Final Report for Internal Use Only From Waste to Resource Shifting paradigms for smarter wastewater interventions in Latin America and the Caribbean Final Report – for internal use only June 2019 1 Final Report for Internal Use Only Executive Summary Population and economic growth have driven a rapid rise in demand for water resources, and already 36 percent of the world’s population lives in water-scarce regions. In particular, rapid urbanization, especially in low- and middle-income countries, has created various water-related challenges. These include degraded water quality and inadequate water supply and sanitation infrastructure, particularly in expanding peri-urban and informal settlements. In Latin America and the Caribbean (LAC), only about 60 percent of the population is connected to a sewage system and only about 30–40 percent of the region’s wastewater that is collected is treated. These percentages are surprising, given the region’s levels of income and urbanization, and have significant implications for public health, environmental sustainability, and social equity. The newly endorsed Sustainable Development Goals (SDGs) are adding a new dimension to the challenges faced in the water supply and sanitation sector, by focusing on sustainability. Associated targets include improving water quality, implementing integrated water resource management, achieving water use efficiency across sectors, reducing the number of people suffering from water scarcity, and restoring water-related ecosystems. If the LAC region is to achieve the SDGs, the region’s governments will need to significantly increase levels of wastewater treatment. The investment needs in the water supply and sanitation sector are very large, and to improve the wastewater situation in the region, countries are embarking on massive programs to collect and treat wastewater. As cities continue to grow, there is an opportunity to ensure that investments are made in the most sustainable and efficient way possible. Future urban development requires approaches that minimize resource consumption and focus on resource recovery, following principles of the so-called circular economy. In this context, wastewater is and should be considered a valuable resource from which energy and nutrients can be extracted, as well as an additional source of water. This report summarizes the work of the World Bank’s initiative “Wastewater: from Waste to Resource,â€? launched in 2018 to raise awareness among decision makers regarding the potential of wastewater as a resource. The report highlights the findings and conclusions from three technical background reports and from an in-depth analysis of several case studies. During the design phase of the initiative, seven case studies were analyzed and published in the form of short notes available here. These case studies provide international best practices examples of projects and programs that promote the implementation of one or several circular economy principles (i.e. resource recovery from waste water treatments plants, efficient plant management and cost savings, innovative financing mechanisms, integrated planning principles and additional financing flows from the final resource recovery). For each case study the following aspects were analyzed: i) circular economy and resource recovery model promoted; ii) contract arrangements; iii) financing structure; and iv) enabling factors (i.e. institutional, regulatory and technical aspects) (see Appendix 1). These cases were also selected based on the sustainability of the project (i.e. projects that have been in implementation for at least 3 years with consistent results). Additional case studies are being edited for future publishing. The result of this analysis has informed the conclusions and recommendations of this report. 2 Final Report for Internal Use Only The initiative involved a participatory process, including multiple consultations and workshops with task team leaders and key stakeholders working on wastewater management projects in the LAC region. This report is informed by the feedback received during those events. An internal workshop was organized in September 2018 in Lima, Peru, followed by a key regional workshop in Buenos Aires, Argentina in November 2018, where counterparts from Argentina, Bolivia, Brazil, Colombia, the Dominican Republic, Ecuador, Honduras, Paraguay, Peru, and Uruguay participated. At the workshop, the main results and key messages of the initiative were presented and validated. An organizing team convened panels of experts and roundtables for counterparts to share their ideas and challenges. A smaller workshop was also organized in Uruguay with key counterparts. The initiative’s findings have been presented at several international conferences, raising awareness of the issue and promoting dialogue among governments, international organizations, and the private sector. To kick-start the initiative, an event was co-organized jointly with the Development Bank for Latin America (CAF) at the World Water Forum (WWF) 2018 in Brasilia: “Planning and Financing Wastewater Treatment Under A Circular Economy: Perspective for Achieving the SDGs in LAC.â€? Panelists included ministers and deputy ministers from several countries in the region and representatives of the private sector. A preliminary report, “Shifting Paradigms: From Waste to Resource – Preliminary Insights for the Latin America and Caribbean Region for the World Water Forum 2018,â€? was prepared for and shared during the event. The main preliminary findings of the initiative were also presented to representatives of the LAC region at the XIX Ibero-America Water Directors Conference (CODIA in Spanish), organized by the Spanish government. It was agreed by all members, as part of the conference’s minutes, to include wastewater resource recovery as part of CODIA’s future work program and to further the exchange of knowledge on the matter. Results of the initiative were also presented at the Water Scarcity and Water Reuse Seminar organized by the State Government of Sao Paulo, with support of the 2030 Water Resources Group (2030WRG), and at Latinosan 2019, where the team co-convened two sessions on the topic. Feedback from these events and from the workshops enabled the team to shape the main messages of the initiative into more practical recommendations. The initiative has also focused on raising awareness of wastewater’s potential contributions to a circular economy by creating several communication materials (blogs, one-pagers, infographics, case studies, PowerPoint presentations, etc.). A website was developed to host all the material created to date by the initiative. The purpose of this report is to share the knowledge created and the conclusions from the initiative with stakeholders and practitioners involved in wastewater planning, financing and management (including water utilities, policy makers, basin organizations, and ministries of planning and finance) to encourage a paradigm shift in which the value proposition of wastewater in a circular economy is recognized. Wastewater can be treated up to different qualities to satisfy demand from different sectors, including industry and agriculture. It can be processed in ways that support the environment, and can even be reused as drinking water. Wastewater treatment for reuse is one solution to the world’s water scarcity problem, freeing scarce freshwater resources for other uses, or for 3 Final Report for Internal Use Only preservation. In addition, by-products of wastewater treatment can become valuable for agriculture and energy generation, making wastewater treatment plants more environmentally and financially sustainable. Therefore, improved wastewater management offers a double value proposition if, in addition to the environmental and health benefits of wastewater treatment, financial returns can cover operation and maintenance costs partially or fully. Resource recovery from wastewater facilities in the form of energy, reusable water, biosolids, and other resources such as nutrients, represent an economic and financial benefit that contributes to the sustainability of water supply and sanitation systems and the water utilities operating them. One of the key advantages of adopting circular economy principles in the processing of wastewater is that resource recovery and reuse could transform sanitation from a costly service to one that is self-sustaining and adds value to the economy. To achieve this paradigm shift, four key actions have been identified: • Develop wastewater initiatives as part of a basin planning framework to maximize benefits, improve efficiency and resource allocation, and engage stakeholders. There is the need to move from ad hoc and isolated wastewater solutions, such as one treatment plant per municipality, to fully integrated river basin planning approaches that yield more sustainable and resilient systems. By planning and analyzing water quality and quantity at the basin level, integrated solutions that are more financially, socially, economically, and environmentally sustainable are possible. Basin planning allows for the optimal deployment of facilities and sanitation programs, including the location, timing, and phasing of treatment infrastructure. It also enables decision makers to set priorities for investment planning and action. The basin planning framework also allows for more efficient investments by designing effluent standards based on the specific contexts of particular water bodies and ecosystems, instead of uniform or arbitrary water pollution control standards. Moreover, by including wastewater in the hydrological system as a potential water source, it is possible to account and plan for wastewater reuse, limiting incidental and unplanned water reuse that can have negative health and environmental consequences. This approach is explored in chapter 2. • Build the utilities of the future by shifting away from wastewater treatment plants to water resource recovery facilities, thus realizing wastewater’s value. Traditionally, treatment focused on removing contaminants and pathogens to recover water and safely discharge it into the environment. Today, treatment plants should be viewed as water resource recovery facilities that recover elements of the wastewater for beneficial purposes, starting with the water itself (for agriculture, the environment, industry, and even human consumption), followed by nutrients (nitrogen and phosphorus), and with contributions to energy generation. These resources can generate revenue streams for the utility, which would potentially transform the wastewater process from a heavily subsidized one to one that generates revenues and is self-sustainable. To move toward the ideal utility of the future, first facilities must be properly run. Second, they need to be designed, planned, managed, and operated effectively and efficiently. Finally, countries need to recognize the real value of wastewater and the potential resources that can be extracted from it, incorporating resource recovery and circular economy principles in their strategy and investment planning and infrastructure design moving forward. Infrastructure is a long-term investment that can lock countries into inefficient 4 Final Report for Internal Use Only and unsustainable solutions. This highlights the importance of having resource recovery in mind when planning for wastewater investments. This topic is explored in chapter 3. • Explore and support the development of innovative financing and sustainable businesses models in the sector. Financing sanitation infrastructure and recovering its costs is a challenge throughout the region. Many utilities do not collect sanitation tariffs adequate to cover the costs of operation and maintenance, not to mention capital investment or future expansion. Hence, there is considerable agreement that more efficient subsidies are needed for sanitation, at least during a transition period. The existence of subsidies, however, does not mean that the sector must rely on conventional financing without taking advantage of market conditions and incentives to enhance sustainability. Given the potential for reuse and resource recovery in WWTPs, the sector should pursue innovative financial and business models that leverage those potential extra revenue streams. These new approaches are explored in chapter 4. • Implement the necessary policy, institutional, and regulatory (PIR) frameworks to promote the paradigm shift. For this paradigm shift to happen, PIR incentives are needed to encourage sustainable wastewater investments that consider reuse and resource recovery and that promote circular economy principles. The case studies analyzed show that this kind of project usually happens in an ad hoc fashion and with no national or regional planning, with the enabling factors often being physical and local: water scarcity, and distance to the nearest water source, among others. To enable the development of these innovative projects, changes in the PIR environment and valuing of water resources are also needed. Current basin planning efforts in the region need to be strengthened: governments need to support basin organizations so they can improve their technical expertise and exert oversight powers to enforce the implementation of planning instruments. Regulations and standards also need to be tailored to the needs of the region and the current trends in the sector, embracing and promoting gradual compliance and fostering reuse and resource recovery. Finally, countries in the region need to ensure they have the required institutional capacity to enforce environmental regulations such as water pollution control standards. PIR interventions are explored in chapter 5. 5 Final Report for Internal Use Only Contents 1. Wastewater as a resource in a circular economy .............................................................. 8 1.1 A growing global challenge ............................................................................................................... 8 1.2 The sanitation sector in Latin America and the Caribbean: A call for a new vision ........ 9 Population and sanitation coverage....................................................................................................................... 9 The potential for better investment ................................................................................................................... 10 1.3 The opportunities presented by circular economy principles ............................................. 11 Wastewater: An as-yet-untapped resource ...................................................................................................... 11 Resource recovery is not new: Why hasn’t this approach caught up in the region? ....................... 13 What must be done to overcome these challenges and achieve the needed paradigm shift? ..... 15 2. Repurposing a traditional water resources management tool for the sanitation sector ....................................................................................................................................................... 18 2.1 Why do we need river basin planning? .................................................................................... 18 2.2 Using a basin planning tool for sanitation planning ........................................................... 20 2.3 Key considerations in the implementation of river basin planning............................... 22 3. Shaping the utility of the future: From wastewater treatment plants to water resource recovery facilities ............................................................................................................. 23 3.1 Efficient and effective management of water resource recovery facilities ................... 23 Projecting wastewater influents: Understanding the demand side of treatment ............................. 23 Setting sustainable targets for effluent quality ............................................................................................... 24 Selecting an adequate treatment process .......................................................................................................... 25 Sizing treatment systems: Bigger is not better ................................................................................................ 25 Using existing infrastructure correctly ............................................................................................................... 26 Reducing energy consumption (“negawattsâ€?) ................................................................................................. 26 3.2 Valuing wastewater: Reuse and resource recovery from wastewater ............................ 27 Water reuse .................................................................................................................................................................... 27 Bioenergy generation ................................................................................................................................................. 28 Beneficial use of biosolids ........................................................................................................................................ 29 4. New financing and business models for water resource recovery facilities .......... 31 4.1 Changing the financing and business game in wastewater treatment through resource recovery ............................................................................................................................................ 31 4.2 Financing framework: Toward blended finance ................................................................... 32 4.3 Learning from successful resource recovery projects........................................................... 33 Market and business potential ............................................................................................................................... 34 Business structures to promote resource recovery projects .................................................................... 36 Success and enabling factors................................................................................................................................... 38 Toward an integrated and circular approach .................................................................................................. 39 6 Final Report for Internal Use Only 5. The policy, institutional, and regulatory frameworks needed to promote a paradigm shift in the sector ............................................................................................................ 41 5.1 The importance of clear policies .................................................................................................. 41 5.2 Institutional arrangements to create incentives ..................................................................... 42 Coordinating various levels of government ...................................................................................................... 42 Cross-sectoral linkages and coordination ......................................................................................................... 