Financeconceptnote

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Financeconceptnote

  1. 1. Draft and Informal Concept Notes – Not for Distribution Solid Waste Management Conceptual Issues on Cost Recovery, Financial Incentives, and Intergovernmental Transfers Author: Sandra Cointreau1 September 2005Solid Waste Systems – Cash Flow NeedsSolid waste management is a daily task that is never done. Every day brings new wasteto collect, streets to sweep, waste loads to haul and safely dispose. As local economiesdevelop, per capita waste generation increases in proportion to increased consumeractivity and related packaging. Tourism and other foreign business transactions maycause waste generation to increase faster than local consumption growth.Solid waste budgetary requirements in municipalities of developing countries aresubstantial. They commonly range from 20-50% of total municipal recurrentexpenditures. With the rise in contracting for private sector service delivery, therecurrent cost goes up, because capital investment by the private sector is reimbursedthrough their contract payments.When services are provided by government workers, solid waste budgets may besignificantly obligated to labor salaries and benefits. Fuel costs and consumables, such astires, also have precedence. Beyond these priority commitments, the solid waste budgetsmay not be sufficiently ample to buy spare parts to make repairs, replace collection bins,or purchase soil to cover waste in the landfill. In such situations, solid waste workersmay not be able to perform their job for lack of operable vehicles and/or consumables.Without spare parts, a portion of the fleet may be set aside to be cannibalized for spareparts. These circumstances then lead to a spiral downward and willingness to pay forservice diminishes as residents experience service irregularities.Good solid waste service occurs only where reliable, regularized and adequate cash flowis available. With adequate cash flow for recurrent expenditures, it is possible to arrangefor private sector involvement that would provide investment in new equipment andfacilities, and thus enable capital costs to be translated to recurrent debt service payments.Similarly, adequate cash flow enables municipalities to borrow from local commercial ornational development banks. Without adequate recurrent revenues, only transfers, grantsand borrowing on concessional terms are likely to be available.Solid Waste Governance – Who is Responsible?Municipalities own the solid waste that is put on their public streets, have full controlover who they allow as their agents to handle that waste, and are expected to providewaste management services from the source to the final disposal. This service is highly1 Sandra Cointreau, Solid Waste Management Advisor, The World Bank, Washington, DC; ,http://worldbank.org/solidwaste. Review and advice on urban finance guidance from Patricia Annez,Urban Finance Advisor, The World Bank, Washington, DC. Examples of various financial mechanismsby Francisco Grajales Cavioto, environmental engineer in the Bank’s Latin America EnvironmentalDepartment. Page 1
  2. 2. Draft and Informal Concept Notes – Not for Distributionvisible and it influences the perception of city functionality held by all residents andvisitors. The many surveys conducted by the World Bank have routinely demonstratedthat it is important to municipal residents and they are willing to pay for service that isconducted in a cost-effective manner. Follow-up surveys show willingness to payincreases after services have been improved.Inadequately collected and improperly managed solid waste generates significant localexternalities that affect, for example, local traffic, aesthetics, flooding, disease, odors, airparticulate levels, and water quality. There are few potential regional and globalexternalities, but these are quite controllable, at a cost, through pollution control systems.The primary regional and global impacts needing special controls are: regional airemissions from improperly controlled incineration (i.e., dioxins, furans and volatilizedheavy metals in stack gases), and global green house gases from improperly controlledwaste disposal (i.e., methane gas from sanitary landfills that do not have gas flaring orrecovery systems). Because solid waste systems have few externalities beyond localboundaries, it is appropriate for local people to manage their wastes within their localcapacity, including financial capacity.Solid Waste System Sizes - Are there Economies of Scale?Solid waste systems do not need to link to regional networks or depend on regionalresources, as do electricity and water. There are limited economies-of-scale justifyingextending management beyond municipal boundaries. And thus, following the objectiveof decentralizing services to the appropriate level of management that is able to captureeconomies and control externalities, municipalities have, and are expected to continue tohave, this sector responsibility.Regarding economies-of-scale, solid waste collection zones can be efficiently allocated toa single truck or cart, without adversely affecting cost of service. Contracting withprivate haulers can be done for those with only a single vehicle, even though there couldbe some economies and built in spare capacity from hiring private haulers with severalvehicles versus one. Large contract zones for collection are not needed, except where aninternational private