AFRICAN DEVELOPMENT FUND

ETH/PAAI/2001/01

Language: ENGLISH Original: ENGLISH

ETHIOPIA

KOGA IRRIGATION AND WATERSHED MANAGEMENT PROJECT

APPRAISAL REPORT

NB: This document contains errata or corrigenda (see Annexes).

COUNTRY DEPARTMENT OCDE EAST REGION FEBRUARY 2001

AFRICAN DEVELOPMENT FUND 01 B.P. 1387, ABIDJAN Tel: 20-20-44-44; 20 20-40-56; 20 20-48-33 Fax: (225) 20 20-49-09/4220/5160

Website: www.afdb.org

PROJECT INFORMATION Date: February, 2001 The information provided hereunder is intended to provide some guidance to prospective suppliers, contractors, consultants and all persons interested in the procurement of goods and works for projects approved by the Boards of Directors of the Bank Group. More detailed information and guidance should be obtained from the Executing Agency of the Borrower. 1. COUNTRY : Ethiopia

2. PROJECT TITLE : Koga Irrigation and Watershed Management Project.

3. LOCATION : The project is located in the Koga irrigation and

catchment areas of the Koga River Valley, Amhara Region.

4. THE BORROWER : The Federal Democratic Republic of Ethiopia. 5. EXECUTING AGENCY : Commission for Sustainable Agriculture and

Environmental Rehabilitation of Amhara Region (COSAERAR), P.O. Box 386, Bahir Dar, Ethiopia. Tel: 251 8 202043/44; Fax: 251 8 202040.

6. DESCRIPTION : The project will comprise four main

components: (i) Irrigation Development; (ii) Watershed Management; (iii) Capacity Building; and (iv) Project Coordination and Management.

7. TOTAL COST : UA 37.84 million Foreign Cost : UA 19.22 million Local Cost : UA 18.62 million 8. BANK GROUP LOAN/GRANT

ADF : UA 32.59 million TAF : UA 1.33 million 9. OTHER SOURCES Government : UA 3.92 million

PROJECT INFORMATION (Cont’d)

10. ESTIMATED STARTING DATE AND DURATION : 1 January, 2002, for 6 years. 11. PROCUREMENT OF GOODS AND WORKS : Project goods and works will be procured

according to Bank rules of procedures. International Competitive Bidding for the purchase of irrigation civil works, vehicles and equipment; National Competitive Bidding for procurement of other civil works and direct contract for inputs and materials.

12. CONSULTANCY SERVICES REQUIRED AND STAGE OF SELECTION : Selection of Consultants/Technical

Assistance will be through Limited Competition on the basis of a shortlist. A firm will be contracted to provide the following long term international consultants: Resident Engineer (51 person months); Dam Engineer (15 person-months); Sr. Geo-technical Engineer (15 person-months); Sr. Structural Engineer (9 person-months); Sr. Irrigation Engineer (24 person months); Local Consultants include Hydrologist or Hydraulic Engineer (24 person-months); Irrigation Engineer (54 person months); Others are Participatory and Institutions Expert (6 person-months); Monitoring and Evaluation Specialist (12 person-months) and Training Needs Analyst (12 person-months); etc. Most of the long-term consultants will be required as from PY1.

ETHIOPIA

KOGA IRRIGATION AND WATERSHED MANAGEMENT PROJECT TABLE OF CONTENTS Page PROJECT INFORMATION SHEET, LIST OF TABLES, LIST OF ANNEXES, CURRENCY AND MEASURES, LIST OF ABBREVIATIONS, EXECUTIVE SUMMARY, PROJECT MATRIX, BASIC DATA SHEET i-vi 1. INTRODUCTION AND BACKGROUND ...................................................................... 1 2. THE AGRICULTURAL SECTOR.................................................................................... 1 2.1 Structure and Performance ..................................................................................... 1 2.2 Land Tenure and Land Use ..................................................................................... 1 2.3 Gender and Poverty Issues …………………… ………………………………… ..2 2.4 Sector Development Constraints ............................................................................ 2 2.5 Sector Development Goals and Priority Policy Reforms ...................................... 3 3. IRRIGATION SUB-SECTOR ……………………………………………………………… 3 3.1 Overview ................................................................................................................ 3 3.2 Watershed Management ......................................................................................... 4 3.3 Potentials and Constraints …………………………………………………………. 4 3.4 Institutional Framework…………………………………………………………….

5 3.5 Donor

Interventions……………………………………………..………………………7 4. THE PROJECT .................................................................................................................... 7 4.1 Concept and Rationale..............................................................................................7 4.2 Project Area and Beneficiaries.................................................................................8 4.3 Strategic Context ................................................................................................... 10 4.4 Project Objective.................................................................................................... 11 4.5 Description of Project Components ...................................................................... 11 4.6 Production, Markets and Prices............................................................................. 15 4.7 Environmental Impact and Mitigation Measures ................................................. 15 4.8 Project Costs........................................................................................................... 16 4.9 Sources of Financing and Expenditure Schedule................................................. 17

TABLE OF CONTENTS (Cont'd) 5. PROJECT IMPLEMENTATION ..................................................................................... 19 5.1 Executing Agency.................................................................................................. 19 5.2 Institutional Arrangements .................................................................................... 19 5.3 Supervision, Implementation and Expenditure Schedules .................................. 21 5.4 Procurement Arrangements................................................................................... 21 5.5 Disbursement Arrangements ................................................................................. 23 5.6 Monitoring and Evaluation.................................................................................... 23 5.7 Financial Reporting and Auditing ........................................................................ 24 5.8 Aid Coordination .................................................................................................. 24 6. PROJECT SUSTAINABILITY AND

RISK……………………………………………….24 6.1 Recurrent Costs ...................................................................................................... 24 6.2 Project Sustainability ............................................................................................. 25 6.3 Critical Risks and Mitigation Measures................................................................ 25 7. PROJECT BENEFITS ........................................................................................................26 7.1 Financial Analysis.................................................................................................. 26 7.2 Economic Analysis ................................................................................................ 26 7.3 Social Impact Analysis .......................................................................................... 27 7.4 Sensitivity Analysis ............................................................................................... 27 8. CONCLUSIONS AND RECOMMENDATIONS .......................................................... 27 8.1 Conclusions ............................................................................................................ 27 8.2 Recommendations ................................................................................................. 28 -------------------- This Appraisal Report was prepared by a Mission comprising Messrs. Chiji Ojukwu

(Principal Agricultural Economist and Mission Leader); Charles Omoluabi (Senior Forestry Officer), Idrissa Samba (Environmentalist), M. Tafesse (Consultant Irrigation Engineer); Peter Bisset (Consultant Irrigation Agronomist) and Ms. Sunita Pitamber (Gender Specialist) following a visit to Ethiopia in November, 2000 and subsequent updates through February, 2001. The team was assisted by counterparts from the Government of Ethiopia led by Mr. Gulilat Birhane of the Ministry of Water Resources. Enquiries should be addressed to Mr. L.I. Umeh, Division Manager, OCDE.2 and the authors.

LIST OF TABLES No. Page 4.1 Summary of Cost Estimates by Component 16 4.2 Summary of Cost Estimate by Category of Expenditure 17 4.3 Sources of Finance 18 5.1 Expenditure Schedule by Component 21 5.2 Expenditure Schedule by Source of Finance 21 5.3 Procurement Arrangements 22 LIST OF ANNEXES1 No. No. of Pages 1. Map Showing the Project Area 1 2. Project Organisational Chart 1 3. Provisional List of Goods and service 1 3. Summary of Financial and Economic Analysis 4 4. Project Implementation Schedule 1 5. Bank Group Operations in Ethiopia 1 CURRENCY AND MEASURES Currency unit : Ethiopian Birr (ETB) UA 1 : ETB. 10.7089 UA 1 : USD 1.30291 Effective rate in January, 2001 GOVERNMENT FISCAL YEAR July 1 - June 30 WEIGHTS AND MEASURES 1 Kilogram = 2.2 Pounds (lb) 1 Quintal = 100 kg 1 Metric tonne = 1000 kg 1 Hectare (ha) = 2.471 Acres 1 Square Kilometer = 100 ha 1 Square Mile = 259 ha 1 Square Mile = 640 Acres

ABBREVIATIONS 1 Annexes in Project Implementation Document (Separate Volume) include: I. Detail Cost Tables; II.

Irrigation Works, Design, Implementation and Development of Irrigated Farms; and III Watershed Management. The EIA Summary and Resettlement Plan have been submitted to the Board separately.

ADA : Amhara Development Association ADF : African Development Fund ACSI : Amhara Credit and Saving Institute ANRS : Amhara National Regional State AWP/B : Annual Work Plan and Budget BCP : Bureau for Cooperative Promotion BOA : Bureau of Agriculture CO-SAERAR : Commission for Sustainable Agriculture and Environmental Rehabilitation in Amhara Region DA : Development Agent DPPC : The Disaster Prevention and Preparedness Commission EFAP : Ethiopian Forestry Action Program EIA : Environmental Impact Assessment EIRR : Economic Internal Rate of Return EMP : Environmental Management Plan EPA : Environmental Protection Agency ESRDF : Ethiopian Social Rehabilitation and Development Fund EMTP : Extension Management Trial Plots ETB : Ethiopian Birr FTC : Farmer Training Centre GOE : Government of Ethiopia GPN : General Procurement Notice ICB : International Competitive Bidding ICRA : International Centre for Development-oriented Research in Agriculture ILRI : International Livestock Research Institute KA : Kebele Administration MCM : Million Cubic Meters MOA : Ministry of Agriculture MOWR : Ministry of Water Resources MT : Metric Tonne MTR : Mid Term Review NGO : Non Governmental Organisation NLDP : National Livestock Development Project PA : Peasants Association PCR : Project Completion Report PMU : Project Management Unit PSC : Project Steering Committee RDCs : Rural Development Co-ordinating Committees RWO : Regional Women’s Office SMS : Subject Matter Specialists SSI : Small-Scale Irrigation TLU : Tropical Livestock Units UA : Unit of Account WUA : Water Users Association

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EXECUTIVE SUMMARY 1. PROJECT BACKGROUND This Appraisal Report follows a request from the Government of Ethiopia (GOE) for Bank Group assistance to finance the Koga Irrigation and the Catchment Projects as identified by an earlier feasibility study financed by the Bank. The proposed Koga Irrigation and Watershed Management Project as now reformulated is located within the Koga Basin in Mecha Woreda of Amhara Regional State. It will harness the water resources of the Koga River to irrigate 6,000 ha of the command area, as well as improve rainfed agriculture, forestry, livestock, soil conservation, water and sanitation on some 22,000 ha catchment area. The GOE decision to accord the project a priority stems from frequent drought and food shortages, as current reliance on rainfed farming and smallscale irrigation practices are unable to cope with the country's food requirement, thus putting food security at risk. A Bank Group mission visited Ethiopia during August, 2000 to prepare the project. A week-long stakeholders' workshop was organised as part of the participatory process. A mission was fielded in November, 2000 to appraise the project. A special session was held with the political leadership in the Region and a sensitization session for a group of 38 women as further process of ensuring participation and ownership. Regular contacts have been maintained with the Government in processing of the report. The proposed project which will be farmer-managed is in line with the GOE Water Resources Management Policy and the Bank's vision on poverty reduction. 2. PURPOSE OF THE LOAN The ADF loan will be used to finance the entire investment cost of the project amounting to UA 32.59 million, while a TAF grant amounting to UA 1.33 million will be used to finance capacity development and institution building. Altogether, the Bank Group will finance 89.6% of the total project cost. 3. SECTOR GOAL AND PROJECT OBJECTIVES The overall sector goal of the project is to contribute towards poverty reduction among smallholders through improvement in food security in the Region in particular and the country as a whole, consistent with the government's policies of sustainable environment and agricultural development. The specific objective of the project is to improve agricultural production in the catchment and command areas of the Koga River valley in a sustainable manner. 4. DESCRIPTION OF PROJECT OUTPUTS In order to attain these objectives, the project will focus attention on: - Irrigation: 77 million m3 of water reservoir created to irrigate 6,000 ha of the command area, with additional production of 15,000 MT of maize, 24,000 MT of potato, 18,000 MT of onions, and 5,400 MT of wheat as from PY6. - Watershed Management: efficient and effective rainfed conservation farming established on 22,000 ha catchment area, with average household income rising from ETB 2,800 to ETB 5,400 as from PY6 and soil loss reduced by 50%.

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- Capacity Building. Over 8,500 farmers trained; 15 staff benefit from MSC level training and over 33 for short-term training. The institutions to be supported include COSAERAR, BOA, WAO, MWR and farmers' organisations. - Management and Co-ordination. Management structures necessary to ensure efficient project management to implement and operate the project will be developed.

