91861 v1 Results-based Financing for Municipal Solid Waste Knowledge PAPERS Executive Summary Municipal solid waste (MSW) management is a crucial ser- US$1.27 billion in investments, with a further 55 analytical and vice provided by cities around the world, but is often inef- advisory activities. Despite this significant portfolio, the exist- ficient and underperforming in developing countries. It is ing global annual US$40 billion shortfall for MSW requires the estimated that cities generated approximately 1.3 billion tons of World Bank to reconsider its approach to MSW and leverage MSW worldwide in 2010, and this is expected to increase to 2.2 innovative instruments and partnerships to increase its impact on billion tons by 2025. The challenges that cities face regarding the sustainability and quality of the MSW sector. In this regard, their solid waste management systems vary, but generally de- since 2012 the World Bank has been exploring the application pend on their financial capacities. Low income countries face the of results-based financing (RBF) in the solid waste sector as an most acute challenges with solid waste management. In low in- instrument to improve MSW services and outcomes. come countries, cities collect less than half the waste stream. Of Results-based financing for MSW is a financial mechanism this, only about half is processed to minimum acceptable stan- through which the payment for solid waste services is con- dards. Improving MSW in cities offers a high economic rate of ditioned to the achievement and verification of pre-agreed return and significant environmental and public health benefits targets. A basic feature of RBF is that financial payments or in- which contribute to overall city livability and competitiveness. kind rewards are provided to a service provider conditional on the At the global level, improving MSW also contributes to climate recipient undertaking a set of pre-determined actions or achieving change mitigation through the reduction of methane emissions. a pre-determined performance goal. RBF offers opportunities to The World Bank’s portfolio between 2000 and 2012 included innovate in the use of development finance in the solid waste sec- 114 active projects in 58 countries in all regions, representing tor and to achieve results. 2 Results-based Financing for Municipal Solid Waste Figure 1: Common Challenges along the MSW Value Chain Recycling/Organic Generation Collection/Transport Disposal Energy Recovery Diversion • High growth rate of • Low collection rate in low • Informal sector • Large use of insanitary • Untapped opportunity to waste generated income communities • Lack of intergration of the dumpsites and open generate energy from • Lack of policies to reduce • Inefficient collection informal sector burning landfill gas waste generation equipment • Low rate of organic waste • Land constraints for • Landfill gas to energy • Inefficient routing diversion future sanitary landfills systems non-existent or • Severe environmental in poor condition impact • Local context unsuitable • Lack of financial or for waste-to-energy technical capacity to operate sanitary landfills Until recently, RBF principles and designs had not been lessons can be inferred only in terms of how solid waste projects widely applied in the solid waste sector, apart from the use of can be developed using RBF principles. some performance-based contracting with private providers of The eight examples could be classified into three main catego- solid waste services and carbon finance for methane mitigation. ries: (a) RBF to improve solid waste service delivery and fee Given existing weaknesses and the challenges that cities face re- collection: in Nepal and the West Bank, the projects use RBF garding solid waste management and service delivery, RBF can subsidies to improve the financial sustainability of MSW ser- benefit the sector by ensuring that public funds are used effi- vices by increasing user fee collection while simultaneously ciently and transparently. improving waste collection services; (b) RBF to promote re- This report provides eight examples of RBF designs, each cycling and source separation: in the cases of China, Indo- tailored to the specific context and needs of the solid waste nesia, and Malaysia, an “incentive payment” model is used sector in the specific city or country. These projects are current- to improve source separation and collection of waste through ly in various stages of preparation or implementation; hence, changes in behavior at the household level; and (c) RBF to strengthen waste collection and transport in under-served Figure 2: Cities Where Work Was Undertaken Bethlehem, West Bank Pokhara, Nepal Leknath, Nepal Hebron, West Bank Tansen, Nepal Ningbo, China Dhankuta, Nepal Lalitpur, Kingston, Jamaica Nepal Sikasso, Mali Penang, Malaysia Manado, Indonesia Dar es Salaam, Balikpapan, Tanzania Tangerang, Indonesia Indonesia GSDPM Map Design Unit IBRD 40973 MAY 2014 This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any CITIES WHERE WORK WAS UNDERTAKEN judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. Executive summary 3 communities: in Mali and Tanzania, projects were designed to the government is focused on improving the financial and en- strengthen secondary waste collection and transport for under- vironmental sustainability of the sector. The RBF model to served communities. In the case of Jamaica, the project was de- strengthen waste collection and transport in under-served signed to improve waste collection in inner-city communities communities is applicable to both low and middle income cit- and to encourage waste separation as well as general neighbor- ies but is most relevant where the focus is to improve solid hood cleanliness. waste services in under-served and low income communities and could be part of community and slum upgrading projects. These models of RBF could be adapted to the context of other countries. The RBF model to improve solid waste service de- RBF is not a panacea for the solid waste sector and is more livery and fee collection is an appropriate model for low in- efficient when associated with other instruments such as in- come countries where service delivery is poor or non-existent frastructure investment, policy reform and