ethiopia water supply sector resource flows assessment · capacities to serve poor people ethiopia...

Ethiopia Water Supply Sector Resource Flows Assessment

Sector Finance Working Papers: No. 10

The Water and Sanitation Program is an

international partnership for improving water

and sanitation sector policies, practices, and

capacities to serve poor people

July 2004

CONTENTS

Abbreviations i Acknowledgments iii Executive Summary iv

1 Approach to Water Sector Finance Assessment in Ethiopia 1 1.1 Regional Study of WSS Resource Flows 1

1.2 Study Objectives and WSS Finance Assessment Approach in Ethiopia 1 1.3 Issues Regarding Information 2

2 Institutional Mapping – Service Providers In Ethiopia 3 2.1 Policy and Institutional Context of Water Services Provision 3 2.2 Status and Population Coverage by Water Service Providers in Rural and Urban Areas 9 2.3 Summary of Key Issues 14 3 Sector Financing Arrangements 16

3.1 An Overview of the S ector Financing Arrangements 16 3.2 Analysis of Current and Emerging Channels and Sources of Funds for Water Service Providers 20 3.3 Summary of Key Issues 29

4 WSS Sector Finance Adequacy Assessment 32 4.1 Government and MDG Coverage Targets Related Financial Requirements 32

4.2 (In) Adequacy of Current Financial Flows 33 4.3 Summary of Key Issues 35 5 The Way Forward 39 5.1 Filling the Critical Information Gaps in Resource Flows Analysis 5.2 Developing a Comprehensive Financing Strategy 39

5.3 Sectorwide Assessment of the Information and M&E Systems 40 5.4 WSP-AF Support Opportunities 40

References 42 Annex 1: A Framework for WSS Resource Flows Analysis 45 Annex 2: Information on Coverage and Resource Flows for Service Providers 49

Annex 3: List of Persons Met 56 List of Figures Figure 1: Reported Water Supply Coverage 1998 iv Figure 2: Emerging Financial Arrangements-Main Financing Challenges v

Figure 3: Resource Flows by Channels of Finance 00-10 & 01-02 vii Figure 2.1: Emerging Institutional Arrangements 5

Figure 2.2: Support to Institutions through Practitioners’ Groups in Bank WSS Project 9 Figure 2.3-a: Population with Access to Water Services (%) 1998 11 Figure 2.3-b: Shares of Served/Unserved Population (%) 2000 11

Figure 3.1: Emerging Financial Arrangements-Main Financing Channels 17 Figure 3.2-a: Flows through Channels of Finance: Recurrent Expenditure-2000-01 19 Figure 3.2-b: Flows through Channels of Finance: Capital Expenditure-2000-01 19 Figure 3.3-a: Stepped Approach to Rural Water Supply and Sanitation 25 Figure 3.3-b: Stepped Approach to Town Water Supply and Sanitation 25

List of Tables Table 1: Channels of Finance Used for Development and Recurrent Expenditures vi Table 2: Coverage and Capital Expenditure in Three African Countries vii

Table 2.1: Emerging Water Service Providers in Ethiopia 6 Table 2.2: Institutional Form of Water Service Providers by Settlement Contexts 7

Table 2.3: Performance of Countries in Sub-Saharan Africa on Selected Social Indicators 10 Table 2.4: Coverage for Water Supply and Sanitation in Ethiopia 10 Table 2.5: Population Served in Urban and Rural Areas, 2000 11

Table 2.6: Regional Variations in Source of Water Used for Rural Water Supply, 1998 11 Table 2.7: Non Functioning Schemes by Types in Rural Areas (1996) 12 Table 2.8: Water Supply Status in Urban Areas, 1994 13 Table 3.1: WSS Resource Flows Matrix, Expenditures in 2000-01 and 2001-02 18 Table 3.2: Channels of Finance used for Development and Recurrent Expenditures 19

Table 3.3: Composition of Federal Budgetary Allocations to the WSS sector in Ethiopia 20 Table 3.4: Regional WSS Budget Allocations in the Four Large Regions 21 Table 3.5: Budgets and Allocation Water Service Improvements in Two Woreda 2001-02 22

Table 3.6: ESRDF Expenditure on WSS by Region 26 Table 3.7: Addis Ababa Water Sewerage Authority (AAWSA)-Revenues and Expenditures 27 Table 3.8: Income/Expenditure for Urban Water Supply Service ‘Utilities’ in Oromiya Region

2000-01 28

Table 3.9: Estimates of Allocations by NGOs for Projects with Water Component 29 Table 4.1: Government and MDG Targets For Improved Water Service 32 Table 4.2: Estimated Investment Requirements to Meet Increased Coverage Targets by 2015 33 Table 4.3: Coverage and Capital Expenditure in Three African Countries 34

Table 4.4: Per Capita Expenditures by Different Water Service Proivders 2001 -02 35 Table 4.5: Indicative per capita Costs for Rural and Urban Water Supply Technologies 35

Annex Tables Table 1.1: Potential Channels and Sources of Finance by Different Service Providers 47

Table A1a: Status of Urban Water Supply Schemes in Oromiya Region 2000-01 50 Table A1b: Analysis of Urban Water Supply Schemes in Oromiya Region 2000-01 50 Table A2: Estimation of Recurrent Expenditure for Urban Water Supply in Ethiopia 2000-01 50 Table A3a: Number of Rural Water Sources by Region Functionality 50 Table A3b: National Recurrent Expenditure of Rural Water Sources 51

Table A3c: Analysis of Selected Community Based Schemes of ESRDF 51 Table A4: ESRDF-Regional RWSS Budget by Year and Region 52 Table A5a: Estimates of (budgeted) NGO Expenditure on Water and Sanitation in Oromiya 53

Table A5b: Estimates of (budgeted) NGO Expenditure on Water and Sanitation in Tigray Region 53 Table A5c: Estimates of (budgeted) NGO Expenditure on Water and Sanitation in Amhara

Region 54

Table A5d: Estimates of (budgeted) NGO Expenditure on Water and Sanitation in SNNPR Region

54

Table A6: Investment Requirements to Meet Coverage Targets-Three Scenarios 55


1

ABBREVATIONS

Exchange Rate 2000/2001 2001/2002

$US 1 = 8.1 birr $US 1 = 8.2 birr

AAWSA Addis Ababa Water and Sewerage Authority CPC Community Planning Committee CRDA Christian Relief Development Association CSA Central Statistical Authority DPPC Disaster Prevention and Preparedness Commission ESP Environmental Support Project ESRDF Ethiopian Social Rehabilitation and Development Fund FINNIDA Finnish International Development Agency GOE Government of Ethiopia HDW Hand Dug Well HHICE Household Income Consumption and Expenditure Survey HIPC Heavily Indebted Poor Countries MBH Motorized Borehole MDG Millennium Development goals MEDAC Ministry of Economic Development and Cooperation M&E Monitoring and Evaluation MFI Micro-Finance Institutions MoFED Ministry of Finance and Economic Development MWR Ministry of Water Resources NGO Non-Governmental Organizations NRW Non-Revenue Water NWSDP National Water Sector Development Plan O&M Operations and Maintenance PIP Public investment program PPA Participatory Poverty Assessments PRSP Poverty Reduction Strategy Paper RWB Regional Water Bureau RWS Rural Water Supply RWSS Rural Water Supply and Sanitation SAR Staff Appraisal Report SCM Supply chains and maintenance SDP Sector Development Program SDW Shallow Drilled Well SIMS Sector Information Management Systems SPD Spring Protection Development SWB Scheme Water Board TWSU Town Water Service Unit UWASNET Uganda Water and Sanitation NGO network UWSS Urban Water Supply Services (‘utilities’) VWC Village Water Committees VWSC Village Water and Sanitation Committee WB Water Board WMS Welfare Monitoring Survey WMU Welfare monitoring unit WSDP Water Sector Development Program WSP Water Service Providers WSS Water Supply and Sanitation


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ACKNOWLEDGMENTS

This study on sector finance and resource flows in the water sector in Ethiopia has been carried out to support the implementation of ongoing water and sanitation sector reforms by the Government of Ethiopia. The need for an assessment of water sector finance came out of an earlier report prepared on a request from the Government of Ethiopia in 2002 to support the Ministry of Water’s inputs for the water supply component in preparation of the full Poverty Reduction Strategy paper (PRSP). This study draws on the 2002 report and develops more detailed analysis of sector finance and identifies issues that need to be addressed while developing a financing strategy for the water sector. The study focuses on institutional and financial mapping, and reviews various studies done to assess adequacy of funds to meet sector targets. The assessment is based mainly on secondary sources of information. Some of the information from this assessment was used in the Public Expenditure Review (PER) of the World Bank, and the additional information collected for the PER has also been used in the current report. The study was initiated in consultation with the Ministry of Water Resources of the Government of Ethiopia and has benefited from discussions with senior officials and their feedback on the draft report. We do hope that this will contribute the ongoing implementation of water sector reforms in Ethiopia and particularly to the development of a water supply sector financing strategy. In a recent interview with the Minister for Water, Government of Ethiopia, he also emphasized the need for focusing on sub-sector allocations issues, adopting a common sector program for mobilizing all external funding and strengthening capacities of service providers 1. We have benefited greatly from inputs and insights provided by a number of different colleagues and stakeholders in Ethiopia. Particular thanks are due to the colleagues from the Ministry of Water Resources, from other federal and regional organization, Non-governmental organizations, development partners and the World Bank, who graciously shared information and spared their valuable time for discussions with the team. A detailed list of persons and institutions we met is in Annex 3. Feedback on the draft report was also provided by Jean Doyen, WSP Africa and Helen Pankhurst of WaterAid. It is worth noting that despite our intention to include both water and sanitation in the analysis it has been difficult to get adequate information for sanitation. Thus, this assessment is limited only to water sector. As a part of our future support in Ethiopia sanitation is a key focus area and separate analysis of sanitation finance can be taken up at an appropriate time. The study was prepared by the regional water and sanitation sector finance thematic group of the Water and Sanitation Program Africa (WSP-AF). The WSP-AF task team comprised Meera Mehta as the task manager, Kameel Virjee, Thomas Fugelsnes, Tesfaye Bekalu and John Ondari. Ato Belete Muleneh from the WSP-AF’s Ethiopia office provided key inputs in identifying information and sector issues as well as feedback on various drafts of this report. Jecinter Hezron provided able production support.

1 Interview with Ato Shiferaw Jarso, Minitser of Water Resources, Government of Ethiopia, done in Dakar in December 2004 during the Global WASH Forum, by Meera Mehta.


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EXECUTIVE SUMMARY

Significant gaps in the financial flows to the water sector exist in Ethiopia; and the gap will most likely increase in the future. At present levels of financial flows, the sector will not be able to meet targets set by either the government in their National Water Sector Development plan (NWSDP) or their pledge to attain the Millennium Development goals. According to investment scenarios, the resource gap in rural areas is smaller than in urban areas, but is expected to increase as expanded coverage is attempted.

Clearly more resources are needed from the government and donor partners. However, it is also essential to take into account other interventions beyond simply ‘more financial resources’, particularly in the context of decentralization and the persistent lack of capacity for implementing sector policy at regional and district level. Main focus will need to be on transition arrangements in implementing institutional reforms at the regional and woreda levels. Other supporting interventions include: adapting service levels to cost recovery potential and ensuring cost-effectiveness, incentives for improved cost recovery by service providers, better coordination of off-budget resources at local levels and development of an appropriate sector information and monitoring and evaluation system. The issue of good and relevant sector information is critical as evident throughout this assessment. A key issue also relates to building local capacities across stakeholders to absorb additional resources effectively.

A. Key findings and their Sector and Policy Implications

The water sector is characterized by complex institutional arrangements, and a variety of channels and sources of funds are used to finance the sector. The study framework in this report responds to the special characteristics of the water and sanitation sector, and includes two tools: institutional and financial mapping (with particular emphasis on public funds as they are the dominant source in the sector). The institutional mapping exercise captures the governance structure of the sector and relates the importance of governance to efficient and effective channeling of funds, and implementation in the sector.

The financial mapping exercise expands the analysis to capture all sector sources, channels and uses of funds. The report concludes with an assessment of the adequacy of current funding flows in the sector and an analysis of the requirements to increase the sustainability of sector development. Key findings and implications for the sector policy and strategy include:

The unserved in the water sector live in rural areas. Despite more investments in rural areas in recent years, 97 percent of the unserved population in the country resides in these. This amounts to an unserved rural population of over 45 million. It needs to be highlighted, however, that issues of unreliable and unsustainable services apply to both urban and rural services.

The urgency to address the low rural coverage is recognized at policy level in Ethiopia, but needs to be addressed at implementation and on the ground. Resources need to reach communities through appropriate mechanisms for financing and capacity building. Incentives need to be provided for the use of cost effective technology options across regions as technology choice has considerable impact on investment and operations and maintenance costs as well as long-term sustainability .


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Figure 1: Reported Water Supply Coverage - 1998

Water Supply Coverage in Ethiopia 1998 Share of Served/Unserved Population 1998 (in percent) (in million persons)

Source: Table 2.4 based on ESP 2003. Source: Figure 2.3 based on ESP 2003.

Transition issues in sector governance need to be addressed. Overall, the water sector in Ethiopia is characterized by a relatively clear policy and definition of institutional roles. Rapid decentralization to the Woreda (district) level has resulted in a deficit in the capacity to implement the changes suggested by the national policy and strategy. Within the decentralized sector arrangements, the federal government is in charge of policy and strategy development through the Ministry of Water Resources, and the regional and Woreda governments are responsible for ensuring provision of services through delegation to water service providers. Addis Ababa water and Sewerage Authority provides services in the capital city. The policy implies the emergence of autonomous service providers in other large cities, urban water services in smaller towns, and village water service committees in rural areas. This is the long term vision of the sector and efforts are needed to support the transition to these new arrangements.

Greater focus is however needed on ensure building and strengthening capacity of different entities. Especially critical are the legal basis and necessary powers of service providers and regulation and monitoring by decentralized government bodies. Monitoring should be undertaken by Woreda water desks and town water boards but facilitated by the existing Regional Water Bureaus. The government needs to develop good comparative performance information to accelerate reform and provide incentives for improved performance.

There is a need to strengthen capacity at regional and Woreda levels where most of the responsibilities for organizing the provision of services have been devolved. Currently, as per the new policy, regional government offices are handling water development and are responsible for planning, formulate policies and regulation with investment planning, monitoring, and technical support. Woredas need to increase capacity to manage their responsibility for technical support to rural and urban water suppliers. The emerging regions and their Woredas will likely need more support from the Ministry of Water Resources and Ministry of Capacity Building until they develop sufficient capacity to plan, prioritize, implement, and monitor their own investment programs. While scaling up capacity building efforts, it is important to engage the private sector and NGOs along with government bodies.

One significant institutional and financial change affecting the sector is the phasing out of the Ethiopian Social Rehabilitation and Development Fund (ESRDF) and the increasing role of the Water Resources Development Fund (WRDF). Set up in 1992, the ESRDF was the major source of financing for community-based rural water supply with an annual investment of about US$ 10.0 million until 2001. The closing of ESRDF will have large implications for financing of rural water supply, and mechanisms will

0.0

30.0

60.0

Served Population Unserved Population

Urban a reas

Rura l a reas

0

2040

60

80

100

Urban Rural


5

need to be put in place to ensure continued funding for rural areas. The newly WRDF will increasingly play a role in the financing of the sector, but for urban sub -sector. Its focus on sustainable credit-based finance may suggest the need to have an appropriate mix of grants and loans for small towns, or use the stepped approach planned under the new World Bank Project.

Figure 2: Emerging Financial Arrangements – Main Financing Channels

Current intra -governmental transfers are not related to performance, but rather rely upon a block transfer formula. It would be useful to explore the possibility of linking the federal and regional transfers to performance (the ability to raise and utilize budgets and outcomes) as well as need, as per current practice. Incentives are needed to attract extra-budget or non-public financial resources at regional and Woreda level. However, to maintain the equity principles implied in current transfer systems, compensation to regions, which have lower economic capacities, will still be needed. It would be useful to draw on lessons from other countries such as South Africa and Uganda, which are also in the process of designing inter governmental transfer systems in response to similar issues.

Non -public funds are important. Table 1 provides estimates of channels of finance used sector expenditure and by different service providers to meet their expenditures. The total WSS expenditure is estimated to be 631 million Ethiopian Birr ($78 million) in 2000-01, declining to 558 million Ethiopia Birr ($68 million) in 2001-02. Separate estimates at woreda level were not available.

Ministry of Water Resources

Regional Water Bureau Regional

Government

AA Water & Sewerage Authority

Addis Ababa City Gov.

Woreda Gov.

Village Water & Sanitation Committee

Woreda Water Desk

Federal

Regions

Villages /kebelles

Municipality

Small Towns

Cities & Towns

2. Regional Budget

5. WRDF

6. Internal Generation

7. Off-Budget Donors

8. Community Contributions

4. ESRDF

3. Woreda Budget

1. Federal Budget

Budget allocations/ Development grants

Off-budget funds

Internal generation

Channel of Finance

Block transfers

Block transfers

Development Grants

Block transfers

Government Budgets Special Funds Direct Mobilization by WSPs

Loans

User Charges / Internal Surplus Urban Water

Supply Service

_________________ Small Towns

Loans

Donors Loans/ grants

Woredas


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Table 1: Channels of Finance used for Development and Recurrent Expenditures – fiscal year 2001-02

(Total Expenditure in million Birr and Percentage of total) Channels of Finance

Recurrent

(% of total) Development (% of total)

Total (% of total)

Expenditure (million birr)

Federal Budget 4.9 9.3 7.4 41.3 Regional Budget 30.8 55.4 44.9 250.7 Ethiopia Social and Rehabilitation Development Fund (ESRDF)

0.0 2.0 1.2 6.5

NGOs/ Off-budget 0.0 33.0 18.9 105.5 Internal Generation through User Charges 64.3 0.0 27.5 153.5 Communities/Households – capital contribution na 0.2 0.1 0.8 Total 100.0 100.0 100.0 558.4 Total Expenditure (in million birr) 238.7 319.7 558.4 - Total Expenditure (in million US dollars) 29.1 39.0 68 - Source: Based on table 3.1 and 3.2. Details in annex 2.

Off-budget NGO funding, on-budget donor funding and internal generation contribute to a substantial amount of total expenditure in the sector. In fiscal year 2001/02, off-budget NGO funding amounted to 18.9% of total sector expenditure and 33% of development/ capital expenditure. It becomes therefore necessary for improved coordination of donors and NGO resources to ensure continued alignment with sector policy and strategy. Internal generation and user charges are also significant, but only for recurrent expenditure and mainly in urban areas. Little is charged explicitly for development expenditure (see table below) though information constraints make accurate community level development expenditure estimation difficult, and so the community inputs are probably underestimated.

Figure 3: Resource Flows by Channels of Finance: 2000-01 and 2001 -02 (in million birr)

Recurrent Expenditure Capital Expenditure

Critical sector resource gaps exist. Total sector expenditure in Ethiopia seems to be low. On average, the sector spending corresponds to about 1.2 percent of GDP (US$ 68 million in fiscal year 2001-02). Available analysis of resources requirements suggests significant resource gaps making it difficult to attain the government and / or MDG targets for water.

Sector expenditure in Ethiopia is indeed low compared to levels in other countries in the regi on (table 2): for instance Ethiopia and Zambia have similar sector finance envelopes despite the considerably larger

0.0

40.0

80.0

120.0

160.0

Federal Budget Regional Budget ESRDF NGOs/Off budget

donors

Internal

Generation (usercharges)

Community

Contributions

0.0

40.0

80.0

120.0

160.0

200.0

Federa l

Budget

Regional

Budget

ESRDF NGOs/Off

budget donors

In terna l

Generation

(surplus/

Community

Contributions

2000-01 2001-02


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population of Ethiopia. The effect of this is to reduce the per capita spending in Ethiopia to one sixth of that in Zambia. The lower per capita spending in Ethiopia is exacerbated by the lower coverage rates, as compared to Zambia. Effectively, then the amount of finance per unserved person in Zambia is more than 6 times that of the spending per capita in Ethiopia, as there is a larger proportion of unserved in a larger national population. The table below shows the relative urban and rural coverage in three Africa countries, together with the level of capital expenditure in each. The level of capital spending in Ethiopia is below both Kenya and Zambia when adjusted per capita.

Table 2: Coverage and Capital Expenditure in Three African Countries

Per capita Dev. Expenditure

(US$) Country Population

(millions) Coverage

(%) Development Expenditure (million US$) Total

Population Uncovered Population

Sector Expenditure as a share of

GDP (%) Ethiopia 63.4 28 40 0.63 0.88 1.2 Kenya 28.8 64 44 1.13 3.13 1.0 Zambia 10.3 64 31 3.01 8.36 1.9 Source: Based on information in: Ethiopia: tables 2.5 and 3.1; Kenya: Mehta and Ondari (2004), Zambia: Chiwele (2004)

B. Addressing the Water Sector Financing Challenge

Increasing the resource envelope to close the resources gap

Several opportunities can be pursued:

§ Increased cost recovery. to capture larger amounts of finance through user payments – both through user charges as well as community contributions to capital costs. At present only two-thirds of the recurrent expenditure is met through this source. Further studies of level of tariffs and cost recovery are necessary and appropriate incentives and monitoring are needed to capture this potential in reality. For example, subsidy ceilings to ensure that only basic levels of service are subsidized, as included in the new World Bank project, should be utilized across the sector to allow for a more distributed benefit of limited public and donor funding.