5. PROJECT COST The total project cost is estimated at UA 37.84 million of which UA 19.22 million (51%) will be in foreign exchange and UA 18.62 million (49%) will be in local currency. 6. SOURCES OF FINANCE The project will be financed by the Bank Group and the Government of Ethiopia (GOE). ADF loan amounting to UA 32.59 million or 86.1% of total costs will be utilized to finance all investment costs (civil works, vehicles, equipment, technical assistance, inputs and materials). A TAF grant amounting to UA 1.33 million or 3.5% of total costs will be utilised to finance the capacity building and institutional development. The GOE contributions amounting to UA 3.92 million or 10.4% of total costs will finance all recurrent costs (staff salaries and allowances; civil works, vehicle and equipment operation and maintenance; and general operating costs). 7. PROJECT IMPLEMENTATION Duration of Implementation: The project will be implemented over a six-year period beginning

January, 2002. Implementing Agency: Commission for Sustainable Agriculture and Environmental

Rehabilitation of Amhara Region (COSAERAR) in Bahir Dar. Other Implementation Arrangements: The beneficiaries, the Regional Bureau of Agriculture,

Bureau for Cooperative Promotion, the Women Affairs Office, as well as the Regional Bureaux for Health and Works will be involved in project implementation. The MWR will monitor implementation.

8. CONCLUSIONS AND RECOMMENDATIONS Conclusions The proposed project is in conformity with the Bank group’s assistance strategy in Ethiopia and the development strategy of the GOE both of which focus on poverty reduction in general and ensuring food security in particular. This will be achieved through promoting agriculture development and at the same time diversifying economic activities to meet seasonal fluctuations. While irrigation development will have a positive impact by making available fertile land with adequate amount of water and the necessary inputs, watershed management will ensure dam life and also provide diverse agriculture related economic activity and stabilize the environment. All these are intended to directly reduce poverty through substantial increase in household income. In addition, the project will impact positively on food consumption and nutrition practices thereby promoting human and economic development in the Region. The most important

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positive impact of the project will be to sustain and build the capacities of farmers in practicing the demand-driven approach. At the community level the project promotes a participatory approach which allows for a sense of ownership. A positive impact on women will be social and economic empowerment as well as improved family livelihoods. The project is technically feasible, economically viable, environmentally sound, and socially desirable. The overall economic rate of return of the project is 17.4%. Recommendations It is recommended that an ADF loan not exceeding UA 32.59 million and TAF grant not exceeding UA 1.33 million be granted to the Federal Democratic Republic of Ethiopia for the purpose of implementing the project as described in this report.

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KOGA IRRIGATION AND WATERSHED MANAGEMENT PROJECT LOGICAL FRAMEWORK

Narrative Summary Objectively Verifiable Indicators Means of Verification

Assumptions/Risks

SECTOR GOALS To contribute towards poverty reduction amongst small holders in the Region through improvement in food security.

1. Poorest quartile household incomes increase by 100% by PY6 2. Minimum of 10% reduction in the proportion of project area population

living below poverty line by end of project (BEP); 3. Participating beneficiary household incomes raised from ETB. 2,635 to

ETB. 11,600 in PY 6 (from irrigation and watershed management); 4. 1.5 million person-days employment created, annually from PY4

BOA annual statistics Project M&E Reports

PROJECT OBJECTIVE To improve agricultural production in a sustainable manner in the Project area.

1. Additional 40,000 MT of grain, 24,000 MT of potato and 18,000 MT of

onions produced each year from PY6

- Project M & E reports - Minutes of farmers organisation meetings - BOA annual statistics

1. GOE policy in favour of privatisation, liberalisation and support to peasant farming will remain in force. 2. Government policies consistent with project objectives

PROJECT OUTPUTS 1. Irrigation Infrastructure Development: Irrigation

structures for efficient all year round crop production constructed; Command area efficiently irrigated under sound environmental management.

2. Watershed Management: Efficient and effective

conservation farming established in the catchment area.

1.1 77 million m3 of water reservoir created on the Koga River, capable of delivering 9,400 m3 per ha per annum and at a rate of 0.98 l/s ha during peak demand by PY4

1.2 16.7km concrete-lined main canal, 78 km of lined secondary canals, 120 km unlined tertiary canals, 310 km of quaternary canals, and 11 night storage reservoirs constructed. by PY4

1.3 100 km of inspection roads constructed along the main and secondary canals, and 200 km along the tertiary canals allowing access to all the command area. by PY3

1.4 6,000 ha net command area provided with efficient irrigation and drainage infrastructure by PY6.

1.5 Intensive smallholder, irrigation-based, diversified multiple-cropping agricultural production system established and fully developed in the command by PY6

1.6 Water users associations ensuring effective and fair management of the water resource; by PY6

2.1 PRA exercise to involve participants undertaken and fully documented in PY1 2.2 An effective, unified agricultural extension service with at least 56 DAs of which

1/3 female in place by PY3 2.3 Average household returns from rainfed cropping increased from ETB 2,800 to

5,400 by PY6 2.4 Small scale irrigation on 138ha developed by PY5 2.5 8000 farmers participate in intensive livestock production by PY6 2.6 Farmer conservation groups cover 90% of 22,000 ha catchment by PY6 2.7 Soil loss reduced by 50%. Sediment load reduced by 50% over 5 years. 2.8 Tree planting undertaken equivalent to 1000 ha with Eucalyptus and multi-purpose

species by PY6 2.6 50 access points to safe water provided by PY4 2.7 Water borne diseases reduced by 30% of current level by PY6 3.1 15 staff trained at MSc level; Over 33 staff for short-term training; Over 8,500

farmers trained by PY6

Consultants completion report CO-SAERAR reports PMU Progress Reports. BOA annual reports Project M & E report Project M & E report Project M&E Reports

Farmers organisations active in managing the irrigation component Rainfall remains within parameters of the last 30 years Labour will not be a constraint There will be no delay in the implementation of the proposed watershed components.

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3. Sector capacity to efficiently manage schemes strengthened. Farmers trained..

4. Project Coordination & Management: Efficient Capacity

& Institution Development project management during implementation and operation assured.

Project Activities 1. Irrigation Development 1.1 Dam Development. 1.2 Main and Secondary Canal Development 1.3 Tertiary Canal and Distribution System Subtotal Irrigation 2. Watershed Management 2.1 Agriculture Extension 2.2 Crop Production 2.3 Livestock Development 2.4 Soil Conservation 2.5 Forestry Development 2.6 Health, Sanitation and Water Supply Subtotal Watershed Management 3. Capacity and Institutional Development 4. Project Co-ordination and Management

3.2 Co-SAERAR capable of undertaking programmes on its own by PY6

4.1 Project Management Unit (PMU) established, staffed, furnished and operational by PY1;

4.2 Woreda project office completed and staffed by Project, BOA and WAO by PY3 4.3 Multi-disciplinary Project Steering Committee established and operational; by PY1 4.4 Criteria for land redistribution, compensation and resettlement agreed in a

participatory manner in PY1 4.5 Water User Groups organised by PY3 4.6 Families to be displaced by project construction and others also adversely affected

fully compensated. PY2-PY5 4.7 Study undertaken to promote gender sensitive approaches.PY1 4.8 An internationally recruited firm to provide a team of consultants comprising

structural engineer, dam engineer, irrigation engineer, geotechnical engineer and watershed management expert to design and supervise implementation.PY1

4.9 Cost recovery mechanism agreed with farmers and functioning by PY4 4.10 Credit provided for 2500 households (equal women and men) by PY6 4.11 M&E unit established and functional in PY1 4.12 4.11 Staff motivation package agreed and implemented in PY1 UA (000) 15,635.3 7,784.8 6,296.6 29,716.6 2,365.1 334.9 49.5 88.3 116.9 536.4 3,491.0 1,330.4 3,299.4 Total 37,837.5

BOA annual reports Report of consultant on participatory approach BOA annual report Committee minutes Project annual report Resources (Million UA) ADF : 32.59 TAF : 1.33 GOE : 3.92 TOTAL : 37.84

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1 INTRODUCTION AND BACKGROUND 1. Studies conducted in Ethiopia by the FAO and Water Resources Development Authority identified the need to establish improved, sustainable farming systems in the Central Highlands of Ethiopia, in view of the high population pressure, high erosion hazard, loss of forest reserves and declining per capita food production. The Bank had between 1992 and 1995 financed a feasibility study and technical proposal for catchment management and irrigation development in the Koga and Birr River Valleys in the Amhara Region. The Bank studies identified an area that could form the basis for the proposed Koga Irrigation Project, involving construction of a dam and an irrigation and drainage system to irrigate some 6,000 ha. A separate proposal was made for a related project – the Koga Watershed Management Project to address development opportunities for improved rainfed agriculture, forestry and livestock production, soil conservation, infrastructure and health in the Koga catchment area. Following request received from the Ethiopian Government to provide assistance in financing the identified projects, the Bank first sent an FAO investment mission on pre-preparation in late 1999 and followed by a Bank mission in August 2000 to prepare the project. This used a participatory approach that included a stakeholders' workshop with broad representation of both men and women in the farming communities. A Bank Group mission appraised the project during November 2000. This appraisal report drawn from the various documents is in line with Government and Bank Group strategies for poverty reduction and food security. 2. THE AGRICULTURE SECTOR

2.1 Structure and Performance

Agriculture is the dominant sector of the Ethiopian economy and its performance is

the major determinant of overall GDP growth rate. On the average, the sector contributed about 48% of Ethiopia’s GDP between 1995 – 1999. It equally accounted for 90% of export earnings and 70% of raw material inflow into agro-based industries during the period. The agricultural sector is also the major employer, accounting for 85% of total employment. The crop sub-sector accounts for 60% of the sector output, livestock 30% and forestry 10%. Peasant farm households are the backbone of the sector, cultivating about 96% of the cropped area and producing 90% to 94% of all cereals, pulses and oilseeds.

2.2 Land Tenure and Land Use 2.2.1 With the fall of the monarchy in 1975, a major land reform was instituted, involving a complete change in the system of land holdings and in the social profile of rural Ethiopia. The reform was particularly radical in the south, south-east and western parts of the country since these were characterised by private lands with high tenancy rates and absentee landlords. It had little effect on kinship and village (communal) tenure in the northern parts of the country. 2.2.2 Under the reform of 1975, land distribution rights were given to the peasants associations (PAs). Redistribution was frequent and led to land sub-division and fragmentation. However, before the system of smallholder agriculture had the chance to prove itself, a policy of collectivisation was implemented. Moreover, the then government also launched major resettlement programmes as a basis for providing rural infrastructure, and abolished the free marketing system. These programmes were plagued by inefficiency, waste and mismanagement and adversely affected the dynamism of peasant agriculture.

2 2.2.3 The present Government has retained state ownership of land but modified the system in other important ways: (i) with few exceptions, no further fragmentation of land is to be implemented; (ii) peasants allocated land have been given rights to lease, inherit, hire labour, sell output freely and receive full compensation in the event of expropriation; and (iii) large-scale private farming is to be encouraged provided this does not result in evictions or affect the interests of peasants, nomads or shifting cultivation. These changes have contributed to a remarkable increase in production over the last few years. The Amhara National Regional State has recently issued a Land Tenure Administration Proclamation which will provide written land titles. 2.3 Gender and Poverty Issues 2.3.1 Women in Ethiopia constitute 49% of the population and in the rural areas are mainly engaged in agriculture and other related activities. Adult female illiteracy is as high as 71% while health statistics show a high fertility rate and maternal mortality rate. Generally, women have less access than men to education and other income generating facilities due to cultural and geographical restrictions. However, the GOE has undertaken to correct this situation by attempting to integrate gender within the ministerial structures. At the federal level, there is the National Women’s Affairs Office and at the various line ministries there are Departments of Women’s Affairs. The National Women’s Affairs office is in the process of designing a national gender policy. Nevertheless, it is not clear to what extent the line departments and the regional offices for women’s affairs were involved in this process. At the regional level, there is a Regional Women’s Office (RWO) which has the task of co-operating with the line Bureaux with regards to gender issues. Although there seems to be a wide representation and commitment to gender mainstreaming, the different women’s affairs offices have not yet been able to find common ground in terms of co-ordinating their activities and setting a comprehensive plan of action. Departmental efforts are isolated and restricted to their respective ministries. 2.3.2 The incidence of poverty in Ethiopia is considered to be one of the highest in the world. GNP per capita income is estimated at US $ 100 with 46% of the population below the poverty line. In some regions, this is as high as 85%. This group consists of small farmers in rural areas, the landless, retrenched workers and demobilized soldiers. Food insecurity and health problems are the main features of poverty. The GOE has undertaken to resolve the poverty situation in the country and has adopted a twin-approach of promoting human development and broad-based economic development. The GOE has adopted the strategy to tackle low productivity, increase in inputs, make available micro-credit, promote micro-enterprises and create non-farm employment.

2.4 Sector Development Constraints

Food security problems are associated with the lack of purchasing power, inadequate production, under-development of marketing and infrastructure, the lack of appropriate storage facilities and the effects of drought. Agricultural production can be improved through intensive cropping systems that are supported with appropriate irrigation management systems to mitigate the adverse effects of drought and the limitations posed by land shortage. Crop production can also be enhanced through increase in credit availability. Agricultural extension needs strengthening to effectively promote the use of appropriate technologies. The agricultural sector has equally not been fully supported with research. This is particularly important for the development of irrigation agronomy. Soil conservation needs to be addressed in all land use initiatives. Poor health conditions due to lack of access to healthcare and poor physical development caused by chronic under-nutrition impact negatively on productivity.

