SMAP III Final WorkshopSMAP III Final WorkshopMarseillesMarseilles

Optimizing Urban Wastewater Optimizing Urban Wastewater Investments Along the Investments Along the Mediterranean Coast: Mediterranean Coast:

The Case of EgyptThe Case of EgyptJune 29, 2009

World Bank/METAP and EC/SMAP III

Decision makers are unaware of the Decision makers are unaware of the economic and financial implications of economic and financial implications of

environmental degradationenvironmental degradation Serious environmental problems related to waste

are a drain on the economy – How much is access to sanitation and good hygiene worth?

While the investment costs of providing eg: and sanitation services are relatively well known:– the benefits resulting from such investments are more

difficult to quantify There is therefore a need to quantify the benefits or

“costs avoided” – For the government to take informed policy decisions

Yet Governments Tend to Overspend Yet Governments Tend to Overspend on their Scarce Financial Resourceson their Scarce Financial Resources

Goverments tend to finance large infrastructure investments such as waste water collection and treatment based on engineering and technical costs only

Technology is the main driver ( primary secondary, tertiary treatment) in order to meet strict and stringent standards

Environment benefits are assumed to be generated as a result of such investments without quantification of these benefits

There is however a proposed methodology There is however a proposed methodology for optimization of the scarce financial for optimization of the scarce financial

resourcesresources Estimation of the cost of inaction

– To assign a monetary value on the damages resulting from environmental degradation caused by lack of waste water collection and treatment

Estimation of the cost of mitigation– To estimate the averted cost of inaction i.e

estimating the benefits for a particular reduction of pollutants

Provision of options for determining tradeoffs to balancing WW investments with benefits (COED) by using the BOD reduction as an entry point

Why estimating the Cost of Inaction?Why estimating the Cost of Inaction?

Environment is a public goodIt is affected by externalitiesAs a result, the externalities lead to market

failure as prices do not reflect the true social costs or benefits of an action

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Algeria Egypt Morocco Tunisia

COED, % of GDP

Cost of protection,% of GDP

% of GDP

Optimization of Optimization of Urban Wastewater Investments Urban Wastewater Investments Along the Mediterranean Coast Along the Mediterranean Coast

Comparison of COED and Cost of ProtectionComparison of COED and Cost of Protection

Source: METAP Reports 2005

Waste Water Cleaning is expensive Waste Water Cleaning is expensive US$ 650 million per annumUS$ 650 million per annum

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50

100

150

200

(US$

Mill

ion)

Algeria Egypt Lebanon Libya Morocco Syria Tunisia WestBank/Gaza

Country

Required vs Planned Annual WW Coastal Urban Investments to Decrease BOD by 50% over 2005-10 (US$ million in 2005 prices)

Required Annual Investments

Planned Annual Investments

Source: Doumani , 2007 for required investmentsNAP 2003, UNEP/MAP for planned investmentsPopulation data: Plan Blue

Advantages of such MethodologyAdvantages of such MethodologyConformity with the MDG # 7 on environment

sustainabilityExternalities are being internalized Undertaking Smart Investments Optimization of scarce resourcesProvision of rationale for investment justificationsOffering a seat to the Ministry of the Environment

in participating in the budgeting of large infrastructure projects

However for everyHowever for every methodology methodology there are some assumptions and there are some assumptions and

hypotheseshypotheses Urban Scope: Neither industrial nor rural effluents considered. Med coastal tourism only represents 8% of total Tourism. BOD per capita is set at 60 grams/capita/day Primary removes 40% and secondary 80% BOD Midpoint investment cost/capita are $100 for connection, $40 for

primary treatment and $100 for secondary treatment Amortized investments over 2005-20 period not considered (old

wastewater treatment plant). Carbon funding/wastewater reuse were not considered due to

time/funding constraints

Application of the methodology : the Application of the methodology : the Case of the Northern Coast of EgyptCase of the Northern Coast of Egypt

With an urban population reaching 11.5 million in 2020 along the Mediterranean coast 2.4 million of un-served and 3.5 million of incremental population will need sanitation (connection and WW treatment) from 2005-20 to comply with the EC 2020 Horizon initiative to clean up the Mediterranean

8 coastal governorates (CZ definition) were considered. The largest is the Alexandria Governorate, located on the Mediterranean Sea 210km north of Cairo, and with a population of 3.9 million inhabitants

Egypt: Annual Cost of Environmental Egypt: Annual Cost of Environmental Degradation in the Degradation in the Governorate of Alexandria, Governorate of Alexandria,