operator is desired to mobilize expertise and major new investmentin a high-profile city or tourist area. A single small vehicle might serve as few as 10,000people/daily shift, while a large vehicle could serve as many as 60,000 people/daily shiftBeyond solid waste collection, transfer facilities have only modest economies-of-scale.Transfer facilities can be sized for service by only one transfer vehicle with multipleliftable containers or trailers, each about 20 tonnes capacity. Thus, a small scale transferstation would handle 80-120 tonnes/day, thus serving up to 240,000 people/daily shift.For treatment and disposal, economies-of-scale are more significant. Most of these typesof facilities are implemented through inter-municipal agreement. The flexibility of inter-municipal agreements, versus regional solid waste entities enables each facility to besized according to its needs, municipalities to partner according to their preferences andthe character of their wastes, and plants to be located relative to potential by-productmarkets (e.g., electricity, secondary materials, compost). Examples of economies-of-scale of treatment and disposal are noted below. • Although manual neighborhood compost facilities can be sized under 10 Page 2
  3. 3. Draft and Informal Concept Notes – Not for Distribution tonnes/day, municipal compost facilities using mechanized equipment would be economic with capacities of 200 tonnes/day (from up to 400,000 people/daily shift) to enable full use of loading and turning machinery. • For sanitary landfill, the economies-of-scale are based on the need to fully utilize heavy landfill equipment that has compaction ability based on its weight, as well as ability to push, spread, grade and cover waste. Typically, a landfill should handle at least 300 tonnes/day (from up to 600,000 people/daily shift). • Sophisticated processing plants such as waste-to-energy plants and anaerobic digesters need to have duplicate process lines so that one keeps working while the other is down for maintenance and repair. These types of plants are not considered appropriate for developing countries, but it is noted that they are typically at least 300 tonnes/day (from up to 600,000 people/daily shift).Inter-municipal agreements are the primary means for separately developing regionalfacilities. Responsibility thus remains in the hands of municipal governments. Even inthose less common situations where regional solid waste authorities are formed, it wouldbe common for municipal officials to participate as board members.Solid Waste Costs – Breakdown of Capital versus Operating Costs?Finance for solid waste management needs to cover capital, operating and maintenancecosts. While solid waste management is often quite labor intensive, the cost of labor indeveloping countries is so low that labor need not be the main expenditure in a well-managed solid waste service..For a perspective of how capital and operating costs break-down by solid waste activity,the following ranges are observed to be common ranges for well managed solid wasteservices in developing countries, as noted below. • For solid waste collection, capital costs range from 30-40%, labor costs range from 15-40%, and consumables and maintenance costs range from 30-45%. • For sweeping, capital costs range from 20 to 30 %, labor costs range from 50-70%, and consumables and maintenance costs range from 10-20%. • For transfer, capital costs range from 50-65%, labor costs range from 10-15%, and consumables and maintenance range from 20-30%. • For composting, capital costs range from 40-60%, labor costs range from 15-30%, and consumables and maintenance range from 10-20%. • For high-tech treatment, such as anaerobic digestion or incineration, capital costs range from 60-85%, labor costs range from 5-10%, and consumables and maintenance range from 10-30%. • For sanitary landfill, capital costs range from 40-70% percent, labor costs range from 10-20%, and consumables and maintenance costs range from 20-30%.Sources of Funds to cover Capital Expenditures – Options?Most municipalities are restricted from having renewal funds to replace capital assets.They also are restricted from saving monies today to cover the capital costs of tomorrow.Allowing this flexibility should be a part of putting municipal finances on a soundfooting. Borrowing for long-lived assets is typically a good solution because thisapproach allocates the costs to those who benefit from the assets in the future as well as Page 3
  4. 4. Draft and Informal Concept Notes – Not for Distributiontoday.Finance to cover capital costs may be obtained from the following potential sources: • intergovernmental transfers from central government, including earmarked and matching grants (sometimes supported by external assistance); • loans from specialized institutions or funds (sometimes supported by external assistance); • direct municipal borrowings from local development banks, communal funds, and commercial banks; • renewal funds from local solid waste user fees, including tipping fees, and special environmental/disposal taxes; • bond-issues for facilities that are potentially revenue generating, such as landfill gas recovery and compost facilities; and • private sector investment as part of a concession, private subscription or service contract.Municipalities may offer private sector investors a range of financial incentives that couldbe viewed as hidden subsidies. These include: • use