3 2.5 Sector Development Goals and Priority Policy Reforms 2.5.1 The main objective of current five-year agricultural development strategy of Government (1998–2002) is to increase agricultural production. Government food security strategy places emphasis on provision of infrastructure, including roads and water controls for irrigation and the diffusion of appropriate agricultural production technologies as incentives for production. Government is also to install sound macro-economic policies that give the maximum sustainable incentives to food production. Policy focus in the sector emphasizes a shift from state-owned farms to private sector production. Agricultural pricing and marketing have been deregulated and liberalized and monopoly power of state marketing companies removed. With growing political stability, the agricultural sector is likely to respond to these reforms. 2.5.2 Peasants now have the right to lease and pass on their land to relatives. There will be no restrictions on the sale of farm produce and taxation will be fair. Conservation, development and utilisation of natural resources are being given high priority, especially forestry, soil and water conservation. 3. THE IRRIGATION SUB SECTOR

3.1 Overview 3.1.1 Irrigation in Ethiopian Economy: Government emphasis is to develop the irrigation sub-sector by assisting and supporting farmers to improve irrigation management practices and the promotion of modern irrigation systems on small (less than 200ha), medium (200 to 3000 ha) and large-scale (over 3000 ha) schemes. Currently, small-scale schemes irrigate some 64,000 ha and medium and large schemes, 127,000 ha. Ethiopia’s experience in large-scale irrigation development and management is in state enterprises, mainly growing industrial crops like cotton and sugar cane. These are now being transferred, partly to smallholders, and the rest to private holdings. Small-scale irrigation (SSI) development and management was started in the 1970s by the Ministry of Agriculture (MOA), in response to major droughts. The MOA implemented more than 50 small schemes in the country, including the ADF funded SSI projects in Amhara region. Development of irrigated agriculture has continued to expand through the implementation of further irrigation and drainage projects, thus enhancing experience in the sub-sector. SSI and medium scale schemes are now implemented through regional offices, often with NGO support. 3.1.2 Surface irrigation is widely used in Ethiopia, with furrow irrigation being the most popular followed by the basin and border methods. Gravity supply of irrigation water is the most commonly used means of water abstraction, while pumping is practised on some farms. In the highlands, the scope for expanding SSI is constrained by the very low stream flow during the dry season and the only way to irrigate large areas of peasant land during the dry season would be to construct storage reservoirs. The Koga Project is the first attempt by the Government of Ethiopia to develop a large-scale irrigation scheme for peasants. 3.1.3 Development Policy and Strategy: The MWR recently issued the Ethiopian Water Resources Management Policy, which sets guidelines for water resources planning, development and management. The main objectives of the Water Resources Management Policy are:(i) promote the development of the water resources of the country for economic and social benefits of the people, on equitable and sustainable basis;( ii) manage and combat drought as well as other drought associated impacts, and disasters through efficient allocation, redistribution, transfer, storage and efficient use of water resources; (iii) conserve, protect and enhance water resources and the overall aquatic environment on sustainable basis; and (iv) to develop and enhance small

4 and large-scale irrigated agriculture and grazing lands for food self-sufficiency at the household level and for food export. 3.1.4 To achieve these objectives, Government strategy is to fully integrate irrigation with the overall framework of the country’s socio-economic development plans as an integral part of the water sector. Farmers’ participation will be promoted at all stages, taking into account the needs of rural women. Small, medium, and large-scale irrigation will be promoted and cost recovery models will be developed to ensure sustainability. Steps will be taken to ensure the prevention and mitigation of degradation of irrigated water and to maintain acceptable water quality standards for irrigation. To this end, a reasonable percentage of GDP will be earmarked as a committed resource towards the development of irrigated agriculture.

3.2 Watershed Management 3.2.1 Resource Situation and Contribution to Economy: The main natural resources of Ethiopia include arable lands, forests, water and limited wildlife and minerals. The deteriorating vegetation cover and consequent increase in erosion have long been causes for concern. Forest cover declined from an estimated 16% in 1950 to less than 3% by the year 2000. Though the forest resource is very limited, the demand remains high. According to the Ethiopian Forestry Action Program (EFAP), the current national woody biomass demand is estimated at 50 million m3 of which 45 million m3 is in the form of fuelwood. The current supply is estimated at only 14.4 million m3 indicating a deficit of some 35.6 million m3 or 71% of the demand. 3.2.2 Watershed Development Strategy: A Government paper on food security in 1996 recognised the need to give priority to agriculture. Government is to adopt strategies that will increase food production to lower real consumer food prices. Rapid growth of family small businesses that create jobs is also to be promoted in addition to diversifying agriculture. However, soil conservation and forestry have not been fully integrated into watershed management. There is a need for more forestry programmes to complement the crop sector in rural development. Forestry is an important sector to explore in Ethiopia with the objective of expanding the choices available to farming families to improve their income through their part-time or full-time involvement in forestry enterprises. Improved vegetation cover has a direct impact on livestock production as well as on soil fertility.

3.3 Potentials and Constraints

A. Irrigation

3.3.1 The total renewable water resources of Ethiopia are estimated at over 123 BCM. The Blue Nile or Abbay basin contributes about 50 BCM (40.6%). The irrigation potential of Ethiopia has been assessed through master plan studies, and is estimated to be 3.5 million ha. The Amhara Region has potential for small, medium and large-scale irrigation. These are estimated at 250,000 ha for small-scale irrigation, and 450,000 ha for medium and large-scale irrigation. The BOA estimates that there are 44,000 ha of on-going traditional farms and 7,000 ha of formal, small and medium-scale irrigation. Irrigation development costs tend to be high in Ethiopia. This is particularly so for large-scale irrigation. Though varying from scheme to scheme, one of the reasons for high costs is attributed to the need for river regulation through construction of storage reservoirs. Rivers such as Koga generate 72% of their flows during the main rainy season of July-September, leaving very little dry season flow to support irrigation. 3.3.2 Until recently, projects have been implemented through a top down approach. Irrigation was generally associated with the compulsory formation of producer co-operatives in

5 which farmers were reluctant to join. The schemes were identified, planned and implemented without the full participation and willingness of the farmers. Future projects should ensure that beneficiary farmers be involved in all stages of project planning, development and management. 3.3.3 As irrigation entails the co-operation of farmers to plan, operate and maintain the irrigation infrastructure, they should be encouraged to form their water user association as early as possible. This will enable them to contribute to the scheme design as well as learn construction techniques. Past irrigation schemes had either disallowed individual holdings or did not have mechanisms for security of tenure. Without the sense of ownership, farmers were not ready to actively participate in the schemes. With the implementation of the recent regional legislation for providing certificates of land holding, farmers should be eager to participate in irrigation development. SSI schemes were generally constructed with government funding with farmers’ contribution in the form of labour, providing access to land and construction materials. In order to ensure scheme sustainability, a viable system of cost recovery/water charges should be effected, in accordance with farmers’ willingness and ability to pay. This is in line with the Water Resources Management Policy. 3.3.4 Implementation of large-scale irrigation projects requires efficiency and effective management. Qualified and motivated staff with the enabling environment, and resources are needed to complete the project within the stipulated time, and budget. The Amibara Irrigation and Drainage Projects were implemented through the establishment of semi-autonomous project implementation offices with the mandate to be involved in disbursement and direct communication with the project’s financiers. Such an arrangement is recommended for implementing large-scale irrigation such as the proposed Koga Project.

B. Watershed Management

3.3.5 The backbone of the agrarian economy is rainfed agriculture and effective watershed management is a precondition to reducing the effects of droughts and floods that increase the vulnerability of the poor to food shortage and exacerbated land degradation. 3.3.6 Throughout the Ethiopian highlands, sheet erosion is reducing soil depth at a rate that, if unchecked, will render crop production impossible over large areas within the next 50 years. Pilot studies on watershed protection have indicated that an integrated approach focussing on improving all aspects of rural livelihoods is what is most likely to succeed. This means including improved rainfed cropping, livestock production including grazing and fodder production, forestry as well as soil conservation measures. Other sectors such as education and health also need to be included. Small-scale irrigation development is to be given major emphasis to supplement rainfall.

3.4 Institutional Framework 3.4.1 Ministry of Water Resources (MWR) The Federal Ministry of Water Resources was established in 1995 combining the duties and responsibilities of the Ministry of Natural Resources Development and Environmental Protection. The MWR is charged with aspects of sector policy, planning, water resources regulation, development and use, and implementation of large scale irrigation. It also has the responsibility of building the capacity of regions regarding water resource development, and preparation of plans for the proper utilization of water resources. 3.4.2 Commission for Sustainable Agriculture and Environmental Rehabilitation in Amhara Region (COSAERAR): This Commission has the responsibility for the management of the irrigation sub-sector development at the regional level in Amhara. It was established under

6 Proclamation No 5/1995 as a semi-autonomous organ, reporting to the Amhara National Regional State. It has its head office is in Bahir Dar. The Commission has a total of 159 technical staff, comprising among others of 33 engineering staff, 8 construction supervisors, 3 coordinators, 7 agronomists, 11 soil and water conservation experts, 2 soil scientists, 6 geologists, 6 foresters, 3 environmentalists, 8 socio-economists, 20 surveyors and 5 draftsmen. It has a total of 160 vehicles and machinery, all committed to other projects, out of which 104 are serviceable, 29 requires repairs and 22 unserviceable. It is mandated by the Region to initiate policies and strategies concerning design, construction, and follow up of the operation and maintenance of dams and irrigation works in co-operation with beneficiaries. COSAERAR co-operates with BOA in providing support services to farmers. A Board composed of relevant regional organs, including 15 to 20 beneficiary representatives, supervises its activities. COSAERAR has limited experience in the design, tendering and construction supervision of large-scale irrigation. All surveys, field investigation, and design have been undertaken through its own staff, and consultants have not been used much in the past, though local capability exists. Construction of schemes has been undertaken by force account methods. This has required COSAERAR to own, operate and maintain fleets of equipment, thereby stretching its capacity. COSAERAR has not engaged contractors (except for buildings) though capability also exists locally. 3.4.3 Bureau of Agriculture (BOA): The BOA is the regional body responsible for the development of the agricultural sector. In addition to its other functions, it provides extension services to farmers on rainfed as well as irrigated farms. It is represented at the Zonal and Woreda levels of the Region. The BOA is mandated to provide extension support to farmers in the areas of irrigation agronomy and management. 3.4.4 Kebele Administration: These are the grass-roots-level arm of the Government and report to the appropriate woreda executive committee. They also serve as vital bridges between peasants and the government. KA s will play a vital role in ensuring effective farmer’s participation in the implementation and operation of the project. 3.4.5 The Regional Women’s Office (RWO) is headed by a director and has four experts of whom two are shared with other Bureaus. Since its establishment in 1995, the RWO has established good working links with other donors such as FINNIDA, UNICEF, and SIDA. Through these collaborations, the RWO has gained extensive experience in GAD training and sensitization for grass-roots and other stakeholders. Although the RWO is mandated to work with other line Bureaux in mainstreaming gender issues, as yet progress in defining such cooperation has been slow. 3.4.6 Credit Institutions: In the Amhara Region, only 30% of the need for micro-credit is presently satisfied. The Cooperative Promotions Bureau (BCP) was established by the Amhara Region under Government Proclamation No. 147/1998 and currently supports 1000 multi-purpose cooperatives in the Region. The Bureau’s credits are disbursed through Government approved intermediary banks to farmers. The BCP lending rate is 12.5%, which is relatively low, compared to the other commercial bank rates. The Bureau is currently managing a revolving credit of 6 million Birr for the UNDP. BCP has offices in 98 Woredas and maintains a staff strength of about 1,000. The total credit under the Bureau’s management at August 2000 was 150 million Birr (US $ 18.25 million approximately). The BCP has a strong credit recovery rate of 96% and has extensive experience in organizing farmers in cooperatives and guiding them through the legal procedures of registration, as well as supporting marketing and other production activities and helping to empower them through autonomous cooperatives organisation. The Amhara Credit and Savings Institution (ACSI) is a private micro-finance institution. It has five major shareholders and is licensed by the National Bank of Ethiopia. It maintains 15 branches and 164 sub-branches within the different Woredas. It provides credit to groups, organized for the purpose of getting the loan,

7 mainly for agricultural inputs, as well as non-farming activities. Current lending rate is 12.5% and repayment rate is around 90%. ACSI’s revolving fund is 60% derived from private savings which are obtained at the rate of 6%. Credit disbursed at present stands at ETB 180 million (approximately US $ 21.9 million). However, the Institution has not managed any public or donor funds. 3.4.7 Other Institutions: Other institutions whose activities will impact on the proposed project include the Ministry of Agriculture (MOA), the Environmental Protection Agency (EPA), the Irrigation Board of the Region which ratifies plans and programs and budgets for irrigation schemes, the Regional Women’s Affairs Office, the Food Security Office, Bureau for Public Works and Urban Development, Bureau of Health and the new Environment, Land Tenure and Land Use Administration. The Bank assisted National Livestock Development Project, Health Sector Programme and the IFAD-assisted Small-Scale Irrigation Project also have co-ordinating responsibilities at the local level.