82 km of coast82 km of coast ENVIRONMENTAL DAMAGE COST % OF GDP

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0,50 %

1,00 %

1,50 %

2,00 %

2,50 %

3,00 %U

rban

isat

ion

Hea

lth

Mar

ine

and

fres

h w

ater

prod

uctio

n

Beac

hes

Wet

land

s

Agr

icul

ture

Tour

ism

% O

F G

DP

The total annual environmental damage costs are estimated at 1300 – 2000 million LE per annum, which is 5.0 to 7.5 % of the total GDP

Source: METAP report ( 2005)

Mediterranean Coast Partial COED Attributable to Wastewater, 2005

Categories of COEDShare of GDP (%)

Share of Coastal GDP 2005 (US$

million)

Total Coastal GDP 2005 (US$ million)

Health Effects due to water res. degradation 0.21% 42

Recreational Use 0.50% 102

Ecosystem Loss 0.30% 119

Mediterranean Sea International Tourism

0.25%50

Lake Tourism 0.56% 61

Total 1.82% 374 20,371

• National (4.8% of GDP) and coastal (6.5% of GDP) COEDs were used to project benefits• In a No Action Scenario, the urban GDP growth rate (+1.9%) and International tourism growth (+7%) were used for the COED Projection to reach $ 568 Mn in 2020.

Five Investment Scenarios Five Investment Scenarios Assuming sewer connection to be at 100% and investments required to

reduce different levels of BOD by 2020

Scenario WWTreatment

BOD in 2020 compared to 2005

Primary Secondary Cost in US$ million 2005-20

A No +60 59% 16% 359

B Yes +33% 60% 20% 559

C Yes 0% 60% 40% 697

D Yes -33% 24% 76% 771

E Yes -50% 5% 95% 843

Scenario A Results Scenario A Results Scenario A 100% Connection: BOD Emission and Untreated

(000' Tons)

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300

2005 BOD Emissions 2005 BOD Untreated 2020 BOD Emissions 2020 BOD Untreated

BOD00

0' T

ons

Scenario A 100% Connection: Cost/Benefit (US$ Million)

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500

600

700

2005 AnnualInvestment Cost

2005 Annual COED 2005 Annual COEDaverted

2020 AnnualInvestment Cost

2020 Annual COEDno Action

2020 Annual COEDaverted

(Order of Magnitude)Investment/COED

US$

Mill

ion

EcosystemTourismLakesRecreationDiarrhea

B/C

Generated and Residual BOD after no Additional Treatment Investment under Scenario A

AnnualInvestment

In 2020

Cost of no Action

Averted Cost in 2020

BOD Generated

Residual BOD

Scenario E Results Scenario E Results Scenario E 100% Connection and 100% Treatment (5/95): BOD Emission and Untreated (000'

Tons)

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50

100

150

200

250

300

2005 BOD Emissions 2005 BOD Untreated 2020 BOD Emissions 2020 BOD Untreated

BOD

000'

Ton

s

Scenario E 100% Connection and 100% Treatment (5/95): Cost/Benefit (US$ Million)

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100

200

300

400

500

600

700

2005 AnnualInvestment Cost

2005 Annual COED 2005 Annual COEDaverted

2020 AnnualInvestment Cost

2020 Annual COEDno Action

2020 Annual COEDaverted

(Order of Magnitude)Investment/COED

US$

Mill

ion

EcosystemTourismLakesRecreationDiarrhea

Generated and Residual BOD After Treatment under Scenario E

B/C

AnnualInvestment

In 2020

Cost of no Action

Averted Cost in 2020

BOD Generated

Residual BOD

Coastal WW Investment ScenariosCoastal WW Investment Scenarios

Item Scenario

A B C D E

Cost per year (US$ million)

24 37 42 51 54

Benefit per year (US$ million)

61 61 61 195 240

Economic rate of return over 15 years (%)

>10% <10% <10% >10% >10%

Two Kinds of BenefitsTwo Kinds of Benefits• Health Benefits are generated from full coverage of the wastewater network • Environmental benefits from tourism, fisheries, recreation, etc, are generated as a result of level of treatment of wastewater.

• What is required is to maximize health and environmental benefits for project for investment that are economically viable, i.e., an Economic Rate of return >10% .

