kibet
A Paper Presented to Beijer Institute of Ecological Economics for Teaching Workshop on
Ecological Economics to be held at Addis Ababa on 5 th
– 15 th
January 2004
Abstract
Conventional accounting systems ignore environmental cost of economic activities by industries. An example of such activities is the mining industry in Nakuru municipality.
Accounting for environmental costs can aid in solving for optimal levels of extraction in extractive industries so as to efficiently manage resources for sustainable development.
Optimal extraction levels according to this study are levels at which the cost of reclamation of land from a quarry is exactly equal to the value of adjacent land (it assumes that the marginal price of a quarry is zero). The approach adopted in the methodology is a combination of engineering cost techniques and valuation method. In this study, quarries whose extraction levels have reached optimal are identified. One important recommendation that arises out of the expected results is that when mining has reached its optimum, the next immediate activity should be to reclaim the land. If extraction is beyond the optimal extraction level, the firm involved in the mining must be penalized to partly cater for the reclamation costs and the government should take possession of the land without any compensation to the owner of the land. Sand quarrying was found to be environmentally unsustainable both in the short and long-run and it is recommended that this activity be either banned and taken over by the government or taxed heavily and closely monitored. In the case of other two forms of quarries (gravel and stone) an important recommendation is each firm involved should create sinking fund/s for reclaiming the land when activity in a site is wound up. The study would be useful to managers of resources and environment not only in urban areas but also in the country as a whole. This study can be adopted in other sectors and nations.
One main limitation of the study is that the data estimates were not collected by use of a professional surveyor but through field observations and interviews by the researcher due to funding constraints.

1.0 Introduction
The common aggregate measures of economic performance include Gross Domestic
Product (GDP), National Income (NI) and level of employment. However, these indicators ignore natural resources and environmental factors.
Though resources and the environment as a whole is not included in the National accounts, changes in the two items contribute to production and income; and must therefore be accounted for. The welfare of the nation’s population present and more especially in the future will be greatly determined by the stock of natural resources available and the quality of environment. Currently, the production processes generally degrades the environments and depletes natural resources. This implies that the system of national accounting used, seriously under-estimates changes in the stock of natural resources and the environment of a nation.
In this microeconomic study, the case of mining industry which is a component of the extractive sector within Nakuru Municipality is taken.
Nakuru town is situated in the North Midwest of Kenya, at the heart of the great East
African Rift Valley 160 Km from Nairobi. It is the administrative headquarters of Rift
Valley Province which started as a railway outpost in 1900. It is famous for its saline lake which is a breeding site and home of the worlds rare species of Lesser flamingos and has about 450 species of birds.The town is the fourth largest in Kenya whose population was
360,000 in 1995 growing at an annual rate of about 7% it is expected to be over 700,000 by the year 2005 (Rollnick, 2001).
The major economic sectors of the town are; commerce, industry, tourism, agriculture and tertiary services. The central business district is squeezed between Menengai Crater and the Lake Nakuru National Park. The area of its municipality (urban) was 78 km 2 by
1994 and was expanded to 290 km
2
in 1996 (Rollnick, 2001). The rapid growth of the town has put pressure on the scarce resources and infrastructure. As a means of improving local urban and environmental conditions, United Nations Centre of Human
Settlement (UNCHS or Habitat) launched a long-term Localizing Agenda 21 Programme in the early 1990s with some pilot projects in three medium-sized cities in the world:
Nakuru, the Moroccan town of Essaouira and Vinh City in Vietnam (Rollnick, 2001).
The environmental problems facing Nakuru are compounded by the nature of geological foundations of the town which is related with the volcanic eruptions and techtonic activities associated with the formation of the Great Rift Valley. Situated within the municipality is Menengai Crater which is a dormant volcano. The structural geology of the town is dominated by faults joints and fissures.
The soils are highly susceptible to erosion because they are highly porous, permeable and of loose structure. During or after heavy rains cases of land sinking and fractures are not uncommon. The increasing intensity of the various forms of agricultural, commercial,