3.5 Donor Interventions

In addition to government financed projects, multilateral and bilateral agencies have been assisting the sub-sector. Some of the on-going donor supported projects in Amhara Region include IFAD’s small-scale irrigation development project to ensure food security. IDA is currently providing resources for the Ethiopian Social Rehabilitation and Development Fund (ESRDF). The ESRDF commenced operations in 1997 and supports projects in infrastructure, health, basic education, water supply and sanitation, and small-scale irrigation. Out of a total project cost of USD 242.0 million, USD 75 million has been allocated for irrigation development of 18,000 ha in all regions of the country including the Amhara region. The ESRDF works closely with the COSAERAR. French assistance is being expected for capacity building in COSAERAR. Their commitment is expected to be in the region of 6.6 million Euro. The World Bank is currently financing some health, education, agricultural research and water supply projects (in five towns). Other donors include, Italian Government -integrated rural development project; EU – Cash for Work Programme to enhance food security; WFP – Food for Work Programme for village forest tree nursery development; SIDA – Capacity development for the Regional Planning Bureau, including office accommodation improvement. FINNIDA – Rural Water Supply and Environmental Protection Programmes in four zones; and the Government of Austria – Nature oriented tourism and livestock biomass project. 4. THE PROJECT 4.1 Concept and Rationale 4.1.1 The project area is experiencing rapid population growth and there is no additional land to be brought into cultivation. Indeed some of the land currently farmed on steep slopes in the upper part of the Koga watershed should ideally be returned to permanent vegetation cover. Thus food for the growing population must be obtained by intensifying production. Farming is also the main source of income, and poverty alleviation can only come about by production of surplus for sale, be it from crops, livestock or forestry activities. Studies have indicated that if current trends in land use continue, sheet erosion from farmland will result in soils becoming too shallow for reliable rainfed cropping. Some increases in production can be achieved by intensifying rainfed cropping, but a large enough increase to satisfy the growing population can only come about by the use of irrigation for double cropping. Farmers have been practicing irrigation on a small scale for a long time. However, the low river flows in the dry season limit the scope for expanding this diversion type small irrigation. Since 72% of the annual runoff occurs during the July-September

8 period, the only feasible way to irrigate large areas and assure food security would be to store the Koga river rainy season discharges for subsequent use in the dry season. This provides justification for the proposed irrigation component. 4.1.2 The protection and sustainable management of watersheds, particularly around areas where irrigation structures have been installed, is important to stabilising the physical and biotic environment for the effective functioning of the ecosystem that is needed to sustain and improve the quality of life. Watershed protection and development can increase the life span of dams; improve available water for irrigation; and enhance crop yields through sustained production. The objective of watershed management in irrigation project will as a matter of necessity incorporate the promotion of soil conservation techniques; rehabilitation of degraded sites; development of viable agro-forestry practices; protection of biodiversity; promotion of water conservation measures; and the adoption of improved crop production technologies. The overall strategy is to promote sustainable and profitable agriculture, efficient land-use and soil conservation by increasing the returns to rainfed farming through effective extension coupled with the support necessary to enable farmers to adopt appropriate practices. The proposed strategy is based on intensification of existing and proven interventions and is within the capacity of farmers and BOA to implement. 4.1.3 Feasibility studies have shown that the land and water resources of the area are suitable for development of a large-scale irrigation project and that the only way to irrigate large areas of land during the dry season would be to construct a storage reservoir. However, this would only be feasible if the catchment area is protected to reduce soil erosion and the subsequent sediment load of the river. The project therefore aims at an integrated development of the land and water resources of the area to increase rainfed farming output, reduce soil erosion, increase timber production and permit development of irrigation infrastructure to enable double cropping of 6000 ha. The Koga River is a minor tributary of the Gilgel Abbay River that flows into the Lake Tana, the source of the Blue Nile. The Blue Nile takes only 6.9% of its annual flow from the lake. A water balance analysis undertaken during the preparation has shown that the project will use 44.8 MCM per annum which amounts to 0.09% of the Blue Nile annual flows measured at the border. The effect of the project will be insignificant on the downstream riparian states. 4.1.4 The proposed project will be farmer driven. The stakeholders are aware of the outline plans, have already set aside land for resettlement and arrived at agreement on how compensation issues will be managed. This involvement will continue with farmer participation in all decision making. Past experience has shown that large-scale rural development projects in Ethiopia have tended to be driven by government and acceptance has been low. Transparent criteria for the necessary resettlement and re-division of land will enshrine the rights of female headed households and the less well off. Full involvement of the beneficiaries in the design and management decisions will increase the sense of ownership and responsibility and lead to more sustainable schemes. A very positive development is that recent changes in the law will allow farmers in the area to obtain legal rights of usufruct, a powerful incentive for farmers to invest in increasing the productivity of the land they farm. A major project component will be capacity building at all levels, to promote beneficiary participation and gender equity, since existing capacity for supporting farmer driven activities is weak at local, regional and federal level. These approaches are in line with Bank Group strategies for poverty reduction.

4.2 Project Area and Beneficiaries

4.2.1 Location and Climate: The project area is located in the Amhara Region, within the Mecha Woreda. The Koga River rises in the Wezem mountain area and joins the Gilgel Abbay. The project area comprises about 34,000ha, of which 28,000ha are within the Koga catchment.

9 Rainfall is of the monsoon type with a mean annual rainfall of 1400mm with an 80% probability of at least 1245mm. Most of the rainfall comes during July - September, thus permitting one season rainfed cropping only. Altitude ranges from 1900m to 3200m. Temperatures are generally suitable for year round cropping, although low night temperatures may exclude some otherwise suitable crops such as tomato during the winter. 4.2.2 Environmental Issues: The effects of the project will be felt in the entire Koga catchment, and there will be limited downstream effects. Most of the area is intensively farmed with no trace of the original flora and fauna. The most important environmental problems observed in the area are soil erosion, deforestation, poor land use and management. These issues are fully discussed in section 4.7 and in the EIA Summary. 4.2.3 Land Use and Soils: Approximately half of the Koga catchment is estimated to be cultivated, predominantly rain-fed. About 30 percent of the land is used for grazing and forestry activities (Eucalyptus plantations), the remaining 20 percent is considered too degraded to be used productively. The reservoir site is a flood plain, which mainly serves as a communal grazing land for cattle living in the project area and in the neighboring KAs during the dry season. The grasses in the grazing land have little feed value. There is significant room for improving pasture land to compensate pasture lost with implementation of the project. The soils in the upper catchment, with the exception of the very shallow Leptosols, have reasonable agricultural potential if conservation based agriculture is applied. The main risk of these soils is their sensitivity to erosion. Over 90% of the command area, in the downstream part of the catchment, is covered by Haplic Alisols, which are suitable for irrigation. The remaining soils, Vertisols and Gleysols, are constrained by poor drainage. 4.2.4 Population: The total population of the project area in 1999 was estimated at 95,000, including Merawi and average annual population growth in the area is of 3%. Average family size is 6.6 persons. The population density in the catchment varies considerably, from 44 persons per km2 in the upper catchment to 300 persons per km2 on the downstream part. This shows the very high pressure on the natural resources. 4.2.5 Physical Infrastructure and Social Issues: There is poor access to safe water, most households depend upon rivers and springs. Total school enrolment is believed to be near the national average which is between 5% and 10%. The prevalence of HIV/AIDS is unknown, it is estimated at 10% for Ethiopia. The area is served by the main Bahar Dar-Addis Ababa road and seasonal roads to Rim. Mains electricity is available in Merawi and Wetet Abbay. Religious and cultural holidays may take up to 150 days in a year. Efficient use of the irrigation component will require dispensation to allow irrigation to take place throughout the season. The project will work with local religious leaders and elders on this issue as this approach has worked elsewhere in Ethiopia. 4.2.6 Farming Systems: Rainfed crop production is the main economic activity in the project area. Between 18,000 and 19,000ha are cropped for rainfed agriculture each year. Millet and barley are double cropped on part of the area, so the total area of harvested crops is estimated at 24,130ha giving a cropping intensity of 127%. The average holding is estimated at 2.6ha. Some of this is under fallow, some double cropped. Within the potential command area the average holding is smaller, estimated at 2.1ha. The area under teff and millet is declining and that under maize and barley increasing. Oxen are very important as most primary and secondary cultivation is with ox drawn equipment. Farmers who do not own oxen are compelled to hire them. Agricultural support activities by Government comprising extension and credit provision have enabled farmers to adopt new technologies. Yields of maize under improved management on farmers’ fields have been as high as 90 qt/ha but 60 qt/ha is a good estimate of the average, compared to only 9.35

10 qt/ha for traditional practices. The average value of the crops produced is estimated at ETB 1,475/ha. Fertiliser use is estimated at 30kg/ha on average. Apart from the fertiliser and improved seeds, farmers use very limited quantities of insecticide. There are limited areas of traditional irrigation, totalling about 200ha within the project area, with water being taken from small rivers and springs. The main crops are pepper, onion, tomato, potato and sugar cane. Average holding in these areas is about 0.25ha. These are managed by the Yewuha Abate; water users associations which co-ordinate supply and distribution, and are typically composed of respected village elders. 4.2.7 Livestock Production and Fisheries: The estimated livestock resource in the Project area is 64,779 Tropical Livestock Units (TLU), most of this is made up of cattle. The average number of livestock in the household is 4.2 cattle, 0.3 sheep, 0.3 goats, 0.5 equines, and 3.3 poultry. Despite large numbers of livestock in the study area, their productivity is much lower than their potential due to poor nutrition and health problems. According to BOA statistics the value of livestock sold from the area is only ETB 26 per household per year on average. It can be deduced that livestock are mainly used for draught power, transport and home consumption. Fisheries activity in the project area is insignificant and limited to the Koga River. 4.2.8 Soil Conservation Activities: The BOA promotes conservation activities in the project area, but there appear to be no special projects operating at present. Many conservation measures introduced earlier are unpopular with farmers because they take up productive land. Research elsewhere in Amhara indicates a high degree of awareness of erosion as a problem causing reducing farm output, but limited awareness of farming practices being the main cause. 4.2.9 Forestry: The BOA is promoting afforestation and farmers have accepted tree growing to some extent. Farmers have been involved in tree planting near the main roads where a good price can be obtained for timber and firewood. In areas further from the road, the economic return from trees is very low. Eucalyptus spp. are the main species grown. There is current debate over the wisdom of planting this species in woodlots on farmland because of the difficulties of bringing such land back into cultivation at a later date, and its poor impact on neighbouring land, erosion and soil fertility. Farmers are aware of a range of indigenous species with multiple uses, but their use is limited by lack of planting material, they are also attracted to the fast growth rate and assured market for Eucalyptus poles. Anecdotal evidence indicated that wood is being exported from the Woreda to as far away as Yemen. 4.2.10 Beneficiaries: The project area is in the Mecha Woreda and includes parts or all of 19 KAs and is believed to comprise about 12,000 households. The majority of these are dependent upon farming for their livelihood. Although there are no figures available for female headed households in the Region, nationally the figure varies from 6 to 30, and are reported to be worse off than average. Average farm size varies from 2.6ha in the upper part of the area to 2.1ha in the proposed command area. Availability of suitable land is the limiting factor. The urban population of Merawi and Wetet Abbay, with estimated population of 15,000 will also benefit indirectly from increased economic activity in the area.

4.3 Strategic Context

The Federal Democratic Republic of Ethiopia has given emphasis to rural development, specifically to agriculture, which plays a significant role in achieving food security, creating employment and reducing poverty at national and household levels. The proposed project is to support Government efforts through integrated development of the irrigation and the watershed management sub-sectors under sustainable environment management. The sector goal is to contribute to poverty reduction through improvements in food security, household incomes,

11 rural employment opportunities, health and sanitation, in line with Bank strategy for assistance to Ethiopia.

4.4 Project Objective

The objective of the project is to contribute to sustainable rural livelihoods through improvement in agricultural production, with active participation of beneficiaries.

4.5 Description of Project Components

4.5.1 The project will include four components as follows: - Irrigation: which includes two major activities, one, construction of dam and irrigation infrastructure for all year round cropping to irrigate a maximum command area of 6000ha. The second is to promote efficient farming of this command area with sound environmental management. Participatory management will be promoted by facilitating the creation and strengthening of water users associations to ensure efficient water use at farm level and farmer representation in the overall management of the command. - Watershed Management: The principal activities will include efficient and effective rainfed conservation farming established on 22,000 ha catchment area. This will also include livestock development, soil conservation measures and forestry. The project will also provide funds for activities in the fields of health care and sanitation associated with water borne diseases and HIV/AIDS control awareness. - Capacity Building. The main activity here is development of capacity for managing participatory development at local, regional and federal levels. The institutions to be supported include COSAERAR, BOA, WAO, MWR and farmers' organisations. - Management and Co-ordination. Management structures necessary to ensure efficient project management to implement and operate the project will be developed. A. IRRIGATION DEVELOPMENT 4.5.2 The main sub-components include the construction of Koga dam, main and secondary canal conveyance system, tertiary canal distribution system, land development and preparation, the construction of project buildings and housing and maintenance. The details are provided in Working Paper II of the Project Implementation Document. 4.5.3 Koga Dam Construction: The main dam with a maximum height of 21.5m will be constructed on the Koga river to impound 77 million cubic meters (MCM), out of which 73.4 MCM will be useable volume, and 3.7 MCM for sediment deposition for project life of 50 years. The dam will be of zoned earth and rock-fill construction with near vertical impervious core flanked by a suitable filter, transition and shell. Construction materials would be obtained from borrow sites located within the reservoir. The dam will have low-level outlet for releasing water to down stream users, and an irrigation outlet for supplying water to the canals at a rate of 0.98 l/sec/ha or 9400 m3/ha/year. A saddle dam, 11.5m high located at the northern end of the reservoir will be constructed to prevent overflow into the watershed to the north. The dam would be of modified homogenous embankment type with a central impervious core. To ensure safety of the dam, a spillway with a flood discharge capacity of 106 m3/s (1:10,000 year flood) will be constructed. The diversion structure will pass a flow of 90 m3/s (1:25 year flood).

