What It Takes To Prepare Bankable Wastewater Infrastructure Projects
August 24, 2021
The Asia Pacific region needs massive amounts of funding for its water and sanitation needs and according to estimates from the Asian Development Bank (ADB), the region will require $53 billion annually between 2016 and 2030.
As a result of the current under-investment, many cities continue to make do with inadequate water and sanitation infrastructure and unsustainable management practices that leave 80 to 90 percent of generated wastewater in the Asia Pacific region untreated.
This hinders city governments in their efforts to improve the health and well-being of local residents, and consequently slows progress toward achieving the United Nation’s water-related Sustainable Development Goals (SDGs), particularly SDG 6 on “clean water and sanitation for all” and SDG 13 on “climate action”.
Cities therefore have an urgent need to facilitate investments in climate-resilient wastewater infrastructure projects. But to attract these investments, city governments first need to understand what it takes to develop wastewater projects that can secure financing.
Financing sources of wastewater projects and barriers to accessing them
The majority of financing for wastewater initiatives comes from government budgets and international donors, as well as the domestic and international private sector.
According to a UNESCAP report, governmental budgets – typically, money acquired through taxation, transfers and tariffs that is then disbursed to cities as non-repayable funding – account for 65 – 70% of this total funding globally (it should be noted that this data is for water supply projects as well, in addition to wastewater projects). Meanwhile, international donors and the international private sector contribute 10% and 15% of total finance sources, respectively, while the domestic private sector provides 5% of funding for wastewater and water supply projects.
A recent ADB report elaborated on the various financing mechanisms that governments, donors and private entities use to disburse funds for these projects. These mechanisms include subsidies and grants to cities from governments and donor institutions, and carbon credits to generate additional revenues that can enhance projects’ financial viability and microfinance loans for sanitation facilities, mainly at the household level in developing communities. Furthermore, partnerships between municipal utility departments and external organizations in the private sector can also bring both financial and technical support to cities.
Developing cities also have the option to pursue blended financing mechanisms, mostly for technical assistance and credit enhancement, to facilitate investments in the design and implementation of wastewater and sanitation projects. One example of blended financing is the Philippine Water Revolving Fund, which blends Official Development Assistance and domestic public funds with commercial financing to lower borrowing rates and to market water and sanitation projects to private finance institutions.
Unfortunately, there are several barriers that cities must first navigate in order to receive funding for wastewater projects.
These barriers concern the nature of wastewater projects; they tend to be capital intensive and have high up‐front costs and long payback periods, which necessitate financing arrangements with long‐term maturities and sufficient grace periods to accommodate long construction schedules.
City governments in the region may also lack the capacity to implement infrastructure projects, which leads to some commercial investors perceiving wastewater infrastructure projects in developing cities as “high-risk” and not financially viable due to inefficient operations, weak financial and management practices and limited cost recovery.
There are non-financial considerations as well. Wastewater projects are not as “flashy” as big-ticket infrastructure initiatives such as roads and transport facilities; they typically do not generate direct revenues. Further, many urban residents who have their own sanitation facilities are not willing to connect to public sewerage systems if it means they must pay for wastewater services. These projects therefore struggle to gain political will and public acceptance.
If cities want to transcend these barriers, they need to strategically mobilize their public resources, enhance their fiscal management of wastewater systems and make a dedicated effort to build their institutional capacities.
Wastewater in the context of COVID-19
Urban wastewater management projects have always been beneficial for cities, but they have become even more crucial since the outbreak of the COVID-19 pandemic.
In many countries, wastewater testing for evidence of pathogens (a practice called wastewater-based epidemiology) recently detected evidence of SARS-CoV-2 (the virus that causes COVID-19) in raw sewage, giving communities valuable data that can inform decisions for public health responses to control the spread of the disease and keep residents safe.
Wastewater-based epidemiology is an invaluable tool that cities with efficient and well-planned wastewater infrastructure can deploy during pandemics and other crises – and it is also a tool that developing cities will struggle to optimize unless they are able to upgrade and expand their wastewater systems.
Many developing cities are indeed attempting to secure investments for these critically-needed wastewater infrastructure projects – but to ensure the success of these projects they must first gain full contextual knowledge of the infrastructure development process.
Key considerations for cities to develop bankable wastewater projects
“It is critical for cities to have a realistic city-wide wastewater management plan and identify the most appropriate approaches for each part of the city. Don’t aim for the sky!” shares Neil Chadder, CDIA Program Manager.