§ Increased internal generation through efficiency improvements. Detailed inquiries with selected urban and rural providers suggest that some of them are in fact generating marginal surplus on operating account. However, to enhance this further through efficiency improvements ongoing capacity building support in business planning, and for improved billing efficiency and minimizing unaccounted for water due to technical losses. Possibility of performance-based management contracts can also be explored for this.

§ Increased WSS allocations at each level of government. Available budget allocation information at the federal and regional level suggests that water receives relatively low priority in these budgets. This is of particular concern at the regional and woreda levels where the main mandate for water services resides. While local priorities need to be respected in context of decentralization, two opportunities need to be explored: linking the intergovernmental transfers to performance and sector targets as


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appropriate and advocacy for WSS allocations backed by capacity building support to regional ands woreda governments.

§ Increased on-budget donor resources. Share of donor resources in total public sector investment resources for water has so far been low – at about 56 million birr in 2001-02 or 26 percent of total public capital expenditure. With the recent approval of a major Bank project for this sector, there is likely to be a greater interest also from other key donors in this sector. This needs to be positioned within the donor emphasis on MDGs and on Africa as evident, for example, from the recent European Union Water Initiative. For this, incorporation of water in Ethiopia’s own poverty reduction strategy paper (PRSP) needs to be improved through annual progress reports.

§ In the medium to long term, leveraging new resources by enabling access to ‘market-based’ funds. To achieve significant additions to sector resources in the future, it will be important to develop measures to support market access for the urban and rural water service providers. For urban utilities, this may be through WRDF. This would require commercial orientation to limit non-performing assets to enable it to overtime mobilize market-based resources. The possibility of raising investment funds for VWSCs given the development of micro-finance institutions in some regions needs to be explored and supported through measures such as partial guarantees and other credit enhancements, support in project development and benchmarking and rating facility for measuring VWSC performance. These measures are necessary, but they cannot replace capacity building and efficiency enhancement, and will need to be developed in tandem with them. The issue of appropriate sequencing of activities has to be addressed while developing these measures.

Improving sustainability of Investments : It is essential to ensure that new investments are sustainable and do not quickly result in further rehabilitation requirements. Decapitalization of investments in the sector is common both in rural and urban areas. For rural areas, studies done during the last five years and reported earlier indicated that a large proportion (ranging from a third to a half) of water schemes are not functional. Measures to improve sustainability of rural water include improved planning and capacity building support. For urban areas, the problems are related to poor financial viability, and technical and managerial capacities, and the measures include both ‘correct’ incentives and demand -based support for capacity building. In both cases, opportunities for private sector participation to enhance efficiency need to be explored. Particular emphasis is needed on the possible role of small scale and local private sector for a variety of support services such as: professional support to operators of town systems and to rural communities for maintenance and provision of spare parts.

Improving sub-sector allocation and expenditure effectiveness by better aligning financing rules with WSS policy and priorities . Significant resource gaps exist in the sector; demand for capital investments outweighs supply by about five times according to the available estimates. It is therefore critical that while developing a detailed financing strategy, rules for allocation of and access to public finance will need to be developed in response to sector priorities. The PRSP, for instance, stresses the need for a greater focus on rural water supply and on urban poor. Pastoral communities also need specific attention. The MWR will need to explore different priority scenarios within possible resource envelopes for the water supply sector. Such scenario assessments would need to include aspects such as: priorities across different sub-sectors, appropriate technology choices and service level and financing/ cost


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recovery rules. While developing these scenrios, it is also necessary to include adequate provision for project development/ management costs, including the ‘software’ costs of social mobilization and community support. Based on the analysis in this report, some allocation principles that need to be considered are:

§ Level of capital subsidies for rural and small town water systems: need to combine the current system of a minimum community share in capital costs (generally 10 percent) with a ceiling on per capita subsidy linked to the notion of basic service levels. Such a principle has already been introduced in the recent World Bank project, but needs to be uniformly applied regardless of the sources of funding. To some extent similar (though lower) subsidies may also be relevant for the rural and small towns with less than 10000 population, particularly to support initial rehabilitation and expansion that would support improved cost recovery and help generate cash surpluses. Use of this financing principle would also provide an incentive to choose cost effective technology and demand linked service levels. Due to the significant financial implications it is critical that the value for money is maximized through use of cost-effective technology. Appropriate service levels would enhance level of cost recovery.

§ Nature of support for urban water: need to reconsider the large capital subsidies to urban water suppliers and move to target subsidy towards two purposes: a) to enhance access for the urban poor to improved services, and b) sustainable measures to enhance financial/ commercial viability of urban water service providers (UWSSs). The World Bank project has incorporated this aspect through a stepwise approach that first provides rehabilitation and capacity building support.

§ Share of management support in project costs and sector development allocations: needs to make adequate provision upfront in order to address the constraint of poor planning and implementation, especially in rural WSS projects. This would cover in particular costs of community preparation for preparation of projects including planning, formation of management committees and developing systems of accountability. To address the overall sector capacity constraints, an appropriate share of total WSS investments is needed for capacity building, sector information and ME systems and development of supply chains.

C. Potential Action Areas for Future WSP-Africa Support

Based on the findings in this assessment, actions for the way forward are identified in three areas:

Developing a comprehensive financing strategy through multi-stakeholder dialogue. A lot of work has been done on developing estimated of investment requirements (WSDP , the master plan, and PER) in Ethiopia. Such analysis, however, needs to be dynamic and open to revision in annual review processes. The focus needs to be on assisting decision-makers in reviewing various investment and financing scenarios within the feasible resource envelopes. WSP-AF’s ongoing work on development of a sector-wide investment and finance tool (SWIFT) may provide useful support to the MWR. The application of SWIFT would aim at making the existing investment work more dynamic and open to changing policy conditions on a rolling annual basis. It will also help outline / articulate different financing principles and their implications. Such strategies would be equally relevant at the regional level.


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Filling the critical in formation gaps in resource flows analysis. This assessment highlights the paucity of available information for sector finance. Compared to public expenditure in the water sector, however, information was even more difficult and at times simply non -existent for many non-public

sources and for sanitation. Three important gaps, particularly in terms of their potential importance, deserve further action: i) better assessment of off-budget finance through the NGOs, ii) a more complete and robust assessment of user financing including both as paid to urban ‘utilities’ and the VWSCs as well as expenditure for self-supply or on coping costs to deal with inadequate and/or unreliable services, and iii) a separate assessment of finance for sanitation and hygiene promotion. WSP-AF’s ongoing work in the region focuses on these constraints faced in many countries. Further inquiries could form a part of these efforts based on further discussions in Ethiopia.

Sectorwide Assessment of the Information and M&E System. On the whole, the water sector information and M&E system(s) in Ethiopia needs to be considerably strengthened to effectively support the linkages between sector objectives and allocation of public funds. Though there are many initiatives (PRSP monitoring, budget tracking at the ministry of finance, water point mapping and regional MIS projects and periodic reviews), these are fragmented and isolated, and are often project-based. Within the context of moving towards sector programs, current work of WSP-AF focuses on developing a better understanding and good practice documentation of WSS sector information and performance monitoring systems in different countries in the region. A preliminary documentation of current and planned information and M&E systems in Ethiop ia would contribute to the regional work and could be useful for providing a situation analysis and identifying the challenges that decentralization presents for monitoring the water and sanitation sector in Ethiopia.


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1. APPROACH TO WATER SECTOR FINANCE ASSESSMENT IN ETHIOPIA

The assessment of resource flows for the water sector in Ethiopia has been done as a part of the regional finance activities of the Water and Sanitation Program, Africa. The study focuses on the financial arrangements and resources within the existing and emerging institutional frameworks for the water sector in Ethiopia. The report builds on the analysis done for the water and sanitation (WSS) sector as a part of the Public Expenditure Review (PER) and the background report on WSS inputs for the full PRSP prepared for the Ministry of Water Resources (MWR).2 It is based mainly on a synthesis of available information regarding public expenditures at the national and local levels, and additional inquiries with a number of actors in the non-governmental sectors.

1.1 Regional Study of WSS Resource Flows

Several Sub-Saharan African countries have initiated WSS sector reforms. However, most of these countries have failed to effectively scale up sector reforms and expand WSS reach and coverage due to inadequate financial resources and inappropriate financing mechanisms. The changing institutional environment associated with reform has to be cognizant of sector financing opportunities. The lack of a comprehensive understanding of the flows of financial resources to the sector makes it difficult to assess their linkages with sector reforms. The lack of finance understanding has also been identified as one of the key reasons for the weak representation of the water and sanitation sector in poverty reduction strategy papers (PRSPs) and the intertwined budget process: medium-term expenditure framework (MTEF). The inclusion of WSS in PRSPs is particularly relevant with respect to achievement of the Millennium Development Goals (MDGs). Other studies also suggest that for a better integration of the WSS sector in PRSPs, it is essential to improve sector effectiveness and efficiency as well as working within a sector-wide approach. 3

The main object of WSP -AF’s regional finance work is to deve lop a better understanding of water sector finance to develop better country -level and sector-wide financing strategies and improve the incorporation of WSS into PRSPs and MTEFs. Both improved financing strategies and PRSP integration of WSS are essential to develop more meaningful country level action plans for achievement of the MDGs. The regional study aims to work at the country level through: a) development of a framework to assess the WSS related financial resource flows, and b) development of a benchmarking tool to assess the sector financial performance. Studies have been initiated in five countries in the region using the tools of institutional and financial mapping. The preliminary analysis was based largely on available studies and information, with detailed studies to be taken up later as appropriate.

The development of a benchmarking framework has been initiated using three sets of performance benchmarks: a) adequacy of sector finance to meet the MDGs and country’s own targets and extent of resource leveraging, b) effectiveness in terms of match between sector strategy and public allocations, decentralization and financial viability of service providers, equity and poverty focus, and c) efficiency in terms of utilization of resources, value for money achieved in the sector and operating performance of service providers. Findings of the country studies will also feed into the benchmarking exercise.

2 Particularly see Watson 2003 and Water and Sanitation Program Africa 2002. 3 Water and Sanitation Program – Africa. 2002.


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1.2 Study Objectives and WSS Finance Assessment Approach in Ethiopia

National level WSS sectors are characterized by complex institutional arrangements; a variety of channels and sources of funds are used to finance the sector. The ‘water service provider’ framework used in this study attempts to capture these complexities while permitting a comparative picture across countries in the region. It also enables the development of comprehensive and countrywide estimates and analysis of sector finance within the institutional context of the sector. The study framework responds to the special characteristics of the WSS sector, and includes two tools: institutional (to capture the governance structure of the sector) and sector financial (to capture sources, channels and uses of funds) mapping with particular emphasis on public funds since they are dominant in the sector. A generic framework outline for what to include in a WSS finance assessment is attached in annex 1.

Specifically, the objectives of the study in Ethiopia are:

• To develop and test a framework for assessing resource flows and public finance – including:

o mapping the existing and emerging institutional arrangements and preliminary measurement of expenditures by all key service providers

o mapping the existing and emerging financing arrangements and assessing the relative contribution of funds by different channels and finance sources with a particularly emphasis on analysis of public finance including: a) a snapshot review of allocation and expenditure at national and local levels, and b) the financing rules and mechanisms that influence public institutions and sector finance

o assessing adequacy of funds in the sector and opportunities for closing resource gaps

• To contribute to the development of guidelines for country studies and benchmarking the performance of WSS sector finance as a part of the regional study.

1.3 Issues Regarding Information

The study is based on available information from a number of sources:

• Information on expenditures for federal and regional governments from the Ministry of Finance and Economic Development (MoFED) and the World Bank database

• Allocation and expenditures from regional government budget documents

• WSS projects and expenditures from the Ethiopia Social Rehabilitation and Development Fund (ESRDF)

• Information on NGOs from the regional Disaster Preparedness and Prevention Commissions (DPPCs) and consultations with selected NGOs

• Information on income and expenditures from the Addis Ababa Water and Sewerage Authority (AAWSA)


13

• Information on the urban water services and rural community schemes from an available database at the Regional Water Bureaus in Oromiya and Southern Nations and Nationalities People (SNNP) regions, detailed primary information on income/ expenditures from a few sample urban and rural schemes, and other secondary sources of available from earlier studies. 4

Limitations of information for this study. The emphasis in the study is to test a framework and an approach that can be generalized for resource flows assessment in different countries in the region. In some cases, such as for the non-governmental sector, community schemes, and urban water services, it is necessary to use the limited available information with ‘best judgment’ assumptions to arrive at national estimates. Even for the information from government budgets, often disaggregation of water sector information is not readily available and it has been necessary to make assumptions related to its share based on available information from selected regions. In addition, the decision-making processes for allocation and expenditures are reviewed based on the analysis of information and preliminary discussions with different stakeholders. Finally, though it was intended to include sanitation and household/ community expenditures (other than for user charges) in the study, this has not been possible due to the lack of adequate information at this stage. Similarly, while some attempt has been made to assess information on monitoring, a detailed inquiry of the WSS M&E system has not been done. Despite its importance, water resources management, is also beyond the scope of this study.

2. INSTITUTIONAL MAPPING – SERVICE PROVIDERS IN ETHIOPIA

The water services sector in Ethiopia is set within the country’s new decentralization framework. The main mandate of ensuring service delivery is with the regional governments, and for rural water and sanitation increasingly with the Woreda (district) governments. Interestingly, however, for actual service delivery the emphasis is on relatively ‘autonomous’ service providers. This section traces the policy and institutional context of water services, and assesses the relative importance of different service providers in terms of coverage and expenditures. It concludes with the key institutional issues facing the sector particularly those related to decentralization-linked service providers and capacity building for newly responsible institutions.

2.1 Policy and Institutional Context of Water Service Provision

The water sector in Ethiopia is characterized by a relatively clear policy and definition of institutional role. In practice, though, autonomy of service providers is only gradually evolving and the capacity to implement these seems to be a key constraint…

Sector Policy and Decentralization

The water sector in Ethiopia has evolved over the last decade in response to decentralization and water sector policy. Implementation is characterized by regional variations in the spirit of federalism.

Evolution of decentralization and the water sector. Decentralization in Ethiopia was initiated in 1995. The first wave of decentralization divided the country in eleven administrative regions following ethnic lines and

4 Refer to Annex 2 for details of the main sources of information used and assumptions made for estimation for different water service providers.


14

de-concentrated activities from the federal to the regional administrative bodies. During this period, the water sector also saw the dismantling of the erstwhile Derg regime (which had created highly centralized structures for over 20 years) and the mandate for delivery of water services being transferred to the regional water bureaus (RWBs). The RWBs in different regions operated directly and in the four large regions through their zonal offices5.In rural water supply, a parallel change emphasizing community based schemes within a demand responsive approach was introduced by the ESRDF since 1997.

Second wave of decentralization. Over the last year, a second wave of decentralization has been initiated, focused on a further devolution to the lowest level of governments: the districts (locally known as Woredas) with an average population of about 500,000. This level is closer to the community and it is expected to better identify and respond to the community priorities. Woreda councils are responsible for determining the needs for urban and rural water supply and communicating those needs to higher levels of government. Woreda water desks provide capacity support, in terms of technical assistance, planning and capital development to communities who will operate rural water systems through water committees. Municipalities are legally responsible for the provision of water services within their jurisdiction, through autonomous town water board (TWB). TWBs provide oversight and are expected to delegate provision to service providers. However, many do not have the capacity to provide the service and so this responsibility is still delegated to RWBs. For urban water supply services decentralization implies closer links with the municipalities to develop and strengthen these through legislation and capacity building support. In the case of city-states such as Addis Ababa and Dire Dawa separate water and sewerage authorities have been set up as local level utilities. It is anticipated that town water boards will ultimately supervise the provision service by autonomous providers in all urban areas of the country.

Water sector policy. Within the framework of the Constitution of the Federal Democratic Republic, the Ministry of Water Resources has adopted a National Water Resources Management Policy in 1999. Its overall goal is to enhance and promote “efficient, equitable and optimum utilization of water resources” for sustainable socio-economic development. It recognizes water as an economic good and encompasses water supply and sanitation (WSS), irrigation and hydropower sub sectors. One of its main objectives for the WSS sub-sector is to ensure that every Ethiopian citizen has access to water of acceptable quality to satisfy the basic human needs. Key aspects of the policy, which are important for the WSS sub-sector, are:

§ Allocation of water resources: gives high priority to water supply and sanitation for human, livestock and industrial needs. It recognizes that the allocation needs to be based on both economic and social benefits;

§ Institutional framework for management: visualizes devolving ownership and management autonomy to the lowest possible level within the emerging decentralization framework, effective coordination mechanisms for collaboration among different stakeholders, and related emphasis on capacity building

§ Financing, water pricing and cost recovery policies: envisions a move towards full cost recovery for urban water supply and partial capital cost sharing and full O&M cost recovery for rural water supply

5 A zone is made up by several districts. This level of administration is being phased out under decentralization, but still exist in some larger regions. Zonal offices act as a sub-regional presence for the regional government.


15

schemes as well as promotion of domestic commercial and micro-finance institutions in financing water investments

§ Technology and maintenance aspects: envisions development of appropriate technologies for local level development and management as well as meeting appropriate standards

§ Integrated water and sanitation policy: puts an emphasis on the need for an integrated approach to water and sanitation, and a clear identification of responsibilities of government and other stakeholders for sanitation and hygiene promotion.

The introduction of DRA and demonstration of community management for implementation and operation of RWS schemes by ESRDF during the late nineties had a positive impact on incorporating these principles within the national water policy.6

The policy provides a guiding framework within which more detailed sub-sector strategies and institutional reforms need to be developed. In this regard MWR prepared a national water strategy in 2001 to articulate implementation of the Water Policy. Some regions plan to adapt the strategy to address specific issues in the regional context. Detailed implementation guidelines have also been developed at the federal level and are being adapted in each region.

Given the developmental autonomy granted to Wordeas as a part of the decentralization process, sector priorities are technically determined through the amalgamation of local administration priorities. The communication of national (or even regional) level objectives to Woreda councils is only through informal means, with no funding linked to performance (financial, coverage or service delivery). It remains to be seen how the autonomy of decentralized administrations will impact upon the coherence of regional and federal sector programs.

Emerging Sector Institutional Arrangements

Figure 2.1 and table 2.1 provide an overview of the newly emerged institutional arrangements with linkages among regional and local governments, sector institutions at different levels and the ‘autonomous’ water service providers. Key highlights of these institutional arrangements are:

Changing role of the government. Within the water sector policy framework, the role of government is changing from service provision to facilitation and provision of an enabling environment. Within the decentralization framework in Ethiopia, different responsibilities are emerging for different levels of government: policy and strategy development, project implementation, and monitoring and evaluation.

§ Federal Government (MWR): Responsibility for policy and strategy development for the water sector is with the Ministry of Water Resources (MWR) at the federal level. The MWR coordinates external agencies for sector finance, and is responsible for introducing a sector-wide approach (SWAP) by developing the WSS Sector Development Program. With the increased responsibility of regional governments to ensure service provision, the role of MWR is also to ensure effective monitoring and evaluation and provide technical and capacity building support to regions. In

6 See Lium and Garvey 2002 for the nature of this influence.


16

urban areas the federal government will also need to explore the possibility for an independent economic regulation of the sector. Independent economic regulation would enable mov ing towards a pricing structure that ensures financial viability of service providers while ensuring that consumer access is improved within affordability constraints.

Figure 2.1: Emerging Institutional Arrangements

§ Regional Governments: The responsibility for ensuring the provision of WSS services is now lodged with the regions and Woredas (districts). Regional Water Bureaus7 are responsible for water and

sanitation (along with their other responsibilities for water resources) within regional governments. In some larger regions, there are Water Departments at the zonal level, which were established in 1996 to support development, implementation and regulation of WSS activities. This represented a deconcentration of regional administration. The RWBs are also charged with providing technical support to Wordeas as they build their capacity in both urban and rural water systems. As such, RWBs primarily provide technical and financial (for capital investment) support where required. Their role in regulatory functions is, however, not very clear though it is anticipated that they will coordinate M&E efforts to be reported up to the federal Ministry level.

7 There are variations across regions ranging from an independent Regional Water Bureau (RWB) in some to a Regional Bureau for Water, Energy and Mines in others. The scope of RWB also includes small-scale irrigation besides WSS.

Sector Institutions

Service Providers

Regional and local governments

Facilitation / Technical Support

Monitoring & Oversight


Regional Water Bureau

Regional Government


Town Water Board


Woreda Gov.

Urban Water Supply Service

_________________

Small Towns


Woreda Water Desk

Federal

Regions

Woredas

Villages

Municipality

Small Towns

Small Town Water Committee/ Board

Cities & Towns

Governments Sector Institutions Water Service Providers


17

§ Woreda Governments: Despite the legislative devolution of administrative responsibility, the shift to Woreda level programming has been somewhat gradual, paced differently in the different regions. In some of the larger regions, Amhara, Tigray, Oromiya and SNNPR, Woreda water offices, with a small staff of two persons have been established. At this level, with the very limited capacity and resources, it is necessary to explore cooperation with Woreda education and health offices, especially for sanitation, hygiene promotion and small water schemes. Under the model schemes taken up by the ESRDF, such links were established in some regions.

§ Kebelle Governments: Kebelles are village areas with approximately 5000 residents. Though they are not formalized in the constitution they form the primary outlet for political contact for the majority of Ethiopians. Kebelle administrations are elected and are responsible for preparing annual development plans as well as ensuring the collection of land and agricultural taxes and conflict resolution. In addition, the Kebelle council is responsible for the mobilization of community contributions in cash or in kind for development projects. Often, Kebelles form community committees, such as water user associations. Whilst Kebelles exist throughout the country, the degree of activity that they engage in varies considerably, with some not meeting frequently at all and not preparing the required written development plans8.