industrial and mining activities increasingly impacts negatively on the sustainability of the growth of the town.
There are a number of sand, gravel and stone quarries within the municipality. The products from these quarries are not only utilized in the construction industry in the town but also exported to other regions outside the municipality. Though these outputs are not properly recorded, the final product thereof is valued and accounted in form of buildings and other infrastructural facilities. However, the negative externality caused by these expanding quarries on the value of assets within their environs is not accounted for.
The environmental costs can be so adverse that there may be no alternative use of the land if the mining activity grinds to a halt. The costs of restoring the land by filling the quarry can be economically too large. Such is the state of some mining pits in various parts of the world. The environmental costs of maintaining abandoned open mines can be astronomical. To avoid this, there is need of having a policy concerning the management of mining industry worldwide.
The premise made here is that the evaluation of economic performance and progress through gross product or income of the various sectors within Nakuru Municipality grossly under-estimates the negative contribution of the extractive industry. For quarrying to be sustainable in the short-run the marginal revenue from a ton of raw material extracted must be greater than the replacement of the ton of raw material. In the long-run the activity will be sustainable if the cost of refilling (reclaiming of the land) is less than the market value of the land. These are the minimum conditions for sustainable mining activity assumed in this study.
Problem
The evaluation of economic performance and progress through gross income of the mining sector within the Nakuru Municipality grossly under-estimates the negative contribution of the mining industry. Over time these cost have accumulated to levels where costs of reclaiming some of the quarries is beyond market values hence unsustainable in the long-run. It is also a concern that probably some quarrying activities are not environmentally sustainable even in the short run, since the marginal cost of filling up the quarry with a ton of soil is more than the marginal revenue from a ton of raw material extracted.
Objectives and Hypothesis
The objective of this study is therefore to estimate the costs of reclaiming land from quarries and to solve for the optimal extraction levels of the quarries. We will also evaluate the marginal income from a ton of raw material extracted relative to the marginal cost of filling the quarry with a ton of soil.
Main research hypotheses are: first, marginal income from a ton of raw material extracted is more than the marginal cost of filling the quarry with a ton of soil, and secondly; the cost of reclaiming an acre of land from a quarry is less than the value of the reclaimed land.

Justification of the Study
Environmental costs are obscured in conventional accounts and yet they are real costs that should be accommodated by all firms and industries. Management of the environmental costs will result in improved environment, production and generally wealth of the urban population in the study area. This study would also argue for a clearer policy of the management of extractive industries and any other industry that largely tends to exploit natural resources. This will also contribute to the sustainability of the growth and development of not only the urban regions but also the rural. Being a pioneering study on one of the industries in an urban centre, other studies covering the various industries and regions will be encouraged. It is the ultimate purpose of this study to have other studies expanded to include all firms and sectors in the economy. To arrive at aggregates for the whole economy it is important to begin with the microeconomic production units.
Scope and Limitations
In this study, focus is made on environmental costs whose effect is reflected on the pricing of rents and sale price of the fixed properties around the quarries in Nakuru municipality. The quarries surveyed will be relating to sand, gravel and building stones only.
This implies that other environmental costs other than those reflected on prices will not be addressed in this study. Other mining activities will also not be a subject of the study.
A major limitation of the study is that the data estimates were collected through field observations and interviews by the researcher and not a professional surveyor. More precise estimates by professional surveyors would enhance the authenticity of the study.