43 Private sector engagement ...................................................................................................................................... 43 Internal organizational and behavior changes ................................................................................................ 44 5.3 A robust regulatory framework ................................................................................................... 45 6. Conclusions and the way forward for the region ............................................................. 47 6.1 Basic rules for planning and financing wastewater treatment plants .................................. 48 6.2 Areas for deeper analysis and future work .................................................................................... 49 Real lifecycle analysis of wastewater treatment plants .................................................................... 49 References ............................................................................................................................................... 51 Appendix 1. Summary of case studies.......................................................................................... 55 7 Final Report for Internal Use Only 1. Wastewater as a resource in a circular economy “In a world where demands for freshwater are continuously growing, and where limited water resources are increasingly stressed by over-abstraction, pollution and climate change, neglecting the opportunities arising from improved wastewater management is nothing less than unthinkable in the context of a circular economy.â€? – UN World Water Development Report (WWAP 2017) This report summarizes the work of the World Bank’s Initiative “Wastewater: From Waste to Resourceâ€? (World Bank 2018a). It contains the findings from several case studies and technical reports—currently being edited as separate annexes—developed by the initiative as well as from the feedback received during workshops and seminars with key stakeholders. The purpose of the report is to share the knowledge created during the course of the initiative with stakeholders involved in wastewater planning, financing, and management (including water utilities, policy makers, basin organizations, and ministries of planning and finance). Specifically, the initiative seeks to encourage a paradigm shift in which wastewater’s potential to create value in a circular economy context is recognized. 1.1 A growing global challenge Population and economic growth have driven a rapid rise in demand for water resources (WWAP 2015). As stated by the High-Level Panel on Water (HLPW 2018), 36 percent of the world’s population already live in water-scarce regions, and by 2050 more than half the world’s population will be at risk due to water stress. Competing demands for water are adding pressure to the allocation of freshwater resources. Governments around the world face an array of water policy options for managing structural water scarcity, droughts, and floods; improve water quality; and protect ecosystems and their services. Careful planning promotes long-term water security and resilience to climatic and nonclimatic uncertainties. Water, importantly, connects to wider policy goals of mitigating poverty and ensuring social equity, public health, and macroeconomic performance, among others. Rapid urbanization, especially in low- and middle-income countries, has created a host of water-related challenges. These include degraded water quality and inadequate water and sanitation infrastructure, particularly in expanding peri-urban and informal settlements. As cities continue to grow rapidly, and climate change impacts water resources’ availability and distribution, it will become increasingly difficult and energy intensive to meet the water demands of populations and economies. Combined, these problems present a challenge for policy makers and municipalities in providing services to their citizens; ensuring that there are enough resources such as food, water, and energy; and protecting public health—all while protecting the environment. In this context, wastewater becomes a valuable resource from which water, energy, and nutrients can be extracted to help meet the population demands for water, energy, and food (WWAP 2017). Wastewater can be treated up to different qualities, to satisfy the demand from different sectors, including industry and agriculture. It can be processed to promote environmental health, or even to be reused as drinking water. Wastewater treatment is one solution to the water scarcity issue, and also to the problem of water security, freeing water resources for other uses or for preservation. The diversification of water supply sources is critical for enhanced security and 8 Final Report for Internal Use Only resilience and may be considered a key factor when estimating water balances. Meanwhile, the by-products of wastewater treatment can become valuable for agriculture and energy generation, making wastewater treatment plants more environmentally and financially sustainable. Treating wastewater as a valuable resource can contribute to the sanitation and major economic sectors in the region. 1.2 The sanitation sector in Latin America and the Caribbean: A call for a new vision Population and sanitation coverage In 2017, the population of Latin America and the Caribbean (LAC)1 reached 644 million, 80 percent of which lived in urban areas. Between 2012 and 2017, the population increased by around 34 million, or by approximately 5.4 percent. During the same period, rural communities’ population dropped by 1 percent (WDI 2019). According to the 2018 Revision of World Urbanization Prospects (UNDESA 2018), by 2030, the total population in the region will be 718 million, with an urban concentration of 84 percent. Regarding access to water supply and sanitation, historically, countries in LAC have prioritized investments in water supply, achieving good coverage in the past years. According to WHO/UNICEF (2017) data of 2015, around 96 percent of households had access to an improved source of drinking water, although this average hides the gap between rural (86 percent) and urban (99 percent) coverage and does not reflect the sustainability of the level of service. The share of the urban population with access to safety managed water services was only 65 percent. About 86 percent of the region’s population had access to some form of basic sanitation, with an important difference between rural (68 percent) and urban (90 percent) areas. However, only 22 percent had access to safely managed sanitation services.2 Moreover, it is estimated that only about 60 percent of the population is connected to a sewage system (14 percent in rural and 72 percent in urban areas) and only about 30–40 percent of the region’s wastewater that is collected is treated (FAO 2017). This is surprisingly low, given the region’s levels of income and urbanization, and has significant implications for public health, environmental sustainability, and social equity. In comparison, in the countries of the Organisation for Economic Co-operation and Development (OECD), 81 percent of the population is connected to a sewage system and 77 percent of people benefit from wastewater treatment by being connected to a wastewater treatment plant (WWTP) (OECD 2017). As shown in Figure 1.1, wastewater management and treatment levels vary significantly across LAC countries, and regional averages mask this significant variation. 1 The LAC region refers to all countries in the Latin America and Caribbean. 2 Improved sanitation facilities are those designed to hygienically separate excreta from human contact (excreta are safely disposed of in situ or transported and treated off-site) and that are not shared with other households. 9 Final Report for Internal Use Only Figure 1.1 Access to sanitation services in selected LAC countries, 2015 Access to Basic Sanitation (% population) Sewerage network connection rates (% population connected) Wastewater treatment (% population connected) 100 80 60 40 20 0 Source: WHO/UNCEF 2017. Note: LAC = Latin America and the Caribbean. The potential for better investment To reach universal coverage of basic and safety managed sanitation services by 2030, the region will have to reach a total of 307 million of as-yet-unserved people.3 Hutton and Varughese (2016) estimated that the level of investment in the LAC region (excluding Chile, Uruguay, and most of the Caribbean countries) needed to meet the UN Sustainable Development Goals (SDGs) for sanitation ranged between $3.4 and $11.8 billion per year for the period 2016–30, of which approximately 95 percent would be devoted to urban areas. It is worth noting the challenge added by SDG target 6.3: “by 2030, improve water quality by reducing pollution, eliminating dumping and minimizing release of hazardous chemicals and materials, halving the proportion of untreated wastewater and substantially increasing recycling and safe reuse globally.â€? The investment needs in the sector are important, and to improve the wastewater situation in the region, countries are indeed embarking on massive programs to collect and treat wastewater. There is a huge opportunity to ensure that these investments are made in the most sustainable and efficient way possible. As lessons learned in LAC and other regions indicate, investment in technology alone will not guarantee meeting the SDGs. There is a need in the region to invest better. Efficiently investing in wastewater and other sanitation infrastructure to achieve public health benefits and environmental objectives, and to enhance the quality of urban life, is a major challenge for the region. As stated by a recent World Bank report (2017) on infrastructure in Latin America: “dismal wastewater performance is a real emergency, and one that epitomizes the potential for spending better.â€? As described in this report, the revalorization of wastewater as part of a circular economy process can contribute to an improved investment efficiency. It is worth noticing that besides a shift toward resource recovery in the sector, the World Bank and other partners are also promoting a broader change in the sector through the Citywide 3 Approximately, 233 million people who currently do not have access, plus 74 million additional people. 10 Final Report for Internal Use Only Inclusive Sanitation (CWIS) Initiative, to shift away from business-as-usual models, and encouraging cities to think about a diversity of technical solutions for the provision of services along the whole sanitation service chain, combining different approaches to better respond to the challenging realities faced on the ground. The CWIS Initiative advocates for adaptive, mixed, and incremental approaches, combining on-site and sewerage solutions in either centralized or decentralized systems, and considering effective resource recovery and reuse, to allow all urban inhabitants to benefit from safely managed sanitation services. Although this report focuses on centralized treatment solutions, it is important to recognize that decentralized sewage collection systems and the separation of different types of wastewater effluents are innovations that could lower the cost of sanitation services and improve sustainability. Given that most estimates show that half or more of the investments in the sector need to be made in sewerage infrastructure, an in-depth analysis of all infrastructure opportunities is also advised as part of any sanitation plan and/or strategy. 1.3 The opportunities presented by circular economy principles Wastewater: An as-yet-untapped resource The challenges mentioned above present an opportunity to plan and invest in sanitation services—and, in particular, the processing of wastewater—in a new way. The long-standing, linear approach of abstracting freshwater from a surface or groundwater source, treating it, using it, collecting it, and disposing of it is not sustainable anymore. Future urban development requires approaches that minimize resource consumption and focus on resource recovery under circular economy principles (Box 1.1). At its core, a circular economy aims to design out waste to achieve sustainability. Waste does not exist; products are designed and optimized for a cycle of disassembly and reuse. In line with this, wastewater should not be considered a “wasteâ€? anymore, but a resource. Box 1.1 The principles of a circular economy A circular economy is an industrial system that is restorative or regenerative by intention and design. It is an economic system aimed at minimizing waste and making the most of resources. The traditional approach is based on a linear economy with a “make, use, and disposeâ€? model of production. The circular economy approach replaces the end-of-life concept with restoration, shifts toward the use of renewable energy, eliminates the use of toxic chemicals which impair reuse and return to the biosphere, and aims for the elimination of waste through the superior design of materials, products, systems, and business models. Such an economy is based on three main principles: (i) design out waste and pollution; (ii) keep products and materials in use; and (iii) regenerate natural systems. Sources: Ellen MacArthur Foundation undated; WEF 2014. However, in most LAC countries, sanitation and wastewater treatment services are still thought out and planned in a linear way. Furthermore, very often water supply is planned first, sewerage systems and planned next, and energy inputs for both are sometimes only considered once the systems have been designed and constructed. In order to change how institutions 11 Final Report for Internal Use Only approach wastewater, a paradigm shift is required in the region. Wastewater should not be seen as a burden to governments and society, but as an economic opportunity that can be turned into a valuable resource (Figure 1.2). One of the key advantages of adopting circular economy principles in the processing of wastewater is that resource recovery and reuse could transform sanitation from a costly service to a self-sustaining and value-adding system. Improved wastewater management offers a double-value proposition: in addition to the environmental and health benefits of wastewater treatment, financial returns that partially or fully cover operation and maintenance (O&M) costs are possible. Resource recovery from these facilities in the form of energy, reusable water, biosolids, and other resources (such as nutrients and microplastics) represent an economic and financial benefit that contributes to the sustainability of these systems and the water utilities operating them. As documented in this report, WWTPs can: • Sell treated water for reuse to industry and potentially cover all O&M costs as in the case of San Luis Potosi, Mexico (Error! Reference source not found.3); Durban, South Africa (Error! Reference source not found.); and Aquapolo, Brazil (WWD 2011). • Generate energy for self-consumption, save energy costs, or generate revenues by selling energy as in the case of Atotonilco, Mexico; Santiago, Chile (ITAC 2019); EBMUD, United States (Error! Reference source not found.4); and Ridgewood, United States (Error! Reference source not found.). • Dispose of biosolids at no cost as in the case of Cusco, Peru (ITAC 2019) and Brazil (Box 3.5). • Sell recovered phosphorous for fertilizer as in the case of Chicago, United States (ASCE 2013). • Cover capital and operating costs completely as in the case of Cerro Verde). Cost-saving and environmental considerations are among the main reasons to consider resource recovery and to incorporate circular economy principles in WWTPs in LAC and elsewhere in the world. The challenge remains one of scaling up the successful experiences and projects. Fostering these new business models with extra revenue streams would in turn attract the private sector to close the funding gap. The private sector is often reluctant to invest in the sanitation sector given the low return on investment and the high risks. There is a need for an enabling environment that fosters business models that promote shifting from waste to resource and that enables private investment in infrastructure in tandem with improved efficiency in public financing to promote sustainable service delivery, especially in the poorest countries. 12 Final Report for Internal Use Only This new approach is also necessary to achieve the SDGs, which are adding a new dimension to Figure 1.2 Resource recovery in wastewater the challenges in the sector by considering treatment plants sustainability. The SDGs focus not only on the provision of sanitation services but also on improving water quality, implementing integrated water resource management, improving water use efficiency across sectors, reducing the number of people suffering from water scarcity, and restoring water-related ecosystems, among several relevant targets. Sustainable wastewater treatment and management will be crucial to achieve SDG 6, and can also contribute toward meeting several other goals. For example, electricity generation in wastewater treatment plants, using the biogas produced, can contribute toward SDG 7 (regarding energy) and SDG 13 (climate action); treating wastewater and restoring watersheds also contributes to SDG 3 (good health and well-being), SDG 11 (sustainable cities), and SDG 14 (life below water), among others. Resource recovery is not new: Why hasn’t this approach caught up in the region? Numerous challenges—institutional, economic, regulatory, social, and technological—will need to be overcome to achieve the needed paradigm shift: Institutional Knowledge gap and lack of political will. There is a general lack of understanding regarding the concept of water resource recovery and how to implement it in practice. Wastewater is still considered a hinderance or a substance to be dealt with and disposed of, rather than a resource. This results in a lack of political will in developing policies and regulations that support and incentivize wastewater reuse and resource recovery. Lack of coordination across institutions, legislatures, and sectors. In most countries in the region, regulations in the water sector are not aligned with the energy, health, industrial (including mining), and agriculture sectors, and therefore limit resource recovery and reuse from wastewater (energy, irrigation water, nutrients, preservation, etc.). Moreover, responsibilities for the provision of wastewater services are often fragmented across different levels of governments. The national government sets policies and targets, while service provision, including investment, O&M, and monitoring, is usually delegated to municipal governments, which in many cases lack the technical and financial capacities to adequately provide services (Trémolet 2011). There is also a lack of coordination between water resource management institutions and those responsible for sanitation service delivery. As a result, 13 Final Report for Internal Use Only sanitation plans are usually not incorporated in river basin planning efforts, leading to inefficient and costly systems. Economic Water is undervalued. Unless water resources are properly valued (as stated in the HLPW “Value Waterâ€? document ), it will be difficult to promote resource