Table 2.1: Emerging Water Service Providers in Ethiopia

Service Providers Brief Description and Key Roles Addis Ababa Water Supply and Sewerage Authority (AAWSA)

AAWSA is a chartered public authority with an independent board and exclusive rights to supply water to the metropolis. It is the largest water service provider in Ethiopia with about 187,000 private connections and 1100 public standposts. Its key functions include: study and design of expansion, construction supervision, operation and maintenance, and procurement of goods and services. The city manager, who is presumed to be independent from the political system, is chairperson of the Board. Though previously nominated by the AA City Government, the General Manager of AAWSA is now recruited on a competitive basis.

Urban Water Supply Services – ‘utilities’

UWSSs are ‘utilities’ for cities and towns with the responsibility to provide water supply. In some regions, the UWSSs of large towns may provide technical support and monitor performance of UWSSs in nearby small towns. Their administrative links are both with the RWB and municipal governments. Their functions are oriented to operation and maintenance of services, with the development activities and capital expenditures by the RWBs. However, in some regions the process of appointing autonomous water boards for the UWSSs has been initiated. These City/Town Water Boards (TWB) provide policy and regulatory oversight of the UWSSs. Municipal governments provide oversight to the TWBs and are supposed to monitor their activities. In case of small town water committees/ boards the oversight and monitoring would be the Woreda government responsibility. The proposed composition of these TWBs includes representatives of women and youth associations, health department, private sector and head of the urban water service as a non-voting member. (Gulyani, 2001)

Village Water Supply & Sanitation committee

VWSCs manage the provision of water supply to rural communities. They participate in scheme development and its operation and preventive maintenance. The committee is elected from the beneficiaries. More recently in Amhara region there is an effort to legalize water committees by the regional council. The lack of such legality restricts the autonomy of the VWSCs and may prevent access to financial services. Increasing women members in the WSS Committee is still a priority. In most cases the position of treasurer and storekeeper is given to women members of the committee. The Woreda Water Office is responsible to facilitate the election of VWSCs and provide technical assistance.

Note: based on various documents and discussions with key stakeholders in Ethiopia.

8 This information is given in World Bank (2001a) pp. 19-20.


18

Sector approach to autonomous water service providers . With the government moving away from direct service provision, the notion of service providers for water services becomes important. In Ethiopia, a number of different forms of service providers exist with considerable inter and even intra-regional variations. In most cases, however, there seems to be a separate ‘entity’ that is recognized as a service provider. Table 2.1 provides brief descriptions of key service providers including: Addis Ababa Water and Sewerage Authority (AAWSA), Urban Water Supply Services (UWSS) and Village Water and Sanitation Committee (VWSC) in rural areas. Some regions also have multi village schemes with their own Scheme Water Boards (SWB). Table 2.2 highlights the different forms of service providers in relation to different settlement contexts.

Table 2.2: Institutional Form of Water Service Providers by Settlement Contexts

Metropolis Large Towns Medium Towns Small Towns Rural Towns Villages

Population range

>2.0 million (Addis Ababa)

80,000 to 250,000

10,000 to 80,000 2,000 to 10,000

Less than 2,000

Less than 2,000

Number of centers

1 10 141 491 282 na

Addis Ababa Water Authority

Metro level independent

utility

Urban Water Service Unit (UWSS)

Utility for a large town

Utility for a medium town

Small town services utility with technical support from

RWB/Zone

Multi- Village water scheme

Provision of bulk water supply to different VWSCs

Village Water and Sanitation Committee (VWSC)

Committee of users to

manage O&M

Committee of users to

manage O&M

Source: Adapted from WSP-AF 2002, Table 5. Original source of information for population and number of towns – CSA (1994), Census. Note: While the MWR uses a population of more than 2500 to define urban centers, available information based on the census uses more than 2000 as the population size for defining urban settlements. The census also classifies about 282 settlements with less than 2000 population as urban. These have been referred as Rural towns.

Role of NGOs. NGOs are important players in the WSS sector. 67 NGOs were active in the water sector in 1994 when the last survey of NGO activity in the sector was undertaken. Currently, it is estimated that there are about 125 NGOs that work in different regions. The vast majority of systems surveyed, required that the community using the service, to be responsible for the operation and maintenance of the facility with some support by either a NGO or the government. Financed by external agencies, most NGOs provide both technical and funding support to the sector. Details of their role and contribution to the WSS sector require detailed inquiries at the regional level.

All NGOs have to register with the Disaster Preparedness and Prevention Bureau (DPPC) at the national level. Those operating in regions also register with the regional DPPC and their projects are reviewed at the regional level by the RWB. All NGOs thus have to register and provide details of their projects in terms of activities and planned expenditure. However, these projects are often multi-sectoral in nature and necessary detail in terms of actual expenditure and disaggregation for water sector is often difficult. Donors may also, in some cases, give off-budget funds directly to regional and Woreda administrations.


19

NGOs can also play a part in sanitation expansion through hygiene promotion and the facilitation of communal toilet blocks and washing facilities. It is necessary for such actors to be better coordinated through the activities of the RWB or Woreda water desk to prevent duplication of work, and increase their contribution to coverage and improved sustainability. Further, standardized technologies amongst different NGOs would facilitate the implementation of reliable supply chains to support the O&M responsibilities incumbent upon the VWSCs9. At the same time, however, NGOs paly an important role in introducing innovations, which need to be facilitated as that may result in more cost-effective technologies 10.

Role of the private sector. Formal involvement of the private sector in Ethiopia is essentially limited to consultancy and construction work. This was as a result of lack of demand for private sector participation in direct management of WSS services. However, with the government moving away from direct provision of services, different forms of private sector participation are now emerging. Considerable efforts and capacity building support is necessary to nurture supply and demand for private sector services. The private sector can enter in a number of different roles as the provision of water services becomes further decentralized. Support to rural water committees, through the development of supply chains for the repair and maintenance of water infrastructure, will reduce the requirement for large VWSC permanent staff. Private sector involvement in small town water supply, through management contracts, could result in lower costs to the consumer through economies of scale.

Variations across regions. With decentralized management of water supply systems, there is variation in the institutions providing services and the degree to which services have been implemented across regions. Such variation is found across rural as well as urban schemes. In the four major regions, zonal offices are important in ensuring service delivery. In the emerging regions, however, the Zone Water Departments have lower capacity. To complement this, RWBs, have a construction wing for rural and small towns water supply schemes. In the large regions RWBs deal also only with water and mineral resources, while in the emerging regions, the RWBs are also responsible for energy. In the regions where zonal administrations still exist, the RWBs have support departments to facilitate implementation of rehabilitation /expansion of water supply systems. This responsibility has been shifted to Woreda Water Desks in those regions where the zonal infrastructure has been dismantled.

The degree to which autonomy and decentralized operations characterize the urban and rural water service providers varies considerably. In the SNNPR region zonal water departments provide maintenance support to urban water providers. The regional council, however, is moving to increase the autonomy of water providers through the development of water services boards, which would be responsible for regulatory oversight of these urban water services providers. Rural water schemes are also autonomous with water committees being responsible for their operation, however the autonomy of the water committees is diluted by bureaucratic procedures whereby the regional bureaus are directly responsible for maintenance. In the Oromia region, the zonal departments support the maintenance requirements of water committees reducing the bureaucratic inefficiencies associated with multiple

9 This has also been suggested by DHV Consultants in ESP 2003. 10 For example, WaterAid is “currently experimenting with rope pumps which might well not meet certain standards but all parts can be made in Ethiopia abd they are significantly cheaper than handpumps” (personal communication from Hele Pankhurst, WaterAid Ethiopia).


20

government administrative levels as exist in the SNNPR region. Capacity to provide all maintenance requirements, however, is not present at this lower level. In the Gambella region, urban water service providers are directly attached to the regional water service board. Due to this, the decision making process is clouded by general, multi-sector, regional priorities.11

Support to the Emerging Sector Institutions and WSPs. The emerging institutional structures clearly redefine the roles for sector management and for service delivery (by autonomous water service providers). Capacity and management support would need to be mobilized for both sector management and service delivery by engaging other actors from the non-governmental and private sectors. In the large NGO community this would mean better coordination of their activities in different regions and focus more on capacity building support to water service providers rather than direct project implementation. To engage private consultants and various contractors there’s a need to move to demand driven approaches.

Figure 2.2: Support to Institutions through Practitioners’ Groups in Bank WSS Project

Source: Adapted from the chart on p. 53 in Annex 4 in World Bank 2004a.

This would require both, incentives and support for WSPs and sector institutions to out-source services to local consultants and contractors as well as various training institutions and professional associations12 to focus on capacity building support. The new World Bank funded Water Supply and Sanitation Project envisages this support through “practitioners’ groups for program management in RWSS and UWSS

11 This is given in Metaferia (2003) pp 17-19 & 24 -25 12 Such as those of engineers, architects, project management and design consultants, construction contractors, borewell drillers, etc.

Practitioners’ Groups

Fee-based Facilitation / Technical Support

Technical support by public institutions


Regional Water Bureau


Town Water Board


Woreda Water Desk

Federal

Regions

Woredas

Villages

Sector Institutions

Service Providers

City/ Town Water Supply Consultants

Small Towns

Cities & Towns

Small Town Water Committee / Board

Practitioners’ Groups Sector Institutions Water Service Providers

Practitioners Network / Facilitators

Woreda Support Group

Local Consultants / NGOs


21

(refer to figure 2.2). The project components include incentives for WSPs to outsource services as well as technical assistance to private consultants and NGOs to provide such support on a sustainable basis. It would also be useful to explore the possibility of a generalized framework with a project preparation and capacity development fund.

2.2 Status and Population Coverage by Water Service Providers13

The share of unserved population in the rural areas is much higher than in urban areas. Issues of reliability and sustainability of services though, are common across both rural and urban services…

Data sources. The information base on WSS service coverage by different service providers is weak and often outdated. Two main sources of information on coverage used for this analysis include the Ethiopia Census Report of 1994 and 1998/2000 Welfare monitoring survey, which were conducted by the Central Statistical Authority (CSA). These original sources have been analyzed previously in a number of different publications and their findings have been used in this assessment14. In addition, findings from primary inquiries conducted as a part of this assessment were also used.15 These inquiries were made in two regions: Oromiya and SNNPR, and covered information maintained by the RWBs as well as surveys of about 8 urban schemes and 8 rural schemes to gather information on their finances. Information on NGO projects was also collected from both the regions.

Relative Levels of Service Coverage

As per official statistics coverage of water and sanitation services in Ethiopia is very poor and among the lowest in the world, especially for rural areas, where only 18 percent of population has access to safe water. While Ethiopia fares poorly on most social indicators, its performance on water and sanitation is particularly dismal (refer table 2.3). The poor performance on the child and maternal health indicators may also be related to poor water and sanitation in Ethiopia.

Table 2.3: Performance of Countries in Sub-Saharan Africa on Selected Social Indicators - 2000

Access to Safe Water Adult Illiteracy Country Urban Rural

Access to Sanitation Male Fem.

Net Enrollment

Primary

Malnutrition

Infant Mortality

Rate

Under-5 mortality

Maternal Mortality

Rate Benin 41 53 20 62 46 63 29 87 140 500 Burkina F 18 78 68 31 33 104 210 930 Ethiopia 90 18 8 64 58 32 48 107 173 1400 Kenya 67 49 77 20 12 65 23 76 124 590 Malawi 52 44 53 42 27 103 20 134 229 620 Mozambiq. 17 40 21 58 42 40 26 134 213 1500 Rwanda 44* na 36 29 Na 29 123 205 1300 Tanzania 65 45 86 26 17 48 31 85 136 530 Uganda 47 32 57 35 24 Na 26 101 170 510 Zambia 64 27 23 24 16 75 24 114 192 650 SSA na na na 32 32 55 33 92 151 778

Source: Based on WSP-AF (2002). Refer to Annex on p. 69 for details of original sources used.

13 This section draws mainly on WSP-AF (2002) and has used some text verbatim. 14 These reports include: WSP -AF 2002, World Bank 2003a and ESP 2003. 15 Tsige 2003.


22

Despite slight increases during the 1990s in both rural and urban access to water supplies, as shown in table 2.4, coverage in the sector remains low. The low coverage probably reflects centralized institutional arrangements in the past, low allocations and expensive technology choices and a greater focus on urban services. For sanitation, the available information again suggests a better performance in urban whereas only 8 percent of the rural population had access to sanitation facilities.

Table 2.4: Coverage for Water S upply and Sanitation in Ethiopia

Percent of population with access to a “safe” source of water Percent of population with access to sanitary facilities

1994 1998 1994

Region

Rural Urban Total Rural Urban Total Rural Urban Total Addis Ababa 35.6 98.4 98.0 54.6 98.8 5.0 75.0 74.0 Dire Dawa 23.6 98.1 78.0 84.8 99.6 3.0 75.0 55.0 Harari 11.2 98.2 63.0 37.7 97.3 1.0 69.0 42.0 Gambella 21.3 72.4 26.0 21.1 62.4 11.0 31.0 15.0 Benishangul Gumuz

14.8 55.0 18.0 14.1 61.0 15.0 63.0 19.0

Tigary 10.6 73.9 21.0 19.2 96.4 3.0 29.0 7.0 SNNPRS 15.5 71.1 19.0 21.4 73.8 9.0 63.0 13.0 Amhara 15.2 80.2 21.0 13.0 85.0 3.0 37.0 6.0 Oromiya 15.8 76.2 22.0 20.0 85.8 7.0 59.0 13.0 Somali 9.0 47.9 15.0 34.9 98.8 4.0 48.0 11.0 Affar 5.2 73.1 13.0 16.2 83.0 4.0 37.0 8.0 Total 14.8 81.0 23.8 18.3 86.0 28.3 6.0 57.0 13.0 Source: Based on WSP-AF (2002). Original sources include: For water: ESP (2003), Volume III Table A5.2.1 to A5.2.33, ESP (2001), Volume I, Table 4.2. Original sources are CSA (1994) and CSA (1998). For sanitation: ESP (2003), Volume II, Tables 2.3 and 2.4, original source is CSA (1994) and CSA (1998). Notes: For water: Definition of safe for 1994 includes: all protected springs and wells, yard or shared taps and taps in the house. For 1998, safe includes: own tap, public tap, protected springs and wells, as well as ‘others’ as it seems to include shared taps (ESP, 2001). For sanitation, facility refers to a sanitary latrine. Details for the region totals for water supply are not available due to the adjustments made in ‘safe’ source. Region-wise details for sanitation for 1998 are also not available.

Unserved are in rural areas. This low coverage reflects clear links with the settlement size and category as illustrated in tables 2.5 and figure 2.3. Despite the large 12000 schemes in rural areas, 97 percent of the unserved population is in rural areas, which translated to over 45 million population. It needs to be highlighted, however, that issues of unreliable and unsustainable services apply to both urban and rural services as discussed further below.

Table 2.5: Population Served in Urban and Rural Areas, 2000

Using ‘Safe’ Sources (%) Using ‘Unsafe’ Sources (%) Total Population (In million)

Piped water Protected spring

Unprotected spring/well

River or pond water

Total Urban 9.5 84 8 4 5

Rural Areas 54.0 5 12 44 39

Total Country 63.5 17 11 38 34 Source: ESP (2003) – original source is CSA (2000). Note: Definition of safe and unsafe is as used in CSA 2000.


23

Figure 2.3: a. Population with Access to Water Services (%) – 1998 b. Shares of Served /Unserved Population (%) – 2000 In Percentage In Million Persons

Rural Water Supply Status – Issues and Regional Variations

Rural water supply in Ethiopia is provided mostly through point sources. However, there are significant variations across regions with regions such as Dire Dawa and Somali in particular relying more on larger systems with distribution network (refer to table 2.6). In contrast, Harari region has a high level of access to safe sources mainly though point sources. There variations need to be better understood as they have considerable impact on investment and O&M costs as well as long-term sustainability. Also, the varying feasibility of different technology options has impact upon the capital cost required for a basic service level, which in turn affects the affordability of improved access levels.

Table 2.6: Regional Variations in Source of Water Used for Rural Water Supply, 1998

Region Percent of population using the source

Point sources Distribution Total

Protected Unprotected Rivers, Network "Safe" Sources Lakes, etc.

Addis Ababa 10.1 32.2 49.5 8.2 18.3 Dire Dawa 5.8 10.9 34.5 48.8 54.6

Harari 43.9 15.2 20.0 20.9 64.8 Gambilla 19.8 3.8 75.2 1.2 21.0 Benishangul Gumuz 7.4 25.5 60.4 6.7 14.1

Tigary 11.1 33.1 47.8 8.0 19.1 SNNPRS 10.5 26.4 52.2 10.9 21.4 Amhara 9.7 38.2 48.8 3.3 13.0

Oromiya 10.2 30.8 49.2 9.8 20.0 Somali 2.0 47.1 18.0 32.9 34.9 Affar 5.1 24.1 59.7 11.1 16.2

Total Rural 10.1 32.2 49.5 8.2 18.3 Source: Based on WSP-AF (2002). Original sources include: ESP (2001), Volume III, Table A5.2.2, and CSA (1998). Note: See the notes for Table 2.4.

Definition of a ‘safe’ source: A key issue in the choice of source and technology is the definition of a ‘safe’ source. Most surveys and statistics define traditional sources as being unsafe and only either piped systems or ‘protected’ springs and wells are considered as safe. It may be good to review this definition as emphasized by ESP (2001). It is possible that the traditional source is safe and the input required is in the handling of water while collecting and transporting. Publicly provided ‘safe’ water on the other hand will not result in desired health benefits if issues of handling during collection and transportation are not

0.025.050.0

75.0100.0

AddisAbaba

Otherlargetowns

Largetowns

Mediumtowns

Smalltowns

TotalUrban

Ruralareas

0.0

30.0

60.0

Served Population Unserved Population

Urban a reas

Rural areas

0.0

50.0

100.0

Share ofServed

Population

Share ofUnserved

Population

Urban areas

Rural areas


24

adequately addressed. Selection of the source and level of service will also need to address the issues of ‘adequate’ consumption levels and the time that the users need to spend in collecting water.

Sustainability of RWS schemes: Inappropriate choice of technology is also reflected in poor sustainability of sources in rural areas. While monitoring of sustainability is not regular, a 1996 survey by MWR16 suggests that 26 percent of the RWS schemes were not functioning. There was a greater propensity for the hand-pumps and boreholes to have problems as compared to capped springs. Surprisingly, however, the capped springs fared worse in Amhara and Tigary regions. Of the seven regions surveyed, conditions were the worst in Benishangul and Gembela regions. A later survey in Amhara region, however, found the situation worse with 57 percent of the schemes being non-functional17. An inventory of 700 completed RWS schemes supported by the Ethiopian Social Reconstruction and Development Fund (ESRDF) also showed that about 33 percent were not functioning18. It is likely that with the sustainability problems, the actual status of access to safe water is even worse than information reported above.

Table 2.7 shows details of non -functioning rural schemes in different regions of Ethiopia. It is noticeable that almost double as many installed boreholes are non-functional as compared to springs. This is most likely due to the increased capacity required for the maintenance of the more complicated technology and the lack of adequate supply chain systems to facilitate adequate maintenance 19. A study by WaterAid showed rural consumption to be as low as 8 lpcd20.

Table 2.7: Non Functioning Schemes by Types in Rural Areas (1996)

Regions Total surveyed Schemes

Springs Handpumps Mechanized Boreholes

Total % Non -Functioning


Total % Non-Functioning


Benishangul Gambela Somali SNNPRS Oromiya Amhara Tigray

125 102 56

830 2571 634 686

67 48 34 32 24 22 18

9 10

- 155

1305 359 45

0 0 -

10 16 27 27

116 14

- 208 856 248 208

72 0 -

37 27 17 24

- 78 56

467 410 27

433

- 63 34 38 42 0

14 Totals 5004 26 1883 18 1650 29 1471 33 Source: Based on ESP (2003).

Issues and Variations Across Urban Areas

Based on the official statistics, condition with respect to access to safe water in urban areas is higher in terms of coverage, with about 84 percent having access to safe water sources, though there are some variations across different town size classes. This needs to be treated with caution as most households rely on shared services, consumption levels are very low, seasonal variability is very high and unscheduled disruptions to services are very common. Smaller towns with less than 2000 population have access levels

16 Survey was done by MWR in 1996, and analyzed by consultants Ernst and Young in 1997, as reported in ESP (2001), Volume II, pp. 21 -22. 17 Sahle and associates (1999), as reported in ESP (2001), Volume II, p. 22. 18 Based on information from Sima (2001). 19 This information is contained in ESP (2003), pp. 24 and is based upon a survey carried out by the Ethiopian MoWR in 1996 20 WaterAid 2004.


25

of only 43 percent and those with less than 10000 population have a level of around 60 percent. Interestingly, except for the very small ‘towns’ with less than 2000 population, most other towns have some form of piped systems, and access to piped systems is over 82 percent in towns with more than 10,000 population (refer to table 2.8). Outside of Addis Ababa, three categories of towns may be distinguished:

§ Rural towns: Towns with less than 2000 population where 60 percent of towns have piped system, but coverage levels in terms of population with access to piped system is low at about 20 percent;

§ Small towns: Towns with 2 to 10000 population that mostly have piped systems but the access to piped system is only about 50 percent; and

§ Medium and large towns: Medium and large towns, which all have piped systems but do require some improvement in access. Even among these towns ‘access’ is largely confined to yard taps or shared connections, with the resultant implications for cost recovery and financial viability.

Table 2.8: Water Supply Status in Urban Areas, 1994.

