Incentivizing Investments and Ensuring Cost Recovery for Operating Wastewater Treatment

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Prepared by Jonathan Neil Parkinson for Conference on DEWATS for Urban Environments in Asia, 25-28 May 2011 Crowne Plaza Galleria, Manila Philippines.

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Incentivizing Investments and Ensuring Cost Recovery for Operating Wastewater Treatment

  1. 1. Editorial Manager(tm) for IWA Conferences Manuscript DraftManuscript Number: IWA-7742R1Title: Incentivizing investments and ensuring cost recovery for operating wastewater treatmentsystems in AsiaArticle Type: Full PaperKeywords: Cost recovery; Economic benefits; Financing; Performance monitoring; WastewatertreatmentCorresponding Author: Jonathan Neil Parkinson, B. Eng (Hons) MSc DIC PhDCorresponding Authors Institution:First Author: Jonathan Neil Parkinson, B. Eng (Hons) MSc DIC PhDOrder of Authors: Jonathan Neil Parkinson, B. Eng (Hons) MSc DIC PhD;Anand Chiplunkar, PhDManuscript Region of Origin: UNITED KINGDOM
  2. 2. final paper for DEWATS conferenceClick here to download Manuscript: Motivating investments and promoting sustainability of DEWATS - submission 07.05.11.doc (Initial page layout) Motivating investments and promoting sustainability of DEWATS J.N. Parkinson *, A.Chiplunkar **, I. Blackett *** * International Water Association, Alliance House, 12 Caxton Street, London SW1H OQS (E-mail: jonathan.parkinson@iwahq.org) ** Asian Development Bank, 6 ADB Avenue, Mandaluyong City 1550, Metro Manila, Philippines (E-mail: achiplunkar@adb.org) ** Water and Sanitation Program, Indonesia Stock Exchange (BEI), Jakarta, 12190, Indonesia (E-mail: iblackett@worldbank.org) Abstract There are considerable economic benefits associated with investments in improved sanitation and excreta management. However, existing policy frameworks are ineffective in the translating these benefits into the necessary financial incentives that are required to mobilise capital investment and to ensure financial sustainability. Bearing this in mind, the authors consider why it is proving to be so difficult to instigate any comprehensive change. To overcome the current status quo, the authors argue for a need to approach wastewater management from a more localised perspective in which standards and strategies for achieving these standards are developed in close partnership with local stakeholders using results from cost benefit analysis to support the decision-making process. The authors make the case that an important part of the process is to ensure that all economic benefits are monetized and realised at different levels. In addition, financial incentives linked to performance of wastewater treatment plant operators is considered to be key towards achieving environmental objectives. Keywords Cost benefit analysis; Cost recovery; Economic benefits; Financing; Performance monitoring; Regulation; Wastewater treatment; Water quality standards INTRODUCTION A lack of urban sanitation coverage and systems for collection and treatment of wastewater, septage and fecal sludge is widespread throughout Asia. Even in situations where systems exist, facilities and infrastructure are frequently poorly operated and maintained. As a result, waterbodies throughout the region continue to be degraded by pollution from uncontrolled discharges of untreated wastewater arising from inadequate and incomplete urban sanitation systems. The two main impacts are those that directly affect human health as a result of transmission of waterborne diseases and those that degrade the quality of water resources and the environment. Some governments recognize the significance of these impacts and have developed policies which aim to protect the health of the populations and the water resources within the counties that they govern. However, even where such policies exist, the Asian Development Bank (ADB) and other agencies still find it challenging to get policy makers and managers at national and local government levels to translate these policies into practice and develop strategies to tackle wastewater management. A typical example comes from China where it is estimated that only 56 percent of municipal wastewater is treated, and often not to acceptable standards. As a consequence, the Hai River is the most polluted river in the PRC and more than 50 percent of surface water in the river basin is rendered unusable for any beneficial use (MEP 2010). This is not an unusual situation in China and also applies in other parts of Asia. This situation is paradoxical given the fact that there are obvious health and environmental benefits that can be achieved as a result of investments in improving coverage and waste management. Even in situations where investments have been made, the efficacy of the investments to reach the desired result is severely compromised when wastewater treatment assets are poorly operated or maintained. For example, a report by the Central Pollution Control Board (CPCB) in India revealed