recovery initiatives. The lack of value for water also leads to improper pricing of water resources and water services, which is also a deterrent for resource recovery projects. For example, if industries pay a very low fee to withdraw freshwater, they have limited incentives to pay for treated wastewater unless there is a significant short-term water shortage or long-term water scarcity resulting in very low freshwater availability. Excessive emphasis on promoting and financing new infrastructure, without sufficiently considering the life-cycle of a plant or sustainability of the system (e.g., coverage of O&M costs) and without evaluating the real capacity of existing infrastructure and maximizing its use. Reliance on conventional/public financing of WWTPs without taking advantage of market conditions and incentives to enhance sustainability. There is a need for innovative financing mechanisms that can encourage the development of and investment in wastewater systems to promote the sustainability of operations and also the health of local ecosystems. Regulatory Current regulatory standards are often too restrictive and/or inconsistent. Countries adopt internationally accepted regulatory standards for water quality that are not tailored to the specific needs of the country. Often regulations are designed without considering the financial implications of their implementation (especially their operation costs). More flexible standards that can be introduced gradually and that are suited to the objective of wastewater investment, will encourage innovative solutions needed to provide wastewater services as well as create value from water reuse and resource recovery. Lack of adequate control over industrial discharge. Inadequate legislation, enforcement, regulation, and/or monitoring of industrial discharge mean that excessive pollutants are released untreated into the environment or left to an already overburdened WWTP. In the case of the direct release of untreated industrial discharge into receiving water bodies, the result is deterioration in water quality, with all its economic, social, and environmental implications. Where the effluents are left to the WWTP, customers end up paying with their tariffs for industrial treatment. Lack of regulatory frameworks and guidelines for water reuse, beneficial use of biosolids, and energy generation in WWTPs. In the LAC region there are even regulations that limit or forbid resource recovery at WWTPs. For instance, in some countries, the reuse of wastewater might be permitted only for a specific set of activities, such as restricted irrigation, or the use of biosolids might be forbidden in the agriculture sector. There is a need for clear regulations and guidelines to ensure the safe use of human-waste-derived products and to widen the market potential. Moreover, a lack of regulation on the pricing of resources recovered from wastewater deters utilities and the private sector from investing in resource recovery projects due to uncertainty regarding the return on their investment. There is a need for new regulatory mechanisms that allow the clear and fair pricing of reclaimed water, biosolids, and energy. 14 Final Report for Internal Use Only Lack of incentives for wastewater reuse and resource recovery. There is a need for new regulatory mechanisms that specifically provide incentives to all stakeholders to consider wastewater systems as resource recovery facilities. There is also a lack of incentives for water utilities to innovate and recover resources from wastewater, given that in many countries the benefits and extra revenue reaped from those interventions would go only toward tariff reduction. The existence of perverse incentives such as the low price of freshwater abstraction is also a barrier to resource recovery initiatives. Social Negative perceptions of reclaimed water and reuse products. A major challenge to the development of the resource recovery market is the low social acceptance of the use of recycled products from human waste. Also, among farmers already using untreated wastewater, many are against treating it because they have the perception that wastewater nutrients will be removed and that their crop yield will diminish. Public awareness and education campaigns are needed to build trust and change negative perceptions. Technological Technology selection criteria biased toward expensive technologies without considering all potential possibilities that better suit the local conditions. A challenge related to this point in some countries is the lack of engineers and planners who are proficient on different wastewater treatment technologies. What must be done to overcome these challenges and achieve the needed paradigm shift? In order to achieve a paradigm shift in the sector, and based on the case studies analyzed and the lessons learnt in the LAC region, four key actions have been identified at different levels. Action 1. Develop wastewater initiatives as part of a basin planning framework to maximize benefits, improve efficiency and resource allocation, and engage stakeholders There is the need to move from ad hoc and isolated wastewater solutions, such as one treatment plant per municipality, to integrated river basin planning approaches that yield more sustainable and resilient systems. Basin planning is a coordinating framework for water resources management that focuses public and private sector efforts to address the highest- priority problems within hydrologically defined geographic areas, taking into consideration all sources of water. By planning and analyzing water quality and quantity at the basin level, integrated solutions that are more financially, socially, economically, and environmentally sustainable are possible. Basin planning allows the identification of the optimal deployment of facilities and sanitation programs, including the location, timing, and phasing of treatment infrastructure. It also enables decision makers to set priorities for investment planning and action. The basin planning framework also allows the design of effluent standards to consider improvements to a specific receiving water body instead of uniform or arbitrary water pollution control standards, allowing for more efficient investments. Basin planning is, therefore, an iterative process that allows decision makers to move from the traditional approach of being reactive to a serious environmental problem to a proactive approach of managing available resources in any given basin through a structured, gradual process. Moreover, by including wastewater in the hydrological system as a potential water source, it is possible to account and plan for wastewater reuse. This shift must be reflected in the water policy framework. This approach is explored in chapter 2. 15 Final Report for Internal Use Only Action 2. Build the utility of the future: Move from the concept of WWTPs to one of water resource recovery facilities, realizing wastewater’s value The practice of wastewater treatment continues to evolve, not only technologically but functionally as well. Traditionally, treatment is focused on removing contaminants and pathogens to recover water and safely discharge it to the environment. Today, WWTPs should be considered water resource recovery facilities (WRRFs) (NSF, DOE, and EPA 2015). This comes with the realization that many components in wastewater can be recovered for beneficial purposes, starting with the water itself (for agriculture, the environment, industry, and even human consumption), followed by nutrients (nitrogen and phosphorus) and energy generation. These resources can generate revenue streams for the utility that would potentially transform the sector, from a heavily subsidized one to one that generates revenues and is self-sustained. To move toward the ideal utility of the future, first utilities have to be properly run and perform adequately. Second, treatment facilities need to be designed, planned, managed, and operated effectively and efficiently, taking the basin as the unit of analysis. Finally, countries need to recognize the real value of wastewater and the potential resources that can be extracted from it, incorporating resource recovery and circular economy principles in their strategy and investment planning and infrastructure design, moving forward. Infrastructure is a long-term investment that can lock in countries into inefficient and unsustainable solutions. This highlights the importance of having resource recovery in mind when planning for wastewater investments. This topic is explored in chapter 3. Action 3. Explore and support the development of innovative financing and sustainable business models in the sector Financing sanitation infrastructure and recovering associated costs pose a challenge throughout the region. Many utilities do not collect adequate sanitation tariffs to cover the costs of O&M, not to mention capital investment or future expansion. Hence, there is considerable agreement that more efficient subsidies are needed for sanitation, at least during a transition period. The existence of subsidies, however, does not mean that the sector has to rely on conventional financing without taking advantage of market conditions and incentives to enhance sustainability. Given the potential for reuse and resource recovery in WWTPs, the sector should pursue innovative financial and business models that leverage those potential extra revenue streams. These new approaches are explored in chapter 4. Action 4. Implement the necessary policy, institutional, and regulatory frameworks to promote the paradigm shift Finally, for this paradigm shift to happen, policy, institutional, and regulatory (PIR) incentives are needed to encourage sustainable wastewater investments that consider reuse and resource recovery that promote circular economy principles. The case studies analyzed show that this kind of project usually happens in an ad hoc fashion and with no national or regional planning, with the enabling factors many times being physical and local: water scarcity, distance to nearest water source, etc. To enable the development of these innovative projects, changes in the PIR environment and valuing of water resources are also needed. Wastewater treatment technologies for reuse and resource recovery have been progressing much faster than the enabling environment. Weak policy and governmental systems are among the key constraints to scaling up wastewater treatments that foster technologies for reuse and resource recovery. Current basin planning efforts in the region also need to be strengthened: governments need to 16 Final Report for Internal Use Only support basin organizations so they can improve their technical expertise and exert oversight powers to enforce the implementation of planning instruments. Additionally, interventions prioritized in basin plans should be aligned with municipal and regional priorities. Regulations and standards also need to be tailored to the needs of the region and the current trends in the sector. The vast majority of the existing legislation in LAC was created with the sole purpose of meeting environmental standards and are copycats of instruments from Europe and/or the United States, which have very different capacities and financial means. However, the changes in the sector call for new legislation and regulation that embrace and promote gradual compliance, are flexible, and foster reuse and resource recovery. Finally, countries in the region need to ensure they have the required institutional capacity to enforce environmental regulations such as water pollution control standards. PIR interventions are explored in chapter 5. 17 Final Report for Internal Use Only 2. Repurposing a traditional water resources management tool for the sanitation sector River basin planning has been traditionally known by water resources management practitioners as a tool to regulate water use, allocate water resources, and plan for future basin interventions. This approach, also promoted as a part of the Integrated Urban Water Management framework, characterizes existing conditions, identifies and prioritizes problems, defines management objectives, develops protection or restoration strategies, and implements selected actions. The guiding principles of the river basin planning approach are: (i) multisector stakeholder partnerships, (ii) a focus on the basin as the basic planning unit, and (iii) coordinated multidisciplinary science-based actions. Despite the widespread use and holistic perspective of river basin planning, it is rare in the planning and design of sanitation projects and particularly wastewater treatment plants (WWTPs). Some of the case studies presented in this report, such as the Rio Bogotá cleanup project (Infotec 2018), demonstrate how the use of a river basin approach helps to reduce investments costs by distributing the responsibility of water quality improvement among different interventions and stakeholders. Wastewater needs to be part of the water balance in basin planning, given its potential as a resource, especially in water-scarce areas. 2.1 Why do we need river basin planning? The river basin framework can help understand different water quality stressors, their interaction in the basin, and can lead to smarter project designs. Impairment of a water body is a result of pollution from various land uses and wastewater discharges that drain to it. Pollution can come from point sources (e.g., discharges from WWTPs, industrial effluent discharges, storm water outfalls, sewer overflows, agricultural drains, etc.) and nonpoint sources (e.g. illegal dumping and litter, fertilizers and pesticides, agricultural runoff, oil and gas from vehicles, etc.). These different pollution sources exert a cumulative effect on the receiving water bodies, depending on pollutant types, loads, timing, and discharge locations in the basin; therefore, their collective impact must be evaluated when planning wastewater treatment investments. Understanding these cumulative effects at the basin level and their interactions can lead to solutions that target distinct pollution sources, reducing the burden on WWTPs and thus resulting in cost efficiencies and greater environmental benefits. River basin planning allows for better treatment processes to be designed as it considers the upstream characteristics of the river basin (existing pollution sources and hydrology) and the characteristics of the downstream users and the receiving water body. The river basin framework can also inform the adaptation of effluent standards to the specifics of a receiving body. 18 Final Report for Internal Use Only Box 2.1 The use of a river basin approach to plan wastewater treatment promotes more efficient outcome and reduces investment needs The municipality of Guayaquil, Ecuador, has promoted the creation of a water fund (Fondo de Agua) to clean and preserve the Daule River Basin (Santos, undated). The action plan includes monitoring and control of water quality, treatment of wastewater, erosion and sediment control, and reforestation, among other actions. The municipality has also developed an integrated plan for wastewater management that includes a hydraulic modelling of the receiving waterbody (Daule Basin) to understand its characteristics and assess the needed level of treatment to meet the existing regulation. The modelling showed that the treatment needed in the wastewater treatment plants to be built was lower than initially designed for since the waterbody had a higher capacity of absorption than thought. This resulted in the more efficient and effective investment in wastewater treatment plants. This framework supports the coordination of multisectoral, public, and private interventions in a basin to maximize the combined impacts of different initiatives for the improvement of water quality. Multistakeholder platforms are the backbone for the development and implementation of a river basin plan. Usually structured around river basin councils or similar institutional bodies, these platforms aim at building consensus among competing needs and defining common goals for a basin. The partnership building effort aims at reaching all stakeholders in a basin: in principle, anyone who directly or indirectly benefits from a basin’s resources and those who contribute to water pollution. Through a holistic assessment, this process promotes the identification of coordinated multisectoral investments, both from public and private sources, that aim at achieving a common vision for the basin in terms of water quantity and quality. As a result, project overlaps are avoided, and higher efficiencies are achieved by taking advantage of project complementarity. This basin planning process can facilitate the identification of reuse and resource recovery opportunities from WWTPs. Through a basin planning framework, treated wastewater can be included as part of the basin’s water balance. Including this additional source of water as part of basin planning can help identify treated wastewater offtakers and promote its use. This participatory process can also contribute to identifying other clients (i.e., potential biogas, electricity, and biosolid clients) benefiting from the development of a resource recovery facility (see chapter 3) within the basin. The river basin approach can therefore enable the identification of possible synergies across sectors and promote the development of projects that combine WWTPs with other sectors (e.g., energy and agriculture) from the beginning (i.e., design and conceptualization). Stakeholders’ platforms developed as part of the river basin planning process have proven to reduce conflicts in at basin level, improving the implementation of river basin plan interventions. River basin councils act as neutral fora where basin-related initiatives, including infrastructure projects, can be discussed and negotiated. In this space, project beneficiaries and people affected can have a voice and influence project design. This process not only improves project design but also facilitates smoother project implementation. As described in the next section, basin planning is an iterative process that allows the application of adaptive management in the face of climate change impacts. Basin plans can be revised to account for changes in climatic variables, which can avoid overly conservative 19 Final Report for Internal Use Only investments that cannot be justified given the level of uncertainty typically surrounding climate change predictions. 