Population size Total Number % of towns Percent of housing units with of towns Population of with piped Individual Piped "Safe"

(in '000s) towns system connections Supply water

Less than 2,000 349 282 58 2 22 43 2 – 5,000 1093 338 90 3 43 61 5 - 10,000 1077 153 98 5 55 69

10 - 20,000 1192 85 100 10 73 82 20 - 30,000 754 30 100 13 74 83 30 - 80,000 1176 26 100 16 76 84

80 – 250,000 1334 10 100 19 89 94 Addis Ababa 2495 1 100 27 98 98

Total Urban 9470 925 83 15 76 84 Source: Based on WSP-AF (2002). Original sources include: ESP (2001), Volume II, Annex II-1.2, Original source – CSA (1994) Note: While the MWR uses a population of more than 2500 to define urban centers, available information based on the census uses more than 2000 as the population size for defining urban settlements. The census also classifies about 282 settlements with less than 200 population as urban. These have been referred as Rural towns in this report.

Defining ‘urban’: The above analysis uses the Census definition for distinguishing urban areas. However, in the WSS sector operations, the very small settlements defined as ‘urban’ by the census are not considered urban. This analysis, however, helps to highlight the special circumstances of these small ‘towns’ that often have piped water schemes that are different than the prevalent point sources in rural areas. This aspect may need further attention due to the different financial and institutional arrangements proposed for rural and urban areas as per the national Water policy and strategy 21.

Service reliability: Another key issue in urban areas is the reliability of supply. Consultations with the poor also highlighted this aspect vividly. Limited available information suggests that reliability of supply is likely to be quite poor, both in terms of quantity and breakdowns 22. The PER report of 2003 takes note of the

21 See the discussion on this issue in ESP (2001), Volume II, section 1.2.2. This is also discussed further below in sections 2.1, 2.3 and 2.4. 22 ESP (2001), Volume II, section 1.2.2, based on original information from MWR (1997), a report by Ernst and Young /Tropics.


26

fact that tariffs in urban water supply systems have been insufficient to provide for adequate maintenance, renewal and expansion of systems, the result of which is the existence of many urban systems offering a low level of service; an average per capita consumption of less than 20 litres 23 per day; rationing and unscheduled disruptions; long waiting for months or even years for customers who want new connections for lack of pipes and meters among others. High coverage rates also disguise low per capita consumption with an average consumption of only 15 lcd in Ethiopian urban areas 24. Water losses are also high and most utilities are operating very inefficiently.

Access for the poor: On the whole, relative level of access to water and sanitation in urban areas is estimated to be high in Ethiopia. However, in some the larger urban centers, the poor may lack access. In future a more detailed assessment of the access to these services by the poor through special studies is necessary. These need to focus on their level of access, existing sources/ services used, level of current expend iture, and nature of demand and willingness to pay for services. Other related studies to assess the existence of small-scale service providers who cater to the urban poor may also be needed.

2.3 Summary of Key Issues

Implementation of reforms in the water sector in Ethiopia under decentralization will need to take into account low coverage levels, lack of reliable and sustainable services, and limited capacity in emerging institutions.

As the Government of Ethiopia and various regional and Woreda governments tackle the issues of water service delivery, some key issues will need to be addressed:

Rapidly improving coverage while ensuring reliability and sustainability. In light of the Millennium Development Goals, to which Government of Ethiopia is a signat ory, as well as the targets set in its own Poverty Reduction Strategy Paper (PRSP), efforts are needed to accelerate coverage of access to safe water, especially in rural areas. However, given the past experience of new rural schemes rapidly becoming non-functional, it is essential to incorporate measures to improve service sustainability. Similarly, in urban areas where initial coverage levels may be shown to be high, service levels are often poor: per capita supply levels are very low, and breakdowns and interruptions are frequent. To ensure sustainability and improve service reliability it is necessary to address both institutional issues as discussed below, as well as financial viability issues as discussed in the next chapter. In the redesign of public policies and financing strategies, the use of fiscal/financial incentives for their implementation is necessary.

Addressing transition issues under institutional reform. Within the decentralization context, Ethiopia is already in the process of implementing major policy reforms in institutional arrangements for water services. The federal government is in charge of policy and strategy development through the MWR; Regional and Woreda governments ensure provision of services. The city level WSS authorities in Addis Ababa and a few other large cities, UWSSs in other towns, and VWSCs in rural areas are emerging as autonomous water service providers.

23 WHO minimum standard is at least 20 litres per capita per day 24 This information comes from a survey conducted by ESP in 2003 (ESP, 2003), pp 39 -42.


27

Greater clarity and focus is however required in relation to reforms and capacity of different entities. A critical issue is the notion of service providers, their legal basis and necessary powers, and their links with the appropriate decentralized government units. Some of the important sector roles related to regulation, M&E and information management also require further attention as these are being neglected at present.

§ Defining institutional models and strengthening capacity of service providers: Institutional aspects of service providers varies across regions. Appropriate institutional models need to be developed with related legal basis to address key aspects such as: i) functional autonomy, ii) links with appropriate government body, iii) right to levy user charges and basis for their assessment, iv) transfer of assets to newly autonomous providers, v) independence in recruitment and procurement, and vi) timely ad transparent payment of bills by government and public agencies. In addition, measures to strengthen their capacities for planning, consumer services, operations and financial management are required. The role of financial incentives to create demand for such capacity building will be crucial (see chapter 4 for further details).

§ Strengthening monitoring and regulation: With the emergence of a large number of service providers, it becomes essential to monitor their operational performance. Such monitoring should be undertaken by existing RWBs, zonal departments (where still in operation) and Woreda offices, with the results ultimately flowing to the federal level for amalgamation. At present, however, in most regions monitoring does not receive adequate emphasis.

For urban WSS service providers, an independent regulatory framework becomes essential to ensure that the tariffs are set to reflect consumer preference as well as viability of the provider. Maximizing improvements in operational performance becomes important in this context. Development of such a regulatory framework in the longer term will also enable gradual entry of the private sector in urban water supply provision. A useful start can however, be made by developing a comparative assessment framework for monitoring performance of service providers, particularly of the urban ‘utilities’, drawing on the approaches developed by the Africa Water Utilities Partnership and the World Bank’s Benchmarking approach for urban water utilities.

§ Lack of sector information management systems (SIMS): Better sector planning and monitoring needs to be based on well managed and regularly updated sector information systems. As MWR and RWBs move away from direct participation in water projects, and shift their role to planning and strategy development, they will need to be at forefront of managing this. Such a system should include: periodic assessment of the sector resources and operational performance.

Capacity building requirements while going to scale. There is need to strengthen capacity at regional and woreda levels where most operational activities have been devolved. Currently, regional government offices are handling water development. Ideally, a water bureau would be created for planning, programming, regulation, monitoring, and technical support. Woredas need to increase capacity to manage the increased responsibility for technical support to rural and urban water suppliers. Especially, the Emerging Regions will most likely need significant capacity building and continued support from the MWR until they develop sufficient capacity to plan, prioritize, implement, and monitor their own


28

investment programs. For capacity building, it is important to engage the private sector and NGOs, as also envisaged through the practitioners’ groups under the new World bank funded water supply and sanitation project.

3. SECTOR FINANCING ARRANGEMENTS

Within the institutional arrangements mapped in the previous chapter, sector institutions and water service providers in Ethiopia use a number of channels and sources of funds. This section delineates the current and emerging financing arrangements, identifies the channels and sources of funds used, and provides a preliminary assessment of level and characteristics of financial resources in the sector.

3.1 An Overview of the Sector Financing Arrangements

Financing and Cost Recovery Policy

Within the framework of the Constitution of the Federal Democratic Republic, the Ministry of Water Resources has adopted a National Water Resources Management Policy in 199925. The National Water Policy provides a basis for developing a framework for financing and cost recovery. The guiding principles in this regard are:

• Demand responsive financing: to enable effective expression of demand, the need for some level of self financing of projects and the need to ensure full coverage of operation and maintenance costs by service providers

• Leverage domestic private and community finance: promote participation of “local banks, other investors as well as popular and traditional self-help associations through appropriate incentive packages”

• Tariff setting and cost recovery : promote site -specific tariff setting along with full cost recovery for urban water supply and at least full operation and maintenance cost recovery for rural water supply while ensuring affordable access for the poor through appropriate mechanisms for cross subsidization.

The policy for financing water supply suggests different approaches for rural and urban areas: to ensure full cost recovery for urban water, and to cover partial capital costs and full O&M costs for rural water. However, this is not clearly laid out in actual guidelines. It is likely that at present a large number of projects provide subsidized funding to urban water service units. In urban areas another constraint has been the difficulty with expanding coverage in the emerging informal areas. It would be useful to explore innovative and locally relevant measures to achieve such expansion within poverty reduction agenda. It is also necessary to assess affordability and willingness to pay for differing levels of service and technology choices in the design of these systems. In this context, concept of a continuum from rural to urban may need to be developed to identify the level of cost recovery in relation to service levels and affordability.

25 Ministry of Water Resources (1999).


29

It is also not very clear whether these rules are applied to rural water schemes financed through regional budgetary resources. It is likely that that at least a part of the maintenance costs for rural schemes are actually met through regional budgetary allocations. To achieve these policy principles in practice for both urban and rural schemes, operational guidelines will need to be developed, and applied in all sector financing. It may also be useful to develop a more realistic timeframe within which these can actually be achieved, when backed by appropriate incentives. The new World Bank project provides such incentives as discussed below.

Financing Arrangements and Fund Flows

Financing of water supply and sanitation in Ethiopia is currently undergoing significant changes under ongoing decentralization reforms. The Ethiopia Social Rehabilitation and Development Fund (ESRDF) is phased out and the Water Resources Development Fund (WRDF) has been set up. While the level of investment in the water sector has been very limited in recent years, it is likely that with decreasing border conflicts and Ethiopia’s prominence in achieving WSS MDGs for Africa, donors will put greater emphasis on funding the sector.

Figure 3.1: Emerging Financial Arrangements – Main Financing Channels


Regional Water Bureau Regional

Government



Woreda Gov.


Woreda Water Desk

Federal

Regions

Woredas

Villages /kebelles

Municipality

Small Towns

Cities & Towns

2. Regional Budget

5. WRDF

6. Internal Generation

7. Off-Budget Donors

8. Community Contributions

4. ESRDF

3. Woreda Budget

1. Federal Budget

Budget allocations/ Development grants

Off-budget funds

Internal generation

Channel of Finance

Block transfers

Block transfers

Development Grants

Block transfers

Government Budgets Special Funds Direct Mobilization by WSPs

Loans

User Charges / Internal Surplus Urban Water

Supply Service

_________________ Small Towns

Loans

Donors Loans/ grants


30

Figure 3.1 provides a broad overview of the emerging financing arrangements in the water sector in Ethiopia, especially in the context of decentralization. It illustrates the main channels of finance used, which may be grouped into three broad categories: a) government budgets, b) special funds, and c) channels for direct mobilization of resources by water service providers. In developing the expenditure estimates it is useful to distinguish between these channels and sources of funds. ‘Channels’ refer to the way the funds are mobilized and allocated. ‘Sources’ represent the contribution from user charges, assistance from donors (loan/grants), general government revenues, household savings, WSPs’ internal accumulated surplus and market borrowing. More detailed description of these categories and sources of funds used is presented in section 3.2.

Estimates of WSS Sector Finance for Different Channels and Service Providers

Information sources. The information base for expenditures from both public and non-public channels and sources is weak. Annex 2 provides details of sources of information and assumptions made to arrive at the estimates. This has been based on available secondary information from government budgets and reported expenditure estimates (at federal and regional levels), results from studies using various primary surveys or field-based information, registration by NGOs in the regions, financial information from ESRDF, as well as discussions with key stakeholders. The weak information base and the difficulties in disaggregating information for water sector makes these estimates at best tentative. However, the main reason for generating these estimates is to demonstrate the urgent need for sector information in order to develop a proper understanding of WSS sector finance and illustrate the nature of information required for developing a sector financing strategy.

Total WSS Sector Expenditures. Within the current service provider framework for Ethiopia, table 3.1 provides estimates of channels of finance used sector expenditure and by different service providers to meet their expenditures. The total WSS expenditure is estimated to be 631 million Ethiopian Birr ($78 million), about 1.2 percent of GDP in 2000-01, declining to 1.1 percent of GDP during the year 2001-02. Comparative information for South Africa, Kenya and Zambia for this share is estimated to be 2.1, 1.0 and 1.9 percent respectively. Adequacy (or otherwise) of this level of sector expenditure and resource gaps is discussed in the next chapter.26

Figure 3.2 a) shows the relative recurrent flows to the sector through various channels. Internal generation is the largest channel for recurrent inputs to the sector amounting to about two-thirds of the total. Most of this is derived from urban users. Regional budgets also contribute a significant portion of the recurrent expenditure in the sector though this spending is on village level water service committees. For capital expenditure (figure 3.2 b), government channels dominate, though off-budget sources are also significant. A larger proportion of capital expenditure is on rural water service providers as would be anticipated given the larger service deficit amongst that constituency. Contribution by communities, particularly in rural schemes account for a mere 0.3 per cent.

26 Information for Kenya, South Africa and Zambia is from Mehta and Ondari 2004, Palmer 2003, and Chiwele 2004 respectively. GDP for Ethiopia for 2000-01 and 2001-02 is estimated to be 54 and 52 billion Ethiopian Birr respectively (World Bank, 2004b)


31

Table 3.1: WSS Resource Flows Matrix, Expenditures in 2000-01 and 2001-02 (In million Ethiopian Birrs)

2000/01 2001/02

Water Service Providers Water Service Providers

Channels of Finance

AAWSA UWSC VWSCSector

Expend.Total

AAWSA UWSC VWSCSector

Expend.Total

Recurrent Expenditure Federal Budget 11.7 11.7 11.7 11.7

Regional Budget 74.6 na 74.6 73.5 na 73.5 ESRDF 0.0 0.0 NGOs/Off budget donors 0.0 0.0 Internal Generation (user charges)

97.4 53.7 6.0 157.1 93.8 53.7 6.0 153.5

Total 97.4 53.7 80.6 11.7 243.4 93.8 53.7 79.5 11.7 238.7 Capital Expenditure

Federal Budget 11.4 12.0 23.3 3.0 26.6 29.6 Regional Budget 11.4 117.1 41.4 169.9 3.0 91.6 82.6 177.2 ESRDF 80.3 80.3 6.5 6.5 NGOs/Off budget donors 105.5 105.5 105.5 105.5 Internal Generation (surplus/ borrowing)

na na na 0.0 na na na 0.0

Community Capital Contributions 9.0 9.0 0.8 0.8

Total 22.7 117.1 236.1 12.0 388.0 5.9 91.6 195.5 26.6 319.7 Total Expenditure 120.1 170.9 316.7 23.7 631.4 99.7 145.4 275.0 38.4 558.4 Sources and notes: Refer annex 2 for details. na – not available. Notes: i) internal generation as a channel is assumed to be used only by WSPs that are able to protect the revenues for use within the sector, and hence include AAWSA,UWSA and VWSC, ii) details of sector expenditure by regional governments are not available, iii) it is likely that some of the UWSSs and VWSCs use internal accumulated surplus for capital expenditures as evident from an estimated surplus of 7 million among UWSSs in Oromiya region (see table 3.8). However, this has not been considered as adequate details are not available, iv) information for NGOs is limited and variations over the two years are not available. This has, however, been included due to its significant levels, and v) it has not been possible to estimate the recurrent expenditures by households and communities besides those paid as user charges to various service providers.

Figure 3.2: Resource Flows by Channels of Finance: 2000-01 and 2001-02 (in million birr)

Recurrent Expenditure Capital Expenditure

Emerging Financial Map. The phasing out of the ESRDF has had two impacts in the flow of finance to the sector: 1) overall finance flows have been reduced, and 2) this decrease has been amplified by the reduction in community level contributions/input to the sector, occurring as a result of the reduced ESRDF monies. This fact highlights the intertwined nature of the financial arrangements at a sector level as well as the fact that community finances, in Ethiopia, are probably in the majority, mobilized through

0.0

40.0

80.0

120.0

160.0

Federal Budget Regional Budget ESRDF NGOs/Off budgetdonors

InternalGeneration (user

charges)

CommunityContributions

0.0

40.0

80.0

120.0

160.0

200.0

Federa l

Budget

Regional

Budget

ESRDF NGOs/Off

budget donors

In terna l

Generation

(surplus/

Community

Contributions

2000-01 2001-02


32

some other leveraging institution. The presence of such institutions then acts to increase flows to the sector not only by their direct sectoral inputs but also by the amount of finance contributed by beneficiaries themselves. This phasing out ESRDF also hurt rural areas the most, areas that need finances the most. Equally importantly, efforts are needed to ensure that the sector does not lose the capacity of teams built as a part of ESRDF operations to support and appraise projects within a demand responsive framework.

Table 3.2: Channels of Finance used for Development and Recurrent Expenditures

(Percentage of total) 2000-01 2001-02 Channels of Finance

Recurrent Development Total Recurrent Development Total

Federal Budget 4.8 6.0 5.6 4.9 9.3 7.4 Regional Budget 30.7 43.8 38.7 30.8 55.4 44.9 ESRDF 0.0 20.7 12.7 0.0 2.0 1.2 NGOs/Off-budget 0.0 27.2 16.7 0.0 33.0 18.9 Internal Generation/ User Charges I

64.5 0.0 24.9 64.3 0.0 27.5

Communities/Households 0.0 2.3 1.4 0.0 0.2 0.1 Total Resources 100.0 100.0 100.0 100.0 100.0 100.0 Source: Based on table 3.2.

Two new channels are emerging from this sector finance arrangement:

1) Woreda Budgets will increasingly fund activities in the rural water sub-sector. The scale of investment of this route is difficult to anticipate as the Woreda budgets are largely funded through block transfers from the Regions and are dependent upon priorities set at the Woreda level. For Woredas to facilitate their responsibilities in water provision, the average amounts spent at this level must increase. However, given the inability of woredas to raise significant own revenues, will be necessary to have either increased intergovernmental transfers or the active engagement of donors and NGOs in financing a decentralized rural water program. Government of Ethiopia is also considering the possibility of a Multi-sector Rural Infrastructure Fund for development expenditure at the Woreda level. The operating principles for such an institution are not developed at this stage, though it is anticipated that these funds would constitute the bulk of capital expenditures at the Woreda level. It is also possible that such a fund may support regional and national level policies and priorities by focusing on particular sub -sectors. It would be useful to review the recent experience from other sub-Saharan countries such as South Africa and Uganda where formula based transfers for consolidated conditional grants for capital expenditure are being developed27.

2) Water Resources Development Fund, set up recently, will increasingly play a role in sector financing. The scale at which it will act is uncertain because of its dependence on external finance. Its resource mobilization requirements are large to finance the expansion and rehabilitation of urban water and irrigation infrastructure. However, consolidation of funding would increase efficiency of donor spending through lower administrative costs associated with disbursement. The scale of funds disbursed from the Fund will depend highly on its management structure and autonomy as well as

27 For South Africa see Government of South Africa. 2003.


33

appropriate policies and incentives to build the capacity of urban utilities/ borrowers to operate on commercial principles and ensure financial sustainability. Availability of funds will also be essentially linked to its capability to recover loans made to urban utilities and control non -performing assets. Operational policies of the WRDF will need to incorporate details of potential borrowers and measures to ensure appraisal rigour.

3.2 Analysis of Current and Emerging Channels and Sources of Funds

Within the three main categories of channels of finance: government budgets, special funds and non-public resources mobilized by WSPs, Figure 3.1 illustrates different channels that are commonly used in Ethiopia. These are discussed below.

Government Budgets

Under the emerging institutional arrangement, there are three important levels of governments that may allocate funds for capital and recurrent expenditure in the water sector: The two important aspects in this are the intergovernmental transfers (block transfers from federal government to regions, and from regional governments to Woredas) and the role of donor funding in influencing sector priorities and inter regional equity. This section discusses the role of different government budget channels of finance and the sources of finance. Unfortunately

Government of Ethiopia federal budget. The redefined role of the federal government in the water supply sector has mainly limited its activities to sector coordination, monitoring and capacity building support by the Ministry of Water Resources. However, donor resources in the water supply sector are still within the ‘project’ mode and not as sector budget support as in other sectors such as education and health. Thus, allocations from the Government of Ethiopia budget directly for the water sector are mainly in the form allocations for the MWR and funds linked to specific donor projects. Specific allocation, however, may also be made for selected WSPs, such as the Addis Ababa Water and Sewerage Authority (AAWSA). Table 3.3 shows federal budgetary allocations to the WSS sector in Ethiopia for three years. These were mostly in terms of projects focused on various feasibility studies and technical assistance. Recurrent expenditure was on regular MWR costs.

Table 3.3: Composition of Federal Budgetary Allocations to the WSS Sector in Ethiopia (million birr)

Capital Recurrent Total Year (EFY- Ethiopian Financial

Year) Internal Budget

Foreign Loan Foreign Grant

Total

2001-2002 (EFY 1994) 5.6 14.5 41.5 61.6 21.5 83.1

2002-2003 (EFY 1995) Total 27.3 110.0 62.1 199.4 26.1 225.5

Allocation to WRDF 22.8 100.0 41.0 163.8 0 163.8 Source: Watson (2003) Table 8, pp.31; the original source appears to be relevant budget documents of the Government of Ethiopia. Note: The information in this table is for allocation, whereas the federal expenditure reported in table 3.1 is for estimates of actuals. The latter may, however, be underestimated, as all donor expenditure is not captured properly in the reported estimates of actuals.