  3. 3. that up to 39 percent of wastewater treatment facilities in the country breached environmentalregulations (CPCB, 2005). In China, more than 1,000 wastewater plants were built between 2000and 2006, but the utilization rate is only 60 percent. About 50 plants in 30 cities are operating atbelow 30 percent capacity, and some are left idle, mainly because of inadequate wastewatercollection facilities and because revenues collected from customers are transferred to the generalcity budget and not used to ensure that treatment plants have the resources needed to operate.Operational efficiency is also low, mainly because plants carry out only primary treatment. Even inShanghai the efficiency is only 10–30 percent (Shalizi 2008).Additionally, there is also a lack of institutional capacity and resources in national agencies toregulate effectively; especially given the high costs incurred in establishing and maintainingeffective regulatory instruments. This may be as a result of the use of inappropriate andunsustainable technologies which were installed in pursuit of aspirational standards. This situationis exacerbated by the uniformity and inflexibility of standards set by central government agencies.The fact that wastewater discharge standards in developed countries have been developedprogressively as societies reached higher levels of affluence and environmental awareness isfrequently overlooked (Johnstone and Horan 1996). Government monitoring and enforcementprograms are having only limited impact, because of selective application of the laws and low levelsof fines at the provincial and central levels, combined with weak enforcement of rules at the locallevel, which diminish the deterrence value of regulations. Regulations are also incomplete insofar asload-based standards are absent and the standards that are set are not achievable given China’scurrent technological capabilities (Shalizi 2008).In this paper, the authors explore the economic benefits of sanitation and wastewater treatment inrelation to the health benefits, reduced pollution of surface and groundwater and wastewater reuse.They consider how the economic benefits may be translated into financial incentives to provide anincentive for wastewater systems to be well operated and maintained. The applicability ofcentralised standards and regulation is also open to question and other more localised andincremental forms of regulation need to be considered.ECONOMICS OF SANITATION AND WASTEWATER MANAGEMENTSome studies focus on the health benefits in the household domain whilst others focus more on thebenefits of wastewater treatment. The Water and Sanitation Program’s (WSP) Economics ofSanitation Initiative (ESI) has looked comprehensively at both the household and public domainand, based upon this analysis, Parkinson and Blume (2010) summarize the following economicbenefits:• Time benefits: as a result of closer access to a toilet and shorter waiting times at publictoilets (resulting in additional time for work or study), and time gains associated with caring for thesick.• Health benefits: increased productivity and income; reduced expenditure on health care.• Education: increased attendance at school and improved cogitative ability.• Improved water quality: reduced costs of provision of water supply for drinking and otherpurposes, and enhanced productivity of aquatic (and to a lesser extent terrestrial) ecosystems.• Environment quality: increased land value due to enhanced environmental conditions.• Tourism: potential for increased revenue from tourism.These benefits can have a substantial impact on the economy as a whole which can be quantified interms of the benefit to people whose livelihoods depend upon the quality of the environment. In thisrespect, although economic analysis is based on an ’human centred’ viewpoint on the value of theenvironment, it provides a useful way of identifying and subsequently quantifying the full range ofimpacts. The benefits that are not directly attributable to the proposed intervention are known asexternalities. For example, these may relate to reuse of treated water which can have positiveexternalities related to the increase in water availability and potential savings in the use ofagricultural fertilizers. The less tangible but nonetheless important economic benefits relate toaesthetics, such as when an area becomes more attractive to live and work in; thus increasing landprices and real estate.