12 4.5.4 Construction of Main and Secondary Canal Conveyance System: A main canal 16.7 km long will be constructed commencing at the measuring weir and ending at the final night storage reservoir. An interceptor drain running along the main canal removes flood runoff to the natural drainage system. The canal will be concrete lined throughout its length to reduce water loss. Gated regulators will be built at the 8 main control points where the night storage reservoirs are located. Stone masonry construction will be used for regulator construction apart from base slabs, gate supports and decks, which will be of concrete construction. A 78 km long secondary canal system will be constructed together with regulators and offtakes. Secondary canals would be lined throughout their length to prevent erosion, reduce maintenance requirements, and control water loss. A total of 100 km of access roads will be constructed along the main and secondary canals. 4.5.5 Construction of Tertiary Canal Distribution System: The tertiary and quaternary systems (120 km and 310 km respectively) will comprise the distribution works at farm level and will be operated by the farmers through the Water User Groups. These systems will be unlined and, as necessary, operation would be alternated to suit on- farm water requirements. A total of 11 unlined storage reservoirs will be constructed under this sub-component, and a surface drainage system to remove excess irrigation water and run-off. Land preparation activity will include regarding, land levelling, and remodelling irrigation distribution units where necessary. Day time irrigation will be practiced thereby contributing to efficient water use. 4.5.6 The development of the command area will be progressive and will be undertaken between PY3 and PY6. Extension effort will start immediately with farmer training sessions by extension staff and farmer to farmer technology transfer in readiness for the start of operations. Farmers and officials of water users associations on other irrigation projects have already signalled their readiness to participate in this. The training will emphasize efficient use of water. No hard and fast crop calendar will be imposed, but rather farmers will be encouraged to choose from a basket of possible options, according to their circumstances and personal preferences. The cropping pattern and planting calendars are expected to evolve over the life of the project. High value, labour intensive crops like onion, carrots and other horticultural crops are potentially the most profitable crops, but it will be necessary to maintain a viable crop rotation for sustainable farming. Some households will also find labour a limiting factor and will choose to grow less labour intensive crops. The model used for economic analysis of the irrigated component of the project is based upon a very conservative estimate of only 15% of the cultivated area being under horticultural crops and 20% under potato which has a medium level demand for labour and profitability. The remaining 65% are under lower value cereal crops. A 5 ha irrigated demonstration farm will be established in PY3 to fine tune recommendations and provide a training resource for farmers and BOA field staff. 4.5.7 The Bureau for Cooperative Promotion will assist in the formation of water users associations, preparation of bye-laws and their registration. A study will determine the basis for cost recovery and how to finance maintenance work, and generate revenue for water users associations. B. WATERSHED MANAGEMENT 4.5.8 Extension Services: The key intervention is to increase the effectiveness of the extension service. The current Development Agent (DA) farmer/household ratio is 1:700 in Amhara. The strategy for the watershed is to quickly build up DA numbers to a level that can be sustained by the irrigated command and to use these DAs for intensive extension in the watershed until the command starts to be farmed. The DAs will then be progressively transferred to development of the command area. By this time (years 2-4) farmers groups should be operational

13 within the catchment and will be able to continue development of the watershed with reduced DA contact. It is planned that 56 DAs and 7 supervisors should be in post by PY2. This number represents a realistic target number and is far above the current extension intensity on irrigation schemes in the Region. However, it is a minimum requirement and should be increased if possible. These field staff will be provided with the training, housing and equipment to work effectively and project support at woreda, zonal and regional level will ensure adequate back-up, support and supervision. Another important extension activity will be the provision of a small and simple farmers' centre. Approximately 1000 man/weeks of training courses will be run per year. 4.5.9 Over the first 3 years of the project, 45km of rural feeder roads will be built to open up the catchment and command areas to vehicular traffic. This will facilitate the provision of inputs and evacuation of agricultural products. The roads will particularly improve the economic attractiveness of tree planting in the upper parts of the catchment. 4.5.10 Crop Production: The basic strategy in the crop sector is to continue to promote the use of fertiliser and improved seed using the already proven extension management test package (EMTP) approach. Small-scale irrigation will also be developed. Six possible sites have been identified where the project will construct diversion weirs that will enable the irrigation of 138ha in total. Horticultural crops will be grown on these schemes. It is possible that further micro-schemes will be identified as the project progresses; but suitable sites are limited. The drainage of water from the command area may enhance dry season flows in some streams and so open up new possibilities for small schemes of this nature. 4.5.11 Livestock Production and Fisheries: will be promoted by demonstration of intensive livestock keeping and provision of a satellite brooder to overcome the Region-wide shortage of improved poultry. The Project will work with the NLDP in extensive livestock improvement and fodder production. Under fisheries, initial stocking of the reservoir with Tilapia will be undertaken to augment the resource. 4.5.12 Soil Conservation: In conservation and watershed protection, the main activity will be the demonstration and training of farmers in general conservation farming measures like maintaining grass strips between fields, early checking of forming gullies, use of catch and fodder crops to maintain vegetation cover, tree planting on vulnerable spots. Where possible the emphasis will be on preventative rather than remedial measures. Local nurseries will be established to supply planting materials. 4.5. 13 Forestry: Planting an equivalent of 1000ha over 5 years in small plots or individual trees, multipurpose trees, forage, fruit etc. will be supported by the project. Fruit tree seedlings will be supplied by the nursery in Wetet Abbay, which requires limited investment to facilitate increased production. Other multipurpose trees produced in local nurseries attached to DA housing or community. A total of 15 nurseries will be established over the first 4 years of the project. 4.5.14 Health, Water Supply and Sanitation: As part of environmental protection and sanitation, the project will provide 50 water points and 19 demonstration pit latrines. It will provide additional support for malaria and schistosomiasis control and AIDS awareness control. The project will co-ordinate these services with the Health Sector Programme. C. CAPACITY AND INSTITUTIONAL DEVELOPMENT 4.5.15 The Project will contribute to capacity building at local, regional and federal level to both ensure effective project implementation and to ensure sustainability. At local level, individual farmer training will be undertaken in a purpose built farmer training centre in Merawi.

14 The courses to be offered will range from one day to one week in duration for up to 40 farmers. The main topics to be covered will be technical information on production techniques and systems management. Study tours to existing irrigation schemes will also be organised for farmers. A very important activity will be to ensure that farmers’ representatives are trained and equipped to take an active role in the overall management of the irrigation scheme. Cross-cutting themes such as gender and participatory approaches will be tackled in addition to technical and financial management subjects. 4.5.16 At the Federal level, COSAERAR, BOA, and RWO MSc level training and short overseas courses will be provided in irrigation engineering, water management, horticulture, agronomy, micro-credit, gender and development, and project and financial management. Funds will also be provided for short term local training and study tours. The training officer will develop a detailed training plan annually, following training needs analysis. Regional experts and Subject Matter Specialists will also need in-service training. It is planned that a total of 3 staff will participate in the 6.5 month International Center for Development Oriented Research in Agriculture (ICRA) training course on participatory methodology. It would be very valuable for the Project to use the contacts developed to host an ICRA practical course during the development of the irrigated command. Field staff will benefit from regular in-service training and study tours. 4.5.17 To strengthen the project management unit, funds will be provided for hiring the consultants in the following areas: procurement, engineering, watershed management, monitoring and evaluation, participation and institution building and training for up to 36 months. These consultants will provide training and advice to their local counterparts to ensure effective project management throughout the project life. The project will submit to the Bank by 31 July each year for approval, the annual training programmes as well as the CVs of staff selected for training. A bonding system will be introduced to ensure that trainees return to the country after their training. D. PROJECT COORDINATION AND MANAGEMENT 4.5.18 The project will provide resources for project management and coordination, including monitoring and evaluation, technical assistance and equipment. Such support will be channelled through a semi-autonomous Project Management Unit (PMU) in COSAERAR. Also Focus offices within the BOA at Regional and Zonal level will be supported. 4.5.19 An office, laboratory, and residential quarters at Merawi Project Management Office will be constructed. The buildings will initially be used by the project construction supervision team and later taken over by the operation staff. In order to get the buildings completed on time for the supervision team, pre-fabricated building units will be installed. 4.5.20 The project will make ETB 2.5 million (or UA 233,450) available for micro-credit purposes, thus supporting directly about 25% of the households or more (as farmers' credit needs are seasonal and currently between ETB 100 - 500. It is intended that the PMU will enter into a Memorandum of Understanding with the CPB on the modality of the micro-credit component administration. Recovered loans will be ploughed back to enrich the portfolio and deepen resources available for investment opportunities and income generation in the project area. The CPB will be required to submit quarterly progress reports and audited accounts on loan administration to the PMU. The CPB has been selected due to its proven experience in managing donor funds and extensive grass-roots outreach with a sustainable approach. Both men and women will have equal access to the micro-credit funds.

15

4.6 Production, Markets and Prices 4.6.1 FAO’s Year 2000 report on food supply situation in Sub-Saharan Africa showed that Ethiopia is one of the 16 African Countries still facing exceptional food emergencies. The country’s food needs in 2000 was met through import and food aid amounting to 1.4 million tonnes. The increased rainfed production from the project will cover subsistence needs and possibly leave a small surplus. The total additional production of cereals from the irrigated command area is expected to be about 40,000 MT. In addition, 24,000 MT of potato, and 18,000 MT of onions will be produced annually as from Year 6. With the existing chronic shortage of food in the country, the prices of these products are not expected to decline. Merawi town is the commercial centre of the area and local trading is undertaken at the weekly market. Traders from distant communities also send lorries to Merawi on market days to buy larger quantities of grains. The demand for cereal crops is buoyant in the region with large parts of the region producing far below their subsistence requirements. Thus all of the grain produced in the area will be easily marketed. The gradual expansion of production over the project life will enable traders to upgrade their trading capital and transport capacity to meet requirements. The GOE is rehabilitating the Bahar Dar to Addis Ababa road that runs through Merawi. This will expose the town to a wider national market and also reduce transport costs to more distant markets and enhance produce marketing through improved competitiveness. 4.6.2 Hybrid seed maize will be grown under contract from the seed companies. Demand far exceeds supply at present and the command area will need about 60 MT per year. The seed companies are confident that they can market all of production. Local officials are confident that the production from the command will be easily sold locally. However, the project will assist farmers with market information and the gradual increase in production will enable the situation to be monitored and farmers advised accordingly. The Water Users Associations may act as a base for co-operative or group marketing of some products when necessary.

4.7 Environmental Impacts and Mitigation Measures 4.7.1 The project is classified in the environmental category 1. An EIA has been conducted, impacts identified, and mitigation measures integrated in project design approach and ideas. An EIA Summary, including a Land Resettlement Plan has also been prepared and circulated to the Board. An Environmental Management and Land Resettlement Monitoring Plan will be prepared during the first year of project implementation. This will be a loan condition. 4.7.2 Potential Impacts of Irrigation: Negative impacts are likely to arise from this activity in a number of ways and will require the implementation of mitigation measures. During construction, the normal temporary adverse effects will be experienced such as disturbance of air and water quality, noise, minor effects on terrestrial and aquatic environment, as well as social impacts and disturbance. 4.7.3 Construction of the various components of the irrigation scheme will take up some farm and grazing land and some houses will need to be demolished. However resettlement in the context of this project is minor as compared to big dams. Reservoir construction will displace 217 families, 40 households are located along the line of the main canals and some homesteads within the command area will need to be re-located. Resettlement will be within the same community within 3 km of the original location. Resettlement will be conducted by the community, and will be thoroughly discussed and agreed on as stipulated in the current legal proclamations and up-coming modifications. Full details are given in the Resettlement Plan.

16 4.7.4 During operation the most significant impacts are: water related diseases (malaria and shistosomiasis), impacts on drinking water supply, possible impacts on surface and ground water resources and on aquatic environment, and possible impacts on soil structure and texture from irrigation. As for most irrigation developments, there is a risk of invasion by pests, as irrigated areas constitute an off-season green oasis. Impact on wildlife is limited since the human population density throughout the area is high and wildlife disappeared a long time ago except for monkeys Colobus sp. One endemic bird is a visitor to the Bojed plain. Inundation of the Bojed plain will improve biodiversity with the permanent presence of water. 4.7.5 Potential Impacts of Watershed Management: The objective of the watershed management activities is to rehabilitate the watershed in order to curb or reduce the cycle of vegetation destruction/erosion/silting, guaranteeing an acceptable life span for the dam. Watershed activities are improvements to rain-fed agriculture, livestock, forestry, soil conservation, infrastructure development, and health. 4.7.6 Mitigation Measures: Mitigation of irrigation activities includes health impacts, soils conservation and preservation of surface and ground water quality. The activities of the watershed components of the project aim at improving the vegetation cover and reducing the erosion that would otherwise significantly affect the project. Mitigation will mainly rely on use of best practices in agriculture, reforesting, and soil conservation. Nevertheless, there is need to closely monitor watershed activities to see if the practices are appropriate and to detect any adverse effects early enough. Environmental training and awareness building is also included as one of the components of the project to provide farmers and other stakeholders with the appropriate instruments to insure sustainability in the project area. All mitigation measures were costed and included in the project budget to ensure successful implementation. 4.8 Project Costs 4.8.1 The total project cost is estimated at UA 37.84 million, including contingencies. The foreign exchange component would amount to UA 19.22 million, representing 51% of the total cost, while local cost would be UA 18.62 million, or 49% of total cost. Summaries of cost estimates by components and by category of expenditure are in Tables 4.1 and 4.2 respectively. Table 4.1 Summary of Cost Estimates by Component

17 Table 4.2: Summary of Cost Estimates by Category of Expenditure

4.8.2 The cost estimates are based on prices prevailing in January, 2001. Cost estimates include 10% physical contingency on all items, except for staff consultancies, training, staff salaries and allowances. Price contingency for foreign costs is assumed at 2.5%, while increases in local prices have been assumed at 5% based on current and forecast inflation levels for Ethiopia.