2.2 Using a basin planning tool for sanitation planning Despite the existence of several planning methodologies, the basin planning process is generally conceived as a cycle with seven main stages. The outcomes of this process are documented in a basin plan that summarizes the analyses, stakeholders, actions, schedule, and resources needed to develop and implement the plan. As the plan is implemented, new data and lessons learned are used to revise and adapt the plan. A summary of the planning process is presented hereafter. Further details can be found in Infotec (2018). Stage 1: Build partnerships. This is the most important component of the basin planning process. Failure to include essential partners often leaves plans to collapse due to a lack of ownership of their implementation. The lead government agency in charge of the basin planning process must institute a robust governance structure that allows stakeholders’ participation in the planning process and clearly establishes their duties. Stage 2: Characterize the basin. The purpose of this step is to understand the problems in a basin and identify their potential causes. Multiple data sources are used for this purpose. The data that support a basin plan tends to be a mosaic composed from several sources of data of varying age and resolution. In the absence of reliable local data, global data and remote sensing can be important tools for this task. Models, too, are fundamental tools that provide an increased understanding of a system. Infotec (2018) provides an overview of the main types of models used in basinwide water quality assessments, and their data requirements. Box 2.2 The use of models in the basin planning process resulted in lower-cost pollution control solutions in Kentucky, the United States The basin planning process identified a range of potential pollution controls, covering both green infrastructure (e.g., stormwater management) and conventional infrastructure (e.g., sewer system improvements). Models were used to define the costs and resulting water quality associated with various combinations of controls. The results of this assessment were used to prioritize which controls to implement. Model results demonstrated that an integrated solution combining watershed controls with infrastructure improvements provided more water quality benefits at a lower cost than a traditional solution based solely on infrastructure controls. The approach was used to guide expenditures so that money would be spent first on controls that resulted in cost- effective improvements. Source: Infotec 2018. Stage 3: Define management goals. The next step is to define the desired conditions expected from the execution of a basin management plan. These management goals correspond to the desired uses for the basin, which will require specific targets of water quantity and quality. Once these targets are defined, the next step is to determine the load reductions that will be necessary to meet the targets. Modeling tools can help to make this determination since they allow an understanding of the relationship between the sources of pollution, the pollutant loads, and the response from the receiving water bodies. 20 Final Report for Internal Use Only Stage 4: Formulate potential solutions. This step seeks to identify engineering and nonengineering measures to accomplish the goals that were agreed among stakeholders. For sanitation programs, the engineering solutions generally consist of the installation of a sanitary sewer collection system and deployment of one or more WWTPs. Nonengineering measures can include on-farm controls for agricultural runoff, closure and relocation of pollutant activities, public education, improvements in solid waste collection, etc. A well-designed basin plan should include both types of measures and formulate control solutions for all significant sources of pollution beyond untreated wastewater. Stage 5: Develop the basin plan. At this point, several alternatives, represented as ensembles of solutions, have been identified to meet the goals for the basin. This step seeks to choose the “bestâ€? of those alternatives using a selection process that screens the alternatives according to technical and nontechnical criteria. The selected alternative becomes the basis for the basin management plan, which provides specificity to all projects and initiatives that comprise the selected alternative, including cost estimates, scheduling, financing plans, and institutional arrangements. Stage 6: Implement the basin plan. Implementation of the basin plan entails the execution of all projects that conform to the selected alternative. To implement these complementary multidisciplinary solutions, strong governance, clear accountability, sufficient resources, and an appropriate level of authority are required. Operation and maintenance (O&M) of the individual projects are also part of the implementation plan. Often, long-term operation is seen as an activity separate from the plan because O&M is conducted by disparate agencies. Nevertheless, proper and adequately funded O&M is essential to the success of the basin plan as it maintains the intended functions of the infrastructure installed. Stage 7: Monitoring and evaluation (M&E). An effective M&E program is vital to track progress even when the results are not yet evident. For example, in urban environments, it is possible that the indicators show some deterioration before the situation improves, reflecting ongoing population growth even as projects in the basin plan begin to come online. Therefore, solutions to basin problems need to be seen as intergenerational, although it is always possible to make quick progress in high-value activities. The most valuable function of the M&E program is that it allows learning from implementation, which in turn enables adaptive management—that is, the ability to adjust the implementation plan according to lessons learned in the process (Hooper and Lant 2007). Box 2.3 Basin plan for the Bogota River, Colombia A watershed management plan developed for Río Bogotá in Colombia focused not only on wastewater and sanitation but also on general water quality in the river, flood risks, and the supply of water for both potable and nonpotable uses. After a thorough inventory of current conditions, environmental, operational, and ecological goals were defined. With the help of sophisticated water quality, water supply, and flood-risk models, the plan laid out several management alternatives that were consolidated into a detailed investment schedule as well as a monitoring plan to evaluate progress toward the goals. 21 Final Report for Internal Use Only 2.3 Key considerations in the implementation of river basin planning Despite its many advantages, challenges still remain in the implementation of the basin planning framework: (i) budgets for government agencies are rarely linked to river basin plans and are usually targeted to independent, sector-specific interventions; (ii) the economic development benefits of a basin plan can be difficult to demonstrate as they usually take place over a long time frame with several nonmarket benefits; (iii) multistakeholder planning and public outreach can be difficult and resource intensive; (iv) stakeholder representation and their decision-making power can be hard to balance; (v) enacted national legislation may not allow application of the watershed approach; (vi) coordination of all relevant government agencies may be difficult due to siloed functions and objectives and differing political interests; and (vii) in some cases there is a need to bring in new technical capacities for the development of the river basin approach. Basin planning efforts in the region need to be strengthened. Governments need to support basin organizations, so they can improve their technical expertise and exert oversight powers to enforce the implementation of basin plans. The sanitation sector—as one of the key beneficiaries of the implementation of the river basin planning framework—needs to be present in basin organizations and strongly active in promoting basin planning. Instead of fostering one WWTP per municipality, countries should assess the real needs of the basin in terms of achieving a water quality standard consistent with the goals established for the basin and considering the diluting capacity of the river. 22 Final Report for Internal Use Only 3. Shaping the utility of the future: From wastewater treatment plants to water resource recovery facilities The utility of the future aims for efficient operation and full resource recovery with improved productivity and long-term sustainability. The utility of the future operates under circular economy principles and recognizes the real value of wastewater as a resource: it aims to be net energy neutral or even energy producing, implements beneficial use of biosolids, and reuses water. Ideally, all these elements provide an extra revenue stream or help cover operation and maintenance (O&M) costs, making the utility both more environmentally and financially sustainable. Therefore, the utility of the future does not operate wastewater treatment plants (WWTPs) but water resource recovery facilities (WRRFs). The utility of the future also manages its infrastructure efficiency, while protecting the environment and the health of the population. The first condition for moving toward the utility of the future is to be well run. Wastewater treatment and sanitation projects are designed to provide service for decades. The previous chapter makes the case that the basin approach is most advantageous because it leads to the best possible solutions under a wide range of situations. However, unless the O&M of the expensive infrastructure laid out in the plan is in the hands of robust water utilities, the benefits of the basin approach to sanitation and wastewater treatment will be severely compromised. In Latin America and the Caribbean (LAC), as in many places around the world, poorly operated utilities jeopardize the sustainability of the solutions deployed. There are of course several examples in the region of very well-run utilities, for example, in Brazil, Chile, and Colombia. The issue of utility performance is complex and is not the main purpose of this report. For further reading, the World Bank has published several materials on the topic, including a publication that defines the characteristics of well-performing public utilities (World Bank 2006) and a recently published report that provides water utilities with guidance on improving performance (Soppe, Janson, and Piantini 2018). 3.1 Efficient and effective management of water resource recovery facilities The first requisite to move toward a circular economy and to implement reuse and resource recovery in treatment facilities is to ensure that the facilities are managed in an efficient and effective way. Effective and efficient management of WRRFs starts with smart planning and design. When treatment facilities are planned with resource recovery and sustainability in mind, the road to circular economy is paved. Smarter O&M of WRRFs is the next natural step to reuse and resource recovery and sustainability. Adequate planning, design, and operation entails a series of actions that are summarized below (and in more technical detail in Nolasco [2019]). Projecting wastewater influents: Understanding the demand side of treatment Projecting wastewater effluents through a textbook approach often results in treatment processes being improperly selected or sized, and in higher-than-necessary capital and operating expenditures. Every municipality has unique characteristics (e.g., climate, seasonal variations, urban infrastructure) that shape the flow rate of its wastewater, the concentration of contaminants, so on. Despite these differences, treatment plants are often designed based on textbook parameters. Theoretical wastewater flow rates or oxygen demand loadings are poor substitutes for localized sampling and laboratory analysis. In most cases, these textbook 23 Final Report for Internal Use Only approaches result in projections and loadings that exceed the actual ones, thereby unnecessarily increasing the size of treatment facilities. An inadequate characterization and projection of wastewater can lead to oversized facilities with unnecessarily high costs. When planning new treatment facilities, wastewater should be characterized in advance, so the facility can be built around the characteristics of the sewage to be treated. In many cases, this is done so as to not only determine the concentrations of various contaminants, but to also map flow rates. When expanding existing facilities, records of the characteristics of wastewater influents should be obtained and studied. Such records should be checked for accuracy and complemented, when needed, with additional sampling and monitoring at the existing plant and immediately downstream from preliminary treatment (see Nolasco 2019). Even when all these considerations are taken into account, planners in low- and middle-income countries often face other challenges to project and understand wastewater characteristics. For example, ensuring the connectivity of households, adequate pretreatment programs for industries, and reducing infiltration and inflow (including illegal connections) into the sewer system are all issues that should be considered when designing a treatment facility. Setting sustainable targets for effluent quality Reasonable targets and standards for effluent quality are crucial to reuse and resource recovery. Standards should be based on the characteristics of the receiving water body and/or on water reuse needs. Countries tend to follow general discharge standards because they are easier to implement and enforce, but standards based on the receiving water body are more efficient and effective. As mentioned in section 2 and exemplified in the case of Guayaquil (Box 2.1), modelling a water body’s receiving capacity can for example reduce capital and O&M expenses for treatment down the road. Moreover, gradual or staged implementation of targets, where applicable, will likely improve the sustainability of the treatment system by gradually improving operators’ knowledge of the characteristics of the incoming wastewater and the effects of treatment on the quality of the receiving water body. Gradual application of effluent requirements will also make it possible to extend coverage of treatment within the basin (i.e., more than one plant discharging), as opposed to having high levels of treatment in one plant and leaving larger areas without treatment. Mexican legislation has implicitly promoted a gradual approach to wastewater standards (Mexican wastewater standards are tacitly gradual: the WWTP can move from the laxest of limits: 150 milligrams per liter [mg/L] to the reuse condition: 30 mg/L). On the other hand, extremely stringent effluent quality imposed on areas with low levels of treatment coverage prevent, in many cases, the utility from reaching adequate treatment coverage. This is because building new plants or upgrading existing plants becomes too expensive compared with existing funding. Therefore, expansions, upgrades, and greenfield WRRF projects elsewhere in the catchment are postponed, resulting in lower coverage, with detrimental implications for population health, receiving water body quality, and environmental conditions. 24 Final Report for Internal Use Only Copying standards from other countries (e.g., European Union [EU] directives for effluent quality, EPA 503c for biosolids management, etc.) without adequate attention to the local context can have negative environmental, financial, and other implications. Selecting an adequate treatment process Careful selection of the treatment processes to be used in the WRRF is key to sustainable resource recovery. The capital and operating costs of processes vary widely. In most of LAC, there is a strong tendency to prefer activated sludge systems to other treatment processes. A clear exception is Brazil, which has become a global model for the use of upflow anaerobic sludge bioreactors (UASBs). Activated sludge is a proven technology that results in the removal of more than 90 percent of the biochemical oxygen demand. However, the energy requirements and operating costs of activated sludge plants are high and cannot always be supported by tariffs. The energy required for aeration accounts for the largest share of the plant’s energy needs, varying from 45 percent up to 75 percent when using extended aeration. This situation gets worse if the plant operates at a high altitude. For example, at 3,500 meters above sea level, a plant will consume approximately twice as much air than the same plant operating at sea level. This is especially relevant for the LAC region, since several of its cities are located at altitudes 2,000 meters above sea level. The impact of operational expenses on the sustainability of WWTPs must be taken into account when selecting the right treatment process. For activated sludge systems, the influence of capital and operating costs can be conceived as an iceberg, where the capital cost is the tip of the iceberg, with the operating costs over the life of the investment concealed below the surface. Therefore, UASBs should not be the default option; all technologies and solutions should be considered (waste stabilization ponds, trickling filters, aerated lagoons, covered lagoons, activated sludge, etc.) and the one best suited for local conditions should be chosen. When selecting the treatment technology, it is important to assess not only capital expenditure but also operating expenditure. O&M costs are usually significant. In fact, in the long run, O&M costs dwarf constructions costs; yet, they are often neglected when estimating required expenditures, thus impacting the sustainability of these systems. Sizing treatment systems: Bigger is not better Traditional design guidelines for WWTPs developed in the 1970s and using knowledge from the 1960s are still cited in the current literature. These conservative guidelines yield plants that are larger than necessary. For these reasons, their use has been discontinued in most of the developed world. Currently, process specialists use dynamic simulators with realistic mathematical models for sizing reactors and other treatment systems. The use of such simulators results in more efficient plants. Unfortunately, the 1970s design guidelines are still common in LAC. One could argue that the reason for their use is simplicity and savings in time and cost during the initial stages of planning. Their analysis requires little in the way of mathematical skill or forecasting data. But the gross oversizing of infrastructure affects the sustainability of systems, raises capital and operating costs, and limits the capacity for resource recovery. 25 Final Report for Internal Use Only Using existing infrastructure correctly Infrastructure already in place can be a valuable resource, once its actual treatment capacity is assessed to determine the maximum flow rate it can treat while still meeting effluent criteria. Yet the possibility of adapting existing infrastructure is often overlooked or miscalculated, leading to unnecessary expansions that waste valuable resources, raise costs, and enlarge the carbon footprint. Analysis of existing plants can reveal excess capacity in some aspects of the treatment processes. Armed with that knowledge, expansion can focus first on processes that present a bottleneck, which can lead to considerable savings. The approach known as “evaluation of real infrastructure,â€? combined with modern design methods (e.g., dynamic simulation), maximizes the use of the infrastructure and enhances its sustainability. These evaluation techniques (explained in Nolasco 2019) are not necessarily complex or expensive and can lead to significant savings and improved efficiency. Box 3.1 The evaluation of existing infrastructure saved AySA, a water and wastewater utility in Buenos Aires, around $150 million Aysa had already planned the expansion of its wastewater treatment plants to increase capacity. The expansion costs were around $150 million. However, the application of process audit techniques allowed the utility to use its facilities to the fullest potential, resulting in cancellation of the expansion plans for five years and savings of about $150 million in capital expenditures. Reducing energy consumption (“negawattsâ€?) In the region, the vast majority of water utilities and WWTPs are struggling to be self-financing. Because energy is often the largest component (30–40 percent) of operating costs, rising energy costs have direct implications for service affordability and sector financing (WWAP 2014). Audits designed to reduce energy consumption—to produce “negawattsâ€?