34

In the context of decentralization, share of federal budget in total WSS expenditure is understandably small. However, a major increase in 2003-03 is mainly because of allocation to the newly established WRDF and over 140 million birr of external assistance for it (refer table 3.3).

Regional government budgets. Regional governments allocate resources for capital investments in both urban and rural water supply as a part of their budget process. The main source of funds for regional governments is the federal block transfer referred as a ‘federal subsidy’; though the generation of resources through taxation (e.g. sales taxes) is also possible. In addition, earmarked donor funds for WSS projects are also channeled to the regions as conditional grants. The regional budget resources for capital investments are likely to reduce significantly with the start of Woreda transfers from last year and the increased direct responsibility for service provision residing at that lower administrative level. Table 3.4 shows allocations to the WSS sector in the four largest regions of the country. As per World Bank (2003a) and Watson (2003), there appears to be considerable regional variations with higher per capita capital expenditures on urban water supply.

Table 3.4: Regional WSS Budget Allocations in the Four Large R egions

Year Oromiya Amhara SNNP Tigray 2000/01 (EFY 1993) Actual

Capital Urban Rural Government Foreign Recurrent Total

73.9 12.0 8.5 3.5 44.2

130.0

11.1 3.8 3.8 na

11.3 26.2

3.9 9.5 8.1 1.4 1.9

15.3

4.8 7.8 3.0 4.8 2.3

14.9 2001/02 (EFY 1994 ) Actual

Capital Urban Rural Government Foreign Recurrent Total

53.1 36.4 34.1 2.3 48.0

137.5

13.5 5.4 1.1 4.3 5.7

24.6

4.2

12.0 5.1 6.9 2.5

18.7

2.5

12.3 0

12.3 2.6

17.5 2002/03 (EFY 1995) Budgeted

Capital Urban Government Foreign Rural Government Foreign Recurrent Total

32.2

30.5 29.2 1.3 46.7

109.4

49.2 23.8 25.4

na

3.6 52.8

5.0

9.1 0.5 8.6 2.5

16.6

2.4 2.4

0 1.0 1.0 na 4.2 7.6

Capital 10.2 16.7 5.4 13.9 Recurrent 8.7 1.2 1.6 3.1

% of total reg. allocation 2002/03 Total 9.5 6.5 3.1 3.4 Source: World Bank (2003a); the original source is likely to be from information as reported in selected regional budgets collected directly from the regions. Note: EFY refers to the Ethiopian Financial Year.

The second source of available information is at the federal level on actual expenditures as collected and available through the World Bank office, However, it is not easy to compare this with the information reported above in table 3.4: i) first, the federal expenditure estimates for comparable years are available


35

only for the Natural Resources category, which also includes expenditure on irrigation, and it is difficult to separate out water from this; and ii) even for this aggregate category, federal level estimates suggest much lower levels of expenditures as compared to the information from the regions. Clearly, any move by Government of Ethiopia to develop a sector program for a better incorporation of WSS in PRSPs and MTEF, would be constrained by the lack of understanding of use of public resources for water sector. Unfortunately it is not possible at this stage to disaggregate the information on recurrent expenditure between operations and sector management type of activities.

Woreda and municipal budgets. Preparation of own budgets by woreda governments is a relatively recent phenomenon. The main source of funds for Woreda governments is transfers by regional governments. Available information suggests that transfers so far are barely sufficient to cover recurrent costs and development expenditure has been negligible. For example, World Bank (2001a) suggests that as much as 95 percent of the total Woreda budget is used to meet salary requirements.

Table 3.5 shows the budget and allocation from the budget to water for two Woredas. As is evident, the demand on the budget of salaries leaves insufficient financial capacity to effect any change in water supply access. In fact, for 2001-02 the Woreda water desks had only between 2000-6000 birr available for water sector development. The transfers from regional governments to Woredas are based upon mechanisms similar to the federal subsidy with an analytic formula used to asses the size of a block grant. Woredas can raise own revenue through the taxation of large natural resource extraction operations and through the direct taxation of corporate profits. Despite this, one study 28 found that the average Woreda generated only 30% of their actual expenditure through such taxation. Further, such taxation routes available are specifically applicable to urbanized regions (in the case of corporate tax) and regions with special natural resource endowments.

Table 3.5: Budget Allocation for Water Services in Two Woredas – 2001/02

(birr million) Zuway Lume

Population 176,093 119,000

Total Woreda Budget 7.8 7.2 Of which: Block Grant 5.8 3.8

Own Revenue 2.0 3.4 Budget Distribution

Salaries 6.0 6.3 Other Recurrent Expenses 1.8 0.9

Of which: Water (values in birr) 6,000 2,000

Source: Watson (2003) based on information collected during field visits to Zuway and Lume woredas.

Budget allocation by Woredas for water supply would depend on local priorities and expressed demand by population as well as the preparedness and capacity of Woreda level staff to take up water schemes. The ability of Woredas to access finance for capital expenditure will be a significant determinant of their ability to achieve infrastructure improvements. This may be through development of special funds for capital expenditure (such as the aforementioned multi-sector infrastructure fund) or demand and

28 This information is given in detail in World Bank (2001a)


36

performance-based allocations of grant funds for infrastructure development outside the offset system as is being done under the ongoing World Bank project29.

For urban areas with municipal status, allocations from the municipal budget may also be made to the respective urban or small town water supply services. Municipal budgets are derived mostly through self-generated revenue, as they apparently fall outside of the intergovernmental transfer mechanisms described below. Some transfer from regional budgets and other external sources do occur though they generally vary significantly across regions and are often unpredictable. In Dire Dawa, over the period 1997/98-1999/00, self-generated funds accounted for 92% of the municipal budget whilst in Gambella only 55% of total municipal budgets were self-realized over the same period 30. Allocation by municipal authorities also depends on their membership of Water Boards and local budget priorities.

Linkages Defining Government Channeled Sector Finance

The channels described above are dependent upon an intricate multiplicity of arrangements that define the source of funds to the sector that flow though government budget channels. These include the medium term expenditure framework, processes which transfer funds between different administrative levels and processes, which account for the effect of donor support to different levels of government.

Public Expenditure and Budgetary Reforms. The process of allocating and using public resources in Ethiopia has recently gone through two major developments which affect the decision making processes: i) the merger of the Ministry of Finance with Ministry of Economic Development and Cooperation (MEDAC) into the ministry of Finance and Economic Development (MoFED), and ii) the rapid implementation of the second phase of fiscal decentralization. These reforms aim at improving expenditure management and accounting systems while ensuring that resources are allocated efficiently, effectively and adequately. The MoFED is expected to pave the way for better co-ordination of both the development and recurrent budgets and promote policy based expenditure planning.

Overall allocation of resources to various sectors of the economy is being done in accordance with the provisions of the Constitution and the fiscal policy of Ethiopia and as contained in the budget manual. The raising of resources, its allocation and providing an environment for proper utilization is a major role of the government of Ethiopia. Under the reforms in public expenditure, the government is restructuring its budget, accounting and expenditure planning systems with the aim of improving efficiency and transparency in financial management. The introduction of a financial calendar and a budget information system will improve the processing of the budget.

The Ethiopian PRSP has identified and prioritized water and sanitation provision particularly to the rural population. This has changed the direction of expenditure in the sector with more resources being directed to rural communities where majority of the poor live. The Medium -Term Expenditure and Fiscal framework (MEFF) and the public investment program (PIP)31 are now being reviewed with a view to

29 Details of World Bank project are discussed below. Under this, allocations to woredas will be only partially offset by about 10 to 15 percent. 30 See Gulyani et al. (2001) for details. 31 Both the recurrent and the development budgets are prepared under the MEFF/PIP framework. A public Expenditure Programme (PEP) – a framework that combines planning and resource allocation exercises, is currently under preparation and will replace the MEFF/PIP framework when ready.


37

making them utilize information from the PRSP in allocating resources to various sectors. Only then can the needs of the poor be addressed adequately.

Inter-governmental budget transfers. As has been mentioned, lower levels of government depend upon fund transfers from higher levels to support their budgetary activities. The federal government transfers funds to the regions through its subsidy mechanism. The regions, in turn, transfer funds to zones that further transfer funding to the Woredas. These transfer mechanisms together with reporting mechanisms between the different levels of government have significant implications for the efficacy of public finance.

A federal subsidy is allocated to each region from the national budget on the basis of an analytical formula. The transfers are weighted by the proportion of the national population in the region and the relative level of development in the region. The planned proportion of the budget that is derived from internally generated revenue is used to adjust transfers. The effect of these modifiers is to increase transfers to regions with lower levels of development, higher populations and those which self-generate less revenue. It is apparent that a region which is collecting relatively large levels of revenue is penalized through reduced federal subsidies providing a disincentive for increased self-generation of revenue.

Predictability of the transfer of funds from the federal government to the Regions has been a major issue. In the absence of a credible and predictable calendar, Regions find out, rather too late, about the level of federal subsidy allocations. A process to streamline this is however in place although adherence to this calendar is not effective yet. Secondly, systems of accounts and audits present significant delays in reporting from lower levels. Although arrangements are being made to reverse this situation, it would take more time to arrive at a consolidated federal/regional accounts. Woredas report to the Zonal administrations, which in turn report to regions before final accounts are submitted upwards to the federal government. Computerization in four of the regions has reduced some delays. There still remains, however, a backlog of about 2 years. For water and sanitation sector, however, disaggregated information continues to be a problem as only aggregated expenditure estimates are available for natural resources where water supply and irrigation are clubbed together.

The offset mechanism . Federal ‘subsidies’ are adjusted by the ‘offset mechanism’ by which external aid amounts to regions are deducted from the federal transfer amount. The effect of this offset is to ensure that regional development priorities remain in the control of the federal government rather than being influenced by the donor community through the targeted funding of particular regions. The impact of such an offset mechanism is to reduce the incentive to engage external aid potentially missing out on the non-financial benefits of such aid, such as technical capacity building. The federal subsidy mechanism is based on the notion of block grants, which on the one hand allows for demand sensitive programs at the decentralized level but stymies the ability of the federal government in setting national policies.

Role and Influence of Funding from Development Partners. Donor funding, both on-budget and off-budget, is an important source of finance for the sector in Ethiopia. However, it is difficult to estimate total aid flows into the sector because a significant amount is allocated off-budget. According to the estimate in this study, on-budget support amounts to about one quarter of public funds in the sector in 2001/02. Off-budget donor funds amounts to nearly 20 percent of total sector finance. While these figures are


38

significant – especially the amount of off-budget support – the aid support given to the Ethiopian water sector falls short of that given to the sector in Kenya and Zambia (Figure 3.3).

As aid flows likely remain important in the future, it is important to develop/ strengthen the planning and coordination at the regional level to better account for these resources, especially for off-budget resources). On-budget resources are part of the planning and budgeting process of public resources and are accounted for in the relevant budgets while off-budget support through NGOs remains outside the planning and budgeting process of public resources. This distorts the overall public expenditure planning and implementation.

Figure 3.3: On-budget and off -budget (NGO) donor funds in the sector – a comparison

Source: Chiwele 2004, Mehta and Ondari 2004, Palmer 2003 and Table 3.1.

The major on-budget donors include IDA, JICA, and the Netherlands. In the future, however, the new five-year IDA (World Bank) water and sanitation project will bring in additional resources into the sector. This will result in an increased share of donor funds in the sector, assuming other sources of finance remain constant.32 The total size of the project is US$ 100 million. The annual sector input will be US$ 20 million from 2006 (or nearly a third of total development expenditures in the sector). The relatively large financial input to the sector will have significant impact on service delivery in both rural and urban water service provision as well as increase the capacity in the sector to manage and support itself.

The largest component of the project is for rural water supply and sanitation, reflecting the access deficit amongst this population. To ensure that the available funds reach the largest number of households, per capita subsidy ceilings have been set for rural water supply. Principles of community cost sharing aim to enhance sustainability. The urban component of the project will support the formation of autonomous town water boards and water undertakers. The project will finance rehabilitation and expansion of facilities with grants determined on a per capita basis, sufficient to maintain affordable water tariffs. The third component of the project aims to increase sector management capacity through improved program management.

The Bank project also provides incentives for improved performance through the stepped approach as illustrated in Figure 3.5 a-b to be followed in the project for rural and urban water components

32 World Bank (2004a).

Total donor funds as share of public funds

12% 26%

100%

365%

0%

100%

200%

300%

400%

South Africa Ethiopia Kenya Zambia

Off-budget/ NGO funds as share of total sector flows

18.9% 18.7%

3.9%

0.0%

5.0%

10.0%

15.0%

20.0%

Ethiopia Kenya Zambia


39

respectively. The initial step provides an opportunity to woredas or town water supplies in improving performance through technical assistance. Performance on this determines later access to infrastructure funds for construction facilities. More importantly the Bank project may also provide a framework for other development partners to enhance their sector funding.

Figure 3.3 a): Stepped Approach to Rural water supply and sanitation

Figure 3.3 b): Stepped Approach to Town water supply and sanitation

Source: adapted from World Bank (2004a)

Special Funds

The use of special funds particularly for community-based schemes has been common in Africa, and particularly in Ethiopia till recently. Government of Ethiopia has also set up a special water fund focusing on urban services. In addition, GoE is also exploring the setting up of a special multi-sectoral fund for rural infrastructure that may also provide resources for the water sector.

ESRDF. Set up in 1992, this was the major source of financing for community-based rural water supply schemes with annual investments of about 80 million birr (about US$ 9.9 million) until 2001. The social

Step 1 Technical assistance to establish Town Water Boards and prepare

applications

Step 2 Planning, capacity

building and immediate service

improvements

Step 4 Expansion

Step 3 Rehabilitation or initial investment – towns not

previously improved with grant financing

Prom

otio

n an

d To

wn

sele

ctio

n

Step 1 Technical assistance to establish Woreda RWSS

Programs

Step 2 Capacity building to implement

Woreda RWSS Programs Woreda Level Planning and

Implementation

Community Level

Planning and Construction

Step 1 Technical assistance t o

establish WATSAN committee and Planning

Step 2 Construction and capacity

building

Prom

otio

n an

d se

lect

ion


40

fund is no longer operational with the responsibility of support for community water being lodged within the emerging responsibilities of the Woreda water desks. ESRDF aimed to facilitate the implementation of demand responsive appropriate technology solutions, where communities were directly involved in design, implementation and post construction operations. The approach adopted by ESRDF, besides acting as a channel of finance, also demonstrated the feasibility and relevance of a community-based approach for rural water supply33. Table 3.6 shows the disbursements by ESRDF over a three year period. It is evident that disbursements towards the end of the social funds tenure declined. Also notable is the effect on community contributions that results from this decline.

Table 3.6: ESRDF Expenditure on WSS by Regions

(In ‘000 Birr)

Region EFY 1992 (1999/2000)

EFY 1993 (2000/01)

EFY 1994 (2001/02)

Tigray Afar Amhara Oromiya SNNPR Gambela Benishangl-Gumuz Harari Somali Addis Ababa Dire Dawa

6,125 680

24,076 48,144 26,504

433 1,642

40 50 0 0

0 612

8,904 45,207 15,003

0 2,925

502 6,739

0 378

0 3,482

343 720

0 0 0

118 50 0

3,290 Total 107,694 80,269 8,004

Source: See annex table A4.

Water Resources Development Fund (WRDF). With the increased decentralization of water supply responsibilities, the WRDF was created to enhance self -sufficiency in the provision of water supply and irrigation systems. Its main focus is to provide finance to urban water supply projects on a sustainable loan basis. The WRDF is not registered as a bank and thus cannot mobilize resources through deposits as per the banking regulations in Ethiopia. Therefore, its major source of finance will be from donors and federal government budget allocation. Initially it is envisaged that donor funds will be routed through the federal government and passed on grants, as has been done for the African Development Bank for Harar. It will pool these sources and channel funds to local service providers in line with the overall sector policy, which envisages full cost recovery in urban water supply services. Potential borrowers would need to be creditworthy and have an appropriate legal entity and borrowing powers as per their legal mandates. WRDF will have regional offices for project appraisal and monitoring of loan repayments. Operational costs of the Fund will be covered through spreads on loans.34 Under the World Bank project while WRDF is one of the implementing agencies, its role in lending for urban water services is indirect as MWR will enter into loan agreements and may delegate WRDF to act on its behalf.

WRDF represents a variant of municipal development funds (MDFs) that have been used in many countries worldwide, and it would be useful for Government of Ethiopia to draw on the global

33 Lium and Garvey (2002) 34 Seyoum et al. (2002) and World Bank (2004a).


41

experience from their use, which suggests, “the track record of many MDFs has been unsatisfactory, with high levels of non-repayment and few programs graduating to become self-sustaining”. At the same time, given their need in many contexts, features that would enable their effective use include: “non -politicized lending according to explicit, simple eligibility criteria; unbundling loans from grants, so that subsidies do not distort the financial market; and unbundling technical assistance from finance, to allow the emerging financial sector to allocate credit and share risks.” 35

Direct Mobilization of Non -public Resources by WSPs

Water sector also receives considerable non-public resources often mobilized directly by water service providers or by sub-national governments. These may include:

§ Internal generation of resources by WSPs through: user charges as directed by the sector policy, internal accumulated surplus through either rural or urban water services, and market borrowing by creditworthy borrowers. Such market borrowing would be different than loans from WRDF, which essentially represents on-lending of public funds. Market borrowing mainly includes direct loans to WSPs from banks, other financial institutions, micro-finance institutions as well as in some countries through bonds or other capital market instruments.

§ Off-budget resources mobilized generally through NGOs or direct donor projects – these may also be given directly to regional or Woreda governments or other public/ private organizations, which are not necessarily, water service providers.

§ Direct contributions by households or communities to their own schemes or service provision –through expenditures not already captured in user charges paid to water service providers.

Internal generation. While in well-functioning utility internal generation may include besides user charges, use of accumulated surplus and market borrowing, the main source in Ethiopia is only user charges as the latter are not feasible in a significant manner at this stage. Several service providers, including AAWSA, UWSSs, community based organizations and small private operators use sources generated internally through user charges, and to a limited extent accumulated surplus from earlier operations. While only limited information is available at this stage, this channel is largely confined to O&M expenditure.

Internal generation of resources can be enhanced by access to market-based borrowing (for example from micro-finance institutions and banks), when the utilities/ service providers are creditworthy, risks are manageable and a firm legal basis and framework for such borrowing exists. This may be used for further development of service delivery through augmentation, rehabilitation or expansion. This requires considerable efforts as illustrated the profile of AAWSA, Ethiopia’s largest urban utility (refer to table 3.7). Interestingly, some UWSSs in selected regions may be generating some surpluses as evident from the information reported in table 3.8 for Oromiya region. More detailed inquiries made by Tsige (2003) in some of the UWSSs in this regions suggests that some UWSSs there will be variations across providers and it is also necessary to review whether the current expenditures are adequate for proper maintenance

35 See for example Mehta (2004), Codate (2001) and Peterson (2000).


42

of services36. Potential role of WRDF and micro-finance institutions will need to be developed in the future. Given the policy of full cost recovery in urban areas, market borrowing may be possible in the future. However, a first step would be to generate a sustainable operational surplus as a basis for financial viability and later market borrowing.

Table 3.7: Addis Ababa Water Sewerage Authority (AAWSA) - Revenues and Expenditures

(Actual in million birr) Year Operating

Revenue Recurrent

Expenditure Operating Deficit/ Surplus Revenue - Recurrent Exp.

Capital Expenditure

1997-98 (EFY 1990) 53.1 46.6 6.5 235.6 1998-99 (EFY 1991) 81.4 112.5 -31.1 172.2 1999-00 (EFY 1992) 62.8 97.5 -34.7 92.0 2000-01 (EFY 1993) 73.8 97.4 -23.6 22.7 2001-02* (EFY 1994) 63.8 93.8 -30.0 5.9

Source: Tsige (2003). Note: *- Budgeted expenditure for 1994 EFY.

Table 3.8: Income /Expenditure for Urban Water Supply Service ‘Utilities’ in Oromiya Region, 2000-01

(Actual in million birr) Category of urban area Annual

Revenue ( in millions Birr)

Annual Exp. (in millions

Birr)

Average Tarrif

Birr/m3)

Estimated Aggregated

Surplus

Per Capita Annual Revenue (in Birr)

Per Capita Annual

Expenditure (in Birr)

Very large town (>80000) 6.0 4.9 1.5 1.1 16.9 13.8 Large Town (50000-80000) 2.5 1.3 1.9 1.2 15.4 7.8 Medium Town (10000-50000) 10.8 8.9 1.9 1.9 13.6 11.2 Small Town (2000-10000) 7.2 4.2 1.5 3.0 11.4 6.6 Total 26.5 19.3 N/A 7.3 57.3 39.4 Source: Urban Water Database, Regional Water Bureau, Oromiya Region. See annex table A1a -b for further details.

A key determinant of internal generation potential is revenue mobilization through water tariffs. The tariff structure employed by most towns tends to be similar. A connection charge and a volumetric charge form the backbone of the utilities’ revenue base. In addition, rentals for meters and charges for disconnection due to late bill payment are often levied. The connection charge should reflect the cost associated with adding that connection to the utility infrastructure and the volumetric charge should reflect the incremental cost incurred with additional water production. A rising block tariff is often employed to curb excessive and wasteful water use. Tariffs are generally set within the affordability of customers whilst attempting to meet the operating costs of the utility.37 Mostly though, tariff based revenues are insufficient to allow for appropriate maintenance. In one study tariffs for water from public fountains were found to be between 1 and 1.75 birr per kl whereas water at household connections cost users 1.6 to 3.2 birr per kl. 38 A survey of tariffs in 78 urban water systems as a part of the Environmental Support Project found that the average tariff was 1.6 birr/kl. The study suggests that this would cover less than half of the total cost of water provision in urban areas (DHV Consultants, 2003).