4.9 Sources of Financing and Expenditure Schedule

4.9.1 The project will be financed by ADF and the Government of Ethiopia (GOE). The ADF loan amounting to UA 32.59 million or 86.1% of total costs will be used to finance all investment costs, while a TAF grant of UA 1.33 million (or 3.5% of total costs) will finance institutional capacity building. The GOE will finance all recurrent costs amounting to UA 3.92 million (or 10.4% of total costs). In addition, GOE will meet all duties and taxes associated with procurement of project goods and services, estimated at UA 1.3 million. Beneficiaries will participate and contribute labour for the following activities: on-farm works, construction of relocation houses, and operation and maintenance of on-farm works. These are together valued at ETB 1.32 million. Following cost recovery guidelines, farmers will be expected to also contribute to operation and maintenance of infrastructure works. Table 4.3 shows the sources of finance for the project as a whole, while Tables 4.3(a) and 4.3(b) show GOE contributions ADF and TAF sources. Annex 3 gives the sources of finance by categories of expenditure (list of goods and services).

18

Table 4.3: Sources of Finance

ETB '000 UA '000 % Total

Source F.E LC Total F.E LC Total

ADF 191,517.2 157,483.7 349,000.9 17,884.2 14,705.9 32,590.1 86.1

GOE 0 41,946.6 41,946.6 0 3,917.0 3,917.0 10.4

TAF 14,247.2 0 14,247.2 1,330.4 0 1,330.4 3.5

Total 205,764.4 199,430.3 405,197.7 19,214.6 18,622.9 37,837.5 100 Table 4.3(a): Sources of Finance (ADF Financed Components)

ETB '000 UA '000 % Total

Source F.E LC Total F.E LC Total

ADF 191,517.2 157,483.7 349,000.9 17,884.2 14,705.9 32,590.1 89.4

GOE 0 41,234.4 41,234.4 0 3,850.5 3,850.5 10.6

Total 191,517.2 198,718.1 390,235.3 17,884.2 18,556.4 36,440.6 100

Table 4.3(b): Sources of Finance (TAF Financed Components)

ETB '000 UA '000 % Total

Source F.E LC Total F.E LC Total

TAF 14,247.2 0 14,247.2 1,330.4 0 1,330.4 95

GOE 0 712.1 712.1 0 66.5 66.5 5

Total 14,247.2 712.1 14,959.3 19,214.6 66.5 1,396.9 100 4.9.2 Justification for Local Cost Financing: The ADF will finance 39% of the project in local costs. This is so because the project is oriented primarily towards poverty reduction with high local cost content. For example, the nature of the irrigation and watershed components focuses on activities that are largely local, mainly civil works which is 70% of total costs. Other justifications are: (a) as part of the economic reform effort, GOE has strengthened its tax administration and revenue collection. In spite of these efforts, the Government does not have the capacity to finance the entire local cost of the project, despite having to finance all the project recurrent cost; (b) the level of aggregate domestic savings in Ethiopia is low (below 4.7%) and therefore limits the country’s capacity to finance a project of this size entirely from domestic resources; and (c) the prevailing high interest rate on resources mobilised from the domestic banking system cannot support a project of this type. 5. PROJECT IMPLEMENTATION

19 5.1 Executing Agency The Commission for Sustainable Agriculture and Environmental Rehabilitation in Amhara Region (COSAERAR) will be the executing agency (see para 3.4.2). COSAERAR, headed by a Commissioner and a deputy, has the mandate to design, construct, operate and maintain (in cooperation with beneficiaries) medium and small-scale irrigation. It has undertaken the design and construction of dams, and small and medium size irrigation schemes. The proposed project belongs to the Amhara Regional state and the MWR which has responsibility for large irrigation schemes has mandated the Commission to implement the Koga Project. The MWR will however, monitor the implementation. COSAERAR experts will be seconded to the project. As most of the staff are committed to other schemes, the Commission's capability will be strengthened under the project.

5.2 Institutional Arrangements

5.2.1 For a project of this nature to be implemented competently on schedule, it requires that day to day implementation be entrusted to a strongly focused implementation unit. Thus without creating a separate agency, a Project Management Unit (PMU) will be set up within COSAERAR charged with day to day monitorable implementation of the project. A full time Project Manager directly accountable to the Project Steering Committee (PSC) through the Commissioner will be appointed. The PSC will be established to advise and oversee the co-ordination and implementation of the project. The PSC will be chaired by the Amhara Economic Sector Head, and will comprise of the Heads of Bureaux of Agriculture;, Health; Co-operative Promotion; Planning and Economic Development;, Water, Mines and Energy; and Women Affairs Office. Other members will include Head of Women Affairs Department in the MWR; Representatives of Ministry of Agriculture and MWR; and representatives of two Water Users Associations. The Committee will meet at least twice annually. The project will finance the costs of its meetings.

5.2.2 The PMU will comprise the Project Manager, Project Accountant, Irrigation Engineer, Watershed Management Specialist (in the BOA), the Agriculturist (in BOA), Gender Specialist, Procurement Specialist, Training Officer, and the Monitoring and Evaluation Officer. Initially, the PMU will be based at COSAERAR, but within the first two years, the Woreda site office will be established, based at Merawi, to co-ordinate field activities. All Irrigation component staff, except for the Project Manager and a few support staff, will then move to Merawi. A Deputy Project Manager will head the Woreda office. A Woreda Technical Committee comprising members from all stakeholders will support and guide activities within the Woreda. Membership of the committee will include representatives of the Woreda Rural Development Committee, Mecha Woreda Agriculture office, Peasants/Kebele Associations, and WUAs. The project organisational chart is given in Annex 2.

5.2.3 A Focus Office (FO) will be established in the BOA to coordinate the implementation of the watershed management component. The focus officer (Watershed Management Specialist) will however be a member of the PMU. The farmers will manage the schemes with support of the PMU. Collaborating institutions in project implementation will include Bureaux for Health; Water, Energy and Mines; Women’s Affairs Office and the BCP. One of the first assignments of the PMU will be the recruitment of the consultants for the design and supervision of irrigation structures – dams, canals, and the Contract Engineer and Project Accountant to support management of the project. The PMU, as well as the collaborating institutions will prepare annual work plans to be integrated by the PMU, from which the annual project budget will be derived.

20 5.2.4 Operation and maintenance of the project will be carried out at two levels. The large irrigation infrastructure such as dams, main and secondary canal and associated road network will be operated and maintained by the Project Operation Unit, to be established at Merawi, under COSAERAR. The WUAs will undertake operation of the maintenance of the tertiary and quaternary canals, associated access roads and on-farm structures, after receiving training. The KAs and the Woreda Rural Development Committee will participate in the formation of the WUAs, with the support of the BCP. Each WUA will be registered, thereby acquiring legal recognition. A group of WUAs will form higher level of organization, preferably at the tertiary canal level. With guidance of the PMU, the WUAs will carry out the preparation of guidelines for scheme operation and maintenance and ensure that members follow instructions, determine rights and obligations of members and establish and enforce efficient water distribution procedures in a fair and equitable manner. In addition, the WUAs will take part in the resolution of disputes, fixing water charges and arranging for collection. They will organize members for efficient procurement of inputs, credit and other support services. 5.2.5 The importance of social and human issues in the management and governance of the project cannot be overstated. Major preconditions to project implementation are resolution of resettlement and re-distribution issues including gender considerations. Fair, transparent criteria for re-settlement, redistribution and management of the water resource arrived at with the full informed participation of the primary stakeholders are the key to the entire success of the project. 5.2.6 The command area will be divided among the 12,000 households, with each receiving approximately 0.5ha. The 5000 households currently farming in the command area will give up their holdings in return for an irrigated plot plus additional rainfed land within the catchment. This additional land within the catchment will be given up by farmers in return for access to irrigated plots. All farmers will then receive a written a right of use for their holding. 5.2.7 Technical Assistance: A firm of Consulting Engineers and Architects will be hired for design and supervision of detail irrigation works and operating systems. This will include provision of detailed cost estimates, tender documents and pre- and post contract supervision of construction work. The firm will work with qualified national counterparts who will assist the Project Manager in the implementation of the engineering component. Resources provided under technical assistance will also be used to conduct important studies needed for the overall success of the project. These will include cost recovery and strategy for women support studies. 5.2.8 Enhancement of Women Participation: The project will strive to balance the participation of both men and women, in order to achieve sustainable development and increased food production. However, specific and focused intervention will be targeted to involve and attract women in the project activities such as, representation in WUAs, access to and control of Land User Rights, livestock production and agriculture, natural resources conservation activities. In addition, women will have equal access to technical training related to project activities, and micro-credit. 5.2.9 The project will provide short training in gender sensitization and GAD for the community members and the various stakeholders at the regional level, as well as the government structure members such as the Kebeles, the Woredas, and the Zonal offices. Such training will ensure popular participation of the various interest groups as well as facilitate gender mainstreaming in the project and in the Region. The integration of gender issues in the project as well as monitoring and evaluating their performance will be done mainly by a full time gender expert in the PMU. S/he will be supported and assisted by the different stakeholders. The Amhara Regional Women’s Office as well as the Women’s Affairs Department of the MWR will be

21 represented in the PSC and will give technical support to the gender expert in the PMU. The RWO will be responsible for the design and implementation of short training for all the stakeholders, in co-ordination with the gender expert. 5.3 Supervision, Implementation and Expenditure Schedules

The project will be implemented over a period of six years. This duration is determined by the technical requirements of the project and experiences in implementing similar projects elsewhere. During implementation, the Bank will closely supervise the project twice annually. A mid term review (MTR) will be undertaken by PY3 and a project completion report (PCR) will be prepared by both the Borrower and the Bank by PY6. The project implementation schedule is given in Annex 5. The project activities will commence with the establishment of the PIU followed by selection of consultants and provision of service facilities and infrastructure for the PIU. The construction activities, including design and preparation of tender documents and selection of contractors will be completed in the 3rd quarter of PY2. Detailed planning for the watershed management component will commence in PY1 with implementation continuing throughout the project period. Site engineering and construction will commence as from PY2. Cultivation on irrigated areas will commence in PY4. Tables 5.1 and 5.2 give the expenditure schedules by components and sources of finance respectively.

Table 5.1: Expenditure Schedule by Component (UA '000)

Table 5.2: Expenditure Schedule by Source of Finance (UA '000)

Sources 2002 2003 2004 2005 2006 2007 Total %

ADF 3,634.7 2,630.9 21,223.5 2,464.2 1,495.1 1,141.8 32,590.1 86.1

TAF 295.1 287.2 317.5 186.6 149.1 94.9 1,330.4 3.5

GOU 405.5 492.2 568.3 770.0 828.1 852.8 3,917.0 10.4

Total 4,335.3 3,410.2 22,109.3 3,420.8 2,472.3 2,089.6 37,837.5 100

5.4 Procurement Arrangements 5.4.1 Procurement arrangements are summarized in Table 5.3. All procurement of works and services, will be in accordance with the Bank's Rules of Procedure for Procurement of Works and in the case of consultancy services, in accordance with the Rules of Procedure for the Use of Consultants, using the relevant Bank Standard Bidding Documents and Letters of Invitation.

