The Cost of Inaction in the Middle East and North Africa MNA Countries

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The Cost of Inaction in the Middle East and North
Africa (MNA) Countries

• by
• Sherif Arif
• Senior Environmental Consultant
• Presented at the Conference on
• Horizon 2020 and Private Sector Involvement
• Athens 22-23 October 2007

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Why estimating the Cost of Inaction?

• Environment is a public good
• It is affected by externalities
• As a result, the externalities lead to market
  failure as prices do not reflect the true social
  costs or benefits of an action

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

• Serious environmental problems related to air,
  water and waste are a drain on the economy
• How much is clean water, access to sanitation and
  good hygiene worth?
• While the investment costs of providing eg clean
  water and sanitation services are relatively well
  known
• the benefits resulting from such investments are
  more difficult to quantify
• There is therefore a need to quantify the
  benefits or costs avoided
• For the government to take informed policy
  decisions

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This may also hinder investments by the private
sector

• Private capital can flow only if
• private investments meet the basic criteria of
  sector creditworthiness,
• there is a secure legal framework, sound
  regulatory regime and
• an efficient banking sector
• Translating these criteria for the environment
  means
• internalizing the costs of past environmental
  damage
• adopting a realistic and enforceable environment
  protection law and workable EIA system,
• developing a realistic and predictable
  environmental standards and guidelines and
• establishing responsible banking sector to
  provide environmental friendly loans and minimize
  liability exposure.

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Estimating the cost of inaction would enable a
comparison between the benefits and the costs
of investing in environmental management

• To assign a monetary value on the damages
  resulting from environmental degradation for one
  specific year
• Each assessment would cover the following
  categories
• Air Pollution (indoor and outdoor)
• Water Degradation (lack of water supply,
  sanitation, hygiene, water pollution)
• Waste Management
• Land and Forest Degradation
• Coastal Zone Degradation

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Two inter-related approach

• Cost of Inaction was made at two levels
• MACRO LEVEL THROUGH
• COST OF ENVIRONMENTAL DEGRADATION (COED) STUDIES
• SECTOR LEVEL THROUGH
• THE ASSESSMENT OF IMPACTS OF ENVIRONMENTAL
  MEASURES IN THE ENERGY , WATER AND COASTAL ZONE
  SECTORS .
• Optimization of the Investments on the basis of
  the averted cost of inaction
• Waste Water Sector in 4 countries Egypt,
  Tunisia, Morocco and Algeria
• Waste water Sector along the Mediterranean Coast
  of Egypt
• Case studies on Industrial Pollution and Solid
  Waste Management

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The Cost of Environmental Degradationin the MNA
countries Environmental Category Percentage of
GDP
Source Sarraf, METAP reports 2001-2006
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Investment Decisions Resulting from Damage costs
from Air Pollution
Annual damage costs from Air pollution as GDP

• Egypt borrowed US 170 million from WB, EIB, EU,
  Afd, JBIC for Egypt-Pollution Abatement Project
  II

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Policy and Investment Decisions Resulting from
Damage costs from Water Pollution

• Morocco
• Water is one of the pillar of the WB Country
  Assistance Strategy
• A 150 million Development Policy Loan in the
  water sector was approved by the World Bank
• 60 million project in water resource
  conservation in Oum Rbiaa Basin is under design
• Lebanon
• Water and waste water projects under design
• Egypt
• EPAP II
• Extended cost of inaction to governorates of Qena
  and Damietta

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Policy and Investment Decisions Resulting from
Damage costs from Inadequate Waste Management
Annual damage costs from inadequate waste
management as GDP

• Morocco
• A Municipal Waste Management project is under
  design by the Government of Morocco and the
  World Bank
• Egypt
• Requested a loan from the World Bank and JBIC for
  municipal, medical and agricultural wastes
• Jordan
• A municipal waste management project is under
  design by the Greater Amman Municipality and the
  World Bank
• Tunisia
• Is implementing a Solid Waste Management Project
  co-financed by the World Bank
• Syria
• A Municipal Waste Management project is under
  design by the Damascus City and the World Bank