He observes that wastewater projects are very complex to implement in many cities. For example, Neil says, some areas of certain cities will never be able to have a proper waterborne sewerage system, simply because of their topography. Cities will also need to ensure they understand the current level of water supply in order to match their wastewater infrastructure with the water supply provision, and develop a feasible plan.
To make urban wastewater projects as inclusive as possible, Neil recommends that city officials hold consultations and discussions with the prospective project’s most important stakeholders – community members. These discussions will help ensure that urban development plans take into account the full range of local perspectives on the new project. For instance, some community members may hold very different opinions on the health risks associated with treated wastewater and its potential reuse, so securing their support with connecting to the wastewater systems is one of the key considerations of any wastewater infrastructure project.
Neil mentions another crucial component in the project planning process. “Cities will need to consider the climate resilience factors into their decision-making process upon developing wastewater projects,” he says, “as climate change has strong implications on wastewater infrastructure design and performance, especially when it comes to wastewater collection and treatment infrastructure.”
He adds that city officials should also be aware that the integration of these elements, however, will increase the capital costs required to design and implement the infrastructure projects to handle the changes.
As an example, he points to Chattogram, Bangladesh’s second largest city, which is located along the Bay of Bengal and vulnerable to rising sea levels. In 2017, as the city developed a comprehensive sanitation improvement strategy and master plan, officials discovered that the projected sea level rise in the Bay of Bengal would submerge the land marked out for the wastewater treatment plant in the near future. The city was then able to consider alternative strategies for the plant’s construction; proposed options included a protective bank, raising the level of ground upon which to build the plant and building the plant itself on concrete pillars.
Chattogram’s situation is not unique; cities around the world are already reckoning with the effects of climate change and therefore need to understand the impacts rising sea levels, saltwater intrusion, increased temperatures and shifting weather patterns will have on urban populations and infrastructure. Only once cities obtain detailed metrics regarding the environmental changes they are likely to experience will they be able to formulate resilient and sustainable infrastructure development plans, then determine the level of investment needed to ensure the long-term resilience of wastewater infrastructure.
Neil also points out one major element of wastewater treatment, which is that it generates an estimated 3–7% of global greenhouse gas emissions globally. These direct emissions are caused by methane and nitrous oxide released during the wastewater treatment process, and this poses a huge challenge for urban climate mitigation efforts. Some water-scarce countries, including Jordan, Mexico, Peru and Thailand have employed the techniques of using methane extracted from organic matter to power wastewater treatment plants – however, this technique requires more capital expenditure, and project planners will need to take this cost into account.
How cities can secure climate finance for wastewater projects
In Neil’s experience, he has observed that cities that have a clear plan for their wastewater infrastructure ambitions, commit to working with funding agencies and focus on capacity building within their administrations stand a good chance of receiving funding for their wastewater projects.
While the majority of wastewater projects funding currently comes from government budgets, cities can explore other untapped sources, such as the private sector. Neil, however, remarks that “wastewater infrastructure is probably the hardest type of project to crowd-in private sector investments, and the majority of private investors will only contribute to the on-site facility.” He then adds that, in order to leverage further private investments, city governments need to foster an enabling environment for infrastructure investments by strengthening policy and regulatory frameworks to support private sector operations and improve the quality of service provided to their residents.
However, it is critical to note that while private sector participation and funding can be of huge benefit to city governments, they must actively oversee and monitor the private sector operation in wastewater infrastructure projects.
Further, Neil advises that cities perform careful research (and partner with external development organizations as needed) in order to appraise different funding options through which they could potentially leverage concessional and commercial finance. Dedicated funds and facilities can customize their financing models to the specific needs of cities with wastewater project aspirations.
While accessing climate finance remains a competitive and difficult process – cities have more options for funding now than ever before. City governments, if they want to tap into these funding sources, need to ensure they are able to develop inclusive, bankable wastewater projects that clearly address financial and operational risks and the causes and consequences of climate change, and they must also showcase their understanding of and compliance with funding procedures.
Cities that can do these things will be well-poised to implement climate-friendly urban wastewater projects that not only contribute to the achievement of the SDGs but also improve public health and well-being.
CDIA is an ADB-managed trust fund with 14 years’ experience working with cities in Asia and the Pacific and has helped several cities prioritize and prepare climate-resilient wastewater infrastructure projects that have been linked to financing.
Recent wastewater projects include the Dushanbe Water Supply and Sanitation in Tajikistan and the Siem Reap Wastewater Collection Network Development.
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