2.0 Literature Review
In the coming decades, the continued urban population growth and especially the continued growth of the urban poor is expected to immensely challenge global sustainability. As at 2001, there were 43 cities in Africa with populations of more than one million and it is expected to increase to almost 70 by 2015 (UNPD, 2001). Nakuru would be among these cities. More problems of overcrowding, informal settlements, inadequate housing, poor infrastructure etc. are bound to increase. Infrastructural development has been slow in keeping pace with burgeoning needs of the urban population. Since most urban environmental problems result from poor management, poor planning and absence of coherent urban policies (Hassan, 1996); it is important that these dimensions be addressed in all sectors of the urban domain.
The conventional national accounting systems, excludes: domestic production; products directly extracted from communal resources for household consumption and not traded in the market, and; benefits from ecological services, cultural, aesthetic, etc. Though GDP includes income from extracted resources corresponding value of these assets lost to the economy is omitted. Depletion of natural and human capital is excluded from total national wealth of a nation and hence the measures of economic performance is wrong and misleading (Hassan, 2003).
To correct the measures of change in wealth (asset accounts) the definition of capital is expanded to include natural and human capital. The resulting saving would have accommodated mineral depletion. (Hassan, 2003) The price of a good or service should relate to the marginal social cost of its provision. Such price which is also called full cost pricing is necessary as part of initial steps towards sustainable development (Veeman,
2001). Veeman, though short of giving case examples, recommended that the most important policy measure for sustainable development involves the implementation of safe minimum standards of resource use which is particularly useful for flow resources with critical zones involving threats of irreversibility.
Sustainable development seeks to meet the needs of the present without compromising the needs of future generations. In other words, the present generation must leave the air, water and natural resources as pure and unpolluted as when it found it. Strong sustainability clarifies that in the case of renewable resources annual off-take must be kept equal to the annual growth increment while in the case of non-renewals depletion should be at a rate equal to the development of renewal substitutes (Daly, 1996). This means that stock of natural capital should not be reduced below a level that generates sustained yield unless good substitutes are currently available.
Sustainable development therefore, has to be financed in such a manner as to compensate for future depletion of exhaustible resources (Hassan, 2003). An example where policies have ensured sustainability is of mining in South Africa, where the capital component
(CC) was fully reinvested in alternative forms of capital (Blignaut and Hassan, 2002).
According to Dasgupta and Maler, the correct index of checking if development is sustainable is wealth. When accounting prices that reflect trade-offs among present and

future well-beings and among contemporaries are used to determine well-being, wealth becomes a good index for showing whether development is sustainable or not. Poverty causes a society to elk out living through adverse exploitation of resources and this is the state of the populations in the Less Developed Countries (LDCs) (Dasgupta & Maler,
1995).
In economics, the centre of the environmental sustainability problem lies within the pricing of environmental consideration and that environmental degradation results from limitations of the price mechanism. Since prices are wrong it is important to know how we can correct them. Market based instruments can play vital roles in environmental policy since they can reconcile environmental concerns and development needs. A prime objective of government policy to finance and promote environmental sustainability is to establish a right incentive structure (de Moor, 1996). The paper by de Moor was however theoretical and not applied. Economic incentives are ideal for shifting both behaviour and patterns of both production and consumption towards sustainability. Existing policy distortions in form of subsidies or tax waivers must first be removed (more specifically government interventions that subsidize waste and environmental degradation). Secondly, the government can intervene through taxation or quota restrictions to increase prices of low-priced commodities whose production contribute towards environmental degradation or depletion of non-renewable resources. Adverse externalities (which are not accounted for), in the production process or (consumption) of a product; results in a distorted low price.
Marginal analysis 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. Most efficient outcomes are achieved by equating marginal gains to marginal costs assuming that the prices of outputs and inputs are correctly valued
(Allen, 2002).
Accounting for externalities has been adopted in the microeconomic level within the firm in hydroelectricity (EPA, 1996), health sector (EPA, 2000), chemical and oil companies
(Shields, 1997a) and electroplating operations (EPA, 1997b) among others. The studies sampled, applied various environmental accounting techniques to evaluate environmental costs of economic activities in an industry. The results showed existence of positive environmental costs in all cases with an implication that most economics activities have environmental costs which are yet to be accounted for.

