June 29, 2009 World Bank/METAP and EC/SMAP III

1. SMAP III Final WorkshopMarseillesOptimizing Urban Wastewater Investments Along the Mediterranean Coast: The Case of Egypt June 29, 2009 World Bank/METAP and EC/SMAP III

2. Decision makers are unaware of the economic and financial implications of environmental 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

3. YetGovernments Tend to Overspend on theirScarce 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

4. There is however a proposed methodology for optimization of the scarce financial resources • 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

5. Environment is a public good It is affected by externalities As a result, the externalities lead to market failure as prices do not reflect the true social costs or benefits of an action Why estimating the Cost of Inaction?

6. Optimization of Urban Wastewater Investments Along the Mediterranean Coast Comparison of COED and Cost of Protection Source: METAP Reports 2005

7. Waste Water Cleaning is expensive US$ 650 million per annum Source:Doumani , 2007 for required investments NAP 2003, UNEP/MAP for planned investments Population data: Plan Blue

8. Advantages of such Methodology Conformity with the MDG # 7 on environment sustainability Externalities are being internalized Undertaking Smart Investments Optimization of scarce resources Provision of rationale for investment justifications Offering a seat to the Ministry of the Environment in participating in the budgeting of large infrastructure projects

9. However for everymethodology there are some assumptions and hypotheses • 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

10. Application of the methodology : the Case 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

11. Egypt: Annual Cost of Environmental Degradation in the Governorate of Alexandria, 82 km of coast 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)

12. Mediterranean Coast Partial COED Attributable to Wastewater, 2005 • 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.

13. Five Investment Scenarios Assuming sewer connection to be at 100% and investments required to reduce different levels of BOD by 2020

14. Scenario A Results Generated and Residual BOD after no Additional Treatment Investment under Scenario A BOD Generated Residual BOD Cost of no Action B/C Annual Investment In 2020 Averted Cost in 2020

15. Scenario E Results Generated and Residual BOD After Treatment under Scenario E BOD Generated Residual BOD Cost of no Action B/C Averted Cost in 2020 Annual Investment In 2020

16. Coastal WW Investment Scenarios

17. Two 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% .

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

19. 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%.

20. Policy 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.

21. 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.

22. What can we conclude so far?(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

23. Policy Recommendations for Optimizing 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

24. Policy Recommendations for 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

25. Examples 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.

26. Thank You for Your Valuable Time