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

1. Editorial Manager(tm) for IWA Conferences
Manuscript Draft
Manuscript Number: IWA-7742R1
Title: Incentivizing investments and ensuring cost recovery for operating wastewater treatment
systems in Asia
Article Type: Full Paper
Keywords: Cost recovery; Economic benefits; Financing; Performance monitoring; Wastewater
treatment
Corresponding Author: Jonathan Neil Parkinson, B. Eng (Hons) MSc DIC PhD
Corresponding Author's Institution:
First Author: Jonathan Neil Parkinson, B. Eng (Hons) MSc DIC PhD
Order of Authors: Jonathan Neil Parkinson, B. Eng (Hons) MSc DIC PhD;Anand Chiplunkar, PhD
Manuscript Region of Origin: UNITED KINGDOM

2. (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
final paper for DEWATS conference
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3. that up to 39 percent of wastewater treatment facilities in the country breached environmental
regulations (CPCB, 2005). In China, more than 1,000 wastewater plants were built between 2000
and 2006, but the utilization rate is only 60 percent. About 50 plants in 30 cities are operating at
below 30 percent capacity, and some are left idle, mainly because of inadequate wastewater
collection facilities and because revenues collected from customers are transferred to the general
city 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 in
Shanghai the efficiency is only 10–30 percent (Shalizi 2008).
Additionally, there is also a lack of institutional capacity and resources in national agencies to
regulate effectively; especially given the high costs incurred in establishing and maintaining
effective regulatory instruments. This may be as a result of the use of inappropriate and
unsustainable technologies which were installed in pursuit of aspirational standards. This situation
is exacerbated by the uniformity and inflexibility of standards set by central government agencies.
The fact that wastewater discharge standards in developed countries have been developed
progressively as societies reached higher levels of affluence and environmental awareness is
frequently overlooked (Johnstone and Horan 1996). Government monitoring and enforcement
programs are having only limited impact, because of selective application of the laws and low levels
of fines at the provincial and central levels, combined with weak enforcement of rules at the local
level, which diminish the deterrence value of regulations. Regulations are also incomplete insofar as
load-based standards are absent and the standards that are set are not achievable given China’s
current technological capabilities (Shalizi 2008).
In this paper, the authors explore the economic benefits of sanitation and wastewater treatment in
relation 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 an
incentive for wastewater systems to be well operated and maintained. The applicability of
centralised standards and regulation is also open to question and other more localised and
incremental forms of regulation need to be considered.
ECONOMICS OF SANITATION AND WASTEWATER MANAGEMENT
Some studies focus on the health benefits in the household domain whilst others focus more on the
benefits of wastewater treatment. The Water and Sanitation Program’s (WSP) Economics of
Sanitation Initiative (ESI) has looked comprehensively at both the household and public domain
and, based upon this analysis, Parkinson and Blume (2010) summarize the following economic
benefits:
• Time benefits: as a result of closer access to a toilet and shorter waiting times at public
toilets (resulting in additional time for work or study), and time gains associated with caring for the
sick.
• 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 other
purposes, 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 in
terms of the benefit to people whose livelihoods depend upon the quality of the environment. In this
respect, although economic analysis is based on an ’human centred’ viewpoint on the value of the
environment, it provides a useful way of identifying and subsequently quantifying the full range of
impacts. The benefits that are not directly attributable to the proposed intervention are known as
externalities. For example, these may relate to reuse of treated water which can have positive
externalities related to the increase in water availability and potential savings in the use of
agricultural fertilizers. The less tangible but nonetheless important economic benefits relate to
aesthetics, such as when an area becomes more attractive to live and work in; thus increasing land
prices and real estate.

4. QUANTIFICATION OF ECONOMICS BENEFITS
Economic benefits that cannot be attributed directly to financial expenditures or revenue can be
quantified in monetary terms and there are various methodologies that can be employed for this
purpose. Cost-benefit analysis (CBA) is widely accepted as a decision-making support tool to
compare the economic viability of different proposals in which benefits are compared using a
common analytical methodology. Shadow pricing is a way of monetising environmental benefits in
which wastewater treatment benefits are calculated as the equivalent of the environmental damage
avoided. All identified benefits are translated into a common monetary language and economic
viability occurs where benefits outweigh costs and the result is positive.
Economic benefits of sanitation
In South East Asia, the ESI study commissioned by WSP estimated that Cambodia, Indonesia, the
Philippines and Vietnam (WSP (2007) lose an aggregated USD 2 billion a year in financial costs
due to poor sanitation (equivalent to 0.44% of their GDP) and USD 9 billion a year in economic
losses (equivalent to 2% of their combined GDP). These figure are important for advocacy purposes
to lobby politicians to invest in improved sanitation. However, further analysis of the results is
necessary to understand what benefits are attributed towards household level sanitation and what
are attributed to investments in additional facilities and infrastructure for wastewater treatment. As
an example of how these cost may be disaggregated, Table 1 shows the benefit-cost ratios and cost
per disability life year averted (DALY) by intervention in urban areas in the Philippines. The results
are presented for ideal settings in which it is assumed that facilities are performing according to
their design and also under actual settings which takes into consideration the fact that many
facilities are not well operated or maintained and therefore the actual benefit realised is lower than
the design value.
Table 1. Benefit-cost ratios of various types of urban sanitation in the Philippines (Rodriguez et al
2010). Note: These results are not for citation as they are draft and unpublished.
Cost per
disability life
year averted
(DALY) (ideal
setting)
000 pesos
Benefit-cost ratios in
urban areas, by
intervention
under ideal
settings
under actual
settings
Shared and
communal
facilities
Community toilets 131 2.9 1.7
Shared toilets 115 2.3 1.3
On-site
sanitation
(household
level facilities)
Pour flush to pit 126 5.1 3.3
Urine Diversion Dry
Toilet
459 1.5 1.3
Pour-flush toilets to
septic tank
No desludging 430 5.1 4.1
Sludge collected and
treated off-site
383 3.8 2.7
Waterborne
sanitation and
wastewater
treatment
Sewers connected to
decentralized
conventional
treatment
434 4.3 3.6

