WATER GLOBAL PRACTICE Wastewater: From Waste to Resource The Case of PRODES, Brazil Output-based financing in Brazil to The Brazilian federal government sought to increase increase wastewater coverage and water quality in key river basins. Since earlier efforts improve water quality to provide input subsidies were failing, the govern- Context ment decided to instead try to provide output-based grants tied to strict environmental and managerial Water supply and sanitation is the responsibility of performance standards set by regional management municipalities in Brazil. Some municipalities provide committees. services through public operation, while others out- source to private operation. Many of the municipalities receive funding for these projects from the central gov- ernment through loans from national or international institutions. Before 2001, the central government pro- CHALLENGE vided funding for sanitation projects through input • Underinvestment, utility inefficiency, and poor management in subsidies to both private and public entities. These the sanitation sector created unacceptable water pollution in rivers input subsidies aimed to pay for part of the costs of • Increase investment in WWTPs establishing and maintaining wastewater treatment • Stimulate use of regional resource management instruments plants (WWTPs). However, these input subsidies were such as river basin committees failing to improve sanitation services at acceptable OBJECTIVE levels. Brazil was facing issues with underinvestment Reduce the level of contamination of watersheds by untreated in infrastructure and utility inefficiency due to weak wastewaters and motivate integrated water resource management in the sanitation sector. As a result of the management systems and programs by creating and empowering issues in the sanitation sector, key river basins were watershed regulatory bodies and introducing charges for water use and water resource management plan overly polluted. 1 Solution wastewater continuously meets certified standards established by the river basin committee, the munic- In 2001, the Federal Government of Brazil cre- ipality, and the service provider (all included in the ated the Watershed Cleanup Program (Programa contract agreement). PRODES contracts can go to new Descontaminación de Cuencas Hidrograficas [PRODES]) treatment facilities or to upgrades at existing facilities through the National Water Agency (Agencia Nacional such as new processes or increased capacity. de Aguas [ANA]). The PRODES program is based on the idea of results-based financing (RBF). RBF is an alter- native type of development financing and assistance Prodes details and contractual agreements method. In contrast to conventional development Eligible to PRODES are the following: (a) WWTPs in financing that focuses on disbursement of inputs such priority watersheds; (b) new WWTPs; and (c) capac- as grants, loans, or guarantees to be used in construc- ity or efficiency improvement of existing WWTPs. tion of infrastructure, RBF focuses on providing fund- PRODES contracts are available only to WWTPs in ing and incentives for achieved development outcomes river basins that have existing and operational river and outputs. RBF mechanisms can serve as alterna- basin committees. A project applies to PRODES tives to traditional financing that is typically disbursed through three stages. In the proposal registration, in advance of delivery. Essentially, the federal govern- the service provider presents a proposal to invest in a ment pays service providers for treating wastewater treatment facility to the ANA. This proposal includes based on certified outputs, instead of financing inputs performance targets, and the river basin commit- such as civil works. tees and municipalities are consulted in regard to Under PRODES, the ANA agrees to a contract with the targets. The targets include quantitative targets an eligible WWTP owner, either public or private. such as environmental targets and removal effi- Eligible WWTPs are located in river basins with legally ciency, and qualitative targets such as management established and operational river basin committees. and maintenance issues. In the proposal evaluation, Up to 50 percent of the investment costs for WWTPs ANA decides if the project meets the requirements can be reimbursed over five to seven years, provided eligibility. ANA also performs technical of PRODES ­ that the quality of the wastewater discharged meets and financial feasibility due diligence. In the final the norms. The sanitation service providers receive a proposal selection phase, ANA chooses specific proj- quarterly payment through PRODES as long as treated ects to sign contracts based on a ranking system (see table  1). The contracts are (a) signed by ANA, the service provider, the river basin committee, and the municipality, (b) include an established amount of CONVENTIONAL INVESTMENT STRATEGY Implementation Operation payment from ANA for the reimbursement grant, and Project Results (c) establish the agreed upon quantitative and quali- $ tative performance standards. Investment (by the Government) NEW INVESTMENT STRATEGY (RBF) Implementation Operation Once the project has a signed contract and is off the Project Results ground, a certifying process occurs to ensure that $ $ performance targets are being met. The certifica- Investment (by the Results-Based government or the Disbursement tion is done by self-reporting sent by the service pro- service provider) vider and regular audits by ANA to validate in situ Source: ANA, 2017 the agreed  criteria and confirm the results of the 2 Wastewater: From Waste to Resource TABLE 1. PRODES Selection Criteria, 2015 Criterion Maximum score Population served and treatment efficiency 