of government land and/or facilities, • tax exemption, • customs duties exemption, • accelerated depreciation periods for taxation, • staffing support from government roles, • facility in obtaining permits, • improved regulatory enforcement to assure compliance with new systems, • assured source segregation to obtain quality wastes for resource recovery purposes, • revenue sharing of by-product sales revenues, • special utility pricing, • limited liability (as in the long-term post-closure liability of sanitary landfills) • development rights to completed and/or reclaimed disposal sites, in partnership with government.Solid Waste Services– Should There be Intergovernmental Transfers fromProvincial or Central Government?Municipalities in developing countries are seldom empowered by central and provincialgovernment to address their solid waste responsibilities in the most cost-effectivemanner. They are also commonly are restricted from developing sufficient localrevenues to cover expenses.For example, municipalities may be restricted from: • increasing local property taxes to include a designated amount for solid waste management; • creating new solid waste or environmental taxes; Page 4
  5. 5. Draft and Informal Concept Notes – Not for Distribution • creating and collecting solid waste user fees or landfill tipping fees; • contracting for service delivery beyond a one-year budget period; • tendering for any contractor above a certain allowed total contract price ceiling; • reducing redundant municipal employees to free up budget for contracting or capital investment; • issuing municipal bonds or borrowing for capital investment; • initiating inter-municipal arrangements that would capture economies-of-scale; and • entering into private sector concession agreements to design, build and operate new facilities.The preferred approach to addressing these issues is to delegate more authority tomunicipalities to address their local service delivery and related cost-recovery needs.These measures typically improve the overall financial health of municipalities for thisand other services. Experience with willingness to pay studies (see above) clearlydemonstrates scope to recover costs. Thus, it is generally not desirable to enshrinespecific subsidies for solid waste in intergovernmental arrangements.Hamstrung by central or provincial government restrictions, intergovernmental financialincentives (ideally temporary) from higher levels of government may be needed. Theymust be carefully approached and designed so that they do not become disincentives togood local revenue generation.Municipalities set standards for their perceived best practicable level of environmentalquality and public health protection that they believe they can reasonably attain andrequire of others in their jurisdiction, taking into account level of income and ability topay. On the other hand, provincial or central governments may wish to requiremunicipalities to meet higher standards, perhaps for downstream water quality ordownwind air quality needs, or perhaps for international agreements to which they havemade commitments.To help municipalities reach a higher standard of environmental protection, carefullyearmarked and time-limited intergovernmental incentives could encourage municipalitiesto address provincial or national targets. This is particularly relevant for public healthand environmental goals that affect people and resources beyond municipal boundaries,such as in the control of communicable diseases or pollutant discharges related to poorwaste disposal.Urban finance policy on the grants was discussed in detail within “Better Urban Services– Finding the Right Incentives”, authored by Bill Dillinger and published by the WorldBank in 1995, and summarized below: “Transfers can serve several important positive roles in the financing of municipal services. First, they permit central governments to influence the sectoral pattern of local expenditure – to use the power of the purse to induce local governments to undertake expenditures that are of national rather than local interest, compensating local government for the costs of services that the central Page 5
  6. 6. Draft and Informal Concept Notes – Not for Distribution government expects them to provide.”Where recommended, intergovernmental transfers would be accompanied by clearregulatory targets, accountability procedures and enforcement sanctions that holdmunicipal leaders and local governments responsible for handling the monies andachieving the intended outcomes.Given the scope for commercialization of solid waste management, the form ofintergovernmental incentive should be chosen such that it “crowds in” market sources offinance by subjecting projects to commercial appraisal and risk management criteria,using the subsidy as a temporary measure, in the form of a separate grant, for example, tomake projects viable. Carbon finance may be viewed as a global form of subsidy toencourage reduction of greenhouse gases.Before establishing transfers for solid waste management, hidden taxes on the sectorshould be considered, and if possible reduced, since this can be a more cost effectivemeans of achieving the same objective. Central and provincial governments influencesubsidies and pricing of various goods that in turn affect the value of solid waste by-products, and hence, how much money municipalities recover from disposal andprocessing activities. For example, subsidies on