technical assis- or where fee collection to support waste collection and disposal tance. The eight RBF examples presented in this report address is a major challenge. It is also an appropriate model to jump start some of the fundamental problems associated with solid waste the solid waste services in fragile and post-conflict situations. management in developing countries, such as: fee collection, The RBF model to promote recycling and source separation behavior change towards source separation of recyclable and is a good model for cities in middle income countries where organic waste, and access to service in underserved communi- the collection of waste is already high but where the effort of ties. However, RBF alone is not a universal solution to all the RBF in Nepal’s MSW Sector “At-a-Glance” Solid Waste Situation. Nepal’s cities are rapidly growing: urbanization rates are more than 3.5 percent per year. This population pressure exacerbates the existing challenges in municipal solid waste services. Of the 700,000 tons of waste that cities generate each year, less than half is collected and most of the collected waste is informally dumped. Waste collection is irregular and done in an ad hoc manner, resulting in hazards for both population health and the environment. Problem Statement. Solid waste collection is defined by low levels of service coverage and weak financial sustainability. Without increasing revenues from solid waste management (SWM) services, municipalities cannot finance improvements to service provision. At the same time, there is low willingness to pay among residents. Design Solution. An output-based subsidy is given to the participating municipalities (Dhankuta, Tansen, Lekhnath, Pokhara, and Lalitpur) to help bridge the gap between the cost (including capital costs, operations and maintenance costs, overheads and other expenses) of delivering improved SWM services and the revenues that municipalities collect for SWM services. Payment of the subsidy is linked to improvements in services. The amount of the subsidy is designed to decrease over time, as services improve and fee collection increases to contribute toward final cost recovery. Implicit in this design is the assumption that residents’ willingness- to-pay increases as there are visible improvements in service coverage and delivery. The outputs measured relate to improved quality of services and improved financial sustainability of the service provider. Upon verification of these outputs each year, the amounts of the subsidy are determined based on a pre-established multiplier and are subject to a maximum amount. This multiplier is based on target levels of cost recovery and long-term municipal subsidy levels. Over the project timeline of four years, the multiplier varies so that by the end, there is no subsidy required for the city to continue service provision in a financially sustainable (fee-based) way. 4 Results-based Financing for Municipal Solid Waste RBF in Malaysia’s MSW Sector “At-a-Glance” Solid Waste Situation. Penang State, Malaysia is comprised of two highly urbanized parts—Penang Island and Seberang Perai on the Malaysian Peninsula. Penang Island’s population of 750,000 residents and Seberang Perai’s population of about 815,767 residents generate about 288,377 and 528,275 tons of waste per year, respectively. Existing landfill capacity is rapidly decreasing with the amounts of waste currently generated, collected and disposed. Problem Statement. Of Penang’s waste, approximately 40-60 percent is organic waste (food and yard wastes). Organic waste that is landfilled releases greenhouse gases like carbon dioxide and methane that contribute to global warming. A significant portion of waste is from residential high-rise buildings and yet most residents in Penang, including those in these complexes, do not separate their organic wastes. Design Solution. “Incentive payments” (i.e., cash awards) are given to participating high-rise communities if they successfully separate organic waste from all other wastes. Separated organic waste will be evaluated on pre-determined quality and quantity measures, such that communities will receive a final overall score. The communities, through organized high-rise management committees (HMCs), will receive an incentive payment based on this score, subject to both a minimum score and a maximum incentive payment ceiling. The program cycle is four months long, with two months of evaluation. RBF in Jamaica’s MSW Sector “At-a-Glance” Solid Waste Situation. The Kingston Metropolitan Area (KMA) has a population of about 579,137 residents. It generates about 420,000 tons of waste per year. The National Solid Waste Management Authority (NSWMA) is in charge of solid waste collection, but this service is poor due to the authority’s inadequate capacity and budget shortfall. Service is notably worse in inner city communities due to an insufficient number of trucks, a lack of storage facilities, and the unplanned nature of these areas. Problem Statement. There is insufficient and irregular waste collection in inner-city communities. Community and dumpster areas are ill- maintained and unclean. Moreover, waste separation (of recyclables and organic materials from other waste) is limited. Design Solution. In-kind incentives (waste collection trucks) are given to the NSWMA if they provide sufficient and regular waste collection services. Sufficient collection is defined by visual evaluations of dumpsters to determine if they are less than 75 percent full. Regular collection is defined by comparison of the actual versus required number of collection pick-ups. Financial incentives are given to Environmental Wardens and community-based organizations (CBOs) if separated recyclables and organics meet a targeted weight and if qualitatively, communities and areas around communal waste dumpsters are sufficiently clean. All quality evaluations are conducted visually using pre-established photographs as benchmarks. The scheme is 36 months long; evaluations are conducted every three months. Subject to their performance, the NSWMA earns a waste truck at year 2 and 5, the Environmental Wardens earn a 10 percent salary bonus every three months, and the CBOs earn between US$1200 and $2400 every 6 months. Executive summary 5 