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Estimated Annual Cost of Water Quality
Degradation in Tunisia as of GDP (2004)
Source Sarraf et al , World Bank report 2006
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WATER QUALITY IN ALGERIA

• Evolution of damage of socio economic and
  environmental costs with different intervention
  scenarios till 2015 ( in US million)

Source Khelladi et al, 2002
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EGYPT DAMAGE COSTS RELATED TO WATER QUALITY
Source Egypt Country Environment Analysis,
World Bank 2004
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Benefit /cost ratios for various interventions
in the Governorate of Qena of Egypt

• Source ECON

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In addition to Investments, Cost of Inaction has
led to Policy Changes

• Cost of environmental degradation was recognized
  in the Cairo Declaration of the Euro
  Mediterranean Conference on the Environment of
  November 20, 2006, as inaction is no longer
  acceptable
• Cost of environmental degradation is used by
  other donors and national agencies in Algeria,
  Morocco and Egypt, and the Gulf Countries
• COED has been included in the World Bank
  Country Assistance Strategies of Algeria,
  Morocco, Lebanon, Jordan, and Egypt and helped
  identify lending operations in these countries
• The Government of Algeria decided to provide in
  2001 an additional US 450 million for
  environment-related investments
• Lebanon is using COED as one of its sustainable
  indicators
• Syria has required in its 10th Development Plan,
  that COED be included in all environment policies
  and programs
• Morocco has used the COED to justify their
  National Waste Water Program ( Plan National
  DAssainissement)

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Optimization of Urban Wastewater Investments
Along the Mediterranean Coast Comparison of
COED and Cost of Protection
Source METAP Reports 2005
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Waste Water Cleaning is expensive US 650
million per annum
Source Doumani , 2007 for required
investments NAP 2003, UNEP/MAP for planned
investments Population data Plan Blue
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Municipal waste collection and disposal is also
expensive US 146 million per annum
Source Doumani and Arif , 2007 for required
investments NAP, UNEP/MAP 2003, for planned
investments Population data Plan Blue
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Egypt Annual Cost of Environmental Degradation
in the Governorate of Alexandria, 82 km of
coast.
The total annual environmental damage costs are
estimated at 1300 2000 million LE per annum,
which is 5.0 to 7.5 of the total GDP Source
METAP report ( 2005)
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Wastewater Policy Investment Optimization for
Egypts Mediterranean Coastal Zones
Scenario A No Investment in Treatment (50 BOD)
cov. 59/16 prim/sec Scenario B 2005 Treatment
level 2020 Treatment level (33) cov. 71/16
prim/sec Scenario C 2005 BOD level 2020 BOD
level (0) cov. 70/30 prim/sec Scenario D 2005
BOD level Greater than 2020 BOD level (-33) cov.
30/70 prim/sec Scenario E 2005 BOD level Greater
than 2020 BOD level (-50) cov. 10/90 prim/sec
Source Doumani et al (2007) Draft METAP report
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Profitability of Different Types of Environmental
Protection/Reduction Activities
Source Ikaheimo, METAP report 2006
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What can we conclude so far?

• The cost of inaction is translated into averted
  benefits, which are gauged in terms of
  environmental externalities . The latter are
  negatively affecting the financial and economic
  profitability (rate of return) of both public and
  private projects therefore hampering private
  sector investments and economic growth.
• Investment needs are usually much larger than the
  Government (i.e. loans or budget) can
  realistically cover...therefore, there is a need
  to look into policy measures that would include
  rethinking the investment program, the time
  framework (stretching the investments over longer
  timeframe), the standards, the targets, sources
  of finance, etc.
• In view of resource constraints, low WW tariffs
  and low WW cost recovery, decision-makers have to
  optimize choices based on the
• The disentanglement between financing network
  and treatment in the case of waste water, and
  between financing collection and disposal in the
  case of solid waste , i.e. priority ONE the is
  collection network (highest rate of return
  because of health benefits) which is seen as
  private benefits (up to a point) and therefore
  has (relatively) high willingness to pay
• The selectivity of the pollution abatement
  technology and the level of treatment
• The affordability of the investments by the
  utilities
• The social benefits to accrue as a result of
  these investments