5. The results show that all interventions show positive economic benefits which justifies the need for
investment and potentially the use of targeted subsidies. The lower cost sanitation options deliver
relatively high economic benefits for each unit of investment, but when actual performance is taken
into account, the reduced cost-effectiveness ratios strengthen the case for off-site treatment where
there 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-effective
way of reducing the transmission of diarroheal diseases as indicated by the relatively low costs per
DALY averted. But these costs are observed to be relatively high (> 3000 US$), which is attributed
to the relatively low rate of child mortality in the Philippines, meaning that deaths account for the
major share of the DALY burden. But the DALY results do not consider the environment benefits
related 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 reuse
The results from the WSP study in the Philippines presented above indicate either comparable or
higher cost benefits of investments in waterborne sanitation and wastewater treatment relative to
other investments. However, the results from other studies demonstrate that the economic benefits
depend upon the type and use of the receiving water into which the wastewater is discharged. For
example, Hernández-Sancho et al (2009/2010) used CBA to assess the economic viability of
various types of wastewater treatment plants (WWTPs) in Spain. The lowest relative benefit was
identified to be in those situations where wastewater is discharged into the sea due to the dilution
and dispersion of pollution in marine waters. The greatest environmental benefit was found to be
associated with discharge into wetlands because these areas have high ecological value and are
more sensitive to pollution. Interestingly, nutrient removal (in particular phosphorus) was identified
to be the most cost-beneficial form of wastewater treatment; whilst treatment of suspended solids
was observed to be the least environmentally beneficial action. Molinos-Senante et al (2010b) also
concluded that phosphorus recovery is viable not only from sustainable development perspective
but also from an economic point of view.
With respect to the quality of wastewater for reuse in agriculture, Lavee (2011) analysed the
implications on the cost–benefit of wastewater treatment plants in Israel as a result of changes in the
regulatory standards. The study showed that the introduction of stricter standards (and therefore
more costly wastewater treatment plants) would result in greater net economic benefit when all the
expected benefits are monetized. Haruvy (1997) compared various wastewater reclamation and
reuse options in Israel looking at the implications of changes in treatment levels and location of
reuse. Estimated costs include those of treatment, storage and conveyance, while benefits comprise
the value of agricultural output, the decrease in fertilization costs, and aquifer recharge.
Environmental impacts that were considered in the analysis related to contamination of groundwater
by nitrates and resultant health risks. According to the analysis, wastewater irrigation may save
US$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 treated
wastewater. They found that the sale of treated wastewater resulted in an average net profit for the
wastewater treatment and concluded that reuse offers significant economic benefits because it
reduces the pressure on conventional water resources, whilst simultaneously reducing pollution of
receiving water courses.
BENEFITS OF DECENTRALISED APPROACHES TOWARDS WASTEWATER
MANAGEMENT
Clearly 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 this
is best achieved at the local level using decentralised systems or at a large scale using centralised
systems. There is no global answer to this, as the economic viability of sanitation systems is
dependent on site-specific conditions and the potential for the productive use of the waterbodies
into which the residual wastes are discharged. However, given the high costs of centralised