36 Tsige (2003) examined 9 UWSS ‘utilities’ in Oromiya and SNNPR regions. Out of these, about 5 were generating some operating surplus. 37 Tropics Consulting Engineers (2001). 38 Seyoum (2002) p. 84.


43

Anecdotal evidence39 suggests that vendors operate in large cities. They generally compete with the utility, or in some cases replace the utility, and charge between four and 20 times as much for water as the utility. Needless to say, vendors do not generally have access to regional and federal operational subsidies and so use the funds generated internally for capital as well as recurrent expenses.

Many CBOs probably do not collect user charges on a regular basis and depend on ad-hoc payments as and when required. Tariff rates charged by Village Water Supply Committees tend to be lower than rates charged in urban areas, though many do mange to just cover operations and small maintenance costs. In such cases, for maintenance or system expansion grants from donors, NGOs or the government are used. Also, in many VWSCs user fees are levied as a flat fee. A review of ESRDF projects shows user fees ranging from as low as 2 to 12 birr per household per year (as advised by Woreda water officers).40 In general, collection of user fees is more common for larger piped and motorized schemes that require regular and larger operations expenditure. A few VWSC run schemes that were reviewed by Tsige (2003) suggest that for such larger schemes some operational surpluses may also be generated41. However, systematic information on these schemes is not available. This is important to follow up further to assess business-planning support to VWSCs and to explore the possibility of their borrowing from micro-finance institutions for maintenance and service augmentation/ expansion42.

Resources through the off-budget NGO channel. A large proportion of total development funds in the sector accrues through off-budget mechanisms mainly through a large number of NGOs operating in the sector. Information on such expenditures is limited and estimates were made based on inquiries were conducted in four regions. Information on the approved NGO projects with some water component was collected from the Regional water Bureaus as well as Regional offices of the Disaster Prevention and Preparedness as all NGOs have to register with this office. Table 3.9 provides this information on total allocations and estimates of actual expenditure for water.

Though all NGO projects dealing with water are appraised and approved by the RWBs more efforts at coordination are necessary. These have been initiated by the MWR as well as in some regions.

`Table 3.9: Estimates of Allocations by NGOs for Projects with Water Component

(In million birr) Region Total Allocation on

Projects with Water Component

Estimated Allocation on Water Component

Actual Expenditure Annual Actual Expenditure

Oromiya 138.3 69.2 41.5 11.9 Tigray 507.3 253.7 152.2 43.5 Amhar a 390.0 195.0 117.0 33.4 SNNPR 97.9 97.9 58.7 16.8 Total 1133.5 615.7 369.4 105.5 Source: Based on region-wise information reported in Annex tables 5a-d. Notes: Various assumptions made on the basis of discussions at region level include: i) Allocations for water in the first three regions were assumed to be 50 percent of total project allocations; in SNNPR the reported allocation is for water; ii) actual expenditure was assumed to be 60 percent of planned; and iii) average project period was assumed to be 3.5 years.

39 While existence of vendors is confirmed by anecdotal evidence no specific studies of small scale providers were available for cities in Ethiopia. 40 World Bank (2003c). 41 For example, Tsige (2003) found that 5 out of the 7 VWSC schemes examined were generating operational surplus. 42 See for example Mehta and Virjee (2004) for a discussion of such potential. This is also currently being explored in Kenya – see Welle (2004) for details.


44

Community and household contributions. Besides user charges, communities and households also contribute through: a) community share in CBO schemes is about 10 percent, b) expenditure for their own provision, and c) for coping costs to deal with inadequate or poor quality of services (such as for water treatment and storage). Funding through ESRDF helped to introduce the concept of community contributions especially for rural water supply. Despite its closure, this principle is likely to continue in further funding of rural water supply through the Bank project as well as other sources in the future. However, it is not known whether the significant level of funding through NGOs in different regions uses uniform rules for such funding.


As the Government of Ethiopia and various regional and Woreda governments tackle the issues of financing water services, some key issues will need to be addressed:

Addressing transition issues in the changing financial arrangements. One significant institutional and financial change affecting the sector is the phasing out of the Ethiopian Social Rehabilitation and Development Fund (ESRDF) and the increasing role of the Water Resources Development Fund (WRDF). Set up in 1992, the ESRDF was the major source of financing for community-based rural water supply with an annual investment of about US$ 6.0 million until 2001. The ending of ESRDF will have large implications for financing of rural water supply, and mechanisms will need to be put in place to ensure continued funding of rural areas. Within the decentralized financial arrangements, Woredas are required to support rural water supply systems administered by communities. This increasing role of the Woredas requires matching finance capacity as such increased transfers to this administrative level will become necessary.

The newly set up WRDF will increasingly play a role in the financing of the sector, but for urban sub-sector. Its focus on sustainable credit -based finance may suggest the need to have an appropriate mix of grants and loans for small towns, or develop a stepped approach as planned under the new World Bank Water Supply and Sanitation Project.

Introducing performance linked incentives for reforms is critical. Incentives are needed at regional and Woreda level for lower level governments to attract extra -budget or non-public financial resources. Intra-governmental transfers at present are not performance based, but rather rely upon a block transfer formula. There is a need to explore possibilities of linking Federal and regional (to the Woredas) subsidies to performance – the ability to raise and utilize budgets upon need, as is presently the allocation principle. Lower level governments should not be penalized in budget allocations from the central government if they are able to attract performance-based donor funding or indeed from special funds such as WRDF or from a new Rural Infrastructure Fund that is being discussed. Despite the need to limit disincentives for external finance mobilization, maintenance of the equity principles implied by the Ethiopian Federation is essential. For this, compensation to regions, which have lower economic capacities, must be maintained. It is important to draw on lessons learned in other countries such as South Africa and Uganda, which are also in the process of designing inter-governmental transfer systems in response to similar challenges.

Improving coordination of off-budget and donor funding is critical. Off-budget funding through NGOs contribute to a substantial amount of total expenditure in the sector. In fiscal year 2001/02, off-


45

budget NGO funding amounted to 19.4% of total sector expenditure and 33.6 % of development/ capital expenditure. Most of the NGO funding is through donors who prefer to use off-budget routes. It becomes therefore necessary for donors and NGOs to align themselves behind a government strategy. At the minimum, donors need to coordinate their interventions in such off-budget funding, though the federal and regional governments will need to take lead in this regard.

With the approval of the new World Bank project a new start is evident in funding from donors. Bank funding from 2006 will be almost half of total sector investments and equal public funds. More importantly, as noted above, Bank project provides a framework that can help draw other donor resources. Ministry of Water Resources will need to take a lead in using this opportunity. It will be also very important to prepare a medium term sector program that will also enable better positioning of the water supply sector in the PRSP process. This may be through the annual progress report on PRSP and also by contributing to the next full revision of PRSP in 2005.

Addressing information gaps in sector financing and budget tracking. Estimates of financial flows in the sector are difficult to assess with precision given the lack of adequate and timely information. Budget tracking together with sector performance monitoring is required to understand more fully the dynamics of the sector financial map. Two aspects are important:

Critical information gaps in finance and resource flows . Water supply is characterized by the use of a number of channels and sources of funds and various water service providers who use these fun ds, spanning across rural and urban areas. This makes it difficult to identify funding levels. Contrary to general perceptions, in general, information on public resources is more readily available. However, a number of problems are important for the water sector:

§ There is no readily available compiled information on allocations and expenditures by sub-national governments (regions and woredas). Even when the regional expenditure estimates are available, these are not disaggregated for water sector and often do not capture the donor funds adequately

§ Adequate details of allocation and use of these funds for different purposes (sector development, and service providers in rural and urban areas), as well as an appropriate classification for recurrent versus capital expenditure is not made

§ For urban areas, there is again no systematic and compiled information on a large number of ‘utilities’ that provide services. Difficulties also arise as there are inadequate standard guidelines used by these entities for fina ncial management and standard financial reporting. This makes it difficult to derive the necessary financial information for any standard utility analysis, particularly focused on the role of internal generation of resources. Also without such standardization and local capacities, even when some attempt is made as by Ormiya RWB (see table 3.8) the level of confidence in this information is difficult to ascertain. As WRDF commends operation this would need to be a key area of focus without which it would not be possible to carry out rigorous project appraisal. Use of appropriate incentives as built into the stepped approach in the new Bank project can help in addressing these constraints.


46

Of non-public resources information on funding through NGOs, though available to some extent is affected by two problems: difficulty in getting disaggregated information for water as NGO projects are often multi-sectoral in nature, and as recorded information only pertains to planned funding and details of actual expenditure is not readily available. On the other hand, information about community based water projects that are managed by VWSCs do not have adequate information and no standard guidelines for financial management and reporting seem to be used. Field inquiries with VWSCs also suggest that financial records are not passed on properly when a change in management takes place (Tsige 2003).

A key difficulty faced was for user financing that is not captured in user charges or community contributions to schemes funded by public funds (such as by ESRDF). The difficulty also arises as to a significant degree investments are made in coping strategies that cannot be captured without special household surveys.

Linking public finance to results: Within the emerging funding fram ework focusing on performance, it is important to shift the traditional emphasis of public finance on inputs to ‘results’ and from ‘controls’ on inputs to achieving the agreed targets for welfare improvement. Such an emphasis makes it possible to track welfare improvements as outcomes of specific expenditure priorities. This approach would also make it possible to explore alternative means of achieving the results and in changing and adapting the inputs to ensure sustainability. In WSS sector this is of great importance, as often in the past, issues related to sustainability of capital investments were not addressed leading to poor results even though the input and output targets were reached. This would also require a clear identification of results/ outcome indicators, which will need to be monitored as discussed further in Chapter 5.

4. WSS SECTOR FINANCE ADEQUACY ASSESSMENT

A key issue emerging in the analysis of WSS sector finance is whether funds in the sector are adequate to meet targets for improved coverage and access. Over the two years 2000/01 and 2001/02, expenditure in the water sector was estimated to be USD 78 and 68 million of which capital investment was about USD 48 and 40 million. With the new World Bank project, this would increase to about USD 70 million by 2006. Adequacy of finance is however determined by the requirements in relation to the targets for changes in access and service level. It is therefore necessary to assess what targets are set for the sector and how they translate into investment and operating costs to determine whether present resource levels are adequate or if there are resource gaps within the sector. This section provides this assessment based on available estimates of requirements.

4.1 Government and MDG Coverage Targets and Financial Requirements

The proportion of the population without access to water supply in 1990 must be halved in order to meet the Millennium Development Goals. For this, by 2015, the coverage must be increased to 60% in rural areas and 93% in urban areas. The government of Ethiopia coverage targets require that urban coverage increases to 98% and rural to 71% by 2016. A slightly higher coverage than suggested by the MDGs. In contrast, in the Interim Master Plan under the Environmental Support Program three scenarios were developed to respond to the financial and technical absorption capacity of the sector (World Bank 2003a). Table 4.1 shows government and MDG targets for the Ethiopian water sector.


47

Table 4.1: Government and MDG Targets for Impr oved Water Service

(% to total population with ‘sustainable’ access to ‘safe’ water) Urban Rural Total Millennium Development Goals (by 2015) 93 60 53 Government Targets as per Water Sector Development Program

Short term (2002-2006) 88 37 45 Medium term (2007-2011) 97 52 60 Long term (2012-2016) 98 71 76 ESP – Interim Master Plan as in PER (by 2015)

(Excl. Addis Ababa)

Ambitious scenario 98 31 - Moderate scenario 89 28 - Low scenario 70 15 - Source: For MDG and Master Plan targets: World Ban k (2003a); for government targets: Ministry of Water (2001c).

In order to meet the targets set by either the government or those implied by the MDGs, sufficient financial and technical capacity must exist in the sector. Two sets of analysis of financial requirements have been conducted in Ethiopia:

The Water Sector Development Program (WSDP). The WSDP has identified direct investment requirements for rural and urban water and urban sewerage given region -wise targets for improved coverage for access to ‘safe’ water and sanitation over a 15 -year timeframe. It also identified an institutional component for the overall program including both human resource development plans and institutional strengthening programs. The WSDP set progress target for five year implementation periods (short-, medium- and long-term). For the short-term five-year period for access to ‘safe’ are: 88 percent in urban and 37 percent in rural areas by 2006 (Table 4.1). According to the WSDP, this translates into a total investment requirement of $US 742 million, or about $148 million per annum to reach the targets set for 2006.

Table 4.2: Estimated Investment Requirements to Meet Coverage Targets by 2015

(million birr in 2002 prices) Total

Total per

annum Scenarios Urban Addis

Ababa Rural Total Total per

annum (in million USD)

Water Sector Development Program Short term (2002-2006) 902 1500 3632 6034 1228 742 148 Medium term (2007-2011) 599 1848 8683 11130 1368 1370 274 Long term (2012-2016) 115 1148 11840 13103 1292 1600 320 ESP – Interim Master Plan as in PER (by 2015) Ambitious scenario 5,933 3,666 5,400 14,999 1,000 3,000 200 Moderate scenario 3,717 3,666 3,041 10,424 695 2,085 139 Low scenario 2,250 300 1,700 4,250 283 850 57 Source: Ministry of Water 2001c and World Bank 2003a, table 7-9. Refer to annex table A6 for details and refer to table 4.1 for related targets for the three scenarios.

The Master Plan. The second estimate has been developed under the Environmental Support Program as a part of the Master Plan. These were analyzed and presented in World Bank (2003a) as three scenarios (refer to table 4.2). The Master Plan (DHV 2003) discusses both the financial and technical requirements to meet different target levels disaggregated by urban and rural requirements. For urban areas, costs are associated with the increased volume of water required due to changing domestic, non-domestic and


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unaccounted for water demands. Thus, for urban areas, projected costs are dependent upon the number and type of connections and increased water service levels (primarily with regard to reliability of service). In the Master Plan projections, it is assumed that the profile of connections moves towards higher levels of service (in house connections) and that, correspondingly, the per capita water usage increases. Investment requirements for rural areas are based on a breakdown of schemes, analyzed at the Woreda level and aggregated to the national level by technology type. The method employed also considers staffing requirements associated with increased coverage. In contrast to the urban case, the population is considered as covered or not covered, without a reference to the level of service. So it is assumed that the connection profile and service levels do not vary within a scheme. Rural investment requirements, dependent upon technology choice and associated unit costs, are further constrained by the maximum walking distance allowed, population densities of the Woreda under consideration and water resource potential of the area.

It is worth noting that the estimates in table 4.2 are based on available information for current coverage levels as well as target coverage levels. The estimates of current coverage levels, and their accuracy, then, are critical to the accuracy of projected investment requirements. If for instance current access levels were over estimated by one percent, an additional 600 000 people would need to be served in order to meet the set out targets. Assuming that only US$ 30 were required to serve each person, the total cost of the additional access would amount to US$ 18 million, which is about 25% of the total annual financial flows in the sector. Thus, in ascertaining the investment required to meet the MDGs or any other targets accurate baselin e data becomes critical for planning.

4.2 (In)Adequacy of Current Financial Flows

Adequacy at the country level. As is evident from table 4.2, the investments required to meet any of the targets are significant. According to the requirements in the WSDP and even under the “moderate investment scenario” in the interim master plan, the level of sector spending will have to at least double from the current level of about USD 70 million per annum by 200643. Total sector finance is inadequate to reach the nationally set targets. Even the MDGs, proposing lower targets, are unachievable given current sector spending.

Adequacy of rural expenditure. To increase access in rural areas to the target levels in the Water Sector Development Program, investments of approximately 750 million birr per annum are required at present, trebling by the final planning period (2012-2016). Development expenditure in rural areas 2000/01 was almost 240 million birr This gap may in reality be less, as in kind and some cash contributions by communities are not captured in this resource flow analysis. However, a focus on MDGs would certainly require considerable increase in financial resources for investments in rural water supply.

Adequacy of urban expenditure. The gap at a sector level reflects the significant resource gap at the urban sub-population level. This sub-sector requires expenditure levels of between 480 million and 1460 million birr per annun. Only 85-120 million birr is spent on capital development in the sector annually at present, implying that current spending levels need to be increased by 5-10 times. Carefully designed policy, which targets capital subsidies to urban areas which cannot fully afford capital costs, is required. Cost recovery

43 The current level is based on measured current flows and also includes the planned disbursements under the new Bank project.


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policies must include the coverage of development expenditure given the lower affordability levels in rural areas and so the focus of public finance allocations on capital subsidies in those areas. However, poorer urban areas, or those with distinct poor subsections and those that are subjected to higher than average cost structures may need access to subsidy funds.

Actual development expenditure in urban areas is realized almost entirely through government channels of finance with little or no internally generated funds available after O&M obligations have been met. As coverage levels are high in urban areas, most of the investment requirement is for increasing service levels and maintenance/ replacement of infrastructure stocks. The gaps in finance, then, perhaps imply that obligatory maintenance is being deferred at present and that the effect of a current finance gap, due to this maintenance deferral, is to increase future resource requirements.

Implications of the offset mechanism. Any discussion of total investment requirements also needs to take into account the offset mechanisms used to adjust allocations from the federal fiscus to the regions.44 As the regional resource envelop is determined by the block transfer from the federal level, an increase in regional WSS allocations would be possible only by reducing other investments, unless there is a significant increase in availability of total resources at a national level . To overcome this, conditional grant structures such as ESRDF or the Water Resources Development Fund, have been used. In addition, it would be also useful to better coordinate direct grant funding by bilateral agencies or NGOs.

Comparison with other countries. Comparisons based on similar sector finance studies in Kenya and Zambia further highlight the low levels of development expenditure in Ethiopia. Analysis in table 4.3 demonstrates that the per capita development expenditure in Ethiopia is only a fifth of that in Zambia and about half that in Kenya. The lower per capita spending in Ethiopia combined with low levels of coverage amplifies the sector’s finance gap. Effectively, then the amount of finance per unserved person in Zambia is nearly 10 times that of the spending per capita in Ethiopia and in Kenya it is more than 3 times. Table 4.3 shows the relative urban and rural coverage in three Africa countries, together with the level of capital expenditure in each.

Table 4.3: Coverage and Capital Expenditure in Three African Countries

Per capita Dev. Expend. (US$) Country Population (millions)

Coverage (%)

Development Expenditure (million US$)

Total Population

Uncovered Population

Sector Expend. as a share of

GDP (%) Ethiopia 63.4 28 40 0.63 0.88 1.2 Kenya 28.8 64 44 1.13 3.13 1.0 Zambia 10.3 64 31 3.01 8.36 1.9 Source: Based on information in - Ethiopia – see tables 2.5 and 3.1; Kenya: Mehta and Ondari (2004), Zambia: Chiwele (2004)

Even after normalizing sector spending by GDP, Ethiopia appears to be under spending relative to other countries in the region. Ethiopia’s 1.2 % of GDP is less than Zambia’s 2% despite having considerably lower coverage rates, and so higher capital cost requirements. Whilst the level of spending in Ethiopia is similar to Kenya (~1% of GDP), again, the relatively low level of service implies that insufficient funds are available in the sector.

44 See the discussion above in chapter 3.


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Role of technology choices and service levels. Table 4.4 shows the spending on recurrent and development expenditure per capita. It is apparent that the development expenditure per capita of unserved population is higher in urban areas. VWSCs spend 4 birr per unserved rural inhabitant whilst UWSCs spend over 60 birr per capita45. The great per capita discrepancy between the two sub populations can be attributed in part to the technologies used in the two different settings. Rural technologies tend to be of lower cost, such as hand dug wells and boreholes, as compared to urban technologies, including components such as complicated distribution networks and treatment plants. Table 4.5 shows typical unit investment costs for rural and urban technologies46. As is apparent, the choice of technology has significant ramifications as to the effectiveness of spending, with regard to increasing access to water services. The choice of technology, therefore, will impact upon the success of increased fina ncial flows in meeting the MDGs or other access targets. Largely affecting the choice of technology should be the ability of the scheme to recover its costs through user charges, as this has impacts upon sustainability and also upon the degree to which public funds can be leveraged. The adequacy of current flows of finance is further questionable given the need for capital expenditure on rehabilitation. This would effectively reduce the per-capita new development expenditure below the levels implied in table 4.4.

Table 4.4: Per capita expenditures by different water service providers – 2001 -02

(In birr)

Service Provider Per capita WSS Expenditure – For Served Population

Recurrent Development Total

Per capita Development Expenditure

For Unserved Population Addis Ababa 37.5 2.4 39.9 - Other Urban 9.9 15.1 25.0 61.7 Sub-total Urban 18.8 11.0 29.8 66.3 Rural 6.6 19.6 26.2 4.0 Total 12.2 15.7 27.8 5.7 Source: Analysis based on - Expenditure for Service provider: table 3.1; and covered population: tables 2.4 and 2.5

Table 4.5: Indicative per capita costs for rural and urban water supply technologies

Technology Per capita investment cost

(birr)

Operations and Maintenance cost

(birr/m3) Urban Capped spring w/ public taps 163 3.95 Borehole w/ public taps 288 5.14 Surface water/ treatment and public/

private taps 252 7.45

Rural Hand dug well 120 0.6 Capped spring 71 0.4 Borehole w/ standpipe 480 5.0 Source: Tropics Consulting Engineers (2003). The reference year for these costs is 1999 to 2000.