challenges that cities in developing countries face regarding solid waste management—it is more effective when associated with other instruments. Lessons Learned Several important lessons emerged from the preparation of the eight case studies. This report presents the challenges faced in the design and implementation phases as well as general recommendations on how to address such challenges in future projects. Some of the lessons learned and recom- mendations are generally applicable to the preparation of any MSW project, whereas others are particular to the design of RBF projects for MSW. The main lessons learned are sum- marized below: General Lessons and Recommendations for Using RBF for MSW • Collecting sufficient baseline information is essential to developing an RBF design that addresses the needs • Improving SWM services does not always require more of the sector. In all eight case studies, baseline studies staff, more vehicles, more equipment, or bigger landfill provided the team with good insight into the situation and space. RBF for MSW could be designed in such a way challenges of the solid waste sector before a tailored RBF that enables it to achieve its objectives using the available solution was proposed. Because MSW practices generally technical and human resources. This could be achieved by vary from one city to another, the design of RBF solutions designing simple, robust, and affordable systems that can for the waste sector must include an analysis of the sector be easily managed and maintained by current staff. as a whole to avoid unintended consequences on the other parts of the system. Considerations for Designing RBF Projects for MSW • RBF solutions for MSW require active involvement of all • In the solid waste sector, OBA subsidies may be more stakeholders from the early stages of project preparation effectively targeted at municipalities rather than in order to be successful. The team undertook community individual households. The lesson from the project in and stakeholder consultations and surveys in all eight the West Bank was that attempting to target low income countries where the RBF was proposed. These stakeholder households for OBA subsidies may not be feasible in consultations have appeared to be a valuable tool to the solid waste sector because it is a shared, community- engage the service providers and beneficiaries as well as based activity. Improving the situation of solid waste the government. management as a whole has a more positive effect on the urban poor—who generally live near improperly disposed • Getting the project prerequisites right, in early solid waste. Also, a large number of informal waste project implementation stages, is essential. Even pickers are from poor communities. though RBF is not a panacea for the solid waste sector, it could provide an avenue through which important • RBF designs should be carefully aligned toward sector reforms are facilitated. In Nepal for example, these achieving the intended improvements in solid waste prerequisites included establishing and institutionalizing outcomes. Any RBF scheme should be designed, as SWM subject committees and operational units, far as possible, to motivate the right players to achieve preparation of SWM strategies and service improvement the intended outcomes, because misalignment between plans (SIPs), and establishment of performance and who is performing and who is being paid could be service delivery monitoring systems, etc. detrimental to the success of an RBF project. In Indonesia, 6 Results-based Financing for Municipal Solid Waste RBF payments could not be made to waste banks and communities whose behavior change was targeted by the project due to fiduciary arrangements; as an alternative, the RBF was designed to provide payment to municipalities as the closest public entity capable of creating the enabling conditions to stimulate the behavior change. • When an RBF scheme is designed as a payment mechanism for solid waste services, the payment should fairly compensate the service received; however, if it is for individual noncommercial behavior change, the payment should be linked to the value of the outcome of the desired behavior change. RBF projects where the service provider is paid for collection could be based on a competitive bidding process or direct negotiations with the incumbent service provider. RBF projects where residential communities are paid for recycling could be based on how much cost-savings the municipality achieves Monitoring and Independent Verification of RBF through reduced costs in solid waste collection, transport, Schemes for MSW and disposal. • Balancing simplicity and meaningfulness in the design • Providing up-front financial assistance to service of the verification process is often a practical necessity providers with limited access to credit could facilitate for implementation in the solid waste sector. The the implementation of RBF projects. An RBF scheme verification mechanism for RBF projects should not be with an unbalanced sharing of responsibility and risks so cumbersome that it results in excessive transaction between the public authorities and the private sector could costs. End results should thus be verified through simple discourage private sector engagement. In Tanzania, the and straightforward protocols. For example, the design RBF design would have provided some equipment for of any scorecards or formulae to calculate the payments collection through the World Bank investment project, to should consider limited local capacities, and therefore be overcome the lack of access to credit. This issue is even easy for all parties to understand. Also, periodic random more acute in fragile countries where investment presents performance evaluations could be used instead of daily a high risk to the private sector. performance evaluation. • RBF projects must be designed with a focus on a set • A third party independent verification agent (IVA) of desired results, allowing the service providers to provides greater transparency but could also be costly; decide what service delivery model would best achieve alternative means of verification could be considered to those results. RBF projects for diverse communities minimize the cost in the solid waste sector. In China and