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Content:Content:

I. Conventional approaches and alternative technologies

II. The way forward: the 3-Step Strategic Approach

III. Financial approaches to municipal wastewater management

Innovative approaches to municipal wastewater management

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Outline

Outline

1. The traditional approach to financing wastewater management

2. The need for an alternative approach

3. Alternatives for Financing Wastewater Management

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Expenditure on Water and Sanitation

Annually, US$ 25 billion is spent on new and rehabilitation of infrastructure for water supply and sanitation

•Domestic Public Sector 65%-70%•Domestic Private Sector 5%•International Donors 10%-15%•International Private Companies 10%-15%

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The traditional approach to Wastewater Management

1. Capital-intensive conventional technologies

2. Undifferentiated universal service

3. Financed by government grants and subsidies

4. Limited financial contribution by consumers

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Traditional Approaches to Financing Wastewater Management

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The traditional approach

• The consumers do not pay for their services (low tariffs)

• Government has insufficient financial resources to finance services

• The utility does not have sufficient funds to operate and maintain the existing systems

• The utility does not listen to the consumers and provides services of very poor quality

•Because of the poor quality of services the consumers are not wiling to pay more for services

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Low tariffs covering only a small part of the costs

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The problem of Undifferentiated Universal Service

Moreover, the emphasis on traditional technologies leads to low service coverage…

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Vicious circle (negative)

Leading to a negative vicious circle…

The need for an alternative approach

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The need for an alternative approach

In summary…

• Low service coverage

• Bad quality services

• Low-willingness to pay

• Low consumer-orientation

• Financially unsustainable

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The basis for a new approach

…What needs to change?

• Water services should be recognized and treated as a scarce and therefore economic good

• Decisions should be taken at the lowest appropriate level, with full public consultation and involvement of users in planning and implementation of water projects

Two Principles for a New (Financing) Approach

New Approach to Financing Water Services

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The Shift in the Role of Government

Financier and Provider of Water

Services

Regulator of Water Services

Government-funded water

services

Consumer-funded (or revenue-driven) service provision

With the shift in financing….

The role of the government changes….

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Characteristics of the New Approach

• Higher tariffs, covering at least operations and maintenance costs.

• Consumers who demand better services. (Customer-orientation)

• Better services provided by the utility.

• Higher willingness to pay of the consumers, who continue to demand service improvements for the tariffs that they pay.

• Government takes on the role of providing an enabling environment and regulating the utility

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Vicious circle (positive)

Leading to a (positive) vicious circle of service improvement

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Involvement of the Private SectorThe Traditional and the New Approach

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Involvement of the Private SectorFull Service Cost

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Sources of Finance

Tariffs Grant FinanceGrant Finance Loans from Government and Multilateral Loans from Government and Multilateral

agenciesagencies Market Financing - Commercial bank loansMarket Financing - Commercial bank loans Revolving fundsRevolving funds Other income….? (reuse of waste water)Other income….? (reuse of waste water)

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Tariffs

Influence the amount of wastewater produced in Influence the amount of wastewater produced in the sense that consumers are stimulated to the sense that consumers are stimulated to produce less wastewaterproduce less wastewater

Cover (at least) operation and maintenance Cover (at least) operation and maintenance costs and part of the investment costscosts and part of the investment costs

Be fair and equitable and have particular regard Be fair and equitable and have particular regard to the needs of the poorer members of the to the needs of the poorer members of the communitycommunity

Be easy to understand for the consumerBe easy to understand for the consumer Be easy to administer and enforceBe easy to administer and enforce

Tariffs for sanitation services should:Tariffs for sanitation services should:

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The Importance of Cost-Recovery

• Increasing cost-recovery would increase available funds for investment

• With increasing cost-recovery comes an increase in consumer orientation

• The traditional subsidy-based approach generally promoted only one service level. Increasing cost-recovery will lead to a variety of service levels

• Payments increase the sense of value and commitment among users

• With user paying for services, they will also demand that the utility deliver good services

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Mechanisms for Cost-recovery

Mechanisms for recovering costs from users:

Consumption-based charges – user charges based on the volume of wastewater discharged and/or characteristics of wastewater (often directly related to consumption of potable water);

Effluent charges – Based on a fixed amount per household, or in the case of industry on a proxy (such as production, number of employees, etc.);

Discharge permits – Charges/levies can be incorporated in discharge permits

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Wastewater management in Guanajuato, Mexico

Regulation NOM-001-ECOL (1996) establishes the standards to which wastewater must be treated prior to being discharged.

A fine of $0.25 is applied for every cubic meter of untreated wastewater that is discharged.

In reaction SIMAPAG constructed a wastewater treatment plant financed by a grant from the government (64%). The remaining 36% was financed by SIMAPAG which implemented a 10% charge on the water supply bill.

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Wastewater Treatment Charges in the Netherlands

Wastewater treatment is financed by a ‘water Wastewater treatment is financed by a ‘water pollution levy’.pollution levy’.

The water pollution levy is imposed on households The water pollution levy is imposed on households and industry.and industry.

For households the pollution levy is based on For households the pollution levy is based on ‘pollution equivalents’, which is the equivalent to the ‘pollution equivalents’, which is the equivalent to the amount one person produces per year. An average amount one person produces per year. An average family pays three pollution equivalents ($150 per year) family pays three pollution equivalents ($150 per year)

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1970 1980 1990 1995

Industry 33.3 13.7 9.8 10.2

Household 12.5 14.3 14.9 15.3

Dissolved in Treatment Plants 5.5 12.6 17.0 18.6

Discharge on Surface Water 40.0 15.4 7.7 6.9

Production of pollution units (millions) by industry and households and the total discharge on surface waters

Wastewater Treatment Charges in the Netherlands

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Difficulties of achieving cost recovery

Designing and enforcing cost-recovery mechanisms in the wastewater sector is a complex process.