As has been discussed above, significant financing gaps in the water sector exist, and may increase in the future. This means that the sector will not be able to meet the targets set by either the government or the 45 This analysis does not reflect the actual spending per capita where a project targets a population. Rather, it simply indicates the investment assuming it is spread over the entire un served population equally. 46 This information was collected by Tropics Consulting Engineers (2003)


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MDGs. The resource gaps in rural areas are smaller than in urban areas, but are expected to increase as increased coverage is attempted. The urban sub-sector, by allowing continued financial gaps, is deferring investment on required maintenance and so increasing the resource requirement in the future, and the demand for increased financial resources. The key issues in addressing the resource gaps include:

Scope for increasing the resource envelope On average, the sector spending corresponds to about one percent of GDP. This is low when compared to levels in for instance Zambia or South Africa. It is imperative that the sector finds ways to leverage more resources. Several opportunities need to be pursued for closing resources gap:

§ Increased levels of cost recovery. The sector needs to capture larger amounts of finance through user charges. At present our estimates suggest that only about two-thirds of the recurrent expenditure is met through this source. No contribution seems to be made to capital expenditure through internal generation of resources. This implies that, as suggested in the policy, urban users would cover a larger proportion of the total costs of water supply. Rural poverty may prevent rural communities from making significant capital contributions. However, the success of the ESRDF does indicate that up to 10% of capital outlays is sustainable as community contributions. Caps on subsidies, to subsidize only subsistence levels of service, as included in the new World Bank project, should be utilized across the sector to allow for a more distributed benefit of limited public and donor funding. This is discussed further below. More detailed studies of level of tariffs and cost recovery are necessary to assess this potential. And, appropriate incentives and monitoring are needed to capture this potential in reality.

§ Increased internal generation through efficiency improvements. In order to maximize availability of resources, and minimize the demand for them, increased efficiency of water service providers is essential. This includes improved billing efficiency and minimizing unaccounted for water due to technical losses. Similarly, the sustainability of rural water systems is highly dependent upon the ability to recovery costs for operations and maintenance and as such billing efficiency and business planning at that level is critical. Interestingly as observed above, detailed financial inquiries with a few selected urban and rural providers suggest that some of them are in fact generating marginal surplus on operating account. However, to enhance this further through efficiency improvements ongoing capacity building support in business planning is required. Possibility of performance-based management contracts can also be explored for this.

§ Increased WSS allocations at each level of government. Available budget allocation information at the federal and regional level suggests that water receives relatively low priority in these budgets. This is of particular concern at the regional and woreda levels where the main mandate for water services resides. While local priorities need to be respected in context of decentralization, two opportunities need to be explored: linking the intergovernmental transfers to performance and sector targets as appropriate and advocacy for WSS allocations backed by capacity building support to regional ands woreda governments. This is also built into the design of the Bank project.

§ Increased on-budget donor resources. Share of donor resources in total public sector investment resources for water has so far been low – in 2001-02 it was about 56 million birr or only 26 percent of total


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public capital expenditure 47. With the recent approval of a major Bank project for this sector, there is likely to be a greater interest also from other key donors in this sector. This needs to be positioned within the donor emphasis on MDGs and on Africa as evident, for example, from the recent European Union Water Initiative. Government of Ethiopia needs to make a case for these funds. However, it needs to be emphasized that such funding would be within the framework Ethiopia’s own poverty reduction strategy paper (PRSP). A recent review of WSS component in PRSPs in Africa found that Ethiopia did not farewell48. Opportunities to improve this through annual progress reports need to be explored.

§ In the medium to long term, leveraging new resources by enabling access to ‘market -based’ funds. To achieve any significant additions to sector resources, it will be important to develop measures to support market access for the urban and rural water service providers. For urban utilities, this will need to be through WRDF. This would mean that WRDF policies ensure commercial orientation and limit its non-performing assets. This would enable it to overtime mobilize market-based resources.

There may a possibility of raising investment funds for VWSCs given the development of micro-finance institutions in some regions. It is likely that some VWSCs will in fact have the capacity for such borrowing for augmentation and some for new projects. Support measures could include49: a) partial guarantees and other credit enhancements to overcome the lack of credit history, and to cover policy and regulatory risks, b) support to VWSCs in project development for the development of commercially viable projects with appropriate risk sharing mechanisms, and c) benchmarking and rating facility for measuring VWSC performance, to overcome the information constraint for the MFIs. These measures are necessary, but they cannot replace capacity building and efficiency enhancement, and will need to be developed in tandem with them. The issue of appropriate sequencing of activities should be addressed while developing these measures further.

Improving sustainability of Investments50: It is essential to ensure that the new investments are sustainable and do not quickly result in further rehabilitation requirements. Decapitalization of investments in the sector is common both in rural and urban areas. For rural areas, studies done during the last five years and reported earlier indicated that a large proportion (ranging from a third to a half) of water schemes are not functional51. For urban areas, the problems are related to poor financial viability, and technical and managerial capacities.

§ Rural water: In rural areas, poor maintenance appears to be a common problem. A number of issues that need to be addressed in this regard include: i) Inadequate emphasis on promotion and participatory and informed demand articulation during the planning stage results in poor technology choices and a lack of community ‘ownership’ of the scheme, ii) poor user fees collection, both due to inadequate management and up-front clarity of rules results in lack of resources to undertake timely maintenance of assets, iii) lack of or poorly developed supply chains (in relation to technology

47 See table 3.3 for an estimate of 56 million birr of external assistance and table 3.1 gives the estimate of public capital expenditure at 213 million birr 48 See Mehta and Fugelsnes 2004. 49 Similar efforts are currently underway in Kenya to facilitate market borrowing for community based water projects. Also see Mehta and Virjee 2004. 50 This section is based mainly on WSP-AF 2002with sections taken verbatim. 51 See for example, WSP-AF 2002; see footnotes 14, 15 and 16.


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choices) that makes access to spare parts difficult and unduly costly, iv) inadequate technical support available to VWSC and WBs, and v) lack of access to credit for bridge finance for sudden or major repairs and augmentation.

§ Urban Water: In urban areas sustainability of investments is also threatened, as timely and regular maintenance is not undertaken. The problems that underlie this trend have been: i) inappropriate tariff setting without an emphasis on full cost recovery, ii) lack of clear guidelines for urban tariff setting including issues related to affordability and financial sustainability, iii) inappropriate or lack of institutional incentives for urban WSPs to achieve fina ncial viability and improved operational performance, iv) poor technical and financial capacity among the urban service providers that leads to high levels unaccounted for water (UFW), and v) poor or non -existent consumer services and grievance redressal system leads to a lack of willing to pay user charges. The Water policy visualizes full cost recovery for water in urban areas in a phased manner, if necessary. Appropriate guidelines and capacity building support are needed to support implementation of this policy. Recent efforts by AAWSA to initiate utility reforms by exploring possibility of private sector participation provide future directions in this regard. Reforms focusing on the poor, for example those using public water taps, to introduce improved local management would also be useful.52

§ Private sector capacity: Improvements in operational performance of especially urban water systems will be enhanced, if appropriate opportunities for private sector participation to enhance efficiency are developed. However, it is not very clear whether such capacity exists domestically, and a detailed assessment is necessary. Particular emphasis is needed on the possible role of small scale and local private sector for a variety of support services such as: professional support to operators of town systems and to rural communities for maintenance and provision of spare parts.

Improving sub-sector resource allocation and expenditure effectiveness by better aligning financing rules with WSS policy and priorities 53. Significant resource gaps exist in the sector; demand for capital investments outweighs supply by about five times according to the estimates in this report. It is therefore critical that while developing a detailed financing strategy, rules for allocation of and access to public finance will need to be developed in response to sector priorities. WSS status and its poverty linkages and the outstanding institutional issues suggest some clear WSS priorities such as: i) priority for rural water, particularly due to its relatively lower coverage levels, ii) within urban water, with relatively better coverage levels, focus needs to be on improved operational performance and overall sustainability of urban WSPs, as well as improved access for the poor, iii) need to better integrate sanitation and hygiene promotion to ensure accrual of full health benefits, iv) need to improve the participatory planning and implementation of WSS investments through adequate software support, and v) need to strengthen overall sector capacity through improved management and M&E systems. Based on the analysis in this report, some allocation principles that need to be considered while developing a financing strategy are:

§ Level of capital subsidies for rural water: need to reconsider the current system of a minimum community share in capital costs (generally 10 percent) and combine it with a ceiling on per capita subsidy linked

52 For example, see Tsige n.d. for a discussion on improved management of public taps which serve an estimated 14 percent of the population in Addis. 53 This section is based mainly on WSP-AF 2002with sections taken verbatim.


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to the notion of basic service levels. This suggestion is based on the discussions in a recent ESRDF National workshop for “Performance of RWSS sub-component” in November 2001 held in Addis Ababa. The notion of basic service level would have to be defined in terms of time spent on water, quantity and quality of water and technical possibilities in a given local area. This would need to be backed by adequate hydrological studies, especially in regions known to face difficulties with water sources. Such a measure would also provide incentives for maximizing resource leverage by exploring community based credit and micro-finance. It would also help to attain more demand based community technology choices. Recent information from ESRDF suggests that there may be an undue shift to more complex technologies that are more expensive and difficult for community management (Lium and Garvey, 2001).

Such a principle has already been introduced in the recent World Bank project, but needs to be uniformly applied regardless of the sources of funding. To some extent similar (though lower) subsidies may also be relevant for the rural and small towns with less than 10000 population. Use of this financing principle would also provide an incentive to choose cost effective technology. Due to the significant financial implications it is critical that the value for money is maximized through use of cost-effective technology.

§ Nature of support for urban water: need to reconsider the large capital subsidies to urban water suppliers and move to appropriate subsidy measures for two purposes: a) to enhance access for the urban poor to improved services, and b) sustainable measures to enhance financial/ commercial viability of urban water service providers (UWSSs). This may be usefully done within an output-based assistance approach. The World Bank project has incorporated this aspect through a stepwise approach as discussed above.

§ Share of management support in project costs and sector development allocations: to address the constraint of poor planning and implementation, especially in rural WSS projects, adequate provision needs to be made for project planning and implementation management in total project costs, especially for community preparation for planning, formation of management committees and systems of accountability54. In addition, to address the overall sector capacity constraints, an appropriate share of total WSS investments needs to be made for activities such as: capacity building, sector information and ME systems and development of supply chains 55.

5. THE WAY FORWARD

This WSS Resource Flows assessment has been developed as a part of the regional finance thematic work of the Water and Sanitation Program, Africa. In line with its main objectives, it has contributed to the development of a framework that can be used in further studies in the region as well as providing a base for further work on water and sanitation sector financing in Ethiopia. It is also a follow up of WSP -AF’s 54 For example, for rural water supply investments in Uganda, a provision of 12 percent is made for project planning and management: community mobilization (3%), engineering design and contract supervision (5%), water quality testing and surveillance (1%), monitoring and accountability (3%) (Government of Uganda, 2001, p. 6). 55 For example, for rural water supply investments in Uganda, a provision of nearly 14 percent is made for expenditures related to national programme support (Government of Uganda, 2001, p. 6). This will of course need to be properly assessed in relation to the costs of critical activities for sector development under the Action Plan for WSS sector development program (see section 2.5 below).


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ongoing support to Government of Ethiopia for implementation of its water and sanitation sector reforms.

Based on the findings in this assessment, actions for the way forward are identified in three areas:

5.1 Filling the Critical Information Gaps in Resource Flows Analysis

As discussed throughout the report a critical shortcoming in this assessment has been the paucity of available information for sector finance. Particularly, consolidated information from the regions, woredas and a large number of water service providers was not readily available, and when available, the necessary disaggregation for water sector was generally missing. In developing sector resource flows assessment, it would be useful to review the approach to National Health Accounts (NHA) developed over the past decade in the health sector. NHA is used to provide ‘reliable information on the sources and uses of funds for heath, preferably comparable across countries, in order to enhance health system performance” (WHO 2003, p.xiii)

Compared to public expenditure in the water sector, however, information was even more difficult and at times simply non-existent for many non-public sources and for sani tation. Three important gaps, particularly in terms of their potential importance, deserve further action:

§ Finance through the NGOs: Our estimates suggest the share of NGOs in total capital expenditure in the sector is likely to be high. However, despite the fact that all NGO projects have to be registered and report on planned expenditure, it has been difficult to get a more robust estimate due to the information constraints related to disaggregation for water and sanitation and difficulty in getting details of actual expenditures as against the planned allocations. It would be useful to assess this on more detail by following up either directly with some of the important NGOs or working with a member organization of NGOs such as the Christian Relief Development Association (CRDA).

§ User financing and coping costs: Another key gap has been to get estimates of user financing both as paid to urban ‘utilities’ and the VWSCs as well as expenditure for self-supply or on coping costs to deal with inadequate and/or unreliable services. For better information on utilities/VWSCs efforts are needed to have better reporting within sector information and monitoring framework as discussed further below. However, for other aspects of user financing the only source would be good household survey based information, either by incorporating these queries preferably in integrated household budget surveys or when that is not possible, through special purpose surveys.

§ Finance for sanitation and hygiene promotion: For better returns to sector investments in terms of improved health, focus on sanitation and hygiene promotion is essential. To develop a better understanding of financing these activities, separate assessment is necessary. This is necessary, as there appears to be the lack of clarity in institutional responsibilities. While integration of sanitation and hygiene with water schemes is mentioned in the Water Policy, institutional responsibilities appear to be with the Health sector. Ongoing work of WSP -AF in Ethiopia


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focuses on a strategy for sanitation and hygiene promotion and will include further inquiries on financing and resource flows.

WSP-AF’s ongoing work in the region focuses on these constraints faced in many countries. Further inquiries in Ethiopia could form a part of these efforts, if there is further interest from the MWR, Government of Ethiopia in these aspects.

5.2 Developing a Comprehensive Financing Strategy through Multi Stakeholder Dialogue

There is a need to match available resources (given policy conditions) with demands associated with development targets in a more dynamic manner. A lot of work has been done on developing water and sanitation investment (cost) requirements (the master plan, WSDP and PER) in Ethiopia. Such analysis, however, needs to be dynamic and open to revision in annual and semi-annual review processes. The focus needs to be on providing decision-makers with various investment and financing scenarios within the feasible resource envelopes rather than simply costing national or MDG targets.

A successful financing strategy depends on appropriate investment, financing and information arrangements. Investments plans need to include unit cost and appropriate levels of service analysis based on willingness to pay and affordability to properly cost interventions. The costed action plans need in return to be matched with availability of sector finance and appropriate financing mechanisms to optimize investment potential given limited sector resources. Given an appropriate information and M&E system, sensitivity analysis and investment scenarios can be run for different coverage targets, service standards and resource envelopes to provide decision-makers with information to fine-tune future investments based on past performance.

The financing strategy also needs to be sector -wide and include relevant sub-sectors. In this context, the new World Bank project provides a good framework for development of a medium term sector program by the Government of Ethiopia. The sector program and financing strategy should address: levels of cost recovery, donor (and public) funding, identification of administrative responsibilities and corresponding finance transfers, appropriate use of technology, efficiency of water service providers, and how to engage private sector participation and build capacity at lower as needed for decentralization of service delivery and management; both in the rural as well as in the urban sub -sector. To develop a comprehensive financing strategy, however, it is also important to improve sector coordination. Sector donors in Ethiopia have already established modalities for coordinating themselves, which is a good starting point for a coherent dialogue with the government regarding.

In the context of emerging decentralization in Ethiopia, such investment strategies need to cascade down to regions. In a sense, the national strategy would draw on the regional strategies, which in turn may cascade to woredas.

WSP-AF’s ongoing work on development of a sector-wide investment and finance tool (SWIFT) may provide a useful support to the MWR. The application of SWIFT would aim at making the existing investment work more dynamic and open to changing policy conditions on a rolling annual basis. Preliminary analysis could draw on the analysis in this assessment and materials already collected regarding investment and financing in the WSS sector. WSP – AF’s role could be to facilitate and build


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MWR capacity in this process to answer questions such as: what does the MDG targets mean for Ethiopia considering the resource constraints? What are the resources available? How to make the master plan rolling/ dynamic?

5.3 Sectorwide Assessment of the Information and M&E System.

On the whole, the information and M&E system(s) for water supply and sanitation in Ethiopia can be strengthened to support the linkages between sector objectives and allocation of public funds. Though there are many initiatives (PRSP monitoring, budget tracking at the ministry of finance, water point mapping and regional MIS projects and periodic reviews), these are often isolated and project-based.

The mandate and responsibility for sector information should be with the MWR, RWBs and Woreda water offices/ Woreda Water desks under the emerging institutional arrangement. External assistance to these institutions should identify the information requirements in relation to the planning process and develop a framework for an information management system. Sector information should include aspects related to coverage and expenditure by different service providers, flow and utilization of public funds (expenditure tracking), and unit cost and value-for-money analysis56.

Within the context of moving towards sector programs, current work of WSP -AF focuses on developing a better understanding and good practice documentation of current WSS sector information and performance monitoring systems in different countries in the region. A preliminary documentation of current and planned information and M&E systems in Ethiopia would contribute to the regional work and could be useful for providing a situation analysis and identifying the challenges that decentralization presents for monitoring the water and sanitation sector.

56 For example, refer to WSP-Africa (2002a) for suggestions regarding WSS sector monitoring and evaluation systems in the context of PRSP.


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References

ADE. 2001. “Donors Shifting to Sector and Budget Support.” Final Report to resal Ethiopia. Commissioned by European Commission. AM Electro Mechanical Consultants. 2003. “Supply Chains for Water Supply and Sanitation.” Report prepared for the World Bank, WSP-AF, MWR and DFID. Processed. Central Statistical Authority (CSA). 1994. “Census of Ethiopia: Population Tables.” ______. 1996. Results of the HHICE. Processed. ______. 1998. Results of the Welfare Monitoring Survey. Processed. ______. 2000. Report of the 2000 Welfare Monitoring Survey: Volume II.” Statistical Bulletin 259. AddisAbaba. Chiwele, Dennis. 2004. “Water Supply and Sanitation Sector Finance and Resource Flows Assessment.” Draft Report for the Government of Zambia, Development Corporation Ireland, and Water and Sanitation Program, Africa. Processed. Christian Relief Development Association (CRDA). 1997. “Watsan: Challenges and Opportunities.” March. Processed. Codato, Elioterio. 2001. “Financing Municipalities and Subnational Governments: World Bank Experience.” Presentation at the Conference on Infrastructure. World Bank, Washington, D.C. Processed. DHV Consultants. 2002. “Component 3 of ESP, National Water Supply and Sanitation Master Plan, Volume 1, Development Scenarios 2025.” Procesesd. DHV Consultants. 2003. “National Water Supply and Sanitation Master Plan, Volumes 1 to IV.” Component 3 of Environmental Support Project. Processed. Environmental Support Project (ESP). 2001. “Status Report - Volume 1: Summary, Volume II: Physical Resource Base, Volume III: Financial and Economic Resource Base, Volume IV: Legal, Institutional and Human Resource Development.” Report prepared by the DHV Consultants for Ministry of Water Resources. Processed. ESRDF (Ethiopia Social Rehabilitation and Development Fund). 2001. “Report of the Team Reviewing RWSS Component.” World bank Supervision Mission. Processed. _______. 2003. “Report of the Team Reviewing RWSS Component.” World bank Supervision Mission. Processed. Lium, Tore, and G. Garvey. 2002. “Water and Sanitation in Social Funds: A rapid assessment of the Ethiopian Social Rehabilitation and Development Fund.” Report prepared for the Solidarite Eau and Water and Sanitation Program – Africa. Processed. Government of Ethiopia. 2001. “Federal Budget 2001-02”. Government of South Africa. 2003. “Policy Framework for the Introduction of the Municipal Infrastructure Grant: Final Version.” Prepared by the Municipal Infrastructure Task Team (MITT). Mimeo. Gulyani, Sumila, Dave de Groot, Y. Tessema, M. Ayenew, and G. Connors. 2001. “Municipal Decentralization in Ethiopia: A Rapid Assessment.” World Bank. Water and Urban I, Africa Region. Processed. Kinde, K. and Abebe L. 2003. “Sanitation and Hygiene.” Report prepared for the World Bank, WSP -AF, MWR and DFID. Processed. Mehta, Meera. 2003. Meeting the Financing Challenge for Water Supply and Sanitation. Water and Sanitation Program and the World Bank. Mehta, Meera and Kameel Virjee. 2004. “Financing Small WSS Service Providers – Exploring the Micro -finance Option in Sub-Saharan Africa.” Water and sanitation Program, Africa.