chemical fertilizer influence themarketability of compost; subsidies of electricity prices influence the grid prices that arepaid for renewable energy from waste; subsidies of logging lands and transport of rawmaterials influence the sale prices for recovered secondary materials. In such instances,if governments are unwilling to adjust existing subsidies and pricing policies, it may benecessary to balance these with subsidies for affected solid waste systems.Municipalities are sometimes burdened with extra service requirements but receive nocorresponding local economic development to enable increasing revenues. For example,tourist charters to beach resorts and remote islands are often booked from other locations,sometimes even from places outside of the country. Municipalities need to be allowed tocharge tourist entry fees, or receive adequate subsides, to cover the costs of extra servicerequirements caused by these tourists. If there is willingness to pay, as is often the case intourism, allowing municipalities to charge carries less overall fiscal burden, and is moredesirable. Concessions for resource extraction or industries may also be arrangedexternally, and the revenue benefits are often not passed on to the local governments thatare tasked with managing the waste. Passing through a user charge from concessionrevenues to municipalities is desirable in these instances. If this is not agreed, subsidiesmay be considered to cover the extra waste management needs of these concessions.Solid Waste Service – A Public or Private Good?Solid waste management as a public good. In part, this determination reflects the factthat uncollected and illegally discharged solid wastes adversely affect the general public,not only the individuals that are not participating in the proper management of theirwastes. Also, everyone benefits from the actions of various individuals to properlymanage their wastes.When user charges and tipping fees are not acceptable to various households,establishments, and private haulers, they may resort to illegal dumping of their wastes.This supports the public good argument, as no one should be excluded from service or it Page 6
  7. 7. Draft and Informal Concept Notes – Not for Distributionwould affect the service benefit to all. While a valid argument for many types of waste(such as demolition rubble), it is possible that a significant portion of illegal discharges ofmost solid waste types may be identifiable from mailing envelopes or other items withnames and addresses found in the waste. This is a tool for enforcement that is unique tosome solid waste categories, as opposed to the impossible task of trying to identify wherean illegally dumped load of pumped septage might have originated.Although solid waste management is a public good, there are limitations to the ability toact as a free rider and people are willing to pay for the service, so promoting costrecovery to the extent possible and affordable is good policy. Willingness to pay isgreatly enhanced when local residents perceive accountability and transparency in themanagement of the fees charged for solid waste management services, thus collectingmoney in a segregated account for the sole use of the solid waste sector is a useful toolfor financial management. Ideally, there should be one entity with full solid wasteresponsibility to enable accountable and transparent services. When the solid wasteactivities are disaggregated (e.g., collection equipment maintained by a central workshop,fleets managed by an engineering department, field supervision conducted by healthinspectors, and collection workers operating under a solid waste manager) accountabilityis virtually impossible.From the perspective of encouraging private sector participation in the solid waste sector,evidence of self-sustaining revenues at the local government level may affect the privatesector’s willingness to invest in solid waste infrastructure and enter into long-term serviceagreements. In a few cases, central government payment guarantees of have enabledcity-wide contracting for all solid waste services (as in Senegal, where MIGA alsoprovided a non-commercial risk guarantee).Solid Waste Revenue Generation – Payment by Fee or Tax?There are few cities in developing countries that attempt to achieve full cost recovery forcollection, recycling, transfer, treatment and disposal systems. Activities such as streetsweeping, cleaning of public areas (e.g., public markets), servicing public institutions andbarracks, and removal of clandestine waste piles easily comprise 20-40% of the totalwaste collection effort.People in developing countries typically are willing and able to pay for the solid wastecollection service that they receive directly at their door and within their immediateneighborhood. Few appreciate the rationale to contribute to city-wide street cleaning,clean up of parks and other public areas, emptying communal collection bins, promotingrecycling activities, providing secondary collection beyond their neighborhoods,transferring waste long distance, treatment or sanitary landfill. When residents directlypay a private operator to collect waste from their home or establishment, it is particularlydifficult to convince them that a second fee is justified to government for servicesprovided beyond the primary collection service.Ideally, it would be efficient and effective to fully cover all solid waste costs throughsolid waste tariffs included within the property tax, designating on the tax bill the solidwaste portion to be set aside for the solid waste sector. However, in most developingcountries, given the inadequate property cadastral and appraisal systems, poor taxcollection efficiency, and the large number of illegal settlements, recovering some Page 7