22 Table 5.3: Procurement Arrangements (UA'000)

5.4.2 Civil works contracts will be administered by COSAERAR. However, the preparation of bill of quantities and tender documents following the Bank's standard documents will be undertaken by a firm of consultants recruited to design and supervise civil works for the relevant irrigation and watershed management activities. The project will recruit a procurement officer and a contract administrator with responsibility for seeing that the Bank's procurement rules and procedures are followed. There will be a launching workshop prior to project take-off. In addition, some members of the PMU will visit the Bank to familiarise themselves with the Bank's procurement process. 5.4.3 Civil Works: Procurement of civil works contracts valued at more than UA500, 000 and totaling UA 24.93 million in aggregate will be carried out under International Competitive Bidding (ICB) procedures. Such contracts will include mainly dam development (UA 10.38 million), main and secondary canal (UA 7.78 million), and tertiary canal and distribution systems (UA 6.30 million) and the Merawi office, quarters and site works (UA 466,400). However, minor civil works contracts below UA 500,000 and amounting to UA 1.45 million in aggregate will be undertaken under National Competitive Bidding (NCB) procedures. These will include those of agricultural extension (DA and Supervisors Housing, Farmers centre building, irrigation demo and access roads contracts valued altogether at UA 845,000); small scale irrigation development (UA 297,500); livestock satellite brooder unit development (UA 23,400); forestry nursery development (UA 17,800); and water supply and sanitation (UA 265,000). However, contracts for the above stated livestock and forestry development which are under UA 100,000 will qualify for procurement post-review to speed up their implementation. 5.4.4 Goods: Procurement of vehicles valued at UA 488,500 and equipment for irrigation works valued at UA 722,500 in aggregate will be under ICB procedures. Other field and office equipment and furniture valued at UA 166,900 in aggregate will be procured under national shopping

23 procedures. Procurement of farm inputs and materials valued at UA 890,000 in aggregate will be through direct negotiation, following a participatory approach after discussing with stakeholders and agreeing on types and sources. A total of UA 1.22 million in aggregate will be used to meet compensation costs under the Resettlement plan (payment for houses, tukul homesteads, and economic crops/trees of displaced households). 5.4.5 Consulting and Capacity Building: Procurement of consulting services valued in total at UA 2.92 million will be undertaken in accordance with the Bank's Rules of Procedure for the Use of Consultants, on the basis of shortlist, and selection will be governed by both technical and price considerations. These include firm of consultants for detail engineering and geo-technical designs and supervision of irrigation works valued at UA2.48 million, extension services (UA 99,300), crop development (UA 8,100), health and sanitation (UA 2,300), project management (UA 133,000) and capacity building (UA 198,400). Also training of various categories of staff and farmers under the capacity building initiative valued at UA 1.13 million in aggregate will be contracted to appropriate institutions, trainers or NGOs, acceptable to the Bank, by direct negotiations in a participatory manner, and following annual skill gap analysis. Proposed annual training programmes as well as procurement of consultants and institutions for training will be reviewed and approved by the Bank before implementation. 5.4.6 General Procurement Notice: The text of a General Procurement Notice (GPN) will be discussed and agreed with the Borrower at appraisal, and this will be issued for publication in Development Business, upon approval by the Board of Directors of the loan proposal. 5.4.7 Review Procedures: The following documents are subject to review and approval by the Bank before promulgation: Specific Procurement Notices; Tender documents/Requests for Proposals; Tender evaluation/Evaluation of Proposals' reports, including recommendations for contract award; and Draft contracts, if these have been amended from drafts included in the tender invitation documents. However, for contracts qualifying for post-review, the Borrower shall submit to the Bank for review after signing the contract and prior to requesting for disbursement or payment, the bids evaluation report, recommendation for award, tender documents and the signed contract.

5.5 Disbursement Arrangements

Disbursements will be through direct payments for civil works, vehicles and equipment with contracts valued at more than UA 20,000 each. Payments under UA20,000 will be made from special account to be established by the Executing Agency in a bank acceptable to the Fund. This will be mainly to finance training, capacity building, resettlement claims, minor civil works, office equipment and furniture and minor consultancy contracts. The PMU will open a special account under which the Bank can deposit funds for advance payments. The PMU and the Focal Office in BOA will each open local account into which funds can be transferred from the special account based on approved work plan and budget for each agency. All disbursements from the loan and grant proceeds will follow the Bank Group disbursement rules and procedures. Recurrent and other overhead costs of the project will be financed by the GOE using its local procedures. 5.6 Monitoring and Evaluation 5.6.1 Monitoring and evaluation of the project activities will be carried out as a regular management function by the Monitoring and Evaluation (M&E) Unit of the PMU. Monitoring will also be undertaken by the MWR. Monitoring will involve the assessment of performance of project activities, including the effect on the environment, the resettlement plan, and against pre-determined monitoring indicators.

24 5.6.2 The foundation for the overall project monitoring (and evaluation) systems will be the logical framework, a series of key performance indicators and the project and Working Papers. The project will provide funds for technical assistance with development of standards and guidelines for monitoring and evaluation. The monitoring indicators will compare programme performance each year with the target set in the Annual Work Plan and Budget (AWP/B) for that year. The general principles for the participatory monitoring of programme activities will include: (a) water users associations will monitor their activities and investment performance, supported by service providers; (b) the woreda office will monitor activities, inputs and output achievements; and (c) relevant institutions (MWR, PMU, BOA, BCP and Regional Women Affairs Office) will monitor support and capacity-building activities. The M&E Officer to be appointed by the project will co-ordinate all monitoring and evaluation activities and ensure the production and publication of the necessary reports. 5.7 Financial Reporting and Auditing The PMU will maintain proper financial reports and audited accounts, copies of which will be made available to the Bank not more than six (6) months after the end of the financial year. The Project will finance the costs of annual audit of the project accounts. It will submit to the Fund regular quarterly progress reports which will follow the official Bank Group report guidelines. 5.8 Aide Co-ordination

As discussed in para 3.5, a number of donors are active in the Region. The Bureau for Planning and Economic Development (BOPED) is responsible for co-ordination of all donor activities in the Region. In the process of formulating the project, the various missions interacted with the donor community to inform them about the proposed project and share from their experiences. The proposed project activities will be co-ordinated under the same umbrella to avoid duplication and ensure collaboration and sustainability.

6. PROJECT SUSTAINABILITY AND RISKS 6.1 Recurrent Costs

All recurrent costs under the project will be financed by the Government of Ethiopia. This amounts to a total contribution of the Borrower to the project, estimated at UA 3.92 million or ETB. 41.95 million (or 10.4% of total project costs) over 6 years. This will range from UA 405,500 in Project Year 1 and rising to UA 852,800 in Project Year 6. Recurrent costs include civil works maintenance, maintenance and operation of vehicles, plant and equipment and general operating expenses, as well as salaries and allowances for the staff seconded to the project. The decision to ascribe financing of recurrent costs to the Borrower is to ensure full project ownership and maintenance of the investments even after project completion. The Government has a policy of cost recovery under its water policy and most of the operation and maintenance costs of the irrigation system will be recovered from the beneficiaries. Assurances will be obtained from the Government that it will provide adequate budget to meet its recurrent costs contribution. However, given the priority to which the GOE and the Regional Amhara Government place on the proposed project, there is no doubt that they will be committed to meeting the recurrent costs requirement. 6.2 Project Sustainability

6.2.1 The project will be sustained as a result of combination of a number of factors. The

25 participatory approach used throughout the design of the project as well as factored in the implementation will foster a sense of ownership among beneficiaries. A Participatory Expert will be appointed to institute the process of participation among stakeholders during implementation. The formation of users' associations and technical steering committees will ensure that technical issues affecting the project are well analysed and understood by all before implementation. The fact that the Government will finance all recurrent costs assures that this level of funding will continue even after donor financing. The institutionalisation of a cost recovery system for operation and maintenance as a government policy will ensure that beneficiaries do not see the project as another government subsidy. The financial returns to the beneficiaries are enough to sustain interest in the project. Vehicle and equipment requirements have been kept to a level where their continued operation after the project will not constitute a burden to the Borrower. 6.2.2 The operation and maintenance of the systems will be sustained by farmers managing the works with the supervision of BOA. Farmers’ capacity will be upgraded under the project. COSAERAR will undertake the operation and management of the large infrastructure. The capacity of governmental officials will also be strengthened to supervise, monitor and provide technical assistance. Thus training is a very key activity for all stakeholders. 6.2.3 There are a number of environmental issues that would affect the sustainability of the project. However the most important ones have been identified and relevant mitigation measures integrated as project activities. Some of the key measures are: watershed rehabilitation and management to alleviate degradation of vegetation cover and curb erosion and silting that would otherwise threaten the life-span of the dam; commitment of population to undertake proper watershed rehabilitation and management; monitoring of water resources quality and quantities; control of water related diseases; environmental training and awareness building. 6.3 Critical Risks and Mitigation Measures 6.3.1 Critical risks include issues of effective community participation; resettlement; delays in implementation of support services; and availability of credit and seasonal inputs. 6.3.2 Farmers may generally be apprehensive about government development initiatives due to past experiences from centrally planned top-down programmes. The project has included a participatory approach with training programmes for ensuring community participation in project implementation. Successful resettlement of displaced households will be assured through minimising the number affected. 6.3.3 Delay in successful implementation of crop production increases may affect adoption of conservation measures with long-term benefits. The project will ensure an early success with increasing crop yields and obtaining farmers confidence in the project activities. 6.3.4 The risks to the project environment could include: soil degradation, water logging if proper drainage is not done in some areas of the command area, silting if the watershed component of the project is not successful, and outbreaks of pests in the command area, especially around time of harvest. To efficiently handle these, the project has included an environmental monitoring system and costs of mitigation so that these types of events are detected and resolved early enough. 7. PROJECT BENEFITS

7.1 Financial Analysis

26 7.1.1 Indicative crop and farm models of the watershed and irrigation components have produced a variety of benefits. The details are given in Annex 4 and Working Papers II and III. Total annual grain production as from PY6 under the irrigation component has been estimated at 40.3 metric tonnes. Current net returns per household under rainfed farming system are estimated at ETB 2,635 per annum. With the project, this is estimated to rise to ETB 5,489 per household per annum or over 100 percent increment in annual income. In addition, irrigated agriculture will return a net of ETB 8,267 per household at full development. The average overall annual net household income from all the models at full development is estimated at ETB 11,596. 7.1.2 No quantifiable direct benefit for gender, health, conservation, is calculated as, the benefits which will accrue from these components will be subsumed into those above. Raising awareness of the need to include women fully in the development process and targeting particular interventions at disadvantaged groups will improve the output of the entire human resources of the project area. Health measures are aimed principally at combating the potentially damaging spread of water related disease associated with irrigation, but will also help raise the labour productivity of the population. It is considered that soil conservation is a vital prerequisite for maintaining and increasing crop production and for protecting the investment in irrigation structures. The capacity building component will ensure both the sustained support for innovations introduced under the Project and the role of the Project as a pilot farmer driven large scale irrigation scheme for Ethiopia. 7.2 Economic Analysis 7.2.1 Following the arrays of costs and benefits calculated from both core components, an economic analysis of the project was undertaken. For the watershed component, it is assumed that production is mainly for subsistence and all inputs and outputs are assumed non-traded, with only 50% adoption rate. However, for the irrigation component, both grain maize and wheat are assumed traded and the economic parity prices for the two commodities have been calculated. For the other commodities, the domestic prices converted to their economic values have been used in the analysis. Both costs and benefits have been converted as appropriate to their corresponding economic values. The economic internal rates of return (EIRR) were estimated over 30 years for the (i) irrigation (dam) development component alone; (ii) watershed component alone; (iii) combined irrigation and watershed components alone; and (iv) for the project as a whole, including the costs of capacity building and project coordination and management. The outcomes are as follows: 1. Irrigation Development Component: = 18.1% 2. Watershed Management: = 40.1% 3. Two Components Combined: = 19.9% 4. Project as a whole: = 17.4%. 7.2.2 These rates of return are robust against an opportunity cost of capital of 12% and also demonstrate that both core components can yield an acceptable rate of return even if implemented separately. 7.3 Social Impact Analysis

27 7.3.1 The Project will have additional positive impacts on the lives of people in the area. Increased economic well-being from agricultural production will increase trade. Merawi is the centre most likely to benefit from this. The town will also benefit from the demand for housing and services for Project staff. Empowerment of the rural community through the participatory approach will certainly have a long-term knock-on impact on development. The integration of all of the population in the development process through support to the various agencies concerned with promoting women’s participation will further strengthen this. 7.3.2 The production models are based on the use of family labour for a small range of crops, but it is very likely that individual farmers will develop niche markets in particular high value crops like fruit and vegetables. This will lead to an increased demand for labour and increased employment opportunities in the area. This in turn is likely to have a positive effect in reducing the rural exodus towards Bahar Dar town. Farmers' risks are considerably reduced through irrigation and the higher cropping intensities will protect them against shortfalls in food production. Reliable water supplies will encourage farmers to diversify their cropping patterns to take advantage of market conditions. Improved technology will benefit farmers in the project area directly but will also serve as a demonstration to other farmers in the region. 7.3.3 Increased cash income resulting from increased crop production will result in family consumption of a greater variety of foods. This will in turn result in improved diets and nutrition levels in the project area. Negative effects have been anticipated in the area of HIV/AIDS through the influx of workers during the construction phase, but activities have been developed to counteract this. The proposed health and sanitation sub-component will also support the nutrition gains. 7.4 Sensitivity Analysis Sensitivity analyses show that the rate of return for the project as a whole would decrease to 15.7% and 13.9% if benefits are down by 10% and 20% respectively. The EIRR will reduce to 15.8% and 14.5% if costs are up by 10% and 20% respectively. A 2-year delay in implementation will reduce the ERR to 13.3%. The project is sensitive to combined fluctuations in costs and benefits. It will take a simultaneous 20% reduction in benefits and 20% increase in costs to reduce the EIRR to 11.3%, marginally below the 12% opportunity cost of capital. This could be a likely scenario. A simultaneous 2-year delay in implementation, coupled with a 40% increase in costs will drag the EIRR to as low as 9.5%. However, this is an unlikely scenario. The project management should thus ensure that implementation is undertaken on schedule and costs overrun avoided. 8. CONCLUSIONS AND RECOMMENDATIONS 8.1 Conclusions The proposed project is in conformity with the Bank Group’s assistance strategy in Ethiopia and the development strategy of the GOE, both of which focus on poverty reduction in general and ensuring food security in particular. This will be achieved through promoting agricultural development, and at the same time diversifying economic activities to meet seasonal fluctuations. While irrigation development will have a positive impact by making available fertile land with adequate amount of water and the necessary inputs, watershed management will ensure dam life, environmental stability and also provide diverse agriculture related economic activity. This is intended to directly reduce poverty through substantial increase in household income. In addition the project will impact positively on food consumption and nutritional practices thereby promoting human and economic development in the Region. The most important positive impact

28 of the project will be to sustain and build the capacities of farmers in practicing the demand-driven approach. At the community level the project promotes a participatory approach which allows for a sense of ownership A positive impact on women will be social and economic empowerment as well as improved family livelihoods. The project is technically feasible, economically viable, environmentally sound and socially desirable. The overall economic rate of return of the project is 17.4%. 8.2 Recommendations It is recommended that an ADF loan not exceeding UA 32.59 million and a TAF grant not exceeding UA 1.33 million be granted to the Federal Democratic Republic of Ethiopia for the purpose of implementing the project as described in this report, subject to the following specific conditions: A. Conditions Precedent to Entry into Force of the Loan Agreement The entry into force of the Loan Agreement shall be subject to the fulfillment by the Borrower of the provisions of Section 5.01 of the General Conditions of the Fund.