50 Existence of Basin Committee in operation 5 Location of the development in priority basin 15 Municipalities prioritized in the Atlas Brazil 5 Allocation of resources to PRODES by committees 10 Planned development in water resource plans, investment programs, etc. 5 Project situated in municipalities with criticality criterion 1 and 2 of Portaria 062 / ANA, and 10 listed in Annex IV of Res. 601, dated May 28, 2015 Total maximum points 100 self-reporting; if the standards are not met in one utilities to increase efficiency and improve environ- trimester, a warning is issued. If they are not met in mental outcomes. The project sponsors have a strong the following trimester, the payment is suspended. incentive to adopt least-cost methods of wastewater If the norms are still not met in the next trimester, the treatment. The arrangement encourages a transition provider is excluded from the program. This service ­ from often poorly managed capital-intensive projects provides strong incentives to properly operate and to more economical alternatives. maintain plants. Following the signature of the contract, construction, The conditional payments linked to the achieve- and operationalization of the WWTP, the PRODES ment of environmental and managerial performance program paying quarterly payments until the agreed in PRODES contracts provides a strong incentive for amount of construction costs are fully refunded. Benefits For the public entity For the public and the environment • Total contribution by ANA through contracts valued over R$400 • Increased provision of wastewater treatment–reduced pollution million, which has mobilized over R$1,597 million of investment by • 7.49 million people are estimated to have benefited from improved service providers water quality • 82 projects under contract since 2001 • Improved sanitation services with higher likelihood of meeting • Operational risk is assigned to the service provider standards • The requirement to have legal and operating river basin • In 2007, the federal government estimated that the program had organizations incentivizes sound regional regulatory management abated 100,000 kilograms of biochemical oxygen demand (BOD) by emphasizing the role of river basin committees and water per day agencies and devolving the implementation of water management • The government also estimated that between 2001 and 2007, systems to the state level. reduction in pollution had led to a 15 percent decrease in For the private partner hospitalizations due to water-related diseases in areas impacted by • Enhances the financial viability of utilities and increases ability to the program. access commercial or development credit • Partial payment for cost of construction Wastewater: From Waste to Resource 3 Key factors for success in infrastructure, utility inefficiency and poor sec- torial management the government created a new • Strict connection between results and financial aid approach. In 2001, the government shifted from an encourages service providers to overcome difficul- input-based development finance model, which ties related to operational monitoring, maintenance, emphasized financing and grants for the construction and staff training. phase of infrastructure, to an output-based model, • To be eligible for funding, the utility must be located which provides grants for construction costs only within a river basin that has an operating river basin after results are certified to meet rigorous standards. committee. This requirement allows the central gov- The standards are set cooperatively with the munici- ernment to guide a transition toward a regional per- palities, river basin organizations, and the prospective spective of water resources management. service providers, and include both environmental • Strong assistance from the ANA during the certifying and managerial elements. The final funding comes from the central government and can be terminated process helps providers create high-quality plans. if performance falls below standards for an extended period of time. The program has effectively leveraged Lessons learned private financing and improved management and By focusing on sound governance and strict out- efficiency in the sanitation sector in Brazil. put  based performance metrics, the Brazilian government was able to improve performance in the sanitation sector. Faced with low investment References ANA (Agência Nacional das Águas) http://www.ana.gov.br/prodes. PROFILE ANA (Agência Nacional das Águas). 2017. “PRODES: Nazareth, P. 2014. “PRODES (Programa Despolución de Cuencas Hidrograficas de la Agencia NAME Nacional de Aguas)—Agência Nacional de Águas (ANA), Brasil.” Presented Programa Descontaminación de Cuencas Hidrograficas de la Agencia at ANEAS Mérida, Yucatán, November 10. Nacional de Aguas (PRODES) “Programa de Descontamincion de Cuencas Hidrograficas.” Presented at LOCATION “Confrencia de Alto Nivel: Perú, ¿un reflejo de la región? Tratameniento y Brazil reúso de las aguas residuales,” Lima, Peru, May 12, 2017. MAIN INNOVATIONS World Bank. 2009. “Concessionary Financing Programs for the Water and Sanitation Sector in China.” Policy Note 56105, World Bank, Output Based Financing or Results Based Financing Washington, DC. Size ———. 2014. “Applying Results-Based Financing in Water Investments.” 82 projects under contract since 2001 Water Papers, Working Paper 89326, World Bank, Washington, DC. ­ ank. Some rights r © 2018 International Bank for Reconstruction and Development / The World B ­ eserved. The find- ings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, represent. The World Bank does not guarantee the accuracy its Board of Executive Directors, or the governments they ­ work. 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