  8. 8. Draft and Informal Concept Notes – Not for Distributionpayment from all residents through property tax is typically not feasible.Solid Waste Fees – Cross Subsidies among Service Recipients?Solid waste collection commonly costs more for service to the poor than the wealthy, andcosts vary with settlement patterns, road conditions, and traffic levels. The poor havesmall quantities of waste in containers that are less easy to gather and load than thosefound in wealthy neighborhoods. Access for collection vehicles is better in wealthyneighborhoods. It costs much less to collect waste in a large container from a big hotel orcommercial establishment, on a per tonne basis, than it costs to collect waste in basketsand cartons in front of slum dwellings.A practical and reasonable solution to this problem from a public finance perspective is tocross subsidize different consumers across a benefit area, and link charges broadly tocapacity to pay, for equity reasons. As long as the service is well-managed, the cross –subsidies needed should not be so significant as to disaffect more affluent users.Solid waste treatment and disposal could also cost more for the waste of the poor than thewealthy. The waste from the poor has a lot of water, ash and sand in it, and seldom hasvery much combustible or recyclable material that could generate resource recoveryrevenues. Charges for various treatment and disposal facilities should be based on city-wide costs for environmentally safe waste management and proportioned fairly by abilityto pay. To minimize transport emissions and energy consumption, comparable tippingfees at the various unloading facilities are essential.To avoid the administrative costs of separate collection of yet another charge or taxuniquely for solid waste, an effective expedient involves tying a solid waste surcharge toutility bills, such as electricity or water. This solution works well when utility servicescover most households and charges are linked to consumption.Fees that reflect affordability (and related consumption that leads to waste) are relativelyeasy to develop and preferable to customer-specific cost of service fees. For households,this typically means setting the tariff based on one of the following: • Size of property, category of neighborhood (by income) and related property tax, • Water consumption and billings, and • Electricity consumption and billings.In order to discourage excessive waste generation, waste generators that regularlyproduce large quantities are typically charged by the size of their containers. The cut-offfor a large generator is any establishment with containers that can hold, for example, over1 cubic meter of waste per day.As countries develop and solid waste systems become more regulated, it becomespossible to increase quantity-based charges. This may be done, for example, by sellingspecially colored or labeled plastic bags for a price that would enable cost recovery andthen collecting only waste that is in these specially marked plastic bags. At this time, fewlow and middle income countries have the monitoring and enforcement system thatwould enable this system to be put in place without significant potential for illegaldumping.Solid Waste Revenues – Additional Sources of Income? Page 8
  9. 9. Draft and Informal Concept Notes – Not for DistributionWhen the electricity and water authorities will not allow the solid waste fees to beincluded in their billing systems, it is necessary to collect monies through a wide varietyof sources. These sources of revenues may also be used to augment the funds availableto cover costs: • penalties for littering, clandestine dumping and other solid waste infractions • license fees from collectors/haulers of special categories of solid waste (e.g., construction/demolition debris, medical waste, bulky waste); • share of gross revenues from collectors/haulers having a franchise (i.e., zonal monopoly) for waste collection; • revenues from sale of recyclables (e.g., secondary materials), recovered resources (e.g., compost), and energy (e.g., steam, electricity) from treatment and disposal facilities; • revenues from sale of avoided or reduced emissions (e.g., methane expressed as carbon dioxide equivalent green house gas); • tipping fees from individuals, private establishments, and waste haulers at transfer, treatment, and disposal facilities; and • landfill or general environmental taxes.SummaryThis is a discussion concept note, which outlines financial options and experiences. Eachcountry needs to develop financial arrangements and incentives that match theirdevelopment policies and plans. No specific cost recovery mechanism or financialincentive is recommendable across the board. In general, decades of experiencerecommends a strong move away from intergovernmental transfers for solid wastemanagement and toward decentralization of financial authority to local governments.However, in a less than perfect world, new environmental and health goals maynecessitate financial support to local governments from provincial and centralgovernment funds. Page 9

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