—can result in substantial savings to the utilities (Nolasco and Rosso 2015; Environment Canada and Ontario Ministry of the Environment and Energy 1995). Technical measures that improve energy efficiency can cut consumption by 10–30 percent and have payback periods as short as a year (Rodriguez, van den Berg, and McMahon 2012). Moreover, reductions in consumption can and should be planned at the design stages, when processes are selected and sized as mentioned earlier. Despite their advantages, however, energy audits are seldom done at WWTPs in the region. Before WWTPs can implement resource recovery projects and become energy producers, it is crucial that they are energy efficient. (For further guidance on the potential to implement energy efficiency and energy recovery initiatives in WWTPs, refer to Lackey and Fillmore 2017). 26 Final Report for Internal Use Only Box 3.2 An energy audit at the San Jeronimo WWTP in Guanajuato, Mexico, demonstrated that the plant could become an energy producer and sell the extra power if low-cost energy efficiency measures were implemented San Jeronimo uses a conventional activated sludge process with anaerobic digestion to process sludge. Biogas generated in the digesters is processed and burned in 500 kilowatt (kW) electricity generators. Currently, with the biogas generated in a full day of operation, the plant can cover electricity use during peak tariff hours (three hours a day). During the rest of the day, the plant relies on electricity bought from the network. When biogas is not enough to generate the electricity needed at peak hours, the plant turns off the aerators of the activated sludge system to keep the electricity bill within the plant’s allocated budget. Because these saving measures affect effluent quality, the plant underwent an energy audit. The audit showed that a series of low-cost energy efficiency measures in the aeration system (automatic control of the dissolved oxygen concentration, cleaning of the air diffusers, introduction of anoxic zones for denitrification), combined with co-digestion of external waste in the existing anaerobic digesters, could tilt the energy balance at the plant, switching it from a net energy consumer to a net energy producer. Since electricity generators were already in place, the payback for these modifications could be measured in months. Source: IWA (http://www.iwa-network.org/WaCCliM/mexico/). 3.2 Valuing wastewater: Reuse and resource recovery from wastewater Wastewater is not waste; several resources can be recovered from it, namely water, energy, and biosolids. All these resources, once recovered, can either generate an extra revenue stream or can help reduce operational costs, therefore contributing to the sustainability of the plant and the operator. Although the resources are explained below separately, the ideal scenario is that utilities would explore the recovery of several of them, as exemplified in the case studies in this report. The paradigm shift from WWTPs toward water resource recovery facilities offers new possibilities to create new and more sustainable business models, create opportunities to involve the private sector, and enable new ways of finance, given the new potential extra revenue stream, as explained in the next chapter. Water reuse Agriculture is the largest user of water, and the use of urban wastewater for agricultural irrigation is a growing practice worldwide. The use of partially treated wastewater in agriculture helps conserve and expand available water supplies, and can contribute toward a more integrated management of water resources. Moreover, the nutrients (phosphorous and nitrogen) found in treated wastewater can be very valuable for farmers. Depending on the treatment technology employed, the levels of phosphorous and nitrogen in the treated wastewater effluent can be very high. These elements in the effluent can increase crop yield and size. Yet if not planned, managed, and implemented properly, water reuse can be associated with a number of risks, including public health, agronomic, and environmental risks. 27 Final Report for Internal Use Only Table 3.1 Potential for wastewater reuse Agriculture Recreational Industry Environmental Food crops Landscaping water Washing/cleaning (beverage, Groundwater recharge (not features food) allowed in some countries) Food crops using drip Boating lakes Cooling (power generation, Flow augmentation irrigation paper, and textile) Nonfood crops Swimming lakes Process water, boiler feed Dryness amelioration water (all industries) Livestock drinking water Snowmaking Source: US EPA 2012. In addition to water reuse for irrigation, there are different uses for treated wastewater, as shown in Table 3.1. Examples of treated water reuse are growing every year, especially in water-stressed regions. However, most of the treated water is still discharged back to the nearest water body. Instead of discharging it into the water body, wastewater can be treated at any level and can be adapted to the requirements of each potential consumer segment: crop or field irrigation, groundwater recharging, cooling water or process water for industries, drinking water, etc. Ideally, the end user would pay a fee for the treated wastewater, creating an extra revenue stream for the WRRF that could help cover O&M costs (Error! Reference source not found.3). Box 3.3 The sale of treated wastewater covers all operation and maintenance costs of the Tenorio WWTP in San Luis Potosi, Mexico New water reuse regulations and a creative project contract incentivized wastewater reuse in San Luis Potosi. Instead of using fresh water, a power plant uses treated effluent from a nearby wastewater treatment plant in its cooling towers. This wastewater is 33 percent cheaper for the power plant than groundwater, and has resulted in savings of $18 million for the power utility in six years. For the water utility, this extra revenue covers all its operation and maintenance costs. The remaining treated wastewater is used for agricultural purposes. Additionally, the scheme has reduced groundwater extractions by 48 million cubic meters in six years, restoring the aquifer. The extra revenue from water reuse helped attract the private sector to partially fund the capital costs under a public-private partnership agreement (40 percent government grant, 36 percent loan, and 24 percent private equity). See full case study here. Bioenergy generation WRRFs with anaerobic processes (of adequate size and design) can attain biogas generation and capture in sufficient volume and quality to improve the plant’s energy efficiency cogenerating electricity and heat. Plants that treat wastewater in anaerobic systems (UASBs and covered anaerobic lagoons) require less energy and have more potential to become energy neutral or energy positive, being able to sell the extra electricity to the grid. Plants with anaerobic digestion of sludge can also cogenerate energy; however, in most cases, the energy produced will be able to cover the heat demand of the digester and about one-third of the electricity demanded by the plant. To increase the biogas production and energy generation, co-digestion (when an external waste source is incorporated directly into the anaerobic digesters) can be implemented (Error! Reference source not found.4). 28 Final Report for Internal Use Only Box 3.4 The implementation of cogeneration in wastewater treatment facilities can help produce enough biogas to generate all the needed power to operate a WWTP, resulting in significant energy savings The East Bay Municipal Utility District (EBMUD), serving areas in the metropolitan area of San Francisco, California, implemented a program to blend food waste from local restaurants with its own biosolids to produce enough methane-generated electricity to meet its own demand and sell the excess to the local grid. The program cost was $31 million and had a generation capacity of 15 megawatts, which saved the utility $2.5 million per year in energy. Electricity sales bring $500,000 of extra revenue and income from waste disposal fees totals $8 million annually. In addition, the program saves landfill capacity and reduces greenhouse gas emissions. Source: TPO 2012. For a plant to have its own decentralized power source, using biogas, can improve energy efficiency, decrease costs, and enhance the plant’s reliability, which is important in areas that experience frequent power outages. Moreover, biogas is a “greenâ€? energy source and therefore using it to generate power and heat can potentially reduce greenhouse gas emissions and other air pollutants (if it replaces fossil fuels) and can allow the plant to get green or carbon credits. The biogas can also be sold to a third party instead of producing electricity on-site for self- consumption, as in the case of the La Farfana treatment plant in Santiago, Chile. (For further guidance on the potential to implement wastewater to energy initiatives, depending on the size of the WWTP, refer to Vazquez and Buchauer 2014; Lackey and Fillmore 2017). Beneficial use of biosolids Traditionally, sludge from WWTPs has been considered as a waste by-product that has to be disposed of at the lowest cost possible. However, biosolids (WWTP sludge treated to levels that permit its beneficial use) can be used for many purposes given their intrinsic value and nutrient content. Biosolids can be used to recover degraded land, as compost or fertilizer in agriculture, as compost in gardens and golf courses, etc., and nutrients such as phosphorous can also be extracted and sold. There are also other applications being explored such as building material, fuel, and extraction of other materials such as minerals and cellulose. The beneficial use of biosolids has been studied extensively in LAC. However, its practice is somewhat limited (Box 3.5 and the case of SEDACUSCO in ITAC [2019]). 29 Final Report for Internal Use Only Box 3.5 The beneficial use of biosolids in agriculture leads to higher crop yields and at the same time saves significant transport and landfill costs for the water utility For several years, the Companhia de Saneamento Ambiental do Distrito Federal (CAESB), the water and wastewater utility of Brazil’s capital district, has been reusing biosolids from its wastewater treatment plant operations to recover degraded areas in its railway operation areas (patios ferroviarios) and in agriculture. The effects on corn production of using biosolids as compared with a mineral fertilizer mixture consisting of equivalent amounts of nitrogen, phosphorus, and potassium, were evaluated in a series of studies in Brazil (Lemainski and da Silva 2006a). All grain yields were higher than average for Brazilian standards for corn. The biosolids were on average 21 percent more efficient than mineral fertilizers. Similar studies performed on soybeans have shown that biosolids were, on average, 18 percent more efficient than mineral fertilizers. Source: Lemainski and da Silva 2006b. 30 Final Report for Internal Use Only 4. New financing and business models for water resource recovery facilities Wastewater treatment and reuse is a capital-intensive activity often incurring large up-front costs. As described chapter 1, the financial resources required to implement wastewater reuse and resource recovery projects in Latin America and the Caribbean (LAC) and other developing regions are well above national budgets, creating significant barriers for the development of wastewater treatment and reuse. In addition, wastewater investment is often not considered a political priority, particularly when wastewater projects are small and context specific, raising significant transaction costs. 4.1 Changing the financing and business game in wastewater treatment through resource recovery Resource recovery can help overcome some of the challenges to financing wastewater infrastructure and help to achieve the paradigm shift in the sector. Resource recovery can help move away from traditional public financing to innovative financing and new business models that can attract the private sector in the financing of infrastructure. Resource recovery projects can leverage extra revenue streams or cost savings (see Figure 4.1) to reduce the financial risk of infrastructure projects, improve the rate of return, and create a more attractive environment for the private sector. These revenues are not solely reliant on public sector tariffs but on the market for by-products that are generated during the wastewater treatment process. Figure 4.1 Potential revenue streams and savings from resource recovery in WWTPs This requires the identification and development of new markets such as wastewater reuse, biogas, and biosolids. The rate of return from these markets can be high and could be of interest to operators, private investors, and investment funds. 31 Final Report for Internal Use Only Reuse and resource recovery projects in wastewater treatment plants can provide a long- term steady financial return, allowing them to reduce their financial cost, thus attracting those long-term investment funds and institutional investors that are comfortable with long-term regular lower yields. This is shown in several of the cases documented, such as San Luis Potosi, Durban, or Ridgewood, where well-designed contracts secured demand for resource recovery products, ensuring a stable revenue stream and attracting private sector participation. 4.2 Financing framework: Toward blended finance As previously mentioned, the financing needs to achieve the Sustainable Development Goals (SDGs) in the region are large and public funding cannot by itself cover these gaps. Private sector involvement is needed, both in providing capital for investments in wastewater and to provide new technologies and skills to implement and operate them. Reuse and resource recovery projects offer an opportunity to attract the private sector. This is exemplified in most of the case studies reviewed for this report. Most large wastewater projects, particularly those that involve reuse and resource recovery from the onset, have been implemented through various forms of public-private partnerships (PPPs) using a mix of public and private finance. The funding of the PPP would typically be a blended financing scheme, incorporating a mix of subsidies or concessional finance from national government and cooperative partner sources and private equity and debt finance, largely commercial in nature, to be recovered through user tariffs and revenues resulting from the sale of treated water and its by-products. There are several types of financial instruments through which public and private investors can develop their projects, which are described in detail in ECA (2019). Traditionally, public wastewater finance will entail subsidies or incorporate a high degree of concessionality. There are two main aspects justifying these subsidies: • Economic justification. There are public health benefits, as well as environmental factors and other positive externalities which would justify wastewater projects, particularly those involving resource recovery, being subsidized. • Practical justification. Water tariffs in many countries are below full-cost-recovery levels, and it is politically and socially difficult for these to be increased when the costs of large wastewater investments are added into the revenue requirements.4 Subsidies might be particularly relevant for early stage reuse and resource recovery projects. In the early stages of market development, reused water and recovered products might need to be priced below cost, as proof of concept. Once users are familiar with these products and are confident that the regulatory system is operating satisfactorily to ensure adherence to hygiene 4There are, however, very important exceptions to this rule —and especially so in LAC—that should be highlighted; for example, many of the state and municipal utilities in Brazil recover their water supply, sewerage, and wastewater treatment costs through their tariffs. 