  4. 4. QUANTIFICATION OF ECONOMICS BENEFITSEconomic benefits that cannot be attributed directly to financial expenditures or revenue can bequantified in monetary terms and there are various methodologies that can be employed for thispurpose. Cost-benefit analysis (CBA) is widely accepted as a decision-making support tool tocompare the economic viability of different proposals in which benefits are compared using acommon analytical methodology. Shadow pricing is a way of monetising environmental benefits inwhich wastewater treatment benefits are calculated as the equivalent of the environmental damageavoided. All identified benefits are translated into a common monetary language and economicviability occurs where benefits outweigh costs and the result is positive.Economic benefits of sanitationIn South East Asia, the ESI study commissioned by WSP estimated that Cambodia, Indonesia, thePhilippines and Vietnam (WSP (2007) lose an aggregated USD 2 billion a year in financial costsdue to poor sanitation (equivalent to 0.44% of their GDP) and USD 9 billion a year in economiclosses (equivalent to 2% of their combined GDP). These figure are important for advocacy purposesto lobby politicians to invest in improved sanitation. However, further analysis of the results isnecessary to understand what benefits are attributed towards household level sanitation and whatare attributed to investments in additional facilities and infrastructure for wastewater treatment. Asan example of how these cost may be disaggregated, Table 1 shows the benefit-cost ratios and costper disability life year averted (DALY) by intervention in urban areas in the Philippines. The resultsare presented for ideal settings in which it is assumed that facilities are performing according totheir design and also under actual settings which takes into consideration the fact that manyfacilities are not well operated or maintained and therefore the actual benefit realised is lower thanthe design value.Table 1. Benefit-cost ratios of various types of urban sanitation in the Philippines (Rodriguez et al2010). Note: These results are not for citation as they are draft and unpublished. Cost per Benefit-cost ratios in disability life urban areas, by year averted intervention (DALY) (ideal setting) 000 pesos under ideal under actual settings settingsShared and Community toilets 131 2.9 1.7communal Shared toilets 115 2.3 1.3facilitiesOn-site Pour flush to pit 126 5.1 3.3sanitation Urine Diversion Dry 459 1.5 1.3(household Toiletlevel facilities) Pour-flush toilets to septic tank No desludging 430 5.1 4.1 Sludge collected and 383 3.8 2.7 treated off-siteWaterborne Sewers connected to 434 4.3 3.6sanitation and decentralized conventionalwastewater treatmenttreatment
  5. 5. The results show that all interventions show positive economic benefits which justifies the need forinvestment and potentially the use of targeted subsidies. The lower cost sanitation options deliverrelatively high economic benefits for each unit of investment, but when actual performance is takeninto account, the reduced cost-effectiveness ratios strengthen the case for off-site treatment wherethere is greater opportunity for greater management control and therefore improved performance.The results also show that the installation of communal and shared toilets can be a cost-effectiveway of reducing the transmission of diarroheal diseases as indicated by the relatively low costs perDALY averted. But these costs are observed to be relatively high (> 3000 US$), which is attributedto the relatively low rate of child mortality in the Philippines, meaning that deaths account for themajor share of the DALY burden. But the DALY results do not consider the environment benefitsrelated to waste treatment and/or reuse and providing low cost sanitation access (as in MDG)without proper disposal of wastewater or sludge still leads to degradation of environmental quality.Economic benefits of wastewater treatment and reuseThe results from the WSP study in the Philippines presented above indicate either comparable orhigher cost benefits of investments in waterborne sanitation and wastewater treatment relative toother investments. However, the results from other studies demonstrate that the economic benefitsdepend upon the type and use of the receiving water into which the wastewater is discharged. Forexample, Hernández-Sancho et al (2009/2010) used CBA to assess the economic viability ofvarious types of wastewater treatment plants (WWTPs) in Spain. The lowest relative benefit wasidentified to be in those situations where wastewater is discharged into the sea due to the dilutionand dispersion of pollution in marine waters. The greatest environmental benefit was found to beassociated with discharge into wetlands because these areas have high ecological value and aremore sensitive to pollution. Interestingly, nutrient removal (in particular phosphorus) was identifiedto be the most cost-beneficial form of wastewater treatment; whilst treatment of suspended solidswas observed to be the least environmentally beneficial action. Molinos-Senante et al (2010b) alsoconcluded that phosphorus recovery is viable not only from sustainable development perspectivebut also from an economic point of view.With respect to the quality of wastewater for reuse in agriculture, Lavee (2011) analysed theimplications on the cost–benefit of wastewater treatment plants in Israel as