3.0 Methodology
Theoretical Framework
There are a diverse number of valuation tools that employ one or more approaches to value environmental liabilities. Among the tools are; actuarial techniques, professional judgment, engineering cost estimation, decision analysis techniques, modeling, scenario techniques and valuation methods (McLaughlin, 1996). In this study, engineering cost estimation technique and valuation method is used in combination. Marginal analysis is also employed.
The cost of reclaiming the land (restoring it to it former state) is estimated and compared with the market value it would fetch.
A way of leaving quarrying grounds as pure and unpolluted as when it was found is by refilling it with material that is a close substitute to the material extracted. This is a step very necessary in the log-run. The feasibility of this reclamation depends on the value of the land.
Diagram 1: Reclamation Costs, Land Value and Optimal Level of Extraction
Volume of extraction
Cost of reclamation

Value of land
0
Optimal level of extraction
In the short-run it would be wise to ensure that marginal net social gains should at least be equal to marginal costs of restoration of the environment. Financing of sustainable development would require that a sinking fund be created in any extractive industry to restore depleted resources.
Diagram 2: Marginal Reclamation Costs, Marginal Revenues and Optimal Level of
Extraction
Volume of extraction
Marginal cost of reclamation
Marginal revenue from extraction
0
Optimal level of extraction

Data collection
Data of interest include; size of acreage of quarry, value of land around the quarry, value of rental housing around the quarry per value of house.
Quantity of raw material (QR) extracted (depleted) will be measured as the volume of the quarry while the quantity of final product (QF) will be QR less waste (QW). Value of waste and by products (apart from brick-stone quarrying) is assumed zero which in practice is not sold.
Costs of restoring the quarry will be measured as costs of buying and transporting soil from other areas to fill up the quarry (assuming that the soils are of the same texture and density). The cost of importing soil is estimated from an average of the transportation cost of the products from the said quarry to various destinations.
To get the opportunity cost for the use of land, the value of land occupied by the quarry will be estimated from an average price of the neighboring land. Costs and prices adopted are current since we are evaluating the stock at a given date. Price of the final product will also be current to reflect the real price assuming it to be constant over time. The price being a simple average incase of existence of various qualities of the final product.
A primary data collection schedule was used and data was collected from the quarry sites through observations and interviews. 22 sand quarries, 4 gravel and 7 brick-stone quarries

were visited. Their sizes ranged from ½ - 35 acres, 1 – 40 acres and ½ - 5 acres for sand, gravel and brick-stone quarries respectively.
4.0 Data Summary and Analysis
Sand quarries
Sand is sold at the quarries within the range of KES 200 – KES 400 per ton. The average price is therefore estimated at KES 300 ($ 4) per ton. Labor costs per ton of sand averages KES 150. The average cost of importing one ton of soil to the quarry site ranges from KES 150 – KES 450. Average cost is hence estimated to be KES 300 (approx. $ 4).
The net revenue to the quarry owner is therefore approximately KES 150 ($ 2). Taking these as the marginal revenue by quarry owners from sale of sand and the marginal cost of replacing the extracted material; we easily see that the marginal cost far exceeds the marginal revenues. This is interpreted to mean that quarry owners are not in a position of meeting the costs of not only reclaiming the quarry but also replacing a marginal raw material extracted. Sand quarries in Nakuru municipality have therefore, not only exceeded optimal extraction but are also not environmentally sustainable. The value of land around the sand quarries averages KES 750,000 ($ 10,000) per acre. This means that the costs of reclamation should not exceed KES 750,000 per acre. According to estimates, all sand quarries have reclamation costs exceeding this.
Gravel quarries
Gravel is sold at the quarries within the range of KES 1,300 – 2,500. The average price is
KES 1,900 (approx. $ 25.3) per ton. Production costs per ton of gravel ranges from KES
750 – 1200 and averages KES 975. The average cost of importing one ton of soil to the quarry site is also estimated to be KES 300 (approx. $ 4). The net revenue to the quarry owner is therefore approximately KES 925 ($12.3). Since marginal costs are less than the marginal revenues; the activity is environmentally sustainable. The gravel quarries in
Nakuru municipality are relatively shallow and may not have exceeded optimal extraction. The value of land around the gravel quarries averages KES 500,000 ($ 6,667) per acre. According to rough estimates, only one gravel quarry has reclamation costs exceeding this, though its land value is greater (estimated at KES 800,000).
Stone/hardcore quarries
Brick-stones are sold at the quarries at a range of KES 800 – 1,600 per ton and an average price of approximately KES 1,200 ($ 13.3) per ton. Average cost of importing one ton of soil to the quarry site being KES 300 ($ 4). Cost of labor per ton of stones ranges from KES 250 – 750 and averages KES 500. For every ton of brick-stones produced, a ton of by product of hardcore is produced. Hardcore fetches a range of KES
100 – 300 per ton with an average price of KES 200 per ton ($ 2.7). The net revenue to the quarry owner per ton of raw material extracted is therefore approximately KES 900 ($
12). Since marginal costs are less than the marginal revenues, brick-stone mining in
Nakuru Municipality can be said to be environmentally sustainable. The value of land around the brick-stone quarries averages KES 300,000 ($ 4,000) per acre. From data estimates, all brick-stone quarries have reclamation costs less that the above value cost.
Interpreting the results we can conclude that private developers will find it economically feasible to fill up the stone quarries and hence brick-stone extraction in Nakuru