32 Final Report for Internal Use Only and safety standards, the prices can then rise to eventually match or exceed their production costs. Some of the case studies reviewed show that resource recovery projects can cover all operation and maintenance (O&M) costs or even generate profits. Therefore, the need for subsidies for resource recovery projects should decline over time once the business model has been proven successful or if demand for by-products increases substantially (for example, with growing water scarcity). Recognizing that subsidies are necessary does not mean that indiscriminating levels of subsidies are to be provided. The level of subsidy that is warranted is to be determined by economic and financial analysis of the wastewater project. Guidelines on how the subsidy level is to be determined are given in ECA (2019). Moreover, to ensure that subsidies will not impair efficient performance, the subsidy schemes should be incentive based (Error! Reference source not found.), as also described in ECA (2019). Finally, given the long-term benefits and potential positive externalities of resource recovery projects, a life-cycle cost analysis could be an important decision-making tool to evaluate and justify the financing of treatment plants and sanitation initiatives. A discussion of how this tool can be used instead of the simple payback method can be found in the World Bank report “Energy Management for Water Utilities in Latin America and the Caribbeanâ€? with a focus on financing energy efficiency and energy recovery measures in treatment plants (Lackey and Fillmore 2017). Box 4.1 Results-based financing of wastewater infrastructure: PRODES, Brazil The most prominent incentive-based subsidy example that has been used to finance wastewater is the results-based financing scheme PRODES in Brazil. PRODES is a federal financing scheme set up primarily for depolluting important hydrological basins. PRODES does not directly fund the capital costs of wastewater treatment infrastructure. Instead, PRODES provides clear incentives for efficient investment and operation of wastewater treatment plants, because payments are linked to the quality of treated wastewater based on certified outputs. PRODES did not focus on resource recovery; however, having a plan for the reuse of treated wastewater is one of the criteria for obtaining PRODES support for a wastewater treatment investment. A secondary results-oriented objective of PRODES is to improve the decentralized management of water resources. Criteria for receiving the award includes, for example, the existence of a functioning Basin Committee and evidence of planned implementation of water resource plans and investments. PRODES is further explained here. 4.3 Learning from successful resource recovery projects Several case studies were analyzed as part of this report, including their business models, the financial instruments used, the contract agreements, the role of the stakeholders, and the enabling factors. These case studies exemplify different aspects covered in the report: efficient subsidies, blended finance, successful PPPs, innovative contracts and partnership models that ensure a stable revenue stream for the plant and enable access to finance, cost saving models, 33 Final Report for Internal Use Only etc., all achieved through resource recovery principles. All case studies will be extensively documented in ITAC (2019). The lessons learned and conclusions from the case studies include the following. Market and business potential There is significant potential in LAC for products recovered from wastewater. The overall LAC market potential for three types of related businesses (water, energy, and biosolids) has been estimated between $3 and $62 billion (see ITAC 2019). These three markets are growing beyond their development stage and have an important growth potential. If designed correctly, all by-products can be profitable. For treated wastewater reuse, the most profitable business is to identify an industrial end user. As shown in the case studies of San Luis Potosi, Cerro Verde, Durban, and Nagpur, the sale of treated water to industry can help cover most or all of the O&M costs, in particular where water is scarce or where water tariffs for industry are high. Under those circumstances, the water utility is in a unique competitive position since the treated wastewater is an attractive option or may be the only available source for the counterpart. If the end purpose is irrigation, aquifer replenishment, environmental remediation, or similar uses, most likely subsidies will be needed since the price for the treated water will be below cost or even free. For example, farmers are not willing to pay more for the treated wastewater than the amount they pay for freshwater, which in many cases is provided at no or very low cost. Moreover, sometimes farmers using untreated wastewater are reticent to use treated wastewater because they think it will affect their yields, as happened initially in the case of Atotonilco, México. Nevertheless, depending on the local regulations, the operator can still benefit from this business model by saving the water discharge fee costs. Moreover, if all benefits (environmental, social, health related) would be considered in a long-term cost benefit analysis, subsidizing these types of projects is economically justifiable, especially in water- scarce areas. Only in some cases, such as where water and fertilizers are costly or scarce, treated wastewater can be very valuable for farmers due to the potential benefits for crop yields and size. Under the right conditions and with a strong awareness campaign, they might be willing to pay full price for the treated wastewater. The energy business’s profitability and the end use for the biogas will depend on the local prices for energy. If gas prices are high the biogas can be sold to a gas company; if electricity prices are high, the biogas produced can be used in the plant to generate the heat and electricity the plant needs and therefore save electricity costs. This is shown in the different cases analyzed: La Farfana sells the biogas to the gas company with a long-term agreement, Atotonilco and Cañaveralejo use the biogas for self-consumption, SEDACUSCO is installing its own power plant for self-consumption, and Ridgewood is producing 100 percent of the energy required by the wastewater treatment plant (WWTP). The energy business can be profitable since the capital expenditure (CAPEX) costs are relatively small compared with the CAPEX costs of the WWTP. In addition, the utility can get carbon credits since biogas is considered a renewable source. This profitability is shown in cases like La Farfana in Santiago, Chile, where the plant invested $2.7 million for the needed infrastructure and is getting a yearly net profit of 1 million from biogas activities (Aguas Andinas 2017). This translates into a profit of 40 percent, and the investment is recovered in a little over two years, where demand risk is low since there is a well-structured contract and 34 Final Report for Internal Use Only there is only one end user (ITAC [2019] for the full case study). Another example is EBMUD, for which energy is becoming its main business, producing higher profit from the sale of energy than from the water treatment business (Error! Reference source not found.4). Entering the energy business can be very attractive, but there are several reasons preventing LAC water utilities from doing so. First, many water utilities do not see themselves as potential energy producers since this is beyond their scope or core business. However, as shown in the case studies, considering investing in energy generation can generate extra revenue streams which can help finance and/or cover the O&M costs of the water business. Water utilities could focus on their business and outsource the energy business to specialized companies in the sector, though PPPs, subcontracting, or other arrangements. Second, economies of scale are also a preventing factor since there is a minimum efficient size for these types of projects. Finally, and most importantly, a lack of clear rules, regulations, and institutional frameworks in most countries in LAC regarding the sale of gas or electricity by WWTPs (and even regarding self- consumption as in the case of Santa Cruz de la Sierra) discourages WWTP operators and utilities from entering the energy business. The biosolids business is the least developed of the three analyzed. In fact, most WWTPs’ biosolids generated in LAC are either deposited near the plant or the utilities pay the gate fees to deposit them in landfills. The main issue with biosolids is that there is no clear price for the final product since usually the potential customer is not ready to pay for it (farmers, public authorities for land restoration, etc.). However, those business models could still be beneficial for the WWTP operator, since it can save the transport and landfill gate fees, which can be significant as shown in the case of SEDACUSCO. Moreover, the use of biosolids can generate important economic and environmental benefits. For example, the case of SEDACUSCO shows the potential benefit of using biosolids for soil restoration to remedy nonpoint source pollution and to help conserve soil moisture. Reducing the amount of organic matter that ends up in landfills also reduces GHG emissions. Ideally, the public sector would account for those benefits and create incentives for these types of businesses. As in the case of energy and water reuse, one key aspect that is preventing the beneficial use of biosolids in LAC is the lack of clear regulations. For example, many LAC environmental agencies do not have enough resources to monitor and guarantee the quality of the biosolids and, therefore, as a precaution, do not allow their usage for agriculture purposes. In a more common situation, biosolids are allowed for only land remediation and soil restoration, with little potential revenue. A wastewater treatment plant in Cusco, Peru, operated by SEDACUSCO, saves around $230,400 a year in transport and landfill fees, due to an agreement with a local compost producer. The compost produced with the plant’s biosolids is then used as part of the water management project to preserve the Piuray Lake. The co-digestion business comprises components of energy and biosolids combined in such a way so as to be attractive to private investors. In co-digestion the WWTP sludge is only a part of the digesters’ feedstock. The digesters also receive other organic matter such as domestic, commercial, agricultural, and industrial organic waste. This extra organic matter allows the WWTP to generate more biogas and as a result, to produce more electricity, potentially exceeding its energy needs. If there is energy excess, electricity can be sold to the market at the feeding rate. Moreover, the WWTP can also have an additional source of income from the tipping fees (or gate fees) from collecting other organic waste (i.e., industries pay the WWTP a 35 Final Report for Internal Use Only fee to get rid of their organic waste. The case studies of EBMUD and Ridgewood (Error! Reference source not found.) exemplify how both utilities understood the potential of co- digestion, invested in expanding their digesters and their power generation capacity, and started a strong marketing campaign to obtain additional feedstock for digestion, producing larger amounts of biogas and electricity. Box 4.2 The Village of Ridgewood leveraged the potential of resource recovery, attracting the private sector to fully finance the retrofitting of their WWTP for co-digestion under a PPP agreement, implying zero investment costs and minimum risk for the village of Ridgewood The case of Ridgewood shows how a well-designed public-private partnership between the village of Ridgewood’s water utility and a co-digestion technology provider and engineering company (Ridgewood Green) led to a successful co-digestion project. The project allowed the wastewater treatment plant to generate enough biogas to meet all the plant’s power needs, becoming energy neutral and decreasing CO2 emissions. Ridgewood Green made all the up- front capital investment needed to retrofit the plan for co-digestion. In return, Ridgewood purchases the electricity generated by Ridgewood Green for the operation of the plant at a lower price than it used to pay for electricity from the grid. The power purchase agreement includes a fixed increase rate of 3 percent per year for inflation, establishing the village’s price and Ridgewood Green’s revenue for the duration of the contract. Therefore, this agreement benefits both parts. Since Ridgewood Green invested in the co-digestion infrastructure, it owns this new equipment, and the village of Ridgewood owns and operates the plant with technical support from Ridgewood Green. Ridgewood Green expects to get a reasonable return on its investment through an innovative revenue model that leverages different revenue streams: (i) selling electricity to the village of Ridgewood; (ii) selling all the renewable energy certificates (RECs) to 3Degrees, a leader in the renewable energy marketplace under an agreement of several years; and (iii) tipping fees for the organic matter collected for the anaerobic digesters. The full case study can be found here. Business structures to promote resource recovery projects The cases in ITAC (2019) exemplify a variety of business structures that could be replicated in the region. A further analysis can be found in this same upcoming technical document. Public-private partnership. A water utility enters in a PPP agreement with a private operator for a specific reuse and/or resource recovery project. The project may be linked to the construction of a new WWTP (case of San Luis Potosi and Atotonilco, for example) or to the retrofitting or adaptation of an existing one (case of Ridgewood or Durban, box 4.2). The most- used PPP model seen in the cases is the build-operate-transfer (BOT) model. This business model is adequate for water utilities which have limited resources and need to tap on private sector knowledge to develop their reuse and/or resource recovery business model. This could apply to many medium-sized utilities in LAC. 36 Final Report for Internal Use Only Box 4.3 In Durban, South Africa, the private sector provided all the capital needed to implement a wastewater reuse project for industrial purposes under a PPP agreement with the local water utility, which resulted in a sustainable solution with no extra cost for the municipality and the taxpayers Durban’s sanitation capacity was reaching its limits. Instead of increasing the capacity of the existing marine outfall pipeline to discharge primary treated wastewater to the ocean, Durban explored the possibility to further treat it and reuse it for industrial purposes. Mondi, a paper industry, and SAPREF, an oil refinery, expressed interest in receiving the treated wastewater. Given the technical complexity, cost, and risk of the project, the municipal utility opted to implement the project under a public-private partnership. After an international bidding phase, Durban Water Recycling (DWR), a consortium of firms, was chosen to finance, design, construct, and operate the tertiary wastewater treatment plant at SWTW under a 20-year concession contract. The municipal utility would still be in charge of the preliminary and primary wastewater treatment, and the effluent would be sent to the plant operated by DWR to be treated and then be sold to industrial users. The private sector provided the entire funding needed for the project. DWR also undertook the risks of meeting the water quality needs of the two industrial users. The guaranteed demand for treated wastewater from the two industrial users made the project economically attractive and allowed DWR to undertake the investment risks. The sale of treated wastewater to the industry has freed enough demand of potable water to supply 400,000 extra people in the city. Moreover, as a result, the need for investment in new infrastructure for water treatment has been postponed. See full documented case study here. Outsourcing. A water utility sells or gives away untreated wastewater, dried sludge, or biosolids to an operator who carries out the business. This is the case of Cerro Verde for wastewater and SEDACUSCO for biosolids. The benefit for the utility is that it saves the wastewater treatment cost—in the case of Cerro Verde—or the biosolids disposal cost. This is an adequate model for water utilities with limited financial and operational development capability. This is also adequate for small utilities that do not reach the minimum size to be profitable and sustainable. (This business structure can also be arranged under a PPP model as in the case of Cerro Verde). Aggregator. This is the other side of the coin of the abovementioned business models. An independent company can collect and transport the raw material from the WWTP in an area, process it in its facilities, and become a seller of energy and biosolids. This is the case of compost processers and energy service companies. Financially the aggregators may be private or an association of utilities and operators, and can take the form of partnerships or limited partnerships. Governments may support their development with different incentives and they can be financed with corporate debt or debt emission. Co-digestion. The water utility can become an aggregator itself, collecting organic matter from other industries. Co-digestion expands the resource recovery business with additional solid waste, which can eventually become the main source of feedstock for the digesters and the main source of income. This is the case of Ridgewood and EBMUD. Co-digestion needs better landfill and energy regulations in order to expand rapidly. Biofactory. A water utility in association with a sound operator creates a subsidiary company to develop a business model. This is the case of Aguas Andinas and its “biofactoriasâ€? model. The WTR business unit works with potential customers, the government, and the regulator to 37 Final Report for Internal Use Only develop different markets (energy, industry, agriculture) and since it is a subsidiary, the utility can keep part of the additional profit to reinvest it in the WTR business. This business is adequate for already creditworthy utilities that have their own financing means to enter into new ventures. Financial structures and instruments In the cases analyzed, the BOT structure is the most used to finance the resource recovery project and leverage the private sector. The financial instruments used to finance the BOT model are typically a mix of government grants, operators’ corporate bonds, bank loans, and operator’s equity. Aside from cases such as Cerro Verde or Durban (fully financed by the private sector), government or multilateral grants still represent a large part of the financing in order to reduce the financial risk of the PPP. For low-profit projects, government and other grants might always be needed, but given the multiple environmental, social, and long-term benefits of resources recovery, this is usually justified. For profitable projects, government grants might be justified in the initial demonstration phase of the projects but once the profitability is proved, grants can be reduced or substituted by other financial instruments providing similar guarantees to the project. For different financial structures, it is worth noting the cases of Tlalnepantla de Baz and SEDACUSCO. In these cases, it was the utility who implemented the business model without any PPP partner. These utilities followed different financial approaches: in Tlalnepantla de Baz, the municipality and the municipal operator decided to carry out and finance the project with their own means. They issued municipal bonds and guaranteed them pledging future revenues from the sold recycled water and from other municipal taxes. This is a trust fund, similar to the federal trust funds like FONADIN in Mexico, although structured at the municipal level, which is quite innovative. The fund is also backed partially by a multilateral guarantee. SEDACUSCO financed the construction of the WWTPs with a loan from the Japanese Bank for Development, which assumed the financial risk. The tariff increase allowed paying back of the loan and SEDACUSCO. Success and enabling factors Physical factors. As shown in the case studies, physical factors have often been the main feature enabling reuse and resource recovery projects. For example, it is not a coincidence that the reuse of treated wastewater occurs in countries and regions facing water scarcity. Also, the location of the closest potential client matters, since transporting water long distances could become difficult financially. Physical or geographical factors can also trigger changes at the institutional level (i.e., by increasing freshwater tariffs for industry) and can also incentivize industries to innovate and find alternative solutions. On the other hand, abundant and cheap water resources and energy can be a barrier to the development of wastewater reuse and energy generation projects. If the WWTP still needs to be designed, all these physical factors can be considered when possible, specially the location of the WWTP in relation to potential end users. Policy, institutional, and regulatory (PIR) factors. Besides physical factors, strong institutions and/or a clear regulatory framework have also triggered reuse and resource recovery projects in the cases analyzed. In the case of San Luis Potosi in Mexico, the state government and state water commission (CEA) have been pioneers in understanding wastewater as a