a result of changes in theregulatory standards. The study showed that the introduction of stricter standards (and thereforemore costly wastewater treatment plants) would result in greater net economic benefit when all theexpected benefits are monetized. Haruvy (1997) compared various wastewater reclamation andreuse options in Israel looking at the implications of changes in treatment levels and location ofreuse. Estimated costs include those of treatment, storage and conveyance, while benefits comprisethe value of agricultural output, the decrease in fertilization costs, and aquifer recharge.Environmental impacts that were considered in the analysis related to contamination of groundwaterby nitrates and resultant health risks. According to the analysis, wastewater irrigation may saveUS$0.50-0.60 per cubic metre of wastewater compared with river disposal in the center of Israel.Hernández-Sancho et al (2009/2010) also looked into the economic benefits of reuse of treatedwastewater. They found that the sale of treated wastewater resulted in an average net profit for thewastewater treatment and concluded that reuse offers significant economic benefits because itreduces the pressure on conventional water resources, whilst simultaneously reducing pollution ofreceiving water courses.BENEFITS OF DECENTRALISED APPROACHES TOWARDS WASTEWATERMANAGEMENTClearly there are economic benefits in investing in both toilets (household, communal and public)and systems for collecting, treating and reusing wastewater. The key question remains whether thisis best achieved at the local level using decentralised systems or at a large scale using centralisedsystems. There is no global answer to this, as the economic viability of sanitation systems isdependent on site-specific conditions and the potential for the productive use of the waterbodiesinto which the residual wastes are discharged. However, given the high costs of centralised
  6. 6. sanitation systems, it is logical to move towards a system in which the economic benefits arerealised as locally as possible.The greater the level of decentralization, the more opportunity there is to bring wastewatermanagement down to a local level whereby the economic benefits are more effectively realised bylocal stakeholders. Evidently, in denser urban areas, decentralised systems become difficult toconstruct once developments have already used all available space. But it should not be assumedthat decentralised systems cannot be installed in urban areas as there are often pockets of urban landthat can be used for smaller wastewater management facilities. In these situations, the use of theland for wastewater treatment is not necessarily a technical problem, but more a socio-politicaldecision.Setting and regulating standards for wastewater disposalAs noted above, standards set by centralised agencies can be restrictive and constrain investment.This is particularly a problem for decentralised systems which are not always capable of achievinghigh standards, unless a three-stage treatment process is adopted. The failings of the uniformstandard approach adopted by central government agencies necessitates a need to consider policiesand standards that are congruous with local needs. Johnstone and Norton (2000) note that theassimilative capacity of the water body is different in different environmental settings andaccordingly the standards can be linked to the intended beneficial uses. Thus, in some cases, theremay be a need to introduce new or amend existing standards where unrealistic standards havealready been introduced. Johnstone and Norton (2000) concluded that there is a need for a phasedapproach to the introduction of standards. Von Sperling (2000) describes further the benefitsassociated with a stepwise implementation of standards to achieve a gradual improvement of thewater or wastewater quality,Even though researchers working in specific situations have shown that higher standards can resultin higher economic gains and are therefore justified, this approach requires additional capital whichis often lacking. Given this situation, a phased introduction of investment may be an alternative,although this too needs to be costed for the specific situation. For example, satisfying the EuropeanUnion’s water quality objectives for minimum dissolved oxygen is estimated to require a capitalinvestment of about US$ 65 million, whereas a lower standard of 6 mg/l would cost US$ 26 millionand a year-round minimum DO standard of 4 mg/l would cost US$ 13 million (Somlyody andShanahan 1998). In Asia, the costs may be quite different depending upon the type of technologyadopted which will impact upon the results from the CBA. CBA is also influenced by operationaland maintenance costs (OPEX) but these data are scarcer. According to EPSAR (2009), the averageWWTP operating costs are 0.12, 0.26 and 0.32 €/m3 for primary, secondary and tertiary treatmentrespectively. These are only indicative as these data are specifically relevant to the Spanish context,but nonetheless illustrate the fact that different levels of treatment required considerably differentlevels of investment.PARTICIPATION FROM LOCAL STAKEHOLDERSOne of the other key benefits of the decentralised approach is that it provides greater opportunity toinvolve stakeholders in the derivation of policy and standards that are appropriate for the localcontext. Enforcement by local stakeholders may be