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A different financial engineering model is
required

• To improve project profitability a different
  financing engineering scheme should be designed
  and implemented whereby
• Government budgetary transfer could bear the
  costs of the externalities and/or provide
  incentives to the utilities for averting past
  and present environmental externalities , as well
  as financing part of the infrastructure such as
  treatment plants for WW or landfill disposals for
  solid waste considered to cover the public good
  components.
• Incentives which are operational, is to tap
  carbon funding to defray some of the initial
  treatment or landfill initial investment costs,
  and/or leverage GEF funds for financing the
  incremental costs of public goods
• Governments and /or national banking sector
  could provide long term financing to the
  utilities using attractive funds secured
  through international financing institutions
• Donor contributions should go to finance
  software costs as well as the difference between
  total costs and the cost fraction paid by central
  government and beneficiaries.
• Beneficiaries should assume part of/ or match
  the cost of infrastructure which is related to
  their private benefits
• Private sector operators should be contracted on
  the basis of performance including meeting
  environmental benchmarking . Private operators
  could be contracted to operate a plant on the
  basis of targets and be paid on the basis of m3
  treated to the level that is required.
• A flexible approach to cost recovery should be
  implemented by the utilities/operators to ensure
  the sustainability of these services
• NGOs would play a leading role in awareness and
  communications

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Egypt Pollution Abatement Program IIAn Example
of Partnership among International Financing
Institutions , Donors and the private and
banking sectors

• Objectives To scale-up financial/technical and
  institutional arrangements that lead to pollution
  abatement in selected hot spots areas in
  Alexandria and Greater Cairo.
• Innovative Approach Blending loans with grants
  and carbon emission revenues to reduce pollution
  based on output indicators
• Estimated Project Costs
• IBRD Loan US 20.0 million
• EIB Loan/EC subsidy US 54.2 million
• JBIC loan US 40.0 million
• AfD US 47.8 million
• FEMIP US 4.0 million
• Finland US 1.1 million
• Government Contribution US 3.0 million
• Total US 170.1 million
• Carbon Emissions Revenues US 10 million (
  est)
• GEF grant for the Lake Maryut US 5.8
  million

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A proposed model based on incentives

• Government passed on the loan amounts at the same
  lending conditions to the Apex Bank
• Apex Bank
• on lend to credit worthy companies for 80 of
  pollution abatement investments for up to 6
  years, with 2 years grace at LIBOR 2-3
• Provide 20 grant of pollution abatement
  investments
• Polluting companies
• Invest on clean and/or end of pipe technologies
• Meet national environmental compliance
  requirements

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That led to win-win-win solutions

• Industrial Pollution is expected to decrease in
  Cairo and Alexandria, hence environment quality
  will improve for the Egyptian citizens
• Apex Bank net profit at maturity is US60 million
  and is providing environmental lending
• Companies introduce clean pollution abatement
  technologies with a cost of fund of 1.09 instead
  of market rate of 6-7

Source The World Bank
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Another Approach Using carbon finance to
improve project financing and financial
sustainability
Construction Capital for underlying climate
friendly project
World Bank Emissions Reductions Purchase
Agreement is bankable and additional revenue
commitment helps bring projects to financial
closure
annual payments under carbon purchase agreement
Cash in
annual payments under power purchase or other
source of revenues to underlying project
Debt
Carbon Revenues for 10-21 years
Equity
Operation
Construction
Yrs 0 1 2 3 4 5 6 7 8
.15-20
Cash out
Carbon sales revenues are commonly in the range
from 10-50 of total revenues for power and waste
management projects
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Tunisia Solid Waste Management Project
Budget ( 36.7 M)
Cash Flow in
Down payment (CF) 25 6 M)
Loan (23M)
Carbon revenues (2006- 2015)
Capital
Construction
Operation
Cash Flow out
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2017
2016
2018
2019
2020
2023
2021
2022
2025
2024
Carbon revenue
Loan payment
NPV
PV
Investment
Source The World Bank
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