resource to utilize rather than a waste. To protect the aquifer and to promote the use of wastewater for nonpotable uses such as for agriculture and industry, the state government implemented an Integrated Plan for Sanitation and Water Reuse. The project also had financial support from the 38 Final Report for Internal Use Only National Water Commission (CONAGUA in Spanish) and of the FONADIN fund (a financing instrument that promotes private sector participation by providing capital expenditure subsidies). This institutional arrangement was crucial for the success of the project. Furthermore, in this case the industry water tariffs were also higher than the price of treated water, making the recycling alternative attractive. On the other hand, there are many places in LAC where industries do not pay to withdraw freshwater for their operations. Therefore, physical factors can trigger the development of reuse and resource recovery projects, but PIR interventions will be needed to scale them up. Socioeconomic factors are those related to the country or region social organization, level of development, economic sectors, traditions, and other socioeconomic factors. These can incentivize or disincentivize the development of all the initiatives mentioned throughout the report. For example, communities engaged in the protection of freshwater resources and the environment can promote reuse and resource recovery projects and can foster initiatives at the basin level via civil organizations or their representatives. Socioeconomic changes can also help shift the paradigm in the sector. In the SEDACUSCO case, the promotion of tourism and culture in the area encouraged the cleaning up of the river and as a result, the development of the biosolids market. On the other hand, in cases such as Cerro Verde or Atotonilco, social elements and customs posed challenges during the design and implementation of the projects. Farmers can oppose the use of treated wastewater because of misconceptions of the impact on their crops, or because they have always used untreated wastewater. Citizens can also oppose the construction of WWTPs near their houses because of taboos on sanitation facilities and/or lack of information. To ensure that socioeconomic factors enable a paradigm shift, it is necessary to involve civil society and to design a strong awareness campaign, and communicate and inform the potential benefits of reuse and resource recovery projects. Mitigating the demand risk of by-products. A specific risk associated to reuse and resource recovery considered one of the most critical obstacle for private financing and participation is that of variable demand. This refers to the uncertainty regarding the actual volume of by- products that will be eventually used by end users or consumers and it determines the risk in the project’s cost recovery. To mitigate this risk, the case studies show that several approaches are possible but a well-designed contract between the parties is essential. The financial structure will require a long-term purchase agreement that should provide securities to financial institutions that would fund the project. Most successful projects involve industries located near the WWTP (La Farfana, Nagpur, Cerro Verde, San Luis Potosi, Ridgewood, Durban) and a contractual structure that mitigates the risks of variable demand. Take-or-pay clauses or a sufficient fixed portion of the payment are common elements in long-term infrastructure contracts and should also be part of reuse and/or resource recovery projects in order to mitigate demand risks. Toward an integrated and circular approach The three resource recovery businesses (water, energy, and biosolids are not incompatible. In fact, they are complementary. To leverage synergies and achieve higher efficiency and profits, it is recommended that planners encourage an integrated approach to WWTP and design bids in a way to attract operators that can manage the three business models: water, energy, and biosolids. To this end the financial structure must include increasing efficiency challenges. Ideally, resource recovery projects and sanitation programs are not only planned within the 39 Final Report for Internal Use Only river basin framework, but also integrated in urban planning and/or in integrated urban water management plans. This could for example ensure the siting of treatment plants close to potential users (industry, irrigation, golf courts, etc.) Box 4.4 The win-win-win potential of a circular economy If reuse and resource recovery projects are designed correctly as shown in many of the case studies, all parties can benefit. Customers—industry, farmers, WWTPs themselves, and so on—can potentially get a product (water, energy, biosolids) more sustainably and at a lower cost. Operators can get additional revenue streams to cover operation and maintenance costs (besides tariffs). Water utilities can, depending on the business model and financing arrangement, reduce capital expenditure and operation and maintenance costs, reduce and/or eliminate discharge and gate fees, and decrease and/or eliminate electricity costs, etc. This will promote a shift toward more financially and environmentally sustainable water utilities. Citizens can also benefit from reuse and resource recovery projects, by receiving a more sustainable sanitation service. 40 Final Report for Internal Use Only 5. The policy, institutional, and regulatory frameworks needed to promote a paradigm shift in the sector As mentioned in the previous section, many reuse and resource recovery initiatives happen ad hoc, but not at a regional or at a country level in a systematic way, because they are triggered by specific local conditions. As demonstrated by the case studies, usually specific climate and environmental conditions (water scarcity, low precipitation, low water tables) have pushed the public and private sector to design and invest in innovative solutions. The right policies, institutions, and regulations are crucial to ensure that a paradigm shift in the region happens in a systematic and planned way and at scale. Policy, institutional, and regulatory (PIR) initiatives can either trigger or become a barrier for reuse and resource recovery projects. Measures by the government such as pricing freshwater use correctly, especially for industries, could create incentives to switch to use treated wastewater instead (see the San Luis Potosi case study). Economic instruments such as pollution taxes and fees can positively contribute to reducing the treatment burden on the wastewater treatment plant (WWTP), positively impacting capital and operating expenditures. Governments can also promote energy generation in WWTPs as part of their renewable portfolio, providing WWTP operators the same incentives they would offer to the energy sector. A better regulation of landfill use could also promote the beneficial use of biosolids, among others. On the other hand, banning treated water reuse for agriculture, blocking power generation license for biogas producers, or classifying wastewater biosolids as dangerous materials can all pose a barrier to the development of reuse and resource recovery projects (see case studies in ITAC [2019]). Some recommendations for PIR incentives for wastewater to resource development and investments are summarized below. A deeper analysis can be found in ECA (2019). 5.1 The importance of clear policies One of the key factors that can encourage the development of wastewater reuse and resource recovery is having a clear national policy objective. A national policy statement, such as the Brazil National Water Resources Policy, shows the government’s commitment to the development of wastewater management that includes reuse and resource recovery. As seen in the case studies, this policy vision is missing in several countries. In many cases, projects have successfully been implemented as ad hoc solutions and not as part of a systematic policy objective. Having a national policy that promotes and shelters these initiatives in turn provides positive incentives and guidelines to stakeholders such as: • Relevant public sector departments, to consider and develop the necessary regulations and develop the institutional capacity of an institution that will be responsible for implementing the policy and developing the necessary tools to implement the national policy. • Different levels of governments, to develop local level wastewater management and investment plans that includes reuse and resource recovery. • Private sector actors: backed by government commitment, private firms will perceive a more stable environment to invest in wastewater reuse and resource recovery 41 Final Report for Internal Use Only technologies and facilities; for academia and think-tank organizations, this provides an incentive to conduct more research into all aspects of wastewater reuse and resource recovery. • Donor and development partners, to provide technical and financial assistance to the national and/or local government to implement the policy. In order to be effective, the national level policy needs to be specific about what problem the policy is designed to address. An effective policy must include a clear reason for reuse and resource recovery that can be embedded in the legal, institutional, and regulatory framework. Clarity as to why the policy is put in place can increase its chance of successful implementation and reduce the potential application of isomorphic mimicry.5 The World Health Organization (WHO 2006), in “Guidelines for the Safe Use of Wastewater, Excreta and Greywater,â€? provides step-by-step guidelines for how national governments can develop a policy framework for the reuse of wastewater. Policy alone is not enough to generate incentives for wastewater resource recovery; it needs to be supported by a legal and regulatory framework and an institutional arrangement. The types of legal frameworks for policy implementation are discussed in ECA (2019). 5.2 Institutional arrangements to create incentives In order to effectively implement wastewater management programs, adequate institutional structures must be aligned with policy and regulatory frameworks to create the right incentives for reuse and resource recovery. Several institutional barriers, however, hinder the development of these activities. Among the major obstacles, a key institutional challenge is the lack of coordination between different levels of government and between different sectors. Coordinating various levels of government Coordination and cooperation between different levels of government plays a crucial role to ensure that roles and responsibilities for wastewater management and resource recovery are clearly assigned and fulfilled. In many cases, the responsibility for policy development in the wastewater sector lies in the national or state level government, while the planning, investment, and implementation of the wastewater services are within the local- or municipal-level governments (e.g., Mexico and Colombia). Therefore, it is important to have clear coordination mechanisms between the different levels of government. There are different coordination mechanisms that can be used to address the institutional disconnect between levels of government: creation of a water/wastewater central institution such as the National Water Commission (CONAGUA) in Mexico; contractual arrangements between different levels of government clearly setting out roles and responsibilities of each part of the agreement through key performance indicators and other monitoring mechanisms; steering committees and working committees (less formal institutional arrangements with similar functions as the more 5 For a detailed description of the isomorphic mimicry concept, see the World Bank (2018b). 42 Final Report for Internal Use Only formal commission above); reinforcing or creating strong river basin institutions; and ad hoc and project-based stakeholder engagement (such as in the case of Cerro Verde, Peru). These arrangements are discussed in more detail in ECA (2019). Cross-sectoral linkages and coordination Wastewater treatment and reuse and resource recovery also involve stakeholders from different sectors such as the water and sanitation sector, environmental stakeholders, energy, agriculture and food, and health, among others. Therefore, a form of coordination between these different stakeholders is needed to ensure the right incentives are created for wastewater resource recovery. Some ways to improve coordination among different sectors are: • Alignment in legislation and regulatory frameworks across sectors. Public resistance and low acceptance of treated products are often reinforced by legal structures that limit or even prohibit the reuse of reclaimed water (e.g., Chile despite the successful experience in La Farfana [ITAC 2019], the water rights system does not allow the selling of treated wastewater), adding further barriers to the objective of promoting resource recovery. Supportive policy, regulatory, and legislative frameworks in all relevant sectors including wastewater, agriculture, energy, and health should be in place to ensure a consistent enabling environment for wastewater investment and reuse. • Contractual agreements between different sectors stakeholders, as in the case of San Luis Potosi, where a national agreement was signed between the National Water Commission (CONAGUA), the Federal Electricity Commission (CFE), and the state government for the sale of treated wastewater to a thermal power plant for cooling purposes. This case shows how intersectorial coordination challenges can be successfully addressed if specific conditions are met. • Collaboration in development of multisector master plans. Such collaboration should consider synergies and trade-offs among different sectors to achieve policy coherence, allowing political and market forces such as profit-seeking motives to exploit the full potential of cross-sectorial linkages (see Rio Bogota example in Infotec [2018]). • Other examples. Partnerships and agreements between stakeholders from different sectors include commissions such as the Joint Commission for the Reuse of Water for Irrigation in Bolivia, partnerships between farmers and water supply agencies (directly or through agricultural departments), and water user associations, among others. Private sector engagement Although wastewater services are typically provided by state-owned utilities, as shown in this report, in most countries of Latin America and the Caribbean (LAC), the case studies analyzed have demonstrated that the involvement of the private sector has been key in the promotion (see Cerro Verde case study in ITAC [2019]) and financing (see Tenorio case study) of resource recovery projects. Private sector involvement has supported the development of these projects through funding, promotion, and technology transfer. A well-developed and implemented PPP law will therefore be important to attract private operators. The government can also provide attractive profitability to investors with a blend of public/private funds and public grants to finance the 43 Final Report for Internal Use Only project and advice during the PPP process to ensure a sustainable financial structure and a fair contract between the relevant parties. Other key elements to ensure successful implementation of PPP projects include (but are not limited to) strong stakeholder participation, with dialogue and transparency throughout the project cycle and with strong support from the government, clear allocation of roles and responsibilities, as well as allocation of risks between public and private partners; and the establishment of adequate governance committees to provide guidance over PPP projects. This is particularly evident in the PPP implemented in New Cairo, Egypt, where the government addressed issues resulting from the lack of PPP experience in the country by establishing a PPP Central Unit as well as a set of laws and regulations governing PPP projects. Similarly, PPP governance committees were created to supervise the correct functioning of infrastructure and deal with unexpected changes in the contracts. Internal organizational and behavior changes Besides external factors, resource recovery initiatives also face challenges within institutions. In order for resource recovery initiatives to take off, it is necessary to change organizational behavior and develop a devoted leadership and team to champion and raise awareness of this issue at all levels in the organization. For example, Aguas Andinas in Chile has a dedicated team for the promotion of circular economy principles and waste-to-resource principles. Another example is the creation of specialized units either within utilities or within ministries to create the capacity to design, develop, and manage PPPs (Error! Reference source not found.). Box 5.1 New Cairo, Egypt: A successful PPP to increase wastewater coverage and foster wastewater reuse As the first public-private partnership (PPP) in Egypt, initially the project faced significant governance issues, since there were no legal or regulatory structures to handle PPPs. The solution was to use the process of the New Cairo wastewater treatment plant to design a model for future PPPs in Egypt and eventually approve a PPP law in 2010. To ensure that the first project was a success, outside advisors were enlisted to assess and evaluate broad options for PPP structuring. The Government of Egypt worked with the International Finance Corporation and the World Bank Group’s Public Private Infrastructure Advisory Facility to create a conceptual framework and transaction model. To facilitate the PPP process, a PPP Central Unit was created to act autonomously within the Ministry of Finance. Following the success of the project, the government has created a set of laws and regulations that will govern future PPP projects in the country, drawing on lessons learned from the New Cairo project. The establishment of a PPP central unit enabled coordination within the government. The full case study can be found here. The management of wastewater is intrinsically linked to an ability to monitor and enforce water quality standards. Countries in the region should strengthen their enforcement capabilities. Without the right monitoring and enforcement agencies and the right administrative procedures to impose sanctions, it will be difficult to promote wastewater and resource recovery initiatives. In several countries of LAC, enforcement agencies are weak or they lack water quality monitoring infrastructure. But advances can be seen in the region. For example, in Peru, the World Bank has been providing support to generate and share information for environmental quality control at the national level, by supporting the government’s efforts to 44 Final Report for Internal Use Only improve its environmental monitoring and analytical capacity, increase public access to environmental quality information, and promote public participation in environmental quality management. Transparency and access to information are important aspects of regulatory and enforcement capacities. 