considered as means to regulate and to holdthose responsible for pollution accountable. The development of policies to prevent the degradationand depletion of water resources requires determining their value in social and economic terms andincorporating this information into the decision-making process (Hernández-Sancho et al 2010).Thus, as well as the catchment approach being logical from a technical perspective (i.e. to derive apollution control strategy that is approach for local water bodies), it also make sense from theperspective of ensuring that local stakeholders are in agreement with the proposed standards and thestrategy for pollution reduction in light of the costs incurred.This approach is being promoted in Brazil where implementation of the PRODES programmewhich was launched in 2001. PRODES requires that a river basin committee (RBC) is operative andis involved with the implementation of water charging in the basin and effluent discharge reduction
  7. 7. levels approved by the committee. It requires also that a social agreement is entered into betweenlegitimate representatives of all stakeholders: the Federal Government through the BrazilianNational Water Agency (ANA), the State Governments; the private sector and civil societylegitimate representatives. Subsequently the RBC should agree to the investment programme via anagreement signed with the Municipal Authority.POTENTIAL FOR OUTPUT BASED FINANCING TO INCENTIVISE INVESTMENTSAND PROMOTE OPERATIONAL SUSTAINABILITY OF DEWATSThe PRODES programme launched in Brazil described above involves an innovative financingfacility that aims to encourage public and private companies to implement new treatment plants andto improve the performance of existing wastewater treatment systems based upon a system offinancial incentives according to the monitored reduction in pollutant loads. The concept of theprogramme is innovative because, instead of financing civil works and equipment, it finances theimplementation of new wastewater treatment plants via a series of financial instruments based uponthe treatment of wastewater according to a set of predetermined standards. ANA also providesfinancing for expansion or retrofitting of treatment plants, provided that these are able to lead toimprovements in the pollutant load removed and treatment plant efficiency. Payments are madeavailable only after the achievement of the agreed goals on water quality indexes are demonstrated.The assessment of compliance of the treatment plant is made by ANA according to a set of rules,based on a process of self-evaluation and auditing, which specifies sampling frequency, compliancepercentage and other criteria. Oliveira et al (2007) argue that this approach has considerablepotential as part of a comprehensive pollution mitigation strategy. This approach may have potentialfor application in Asia, but success is dependent on the development of a standardised framework ofperformance evaluation for regulatory purposes.CONCLUDING REMARKSIn contrast to water supply and sanitation services, the benefits of wastewater treatment are lessobvious to individuals and also more difficult to assess in monetary terms. Although wastewatertreatment has many associated environmental benefits, these are often not calculated because theyare not set by the market (Molinos-Senante et al 2010a). There is however an increasing body ofevidence that indicates that wastewater treatment is economically viable but this depends on the fullrange of environmental benefits being included in the analysis. In general, studies show that morecomplete and advanced systems that achieve higher standards of environmental health are also morecost-beneficial per unit of investment. There are however more costly and therefore require greaterlevels of investment as well as more advanced systems for operation and maintenance.Therefore, the two main constraints are access to finance and development of technical andmanagerial capacity to be able to operate and maintain wastewater systems. Underlying both ofthese constraints is the lack of political incentive to invest in the first place and lack of incentivefrom an operational perspective to ensure that systems are well operated. The results from financialand economic analysis can play a key role in advocacy to politicians that investing in sanitation andwastewater management systems is cost-beneficial and does not necessary result in an ongoingdrain in financial resources if local stakeholders sign up to a policy that is perceived to result inenvironmental health improvements that will benefit the local community. Identifying theappropriate standards is key in this process as they need to be congruous with these demands andthe local context.There is therefore a need to develop and apply methodologies for economic analysis that can beused to support decision-making and policy development at the local level rather than using theresults from other studies to make generic conclusions about the applicability of specifictechnologies. Central governmental regulatory agencies should embrace these contemporaryapproaches and consider how they make work effectively with local authorities to support decision-making and policy development at the local level. These approaches are envisaged to have greaterpotential for achieve more widespread and long-term improvements in sanitation and wastewatermanagement than are currently achieved.