Municipality is also environmentally sustainable in the long–run. This study recommends creation of sinking fund/s at a rate of KES 300 (2003 prices) for every ton of material extracted for land reclamation by firms involved in stone quarrying.
5.0 Conclusions and Recommendations
Sand quarries
Since marginal revenue by quarry owners from sale of sand is less than the marginal cost of replacing the extracted material; we easily see that the marginal cost far exceeds the marginal revenues. This means that the costs of reclamation of land (filling up the quarries with rock or soil) in each sand quarry exceed revenues thereof and the activity is therefore an environmental disaster. Sand harvesting in Nakuru Municipality is hence environmentally not sustainable both in the short and long-run and should either be totally banned or a tax of not less than KES 300 per ton be imposed by the government to cover reclamation costs. Out of the expected value of reclaimed land, it is implied that no private developer will find it economically feasible to fill up the quarry and thus, most of the sand quarries will never be filled unless the government or local authorities intervenes to meet the costs or subsidize private developers. An alternative is to turn the sand quarries into garbage pits so that they can be reclaimed in the future.
Gravel quarries
Given that the marginal costs are less than the marginal revenues; through environmental accounting and creation of sinking fund for reclamation, quarry owners can meet the costs of reclaiming the quarry. The gravel quarries in Nakuru municipality are relatively shallow and may not have exceeded optimal extraction. Gravel mining in Nakuru
Municipality is hence environmentally sustainable in the short-run and needs to be properly managed and monitored. Interpreting the results from land value, we can conclude private developers will find it economically feasible to fill up the gravel quarries and hence gravel quarries are environmentally sustainable also in the long–run.
This study recommends that firms involved in gravel quarries should create sinking funds, at a rate of KES 300 (2003 prices) for every ton of material extracted for future land reclamation.
Stone/hardcore quarries
Given that the marginal costs are less than the marginal revenues, by creating sinking fund for reclamation, quarry owners can meet the costs of reclaiming the quarry. Brickstone mining is environmentally sustainable in the short-run and needs to be properly managed and monitored. From the value of land around the brick-stone quarries we can conclude that private developers will find it economically feasible to fill up the stone quarries. Hence brick-stone extraction in Nakuru Municipality is also environmentally sustainable in the long–run. This study recommends creation of sinking fund/s at a rate of
KES 300 (2003 prices) for every ton of material extracted for land reclamation by firms involved in stone quarrying.
It is interesting to note that owners of sand quarries are relatively poor compared to the other forms of mining. Owners of other quarries are relatively wealthier that those of

sand quarries. This supports the argument by Dasgupta and Maler (2001) that the correct index for checking if development is sustainable is wealth.

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