should be designed in a manner that allows participating Jamaica, alternative verification agents were considered in municipalities to design to their specific needs. lieu of an independent firm to reduce the transaction cost. A Additionally, the experience from Nepal has highlighted verification process that is very costly cannot be sustainable the need to ensure that any results indicators are under the in the long run, particularly in the solid waste sector which full responsibility of the implementing agency, that the is often struggling with the financial sustainability of indicators are well-defined and independently verifiable, operations in the first place. One alternative would be to and that project designs reflect pragmatic levels of use a city’s own monitoring and verification system, which risk transfer. has the added benefit of strengthening local capacity in this area which is often weak to start with. Executive summary 7 Ensuring Successful Implementation of RBF for MSW • Supplementing financial subsidies with educational outreach and technical assistance provides greater leverage for RBF projects. Although RBF is about paying for the results and shifting performance risks to the service provider/implementing agency, experiences from Nepal and West Bank have shown that technical assistance is needed to ensure the achievement of the performance targets. Technical assistance resources should therefore be included as part of any RBF project to enhance the basic capacity for service delivery. • Linkages to investment projects provide more leverage for implementation of RBF schemes in the solid waste sector. All eight of the schemes described in this report were linked at some stage to related solid waste investments. These linkages provided added momentum for implementation, although they also brought the risk of delay or cancellation if the investment projects did not go ahead. • The institutional arrangements and flow of funds for RBF projects must be simplified as much as to establish, so setting realistic targets is important in possible, taking into account the capacity of the order to keep stakeholders motivated. The RBF designs implementing agency. The diagrammatic representation in China, Malaysia and Indonesia attempt to improve solid of the institutional arrangements and flow of funds for waste management through the very difficult objective the RBF project in Nepal is complicated and difficult to of behavior change among communities, which could explain. Institutional arrangements and flow of funds are take time to be effective. Expectations should be set for important factors during implementation and must be gradual improvements over time; otherwise, dissatisfaction presented in a manner that could be easily understood and de-motivation may set in among recipients who fail by the implementing agency, the beneficiaries, and the to meet targets despite their reasonable efforts. Setting independent verification agency. realistic targets is important in order to minimize the risk Sustainability of RBF Projects that people could go back to their original behaviors, or develop new unexpected ones, after the financial rewards or • Keeping the big picture in mind helps ensure that the incentives are ended. resulting scheme contributes to long-term sustainability in the solid waste sector overall. The design of any The report recognizes that the eight case studies did not cover solid waste management interventions, including RBF, some issues or activities such as waste generation, energy re- should take into account the country’s broader solid covery or waste picking. There are opportunities to develop waste management context, from waste collection to final additional RBF concepts to address these other issues or to disposal, to ensure that the problem statement and the address the same issues from a different perspective. The fol- proposed solution are appropriate and to avoid unintended lowing additional concepts are suggested for consideration for consequences or knock-on effects on other sectors. As far future RBF projects in the solid waste sector: as possible, waste reduction, reuse and recycling initiatives • Providing incentives to households to reduce the quantity should be prioritized. of waste generated at source (impacting the choice of • Addressing solid waste challenges often involves manufactured products with less packaging); including fundamental changes in behavior that can take time conditional cash transfers to waste pickers; 8 Results-based Financing for Municipal Solid Waste • Implementing performance-based operating contracts for undergone peer reviews or review by a GPOBA panel of ex- the management of waste facilities by the private sector perts, there is a need to see how they will be implemented. (e.g., landfill, waste-to-energy, compost facility, transfer Moving forward, a second phase of this worked is planned to station, materials recovery facility (MRF), etc.) start in fiscal year 2015 and will have three main objectives: • Utilizing performance–based grants to municipalities for • Continue to assess the implementation of the various reducing methane and black carbon from the solid waste designs presented in this report to infer lessons revealed sector; and during implementation and from the subsequent • Providing solid waste service fee vouchers to adjustments made to the designs; poor households. • Design new RBF undertakings in additional cities, some of This work represents the first phase of a programmatic un- which would consist of replicating or adapting the existing dertaking to pilot the use of RBF in the waste sector to tackle models while others would attempt to design entirely new critical challenges faced by cities with respect to solid waste solutions; and management. The focus of this first report has been on the les- • Disseminate the findings from this phase to decision- sons learned from the preparation and design of RBF to address makers and donors. specific solid waste issues. Even though these designs have Copies of the Executive Summary and the full report are available at: Global Urban and Disaster Risk Management Unit The World Bank 1818 H Street, NW Washington, DC 20433 USA Email: Urbaninfo@worldbank.org Website: www.worldbank.org/urban July 2014