  8. 8. REFERENCESCPCB (2005) Status of Sewage Treatment in India. Central Pollution Control Board, Dehli, November 2005EPSAR. Manual de gestión 2009. http://www.epsar.gva.es/sanejament/quienes-somos/ INFORME-DE-GESTION-Castellano.pdf (In Spanish).Haruvy, N. (1997) Agricultural reuse of wastewater: nation-wide cost-benefit analysis. Agriculture, Ecosystems and Environment 66 (1997) 113-119Hernández-Sancho F, Molinos-Senante M, Sala-Garrido R. (2009). Environmental Benefits of Wastewater Treatment: An Economic Valuation. Earth and Environmental Science Risk Management of Water Supply and Sanitation Systems. NATO Science for Peace and Security Series, 2009, Part 4, 251-260, DOI: 10.1007/978-90-481-2365-0_24Hernández-Sancho F, Molinos-Senante M, Sala-Garrido R. (2010) Economic valuation of environmental benefits from wastewater treatment processes: an empirical approach for Spain. Science of the Total Environment 408 (2010) 953–957Johnstone, D. W. M. and Horan, N.J. (1996). Institutional developments, standards and river quality: A UK history and some lessons for industrialising countries. Wat. Sci. Tech., Vol. 33, No. 3, p. 211-222.Johnstone, D. W. M. and Norton, M R. (2010). Development of Standards and Their Economic Achievement and Regulation in the 21st Century. Paper presented at C.I.W.E.M/Aqua Enviro joint Millennium Conference. University of Leeds, April 2000.Lavee, D. (2011), A cost–benefit analysis of alternative wastewater treatment standards: a case study in Israel. Water and Environment Journal, 25: no. doi: 10.1111/j.1747-6593.2010.00246.xMEP (2010) Report on Environmental State of China, 2009”, The Ministry of Environment Protection, Beijing.Molinos-Senante M., Hernández-Sancho F., Sala-Garrido R. (2010a) Economic feasibility study for wastewater treatment: a cost-benefit analysis. Sci Total Environ. 2010 Sep 15;408(20):4396-402. Epub 2010 Jul 29.Molinos-Senante M., Hernández-Sancho F., Sala-Garrido R. and Garrido-Baserba, M. (2010b). Economic Feasibility Study for Phosphorus Recovery Processes. AMBIO DOI 10.1007/s13280- 010-0101-9Johnstone, D W M and Norton M R (2000). Development of standards and their economic achievement and regulation in the 21st Century. Paper presented at C.I.W.E.M/Aqua Enviro joint Millennium Conference. University of Leeds, April 2000.Oliveira, S. Parkinson, J. and von Sperling M. (2006). Wastewater treatment in Brazil: Institutional framework, recent initiatives and actual plant performance. Journal of Technology Management and Sustainable Development. 5 (3) Pp 241-256Parkinson, J. and Blume, S. (2010) Improving the robustness of financial and economic analysis of sanitation systems. IRC Symposium 2010: Pumps, Pipes and Promises, Costs, Finances and Accountability for Sustainable WASH services. The Hague.Rodriguez et al (2011) Economic Assessment of Sanitation Interventions in the Philippines. A six- country study conducted in Cambodia, China, Indonesia, Lao PDR, the Philippines and Vietnam under the Economics of Sanitation Initiative (ESI). Draft For Peer Review May 2010 (forthcoming).Shalizi, Z. (2008). Water and Urbanization in “China Urbanizes: Consequences, Strategies, and Policies”. Eds . Shahid Yusuf and Anthony Saich. Chapter 7, pp 157 – 179. World Bank, WashingtonSomlyody, L. and Shanahan. P. (1998). Municipal Wastewater Treatment in Central and Eastern Europe. Washington: The Word Bank.von Sperling. M. (2000). Stepwise Implementation of Water Quality Standards in Developing Countries. XXVII Congresso Interamericano de Engenharia Sanitária e Ambiental ABES - Associação Brasileira de Engenharia Sanitária e Ambiental 1 V-066.WSP (2007). The Economic Impacts of Sanitation in South-East Asia. Water and Sanitation Program, World Bank. New Delhi, India

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