It requires arrangements (technical, institutional, legal, and financial) for a good monitoring system, including regulations and legislation on receiving water quality levels and emission standards.

An efficient revenue collection system should be in place (including the capacity to determine the right tariffs, to implement appropriate billing systems, and to enforce fines).

Moreover, polluters need to be willing to change their behaviour.

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The Costs involved in providing Sanitation Services

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Investment Options

Type of FinancingType of Financing CharacteristicsCharacteristics ConstraintsConstraints

Grant FinanceGrant Finance Can help overcome high Can help overcome high investment costsinvestment costs

Reduces pressure to Reduces pressure to identify efficient identify efficient solutionssolutions

Loans from Loans from Government and Government and Multilateral agenciesMultilateral agencies

Long grace and Long grace and repayment periodsrepayment periods

Matches expected facility Matches expected facility life to loan periodlife to loan period

Market FinancingMarket Financing

Commercial bank Commercial bank loansloans

Typically require a Typically require a public sector guaranteepublic sector guarantee

Revolving fundsRevolving funds Debt repayment risk is Debt repayment risk is spread out over a large spread out over a large diverified pool of diverified pool of borrowersborrowers

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Fully Public Sector

Fully Private Sector

Service contract

Management contract

Concession contract

BOT contract Divestiture

Increasing private sector involvement

…and the role of Government

Provider Enabler and Regulator

Lease

Another option?….Involvement of the Private Sector

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Essence: The government awards the private organization full responsibility for the delivery of infrastructure services in a specified area for a specified time (usually 20-30 years), including all related operation, maintenance, collection and management activities. Moreover, the concessionaire is responsible for any capital investments

Financing Structure: The concessionaire collects the tariff directly from the system users. The tariff is established by the concession contract (sometimes with back-up financing from the government).

Potential Strengths: Infusion of private capital, the combined responsibility of operation and investment provides an incentive for efficient investment decisions and innovation, less prone to political interference from the public sector.

Potential Weaknesses: Politically controversial and diificult to organize, requires strong regulation from the public sector, unpredictability of events over 20-30 years means frequent re-negotiation of contracts, open competition is limited to one time every 20-30 years

Management contract

Concession contract

BOT contract

DivestitureLease/Affermage

Service Contract

Involvement of the Private Sector

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Essence: Build-Operate-Transfer contracts are designed to bring private investment into the construction of new infrastructure plants. The contracts usually have a duration of 20-30 years.

Financing Structure: The private sector can recover its investments costs by operating the infrastructure during the time of the contract. It either collects tariffs from end-users or has an off-take agreement with the public sector to recover costs.

Potential Strengths: Infusion of private capital, suitable for construction of new infrastructure.

Potential Weaknesses: Very complex projects, limited competition between private companies due to the length of the contract, require strong government regulation

Management contract

Concession contract

BOT contract DivestitureLease/

AffermageService Contract

Involvement of the Private Sector IV

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Involvement of the Private Sector

Concession ContractExamples: Buenos Aires, Argentina

Selected Indicators

Indicator 1993

Water supply coverage 6.0 million (70%)

Sewerage coverage 4.9 million (58%)

Unaccounted for water 44%

Metering 4%

Collection rate 80%

Net income -$23 million

Employment per 1,000 connections 8.3

Source: Haarmeyer & Mody, 1998

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Involvement of the Private SectorSelected Indicators

Parameter Start Year 5 Year 10 Year 15 Year 20 Year 30

Potable water 70% 86% 90% 95% 97% 100%

Sewer 58% 66% 75% 84% 90% 95%

Primary treatment 4% 66% 75% 83% 90% 95%

Secondary treatment 4% 9% 16% 83% 90% 95%

Water system renovation

0% 9% 12% 19% 28% 45%

Sewer renovation 0% 2% 3% 4% 5% 5%

Unaccounted-for-water 45% 37% 34% 30% 28% 25%

Contract requirements

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Length of Time

Revenue (tariffs, fees, etc.)

Costs (capital investment, O&M, etc.)

Market size

Investment….and Tariffs

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Question…..?

Should the Private Sector be involved in the provision of wastewater services?

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Connection Fee

The connection fee for a sewerage connection can present a significant problem in many countries.

Buenos Aires: Connection costs – $1,000Many low-income residents have an annual income of less than $500 per year

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Connection Fee

Possible ‘solutions’ for high connection fees

SolutionSolution DescriptionDescriptionAmortisationAmortisation Payment of the connection fee is spread out Payment of the connection fee is spread out

Labour participationLabour participation Beneficiaries do part of the work in making Beneficiaries do part of the work in making the connectionthe connection

Grants/subsidiesGrants/subsidies Part of the fee is subsidised by an agencyPart of the fee is subsidised by an agency

Cross-susbsidisation Cross-susbsidisation mechanismsmechanisms

Connection fee of a particular population Connection fee of a particular population category is subsidised by another categorycategory is subsidised by another category

Micro-credit schemesMicro-credit schemes People form a particular population category People form a particular population category can loan money at favourable rates for the can loan money at favourable rates for the connection fee connection fee

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Connection Fee

Example: La Paz-El AltoReduction of the connection fee by:

1. New customers can lower the connection fee by supplying labour

Does not supply labour$180

Digs trench for household connection $150Digs trench for connection and network line

$130

2. Amortisation, allowing the ‘population most in need’ to pay the connection fee over 3 to 5 years

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Connection Fee

‘Participative Water Services’ in Buenos Aires