5.3 A robust regulatory framework Designed to support the implementation of policy that encourages wastewater reuse and resource recovery and supported by an institutional structure that can monitor and enforce the regulation, a regulatory framework provides incentives for wastewater reuse and resource recovery. On the other hand, some regulatory frameworks can create disincentives for wastewater reuse and resource recovery. Clear regulation for by-products. One of the main issues with resource recovery from wastewater is that in most LAC countries the by-products (treated wastewater, energy, and biosolids) are not clearly regulated and have no clear value or price. As mentioned in section 4.3 (lessons learnt from the case studies), this disincentivizes both the utilities and private investors to get involved in waste-to-resource projects. For example, if there is no clear regulation for the use of biosolids in agriculture (e.g., legislations in Panama and Colombia are very strict on the reuse of biosolids), there will be no demand for this by-product; or if there is no regulation for WWTPs to be able to sell electricity to the grid, no water utility will try to develop that business; or if industries do not pay a reasonable freshwater abstraction fee, they have no incentive to switch to treated wastewater. In the San Luis Potosi example, the power plant paid a price to withdraw freshwater from the aquifer. Treated wastewater was therefore a very attractive option since it was cheaper than the freshwater that the plant was using. Intersectoral regulation. To really create a regulatory framework that incentivizes wastewater reuse and resource recovery, it is imperative that regulatory frameworks from different sectors that are relevant to wastewater reuse and resource recovery are aligned (see difficulties in aligning water and energy regulatory frameworks in SAGUAPAC case study). The regulatory framework to govern wastewater reuse and resource recovery will need to span across different sectors, as well as have the flexibility to adapt to local conditions. Both technical regulations (to ensure human and environmental health and safety) as well as economic regulations (to ensure market competition, performance of service providers, and cost-reflective tariffs) are needed. In several sectors, technical and economic regulations for the different sectors already exist. However, to create a regulatory environment that will encourage wastewater reuse and resource recovery, there is a need to align all existing regulation. The case studies presented depict how each project managed to bridge across intersectoral regulation, particularly between water and energy. In most cases this was achieved through innovative contracting arrangements. For further details, ECA (2019) expands on this issue and on the regulatory frameworks and incentives for resource recovery. Clear water pollution regulation and adequate control of industrial discharges. In cities where industries contribute a significant amount of wastewater, the enforcement of industrial pretreatment and control programs is essential for the minimization of chemical risks and the successful operation of any treatment plants or effluent irrigation schemes. The establishment and implementation of industrial discharge standards is important to promote industrial pretreatment programs and control certain industrial discharges that may be critical to the operation of wastewater treatment plants and the quality of treated effluents and biosolids. 45 Final Report for Internal Use Only Quality standards must be set up for industrial wastewater discharged into municipal sewerage systems to ensure that heavy metals, organic toxins, salts, or other harmful contaminants generated by industrial activity do not reach levels that may damage pipes, inhibit the biological treatment processes, remain in the effluent in higher concentrations than permitted for irrigation use or environmental discharge, or accumulate in the sludge and limit or even prevent its disposal or reuse as biosolids. 46 Final Report for Internal Use Only 6. Conclusions and the way forward for the region Wastewater reuse and resource recovery will soon become key aspects of wastewater management strategies worldwide. The scarcity of freshwater in the face of population growth and rapid urbanization, the challenge of meeting the Sustainable Development Goals (SDGs), and the logic of the circular economy have created a compelling incentive to reuse and recover wastewater. The linear approach to wastewater as something to dispose of must give way to a more circular conception of wastewater as a potentially valuable resource. In the past, the incentives for reuse and recovery were diluted by inconsistent policies, and institutional and regulatory structures focused solely on wastewater treatment and disposal. The necessary paradigm shift is well under way: wastewater policies in many countries already include reuse and resource recovery. As more join them, the new paradigm will boost the sanitation sector and contribute to the achievement of the SDGs. Four actions are key: â–ª Wastewater initiatives must be part of a basin planning framework to maximize benefits, resources allocation, and stakeholder engagement. â–ª Water resource recovery facilities must gradually replace wastewater treatment plants (WWTPs). At the same time, the efficient and effective management of wastewater infrastructure is crucial to foster reuse and resource recovery. â–ª Innovative financing and sustainable businesses models in the sector must be explored and supported. â–ª Policy, institutional, regulatory, and financing frameworks must be reviewed in each context and fashioned to promote the paradigm shift in the sector, a process that may profitably take place in conjunction with reviews of the country’s water sector and its plans for low-carbon development and climate-change mitigation and adaptation. Important efforts are needed to align policy, institutional, regulatory, and financing frameworks to encourage and incentivize the development of wastewater resource recovery projects. Although policy and regulatory reforms are context specific and linked to the political economy of each country, a clear policy statement of the reason for resource recovery as part of a broad policy on water is a good first step. Around it, commitments from high-level political leaders can coalesce and public support can be built. A set of policies to create incentives for resource recovery from wastewater comes next, accompanied by complementary institutional, regulatory, and financing frameworks that can be improved over time. In fact, flexibility and adaptability may well be more conducive to progressive adoption of resource recovery practices. The policies and frameworks then need to be cascaded down from the national or federal levels to lower levels. When designing reuse and resource recovery projects, it is imperative that technological and commercial risks be properly assessed and mitigated to instill confidence that resource recovery projects will be sustainable. New or improved institutional arrangements may be needed. Such arrangements should universalize basin-level planning and encourage collaboration between different levels of government, as well as between different sectors. 47 Final Report for Internal Use Only Private sector involvement in wastewater (including resource recovery projects) has proven to be key for the promotion of waste-to-resource projects. Private sector participation brings technical expertise and technology, as well as investment in infrastructure and technology. Moreover, early on private sector participation has led to the successful identification of resource offtakers from wastewater treatments plants. Nevertheless, effective private sector participation depends on a conducive enabling environment for investment and a clear policy and regulatory framework. Various forms of public-private partnerships will be needed for the financing of waste-to- resource projects, especially since the up-front investment requirements of reuse and recovery projects are beyond what many national governments can afford. Blended finance is typically necessary, with subsidies from governments or donors combined with private equity and debt financing that is recovered through user tariffs and resource recovery revenues. The level of subsidy warranted should be determined by economic and financial analysis at the basin level. To provide incentives for efficient performance, subsidies should be disbursed based on achieved results. Technical standards for water reuse and biosolids are important in building public confidence and creating a market that makes resource recovery investments viable. Standards must be flexible and well adapted to local conditions, as standards that are too strict may disincentivize resource recovery. They must also be consistently enforced. Cross-subsidies from tariffs on fresh water may be needed to allow the price of reused water to be set low enough to allow the market to grow. Economic regulation can also be used to stimulate and create competition in the bioresource market. There is also a great need to align regulatory frameworks from other sectors relevant to wastewater resource recovery, as overlapping regulations can create negative incentives. Finally, it will be important to raise awareness of the reuse and resource recovery potential and benefits in the region at all levels. Through project design that ensures that those involved in resource recovery projects face appropriate incentives, including measures to mitigate risks, there can be confidence that the resource recovery projects will be sustainable. 6.1 Basic rules for planning and financing wastewater treatment plants When planning and financing WWTPs, priority should be given to projects that meet the following criteria: • The project is a prioritized component of a larger integrated water-resource management program. • The project sponsors have adequately analyzed capital and operating costs across the life cycle. • They have conducted life-cycle evaluations of the project’s environmental, social, and financial aspects. Climate resilience considerations and contributions to climate change mitigation are built in. The project will have a measurable contribution to the SDGs. 48 Final Report for Internal Use Only • The potential for the use of existing infrastructure has been analyzed and integrated into project planning. • Sponsors have chosen a technology based not only on its suitability for the specific application and initial capital costs but also on its long-term operating costs to ensure that the project can cover operating costs under viable tariffs, taking into account income from sale of water for reuse, biosolids for beneficial use, and energy generated by the facility (through biogas or hydropower) as demonstrated by the life-cycle analysis. • The project promotes resource recovery (water reuse, beneficial use of biosolids, and energy generation from biogas or hydropower) in a sustainable way. • Planners and sponsors have explored innovative and sustainable business and financial models, weighing the benefits of private sector participation in investment and operation while retaining regulatory control (preferably by an independent regulator). If the private sector is to be involved, the project must clearly indicate how it will contribute to the sustainability of the project. • Clear effluent limits are based either on the loading criteria of the receiving water body (best option) or regulatory requirements based on scientifically/economically sound legislation. • Industrial discharges are identified and specified in adequate monitoring and control systems. Industries will either pay for treatment (e.g., $/kg treated) or will reduce their discharges to agreed concentrations through in-house treatment. • The project contributes to the development of the sector by assisting in the training of government employees, local university students, operators from government-run utilities, and other professionals in the region who can gain from the experience • There is public and stakeholder awareness and acceptance on the need to implement a WWTP. A communication strategy has been developed that clearly explains the benefits of resource recovery and debunks the misconception around wastewater reuse. 6.2 Areas for deeper analysis and future work Real lifecycle analysis of wastewater treatment plants During the preparation of this report, it became obvious that reuse and resource recovery projects and initiatives will not always generate an additional revenue stream from the WWTP, usually because the end use generates low revenue—for example, if water is used for irrigation, or to recharge an aquifer, or if biosolids are used to restore degraded land. To understand the full benefits of such projects and assess the desirability of subsidies or grants to promote them, a deeper cost-benefit analysis is needed, one that takes financial, environmental, and social aspects into account. The contribution of the WWTP to the environment should be seen not only as an improvement in the quality of the receiving water body, but also as an environmental benefit associated with water reuse (substitution for alternative water sources, which is especially beneficial in water- scarce areas and, in the near future, to respond to potential impacts of climate change), energy generation from biogas (climate change mitigation and adaptation), and beneficial use of 49 Final Report for Internal Use Only biosolids as fertilizers (substitution for synthetic fertilizers, which contribute to pollution). The facility’s positive social implications should be considered over the entire cycle: jobs generated by the construction, operation, and maintenance of the plant; increases in property values following improvement of the receiving water body; alternative water sources for farmers from reuse; low-cost, valuable fertilizers for farmers from a biosolids program; and improved health from better water quality. Tariffs for wastewater should be approved and justified based on such a life-cycle analysis. Given its importance, this topic requires further analysis and implementation in future projects and lending operations. Use of economic instruments for water pollution control Economic instruments have been used in several LAC countries for several years as complementary to command and control options. Some of these applications have significantly contributed to considerable reductions in wastewater discharges. However, there has been limited scaling up of the use of instruments. 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Paris: UNESCO (United Nations Educational, Scientific and Cultural Organization). 53 Final Report for Internal Use Only ———. 2015. The United Nations World Water Development Report 2015: Water for a Sustainable World. Paris: UNESCO. ———. 2017. The United Nations World Water Development Report 2017. Wastewater: The Untapped Resource. Paris: UNESCO. WWD (Water and Wastes Digest). 2011. “Brilliant Water Reuse in Brazil.â€? WWD Magazine (online), September 12. https://www.wwdmag.com/water-recycling-reuse/brilliant- water-reuse-brazil. 54 Final Report for Internal Use Only Appendix 1. Summary of case studies Case Study Contract Circular economy model Financial structure Enabling factors Structure Institutional: Strong leadership of the BOOT 20 40% Government grant Treated Wastewater Federal and State Water Authority. Cross years from FINFRA funds reuse for: industry sectoral collaboration with CFE. (power plant cooling), Revolving 36% from Banobras agriculture (irrigation of Regulatory: local water prices at contract Mexico: San Luis purchase Loan 18 years maturity 500 ha) and signing promoted the use of non-aquifer Potosí, Tenorio agreement period environmental water. Clarity of payment mechanism and project with the conservation (wetland risks well defined and allocated. Federal 4% Equity by Risk improvement) as part of Electricity Capital company a wider sanitation and Technical: scarcity of water resource, multi- Commission water reuse plan. quality of treated wastewater tailored for the (CFE) Federal Gov. Guaranty different uses Treated Wastewater is Institutional: Strong ownership of reused for agriculture 49% Government grant experienced Water Resource Management from FONADIN (irrigation Valle institutions. Strong experience of public Mexico: Mezquital). Self- DBOOT 25 funding agency Atotonilco de 20% equity form generation of energy years Tula consortium Partner with biogas to cover Regulatory: clear regulations have allowed around 60 % of energy 31% commercial finance the reuse of water and biosolids. needs. Biosolids use for 55 Final Report for Internal Use Only fertilizers and soil Technical: multi-quality of treated enhancement. wastewater tailored for the different uses, WTTP technology adapted to dry seasons. Emission Purchase of Certified Reduction Emission Reductions Purchase Regulatory: Project failed to be implemented Agreement World Bank financing due to regulatory limitations in the energy (CERs) from Gas Bolivia: Santa sector. methane capture for bio gas CER but withdrew due Cruz de la Sierra capture. First to change in legislation Electricity for self- Technical: Methane capture technology of its kind for consumption adapted to anaerobic lagoons. low income countries. Egypt: Cairo, Treated water reuse for First PPP in 71% public finance Institutional: Strong leadership of central New Cairo agriculture Egypt government (creation of a centralized PPP 21% non-recourse project unit) Biosolids used as Design Build finance fertilizers Finance Regulatory: The full potential of the project 8% equity Operate has not been realized due to ambiguous or Transfer: 20 lack of regulatory frameworks. Both the sale years of carbon credits and the use of electricity generated have been stalled. Technical: Strong external technical support and advising (PPIAF) USA: New Jersey, Plant energy neutrality 20 years 4 million private Institutional: Strong public support and Ridgewood through the use of biogas power finance (Ridgewood commitment form the municipality. generated by the plant purchase Green) and 56 Final Report for Internal Use Only and fat oil and greases agreement Renewable energy Technical: innovation used to retrofit purchased to nearby with certificates existing infrastructure haulers municipal utility Brazil: PRODES Output based grants tied No particular Results Based Financing Institutional: Strong support from the to strict environmental contracting Finance Ministry and the National Water and managerial structure is Agency. performance standards promoted Regulatory: Strict connection between promoting resource results and financial aid efficiency. Funding eligibly tied to river Technical: Strong technical support from basin committees ANA during the certifying process. promoting a river basin planning approach South Africa: Treated waste water sold 20 year BOOT 47% Development bank Institutional: Strong coordination Durban for industrial purposes: contract of Southern Africa loan mechanisms supported by the local Modi (paper industry) government. 20% Equity and SAPREF (refinery) Technical: Closeness of treated waste water 33% Commercial Loan off takers. Technological innovations to retrofit existing plant 57