Coastal WW Investment ScenariosCoastal WW Investment Scenarios

Scenario A: No Investment in Treatment (+60% BOD) cov. 59/16 prim/secScenario B: 2005 Treatment level = 2020 Treatment level (+33%) cov. 60/23 prim/secScenario C: 2005 BOD level = 2020 BOD level (+0%) cov. 60/40 prim/secScenario D: 2005 BOD level Greater than 2020 BOD level (-33%) cov. 24/76 prim/secScenario E: 2005 BOD level Greater than 2020 BOD level (-50%) cov. 5/95 prim/secAll Scenarios have a 100% sewer network coverage

WW Annualized Investments and Residual BOD by 2020 (US$ million and BOD 000' tons)

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60

Scenario A100% Net.

No new WW Invest.

Scenario B100% Net.

60%-23% WW

Scenario C100% Net.

60%-40% WW

Scenario D100% Net.

24%-76% WW

Scenario E100% Net.

5%-95% WWScenario

WW

Inve

stm

ents

(US$

mill

ion)

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Residual B

OD

(000' tons)

Annualized Network & WW InvestmentAnnualized Network InvestmentResidual BoD

ERR >10%

ERR <10%

ERR >10%

Health Benefits

Environmental Benefits

WW Investment Decision WW Investment Decision

Tradeoffs between health and environmental benefits are reached at a investment rate of return equal to the discount rate (10%).

If Scenarios A, it will only reap health benefits

If Scenarios D (24-76) and E (5-95) both health and benefits will start being generated at an ERR>10%.

Policy ImplicationPolicy Implication- Connect all dwellers to the collection network,

which has the highest ERR due to health benefits; and where financing is assumed by various Government-tiers but management is entrusted to the lower tier with a high dweller WTP acceptability to balance O&M.

- determine phased and select level of treatment (climate change should be factored in) based on trade-offs that generate environmental benefits.

What Can we Conclude so far?What Can we Conclude so far? The cost of inaction is translated into averted

benefits, which are gauged in terms of environmental externalities . The latter are negatively affecting the financial and economic profitability (rate of return) of both public and private projects therefore hampering private sector investments and economic growth.

Investment needs are usually much larger than the Government (i.e. loans or budget) can realistically cover...therefore, there is a need to look into policy measures that would include: rethinking the investment program, the time framework (stretching the investments over longer timeframe), the standards, the targets, sources of finance, etc.

What can we conclude so far?What can we conclude so far?(ctd)(ctd)

In view of resource constraints, low WW tariffs and low WW cost recovery, decision-makers have to optimize choices based on the:– The disentanglement between financing network

and treatment in the case of waste water, and between financing collection and disposal in the case of solid waste , i.e. priority ONE the is collection network (highest rate of return because of health benefits) which is seen as private benefits (up to a point) and therefore has (relatively) high willingness to pay

– The selectivity of the pollution abatement technology and the level of treatment

– The affordability of the investments by the utilities– The social benefits to accrue as a result of these

investments

Policy Recommendations for Optimizing Policy Recommendations for Optimizing Waste Water Investments Waste Water Investments

To improve project profitability a different financing engineering scheme should be designed and implemented whereby:– Government budgetary transfer could bear the costs of

the externalities and/or provide incentives to the utilities for averting past and present environmental externalities , as well as financing part of the infrastructure such as treatment plants for WW.

– Incentives which are operational, is to tap carbon funding to defray some of the initial treatment or landfill initial investment costs, and/or leverage GEF funds for financing the incremental costs of public goods

– Governments and /or national banking sector could provide long term financing to the utilities using “ attractive funds” secured through international financing institutions

Policy Recommendations for Policy Recommendations for Optimizing Waste Water Investments Optimizing Waste Water Investments

– Donor contributions should go to finance software costs as well as the difference between total costs and the cost fraction paid by central government and beneficiaries.

– Beneficiaries should assume part of/ or match the cost of infrastructure which is related to their private benefits

– Private sector operators should be contracted on the basis of performance including meeting environmental benchmarking . Private operators could be contracted to operate a plant on the basis of targets and be paid on the basis of m3 treated to the level that is required.

– A flexible approach to cost recovery should be implemented by the utilities/operators to ensure the sustainability of these services

Examples of Policy ImplicationExamples of Policy Implication- As a matter of example regarding the public

sector incentive, an interesting program exists in Brazil whereby the Federal Government encourages the construction of wastewater treatment plants by local private utilities by promising to pay up to 50 percent of the cost of capital and O&M for every m3 of sewage treated.

Thank You for Your Valuable TimeThank You for Your Valuable Time