B. Conditions Precedent to First Disbursement of the Loan The obligations of the Fund to make the first disbursement shall be conditional upon the entry into force of the Loan Agreement and the fulfillment by the Borrower of the following conditions: The Borrower shall have, to the satisfaction of the Fund: (i) opened a special project account into which the loan proceeds shall be deposited on the request of the executing agency (para. 5.5); (ii) established a Project Management Unit (PMU) in COSAERAR and appointed the following key personnel: Project Manager, Project Accountant, M&E Officer, Training Officer, Watershed Management Officer (BOA), Gender Specialist and a Procurement Officer; (para 5.2.2); and (iii) established a Project Steering Committee (PSC) chaired by the Amhara Region Economic Sector Head, and comprising of COSAERAR Commissioner, Heads of Bureaux of Agriculture; Co-operative Promotion; Health; Works; Planning and Economic Development; Women Affairs; and Water, Energy and Mines. Others are Head of Women Affairs in the MWR; Representatives of MWR and MOA and two representatives of Water Users Association. The Project Manager shall be the Secretary (para 5.2.1). Undertaking: (i) The Borrower shall have undertaken to provide adequate staff for the project as described in this report (para. 5.2.2 and 5.2.3). Other Conditions: The Borrower shall: (i) prepare and submit to the Bank by PYI an environmental management and resettlement monitoring plan (para 4.7.1); (ii) provide adequate annual budgets to meet its contribution to finance the recurrent costs of the project (para. 4.9.1); and

29 (iii) submit to the Fund by 31 July of each year the project's annual work plan and budget and annual review reports (para. 5.6.2 and 5.7).

C. Conditions Precedent to Entry into Force and First Disbursement of the Grant The entry into force of the Grant shall be subject to the fulfillment by the recipient of the provisions of Section 4.01 of the general Conditions Applicable to the Activities of the Technical Assistance Fund. The conditions precedent to first disbursement of the Grant shall be subject to the three conditions precedent to first disbursement of the Loan as above, and the Recipient shall have, to the satisfaction of the Fund: (i) submitted for approval, its PYI training programme under the Capacity Building Component as well as CVs of potential trainees as described in this report (para. 5.4.5). Other Conditions: The Borrower shall: (i) submit to the Fund for approval, by 31 July each year from PYII, its annual training programme under the Capacity Building Component as well as the CVs of potential trainees (para. 5.4.5)

ANNEX 1 ETHIOPIA

KOGA IRRIGATION AND WATERSHED MANAGEMENT PROJECT

PROJECT LOCATION MAP

This map was provided by the African Development Bank exclusively for the use of the readers of the report to which it is attached. The names used and the borders shown do not imply on the part of the Bank and its members any judgement concerning the legal status of a territory nor any approval or acceptance of these borders.

ANNEX 2 Organizational Chart for the Project Management Office

STEERING

COMMITTEE

COLLABORATING INSTITUTIONS*

PMU

(COSAERAR)

IRRIGATION DEVELOPMENT+ AND

OPERATION AND MAINTENANCE

WATER USER ASSOCIATIONS

PMU (WOREDA OFFICE)

OPERATION And

MAINTENANCE

ENGINEERING

BOA WOREDA OFFICE

BOA ZONAL OFFICE

BOA FOCUS OFFICE

EXTENSION AND

WATERSHED MANAGEMENT

*Collaborating Institutions

BOPED, RWA BOA, BOW CPB, BOH BWRMED

Annex 3

Page 1 of 4

ETHIOPIA - KOGA IRRIGATION AND WATERSHED MANAGEMENT PROJECT SUMMARY OF FINANCIAL AND ECONOMIC ANALYSIS

A. INTRODUCTION

1. The proposed Project has two major core and two support components. The major components are (i) Irrigation (Dam) Development; and (ii) Watershed Management. The Irrigation Development Component has three sub-components - Main Dam Development; Secondary Canal Development; and Tertiary Canal Distribution Systems, Drainage and Land Development. The Watershed Management Component has five sub-components - Extension Services; Crop Production; Livestock Development; Soil Conservation; Forestry Development; and Health, Sanitation and Water Supply. The Support Components are Capacity and Institutional Development; and Project Coordination and Management. Detailed cost tables have been given in Working Paper 1.

B. COST ESTIMATES 2. In estimating project costs, the following basic assumptions have been made: - the Project would be implemented over 6 years; - costs are based on most recent updated prices, as determined during the appraisal mission in November 2000, excluding taxes. Project costs are expressed in ETB., converted at ETB 10.7089 to the UA, rate for 1 January, 2001. It is assumed that GOE will take care of all associated taxes and duties or the project will obtain waivers where appropriate; - unit cost estimates for civil works are based on provisional engineering design estimates as determined during the feasibility studies and confirmed during the appraisal. Competitive bidding will be practised for the implementation of the Project and this is expected to result in more realistic, market-based, costing of civil works; - domestic price increases, in line with projections in the Country Strategy Paper for Ethiopia are assumed at 5% all through project period; - price contingencies for foreign costs have been assumed at 2.5%; - cost estimates include physical contingencies of 10% of base cost (except for consultancies, salaries and

allowances); - the Bank loan will cover all investment costs while the GOE will finance all recurrent costs as a means of assuring project sustainability;

- the following foreign exchange components have been assumed for the various categories of expenditure: civil works (50%), input and materials (80% ) vehicles and equipment at 95%; technical assistance and capacity building at 100%; All Recurrent costs are assumed at 0% FE component.

C. PROJECT BENEFITS

Financial Analysis 3 Indicative crop and farm models of the watershed and irrigation components have produced a variety of benefits. The details are given in Working Papers II and III. Total annual grain production as from PY6 from the irrigation component has been estimated at 40.3 metric tonnes. These include teff (4.9 MT), barley (10.6 MT), noug (1.2 MT), maize (24.8 MT) and seed maize (2.4 MT). There will be a net loss of 3.4 MT of millet. Current net returns per household under rainfed farming system is estimated at ETB 2,635 per annum. With the project, this is estimated to rise to ETB 5,489 per household per annum

Page 2 of 4

or over 100 percent increment in annual income. In addition, irrigated agriculture will return a net of ETB 8,267 per household at full development. Other benefits to the farm family will come from small scale irrigation (ETB 322), intensive livestock ETB 31 and forestry activities (ETB 95). The average overall annual net household incomes from all the models at full development is estimated at ETB 11,596. 4 No quantifiable direct benefit for gender, health, conservation, are calculated as, the benefits which will accrue from these components will be subsumed into those above. Raising awareness of the need to include women fully in the development process and targeting particular interventions at disadvantaged groups will improve the output of the entire human resources of the project area. Health measures are aimed principally at combating the potentially damaging spread of water related disease associated with irrigation, but will also help raise the labour productivity of the population. Activities aimed at raising the awareness of HIV/AIDS will reduce the spread of the syndrome in the area. It is considered that soil conservation is a vital prerequisite for maintaining and increasing crop production and for protecting the investment in irrigation structures. The capacity building component will ensure both the sustained support for innovations introduced under the Project and the role of the Project as a pilot farmer driven large scale irrigation scheme for Ethiopia. Economic Analysis 5. Following the arrays of costs and benefits calculated from both core components, an economic analysis of the project was undertaken. For the watershed production, it is assumed that production is mainly for subsistence and all inputs and outputs are assumed non traded, and only 50% adoption rate is assumed. However, for the irrigation component, both grain maize and wheat are assumed traded and the economic parity prices for the two commodities have been calculated. For the other commodities, the domestic prices converted to their economic values have been used in the analysis. Both costs and benefits have been converted as appropriate to their corresponding economic values. The economic internal rates of return (EIRR) were estimated over 30 years for the (i) irrigation (dam) development component alone; (ii) watershed component alone; (iii) combined irrigation and watershed components alone; and (iv) for the project as a whole, including the costs of capacity building and project coordination and management. The outcomes are as follows: 1. Irrigation Development Component: = 18.1% 2. Watershed Management: = 40.1% 3. Two Components Combined: = 19.9% 4. Project as a whole: = 17.4%. 6. These rates of return are robust against an opportunity cost of capital of 12% and demonstrates that both can yield an acceptable rate of return if implemented alone. No benefits have been ascribed to improvement in health and sanitation and soil conservation and environmental protection with existence value. Sensitivity Analysis 7. Sensitivity analyses show that the rate of return for the project as a whole would decrease to 15.7% and 13.9% if benefits are down by 10% and 20% respectively. The EIRR will reduce to 15.8% and 14.5% if costs are up by 10% and 20% respectively. A 2-year delay in implementation will reduce the ERR to 13.3%. The project is sensitive to combined fluctuations in costs and benefits. It will take a simultaneous 20% reduction in benefits and 20% increase in costs to reduce the EIRR to 11.3%, marginally below the 12% opportunity cost of capital. This could be a likely scenario. Also a simultaneous 2-year delay in implementation, coupled with a 40% increase in costs will drag the EIRR to 9.5%. Though this is an unlikely scenario, the project management should ensure that implementation is undertaken on schedule and costs overrun avoided.

Annex 4Page 3 of 4

Annex 4Page 4 of 4

Annex 5

Annex

1

THE GOVERNMENT OF THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA:

KOGA IRRIGATION AND WATERSHED MANAGEMENT PROJECT

CORRIGENDUM [A]. The following changes are made in the Appraisal Report:

Section of document Corrections Made

1 Government Fiscal Year

Edit as July 8 – July 7; and add in parenthesis (Hemle 1 - Sene 30)

2 Section 3.5 – Donor Intervention

five towns is changed to 25 towns; ‘The Dutch are financing environmental support project in the Amhara Region’ is added to complete the section under donor intervention.

3 Para 4.5.11 – Livestock production and Fisheries

The last sentence is corrected to read ‘Tiliapia and other fish species’

4 Section 5.2.6 - line 2 The word ‘approximately’ is replaced with the word ‘minimum of’. And ‘written a right of use’ is corrected as ‘Written Right of Use’

5 Section 5.5 Disbursement arrangement

This section is rephrased as follows: Disbursements will be through direct payments for civil works (dam development, main and secondary canals; tertiary and distribution system; and long term consultants), vehicles and equipment with contracts valued at more than UA 20,000 each. The Executing Agency will also establish a special account in a bank acceptable to the Fund from which the following items will be financed: training, capacity building, resettlement claims, minor civil works (see para 5.4.3), office equipment and furniture, and minor consultancy contracts. The PMU and the Focal Office in BOA will each open local account into which funds can be transferred from the special account based on approved work plan and budget for each agency. All disbursements from the loan and grant proceeds will follow the Bank Group disbursement rules and procedures. Recurrent and other overhead costs of the project will be financed by the GOE using its local procedures.

6 Para 5.4.3 The Merawi office, quarters and site works valued at UA 466,400 will be procured by NCB. This is now reflected in the Procurement Arrangement (Table 5.3) hereafter:

2

Table 5.3 Procurement Arrangements The table is revised as follows:

[B]. Loan Conditions: The following minor modifications were made in the loan conditions under Conditions Precedent to First Disbursement : 1. Condition (i) now to read: “Opened a special project account in a bank acceptable to the Fund,

and on terms and conditions acceptable the Fund, into which the Loan proceeds shall be deposited on the request of the Executing Agency’.

2. Condition (iii) now to read: ‘Established a Project Steering Committee (PSC) chaired by the

Amhara Region Economic Sector Head, and comprising of the COSAERAR Commissioner, Heads of Bureaux of Agriculture; Co-operative Promotion; Health; Works; Planning and Economic Development; Women Affairs; and Water, Energy and Mines. Others are Head of Women Affairs in the Ministry of Water Resources (MWR); Representatives of MWR and Ministry of Agriculture (MOA) and two representatives of Farmers’ Association or Water Users’ Association. The Project Manager shall be the Secretary’