1 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

2 Outline 1.The traditional approach to financing wastewater management 2.The need for an alternative approach 3.Alternatives for Financing Wastewater Management

3 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%

4 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

5 Traditional Approaches to Financing Wastewater Management

6 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

7 Low tariffs covering only a small part of the costs

8 The problem of Undifferentiated Universal Service Moreover, the emphasis on traditional technologies leads to low service coverage…

9 Vicious circle (negative) Leading to a negative vicious circle… The need for an alternative approach

10 The need for an alternative approach In summary… Low service coverage Bad quality services Low-willingness to pay Low consumer-orientation Financially unsustainable

11 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

13 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….

14 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

15 Vicious circle (positive) Leading to a (positive) vicious circle of service improvement

16 Involvement of the Private SectorThe Traditional and the New Approach

17 Involvement of the Private SectorFull Service Cost

18 Sources of Finance Tariffs Grant Finance Grant Finance Loans from Government and Multilateral agencies Loans from Government and Multilateral agencies Market Financing - Commercial bank loans Market Financing - Commercial bank loans Revolving funds Revolving funds Other income….? (reuse of waste water) Other income….? (reuse of waste water)

19 Tariffs Influence the amount of wastewater produced in the sense that consumers are stimulated to produce less wastewater Influence the amount of wastewater produced in the sense that consumers are stimulated to produce less wastewater Cover (at least) operation and maintenance costs and part of the investment costs Cover (at least) operation and maintenance costs and part of the investment costs Be fair and equitable and have particular regard to the needs of the poorer members of the community Be fair and equitable and have particular regard to the needs of the poorer members of the community Be easy to understand for the consumer Be easy to understand for the consumer Be easy to administer and enforce Be easy to administer and enforce Tariffs for sanitation services should:

20 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

21 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

22 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.

23 Wastewater Treatment Charges in the Netherlands Wastewater treatment is financed by a water pollution levy. The water pollution levy is imposed on households and industry. For households the pollution levy is based on pollution equivalents, which is the equivalent to the amount one person produces per year. An average family pays three pollution equivalents ($150 per year)

Industry Household Dissolved in Treatment Plants Discharge on Surface Water Production of pollution units (millions) by industry and households and the total discharge on surface waters Wastewater Treatment Charges in the Netherlands

25 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.

26 The Costs involved in providing Sanitation Services

27 Investment Options Type of Financing CharacteristicsConstraints Grant Finance Can help overcome high investment costs Reduces pressure to identify efficient solutions Loans from Government and Multilateral agencies Long grace and repayment periods Matches expected facility life to loan period Market Financing Commercial bank loans Typically require a public sector guarantee Revolving funds Debt repayment risk is spread out over a large diverified pool of borrowers

28 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

29 Essence: The government awards the private organization full responsibility for the delivery of infrastructure services in a specified area for a specified time (usually 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 years means frequent re-negotiation of contracts, open competition is limited to one time every years Management contract Concession contract BOT contract DivestitureLease/ Affermage Service Contract Involvement of the Private Sector

30 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 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 Divestiture Lease/ Affermage Service Contract Involvement of the Private Sector IV

31 Involvement of the Private Sector Concession Contract Examples: Buenos Aires, Argentina Selected Indicators Indicator1993 Water supply coverage6.0 million (70%) Sewerage coverage4.9 million (58%) Unaccounted for water44% Metering4% Collection rate80% Net income-$23 million Employment per 1,000 connections8.3 Source: Haarmeyer & Mody, 1998

32 Involvement of the Private Sector Selected Indicators ParameterStartYear 5Year 10Year 15Year 20Year 30 Potable water70%86%90%95%97%100% Sewer58%66%75%84%90%95% Primary treatment4%66%75%83%90%95% Secondary treatment4%9%16%83%90%95% Water system renovation 0%9%12%19%28%45% Sewer renovation0%2%3%4%5% Unaccounted-for-water45%37%34%30%28%25% Contract requirements

33 Length of Time Revenue (tariffs, fees, etc.) Costs (capital investment, O&M, etc.) Market size Investment….and Tariffs

34 Question…..? Should the Private Sector be involved in the provision of wastewater services?

35 Connection Fee The connection fee for a sewerage connection can present a significant problem in many countries. Buenos Aires:Connection costs – $1,000 Many low-income residents have an annual income of less than $500 per year

36 Connection Fee Possible solutions for high connection feesSolutionDescriptionAmortisation Payment of the connection fee is spread out Labour participation Beneficiaries do part of the work in making the connection Grants/subsidies Part of the fee is subsidised by an agency Cross-susbsidisation mechanisms Connection fee of a particular population category is subsidised by another category Micro-credit schemes People form a particular population category can loan money at favourable rates for the connection fee

37 Connection Fee Example: La Paz-El Alto Reduction 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$150 Digs 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

38 Connection Fee Participative Water Services in Buenos Aires