6. sanitation systems, it is logical to move towards a system in which the economic benefits are
realised as locally as possible.
The greater the level of decentralization, the more opportunity there is to bring wastewater
management down to a local level whereby the economic benefits are more effectively realised by
local stakeholders. Evidently, in denser urban areas, decentralised systems become difficult to
construct once developments have already used all available space. But it should not be assumed
that decentralised systems cannot be installed in urban areas as there are often pockets of urban land
that can be used for smaller wastewater management facilities. In these situations, the use of the
land for wastewater treatment is not necessarily a technical problem, but more a socio-political
decision.
Setting and regulating standards for wastewater disposal
As 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 achieving
high standards, unless a three-stage treatment process is adopted. The failings of the uniform
standard approach adopted by central government agencies necessitates a need to consider policies
and standards that are congruous with local needs. Johnstone and Norton (2000) note that the
assimilative capacity of the water body is different in different environmental settings and
accordingly the standards can be linked to the intended beneficial uses. Thus, in some cases, there
may be a need to introduce new or amend existing standards where unrealistic standards have
already been introduced. Johnstone and Norton (2000) concluded that there is a need for a phased
approach to the introduction of standards. Von Sperling (2000) describes further the benefits
associated with a stepwise implementation of standards to achieve a gradual improvement of the
water or wastewater quality,
Even though researchers working in specific situations have shown that higher standards can result
in higher economic gains and are therefore justified, this approach requires additional capital which
is 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 European
Union’s water quality objectives for minimum dissolved oxygen is estimated to require a capital
investment of about US$ 65 million, whereas a lower standard of 6 mg/l would cost US$ 26 million
and a year-round minimum DO standard of 4 mg/l would cost US$ 13 million (Somlyody and
Shanahan 1998). In Asia, the costs may be quite different depending upon the type of technology
adopted which will impact upon the results from the CBA. CBA is also influenced by operational
and maintenance costs (OPEX) but these data are scarcer. According to EPSAR (2009), the average
WWTP operating costs are 0.12, 0.26 and 0.32 €/m3 for primary, secondary and tertiary treatment
respectively. 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 different
levels of investment.
PARTICIPATION FROM LOCAL STAKEHOLDERS
One of the other key benefits of the decentralised approach is that it provides greater opportunity to
involve stakeholders in the derivation of policy and standards that are appropriate for the local
context. Enforcement by local stakeholders may be considered as means to regulate and to hold
those responsible for pollution accountable. The development of policies to prevent the degradation
and depletion of water resources requires determining their value in social and economic terms and
incorporating 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 a
pollution control strategy that is approach for local water bodies), it also make sense from the
perspective of ensuring that local stakeholders are in agreement with the proposed standards and the
strategy for pollution reduction in light of the costs incurred.
This approach is being promoted in Brazil where implementation of the PRODES programme
which was launched in 2001. PRODES requires that a river basin committee (RBC) is operative and
is involved with the implementation of water charging in the basin and effluent discharge reduction

7. levels approved by the committee. It requires also that a social agreement is entered into between
legitimate representatives of all stakeholders: the Federal Government through the Brazilian
National Water Agency (ANA), the State Governments; the private sector and civil society
legitimate representatives. Subsequently the RBC should agree to the investment programme via an
agreement signed with the Municipal Authority.
POTENTIAL FOR OUTPUT BASED FINANCING TO INCENTIVISE INVESTMENTS
AND PROMOTE OPERATIONAL SUSTAINABILITY OF DEWATS
The PRODES programme launched in Brazil described above involves an innovative financing
facility that aims to encourage public and private companies to implement new treatment plants and
to improve the performance of existing wastewater treatment systems based upon a system of
financial incentives according to the monitored reduction in pollutant loads. The concept of the
programme is innovative because, instead of financing civil works and equipment, it finances the
implementation of new wastewater treatment plants via a series of financial instruments based upon
the treatment of wastewater according to a set of predetermined standards. ANA also provides
financing for expansion or retrofitting of treatment plants, provided that these are able to lead to
improvements in the pollutant load removed and treatment plant efficiency. Payments are made
available 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, compliance
percentage and other criteria. Oliveira et al (2007) argue that this approach has considerable
potential as part of a comprehensive pollution mitigation strategy. This approach may have potential
for application in Asia, but success is dependent on the development of a standardised framework of
performance evaluation for regulatory purposes.
CONCLUDING REMARKS
In contrast to water supply and sanitation services, the benefits of wastewater treatment are less
obvious to individuals and also more difficult to assess in monetary terms. Although wastewater
treatment has many associated environmental benefits, these are often not calculated because they
are not set by the market (Molinos-Senante et al 2010a). There is however an increasing body of
evidence that indicates that wastewater treatment is economically viable but this depends on the full
range of environmental benefits being included in the analysis. In general, studies show that more
complete and advanced systems that achieve higher standards of environmental health are also more
cost-beneficial per unit of investment. There are however more costly and therefore require greater
levels 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 and
managerial capacity to be able to operate and maintain wastewater systems. Underlying both of
these constraints is the lack of political incentive to invest in the first place and lack of incentive
from an operational perspective to ensure that systems are well operated. The results from financial
and economic analysis can play a key role in advocacy to politicians that investing in sanitation and
wastewater management systems is cost-beneficial and does not necessary result in an ongoing
drain in financial resources if local stakeholders sign up to a policy that is perceived to result in
environmental health improvements that will benefit the local community. Identifying the
appropriate standards is key in this process as they need to be congruous with these demands and
the local context.
There is therefore a need to develop and apply methodologies for economic analysis that can be
used to support decision-making and policy development at the local level rather than using the
results from other studies to make generic conclusions about the applicability of specific
technologies. Central governmental regulatory agencies should embrace these contemporary
approaches 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 greater
potential for achieve more widespread and long-term improvements in sanitation and wastewater
management than are currently achieved.

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