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Mehta, Meera and John Ondari. 2004. “Sector Finance and Resource Flows for Water Supply: A Pilot Application for Kenya.” Water and sanitation Program, Africa. Processed. Mehta, Meera, and Thomas Fugelsnes. 2004. “Water Supply and sanitation PRSPs: Developing a Benchmarking Review and Exploring the Way Forward.” Water and sanitation Program, Africa. Processed. Metaferia Consulting Engineers. 2003. “Management Models and Contractual, Legal Arrangements Of Water Supply in Urban and Rural Areas.” Report prepared for the World Bank, WSP-AF, MWR and DFID. Processed. Ministry of Water Resources (MWR). n.d. “Current Status and Issues in Water Supply and Sanitation: Sector Review Report.” Government of Ethiopia. Processed. _______. 1997. “Data Compilation and Analysis Project.” Report by Ernst and Young / Tropics. Processed. _______. 1999. “Ethiopian Water Resources Management Policy”. Federal Republic of Ethiopia. _______.2000. “Water Sector Development Program: Sector Review Report”, February, Federal Republic of Ethiopia. Report prepared by Water Works Design and Supervision Enterprise. Processed. _______. 2001a. “Water Supply and Sanitation Development Strategy”, April, Federal Republic of Ethiopia. _______. 2001b. “Water Sector Development Program: Methodological Framework.” Processed. _______. 2001c. “Water Sector Development Program: Volumes I to IV.” Draft Report. Federal Republic of Ethiopia. Report done by Water Works Design and Supervision Enterprise. Processed. _______. 2002a. “Water Sector Development Program: Executive Summary.” Draft Final Report. Federal Republic of Ethiopia. Report prepared by Water Works Design and Supervision Enterprise. Processed. _______. 2002b. “Review of Water Sector Financing and Management in Ethiopia.” Report for the Water Resources Development Fund. Processed. Mokoro Limited. 2001. “Tracking of Public Expenditure for Poverty Reduction.” Background paper for the Ethiopia PER 2001. Processed. Palmer, Ian. 2003. “Assessing Water Supply and sanitation Resource Flows: An Application for South Africa.” Report prepared for the Water and Sanitation Program, Africa. Processed. Peterson, George. 2000. “Building Local Credit Systems.” Municipal Finance – Background Series. Rahmato D. and Kidanu A. 1999. “Consultations with the Poor: A study to inform the World Development Report 2000-01 on Poverty and Development.” National Report, Ethiopia. Processed. Sahilu T. 2001. “The challenge of designing a pro-poor tariff structure”, paper presented at the Regional Workshop on ‘Building partnerships to provide WSS services to the urban poor”. Abidjan. November. Processed. Sahle Sisay and Associates. 1999. “Study on operation and maintenance strategies of rural water supply schemes.” Study for the Amhara State Water, Mines and Energy Resources Development Bureau. May. Processed. Seyoum G, M. Shenkut, A. Kassaye. 2002. “Review of Water Sector Financing and Management in Ethiopia.” Water Resources Development Fund, Ministry of Water Resources. Processed Sima G (2001), “ESRDF - RWS Performance.” Presentation at the national workshop on RWSS Performance Review in Addis Ababa. November. Processed. Thomson, Mike. 2004. “ Strengthening Budget Mechanisms fror Sanitation in Uganda.” Report prepared for the Environmental Health Department, Government of Ethiopia and Water and Sanitation Program, Africa. Processed. Tropics Consulting Engineers. 2001. “Management Study of 13 Urban Water Services of Oromia.” Processed. _______. 2003. “Project Design: Technical, Financial and Economic Feasibility.” Report prepared for the World Bank, WSP-AF, MWR and DFID. Processed.


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Tsige, Tekalign. N.d. “Description of public water tap management practices in Addis Ababa.” A study for WaterAid. Draft report. Processed. _______. 2003. “Resources flow study for the Water Supply sub-sector in Ethiopia” Collection of income and expenditure information for selected urban and rural water supply schemes.” Report prepared for the Water and Sanitation Program, Africa. Processed. WaterAid. 2004. “Findings on Robe-Melliyu water Consumption.” Processed. Water and Sanitation Program Africa (WSP-AF). 2002a. “Water Supply and Sanitation Inputs for Ethiopia Full PRSP.” Report prepared for the Ministry of Water Resources, Government of Ethiopia. Processed. Water and Sanitation Program Africa. 2002b. Summary Proceedings of the Regional Workshops on Water and Sanitation on Poverty Reduction Strategies. December. Watson, Peter, J. Gadek, and E. Defere. 2003. “Background Paper for the WSS Chapter of PER 2003.” Processed. Welle, Katharina. 2004. “Financing Community-Based Water Supply Projects: A summary of finding.” Forthcoming. Water and Sanitation Program, Africa. Processed. World Bank .1999. “Ethiopia: Public Expenditure Review: Volume I and II. _______. 2000a. “Ethiopia: Regionalization Study”. _______. 2000b. “Ethiopia: Public Expenditure Review 1999: Volume I and II.” _______. 2000c. “World Development Report.” _______. 2001a. “The Woreda Studies: Main Phase.” Ethiopia Country Office. Processed. _______. 2001b. “Ethiopia: Public Expenditure Review 2000: Volume I and II.” _______. 2001c. “Ethiopia: Focusing Public Expenditures on Poverty Reduction: Volume I” _______. 2002. “Ethiopia: Public Expenditure Review 2001: Volum e I and II.” _______. 2003a. “Public Expenditure Review 2002: Water and Sanitation - Chapter 7.” _______. 2003b. “Water Supply Development and Rehabilitation Project: Aide Memoire of the Project Development and Supervision Mission.” May and November. Processed. _______. 2003c. “Report of the Team Reviewing the Rural Water Supply and Sanitation Component.” Ethiopian Social Rehabilitation and Development Fund (ESRDF). _______. 2004a. “Project Appraisal Document on a Proposed Credit and IDA Grant to Fede ral Democratic Republic of Ethiopia for Water Supply and Sanitation Project.” _______. 2004b. “World Development Indicators”, World Bank World Health Organization (WHO). 2003. “Guide to Producing National Health Accounts.” WHO, World bank and USAID.


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Annex 1: A Framework for WSS Resource Flows Analysis The WSS sector in general is characterized by complex institutional arrangements, and a variety of channels and sources of funds are used for financing the sector. The ‘water service provider’ framework used in the study attempts to capture these complexities while permitting a comparative picture across countries in this region. It also enables the development of comprehensive and countrywide estimates and analysis of sector finance within the institutiona l context of the sector. The study framework has been developed to respond to the special characteristics of the WSS sector, and includes three tools: Sector Institutional Mapping. The study uses the concept of WSS service providers as those that actually deliver water service to the consumers. The two key distinguishing principles of service provision are: i) the notion of an ‘independent’ utility where the full revenues are retained for its own use by the service provider, as against government departments that mainly rely on the consolidated government funds on the basis of budget allocations, and ii) the notion of public service as evidenced by government departments versus entities providing the service on a ‘commercial’ basis (such as utilities), private profit basis (such as private providers), or on a mutual benefit basis (such as the CBOs). In general it may be argued that the reforms in the sector suggest a movement towards greater independence through a direct correspondence between sector revenues and their use by the service providers. For a given country the identification of service providers is done by: a) distinguishing between sector institutions (those that determine policy, monitor implementation and provide regulatory oversight) and service providers, along with classifying the national budget allocations between wider sector development related expenditures versus those focused on actual service delivery 57, b) assessing the nature of decentralization particularly in relation to the role of local governments and local level service providers, and c) determining the emerging institutional arrangements as most countries in the region are undergoing change. In order to capture the contribution of different service providers two indices are used: relative share in total population coverage and in total sector expenditures on service delivery. Based on a broad understanding of the prevailing systems in this region, the generic categories of service providers used are:

§ National level government departments – when a national (or a large provincial) department delivers

water to consumers or provides bulk water supply as a public service; § National level utility – when a national (or large provincial) ‘independent’ utility delivers water to

consumers or provides bulk water supply on a ‘commercial’ basis – it may be owned/ managed as a public parastatal, public company or a private company;

§ Local government WSS department – when a WSS department within a local government delivers water within its jurisdiction as a public service;

§ Local level utility – when a local level ‘independent’ utility delivers water to consumers within the local jurisdiction on a ‘commercial’ basis – it may be owned/ managed as a public parastatal, public company or a private company;

§ Small private providers (SPS) – when SPSs deliver water to consumers on a commercial private profit basis; and

§ Community-based organizations (CBOs) as service providers – when CBOs deliver water to their own members on a mutual benefit basis.

Sector Financial Mapping. To capture the contours of sector finance, the analysis is based on the concepts of channels, sources and uses of finance. Channels of finance are through which funds from specific sources reach the service providers to meet the costs of delivery of services or to sector institutions for wider sector development related expenditure. Channels are defined by the associated decision making

57 While it may also be possible to identify ‘support service providers’ as a third group, this has not been included in the study framework at this stage. Future work may explore this with the associated broadening of sector finance analysis to include this group.


62

processes as well as the manner in which the resources actually flow from the origin to its use in service delivery process. Based on a broad understanding of the prevailing systems in this region, the generic categories of channels and sources of finance used in this framework are: § Channels of Finance:

o national government budget allocations, (or for large federal countries - provincial/ regional government budget allocations) – increasingly within the framework of PRSPs and MTEFs and therefore influenced by MTEF linked budgetary ceilings, poverty linkages and sector monitoring and reporting;

o local government budget allocations – in contexts where the LAs have the mandate for water services and associated resources for decision making within their own budgets;

o special fund mechanisms – with independent decision making in allocations and often not covered by sectoral budgetary ceilings;

o internal generation of resources – used by ‘independent 58’ water service providers who are able to protect the internally generated resources (from user charges, borrowing or accumulated surplus) for own use to meet WSS related expenditures;

o off-budget routes often used by donors, mostly through NGOs – often resorted to due to a lack of confidence in public fiduciary and accountability systems; and

o direct expenditures/ contributions by households/ communities – other than for user charges and generally to meet the costs of self provision or as a partial contribution

§ Sources of Finance:

o own resources of the governments – at national (taxes and overall public debt) and at local (local taxes, general local authority borrowing and unconditional intergovernmental transfers) 59;

o user charges – paid by consumers to water service providers as fees and charges for services delivered;

o internally generated surplus of service providers – accumulated through surplus on the utility accounts as well as through special provisions (as for depreciation), and would be particularly relevant for all utilities as well as community based providers and small private providers;

o external donors and international financial institutions (IFIs) – either as grant assistance or as concessional lending;

o household savings – to meet costs of self service provision, or to meet partial capital contributions other than for user charges levied by service providers; and

o market borrowing – generally for rehabilitation or new investments, and would be relevant for all service providers that are able to borrow from the market.

§ Uses/ utilization of finance:

o Expenditure by different service providers – use of different channels and sources across different service providers;

o Development and recurrent expenditures – use of different channels and sources for ongoing expenditures for operation and maintenance versus capital investments for new services, augmentation or rehabilitation.

For a given country, sector financial mapping is done by: a) determining the actual channels and sources used by different service providers, and the manner in which resource flows take place, b) measuring the actual resources flows within this framework, and c) determining the emerging financial arrangements as most countries in the region are undergoing change. The measurement is done for both development and recurrent expenditures. Given the difficulties in sources of information for this analysis, this analysis has been attempted only for one or two years.

58 The term is used to refer to independence in decisions about the use of internally generated resources by its own board in the case of utilities/ formal private providers, by a committee in the case of CBOs, or by the entrepreneur in the case of small private providers. 59 It is important to distinguish between general borrowing by national or local government which may then be passed on to the WSS sector versus borrowing by a utility, a CBO or a private provider that is meant for specific use and is to be repaid from WSS related earnings.


63

Table 1.1: Potential Channels and Sources of Finance by Different Service Providers

Channels of Finance National

government budget

allocations

Local government

budget allocations

Special fund

Internal generation

of resources

Off-budget routes

(NGOs)

Direct by households/ communities

Service Providers National government department National level ‘utility’ Local government WSS department Local level utility Small private providers Community-based organizations Sources of Funds Government own resources User charges Accumulated internal surplus External donors and IFIs Household savings Domestic market borrowing

Sources of Funds Government

own resources

User charges

Accumulated internal surplus

External donors

and IFIs

House-hold

savings

Domestic market

borrowing Service Providers National government department National level ‘utility’ Local government WSS department Local level utility Small private providers Community-based organizations Note: Shaded cell denotes the possibility of use of that channel or source of finance. Analysis of Public Finance. Despite the prevalence of a number of different channels and sources of finance, public finance dominates the sector both in terms of public sector resources as well as the framework of rules and regulations within which service providers operate, and mobilize and expend resources. These essentially provide the incentives or disincentives for improved sector finance and performance. Three aspects are important in an analysis of public finance: § Decision making for allocation of public resources – essentially within the framework of national and local

budget allocations. For national level, these decisions are increasingly within the framework of a medium term expenditure framework that defines the total resources, though allocation within the sector are determ ined generally by key sector ministries. For the local level, the important aspect is whether the decentralization framework ensures adequate untied resources for local authorities. In both cases, the nature and level of consultations, and the monitoring and evaluation systems to provide feedback to the decision makers are important influences.

§ Review of rules, procedures and regulatory framework – which affect the incentives for efficiency, in reaching

the poor, the potential for service providers to mobilize finance from different sources, and the extent of community contributions and cost recovery; and

§ Analysis of monitoring and accountability systems – as it affects the possibility of linking public finance

allocations with actual results and an assessment of value for money achieved with public resources.

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Annex 2: Information on Coverage and Resource Flows for Service Providers Provider Estimation Procedure, Related Assumptions and Main Sources of Information

For Coverage Addis Ababa Water Service Authority and other urban water services providers

Estimates of coverage by the Addis Ababa water authority are based upon the 1994 Central Statistical Authority census. DHV consultants compared the 1994 results with the results of a less detailed survey carried out by CSA in 1998 and 2000 and concluded that the 1994 results were sufficiently representative of the current situation. The analysis is contained in ESP (2003)

Community schemes in rural areas

Rural coverage estimates also rely upon CSA data from 2000. This survey asked households about their actual water source to arrive at estimates of coverage. Other coverage estimates rely upon assumptions about the number of households using engineering water sources. As many of these are not or partially functioning this method is not as accurate as the CSA data. More details are available in ESP (2003)

For Estimates of Resource Flows (expenditure, channels and sources of funds) Addis Ababa Water Service Authority

Expenditure estimates for AAWSA were developed from the audited profit and loss statements of the company. Tsige (2003) collected these as background information in the study of income and expenditures in selected urban and rural water supply services. For AAWSA, it was assumed that capital costs are funded equally by the federal and regional budgets.

Other urban water providers

Detailed information on income and expenditure for UWSS was available only for Oromiya region from the database of the Regional Water Bureau. These estimates were used to develop per capita expenditures and were applied to the remaining regions in relation to coverage levels (See annex tables A1a, b and A2). For capital expenditure actuals were available for four largest regions (see table 3.4). For other regions, based on World Bank (2004a) it was assumed that their share in total is about 20 percent.

Community schemes in rural areas

i) Recurrent expenditure is assumed to come from both regional budgets and internal generation of funds. Regional government recurrent budgets are assumed to be entirely used for community level recurrent expenditure. Estimates of internally generated funds are based on an assessment of unit operations costs by technology type (see annex tables A3a,b,c for details). ii) For capital expenditure actuals were available for four largest regions (see table 3.4). For other regions, based on World Bank (2004a) it was assumed that their share in total is about 20 percent. iii) Estimates of ESRDF capital contributions were provided by ESRDF (full details in annex table A4). iv) For expenditures by NGOs, it was assumed that the four largest regions (accounting for 90% of the rural population) attract the majority of the national NGO activity. For NGO expenditures, details for water projects were available only for SNNPR region. Based on discussions at the region level, for other regions it was assumed that 50 percent of planned expenditures were for water and that utilization was about 60 percent (see annex tables A5a-e for details). v) For community capital contributions, it is assumed that these arise due to funding by ESRDF. Actual contributions were reported by ESRDF (see annex table A4).

Sector development It is assumed that all the expenditure by the federal government is for sector development. Information on actual expenditure was available only at an aggregated level for ‘Natural Resources’. Based on trends in earlier years for which disaggregated information was available for water supply, it was assumed that 40 percent of reported actual expenditure for ‘Natural resources’ was for Water Supply. While the regional governments also spend resources on sector development, no separate details were available. It is likely that a share of recurrent expenditures by regional governments shown for rural in tables 3.1 and 3.4 are actually for sector development. To that extent regional recurrent expenditure on VWSCs may have been overestimated.

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Annex Table A1a: Status of Urban Water Supply Schemes in Oromiya Region 2000-2001

Category of urban area Number of towns

Population Population Served

Annual Production of

water (m3)

Production per capita (l/d)

Very large town (>80000) 3 389940 358745 4964791 37.9 Large Town (50000-80000) 3 197158 161670 1552064 26.3 Medium Town (10000-50000) 53 1016062 792528 6011822 20.8 Small Town (2000-10000) 205 900187 630131 8904819 38.7 Total 264 2503347 1943074 21433496

Source: Urban Water Database, Regional Water Bureau, Oromiya Region Annex Table A1b: Analysis of Urban Water Supply Schemes in Oromiya Region 2000-2001

Category of urban area Annual

Revenue ( in millions Birr)

Annual Exp. (in millions

Birr)

Average Tarrif Birr/m3)

Estimated Aggregated

Surplus

Per Capita Annual Revenue

(in Birr)

Per Capita Annual Expenditure (in

Birr)

Very large town (>80000) 6.0 4.9 1.5 1.1 16.9 13.8 Large Town (50000-80000) 2.5 1.3 1.9 1.2 15.4 7.8 Medium Town (10000-50000) 10.8 8.9 1.9 1.9 13.6 11.2 Small Town (2000-10000) 7.2 4.2 1.5 3.0 11.4 6.6 Total 26.5 19.3 N/A 7.3 57.3 39.4 Source: Urban Water Database, Regional Water Bureau, Oromiya Region Annex Table A2: Estimation of Recurrent Expenditure for Urban Water Supply in Ethiopia 2000-01 (in million birr)

Category of urban area Total Served

Population Estimated Total Annual Revenue

Estimated Total Annual Expenditure

Estimated Aggregated Surplus

Very large town (>80000) 1.2 20.9 17.1 3.8Large Town (50000-80000) 0.4 6.6 3.3 3.3Medium Town (10000-50000) 2.1 28.7 23.5 5.1Small Town (2000-10000) 1.5 16.8 9.8 7.0Total 5.2 72.9 53.7 19.2Source: Served population is estimated using information from CSA 1994 as reported in ESP 2001 and WSP-AF (2002) and annual revenues, expenditures and surpluses are estimated based on the values for schemes in Oromiya (annex table 1b). Refer to Annex 2 for details. Annex Table A3a: Number of Rural Water Sources by Region Functionality Region Boreholes HDW Springs Total #of Woredas

Functional Non func. Functional Non func. Functional

Non func. CSA Data Sheet

Amhara 27 0 207 41 262 97 634 106 27 Benshangul 0 0 32 84 9 0 125 12 5 Gambela 29 49 14 0 10 0 102 7 6 Oromia 236 174 624 232 1094 211 2571 186 88 Somali 37 19 0 0 0 0 56 7 SNNRS 290 177 131 77 140 15 830 74 31 Tigray 373 60 159 49 33 12 686 41 25 All regions 992 479 1167 483 1548 335 5004 433 182 % functional 67.4 70.7 82.2 Total by category 1471 1650 1883 5004 Estimate for the country 3500 3926 4480 11905 Source: Based on ESP (2003) who conducted a sample survey of rural schemes in seven regions

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Annex Table A3b: National Recurrent Expenditure of Rural Water Sources

Type of Scheme Assumption Recurrent

Expenditure (Birr/scheme/

month

Assumed distr of spring

schemes (%)

Estimated number of

schemes in the country 1997

Estimated functional schemes

Total Recurrent Expenditure in

million Birr - 2001

Boreholes motorized 2000 3500 2360 4.7 HDW 40 3926 2776 0.1 Springs Total 4480 3683 Spring Protection 20 50 1841 0.0 Motorized schemes 2000 11 405 0.8 Gravity schemes 200 39 1436 0.3

Total 100 11905 8819 6.0 Source: Based on World Bank (2003c) and discussions with local experts.

Annex Table A3c: Analysis of selected community based schemes of ESRDF

No. Scheme Name

Population Total Cost (birr)

Location (Region)

Zone Technology Tariffs Income (Birr) Expenditure

1 Shola Gebeya 5,000 418,275 Amhara Region,

North Shewa Zone

Motorised Spring

Development

10 cents/jerry can 4,128/month Birr:2,313/month

2Chira Meda 3,000 285,208 Amhara Region,

North Shewa Zone

Gravity Spring Distribution

5 cents/ 100 litres Transport: 1 Birr/25 litres

Salary 50B/mth 3 Fugnan Dembi 350 20,624 Amhara

Region, Oromiya

Zone Hand dug well Birr 1/month/HH 120/month Salary:

Birr:80/month 4 Cheretie

Debeso 650 25,532 Amhara

Region Oromiya

Zone Hand dug well User fee: Birr

0.5/month 40/ month -

5 Mila Mile 1 350 14,977 Amhara Region

Oromiya Zone

Hand dug well - - -

6 Mila Mile 2 400 15,020 Amhara Region

Oromiya Zone

Hand dug well - - -

7Degan 4,200 448,591 Amhara Region South

Wollo Zone Motorised Borehole

- 90,655 in bank account.

Birr 2320/month

Amhara Region

South Wollo Zone

10 cents/jerry can 4,050/month 8 Bokoksa 4,600 730,702

Motorised Spring

Development

15,000 in Bank account

Birr 2,040/month

9 Worka Sefer 1,360 265,398 SNNP Region,

Gedeo zone Gravity Spring Development

Birr 1/month/HH 150-300/month Birr 160/month

10Dilla Gumbe 1,200 232, 758 SNNP Region

Sidama zone

Shallow Drilled Well

Birr 1/month/HH - -

11 Sege and Misa 5,870 SNNP Region

Hadiya zone Motorised Borehole

Birr 2.5/m3 - -

12Anole 8,100 SNNP Region

Silti zone Spring Development with gravity distribution

5 cents/25 litres Birr 1,300/month

13 Sefra Chew 767 32,377 Tigray Central Shallow drilled well

- - -

14 Embatizu 352 11,054 Tigray Western Protected spring Considering 2/HH/year

- 4kg/HH/year for guard

15 Miela (Abaki) 400 61,500 Tigray Western Shallow drilled well

2/HH/year 200 in bank a/c & estimate of 800/year

-

16 Gizgizia 670 63,525 Tigray Western Shallow drilled well

3/HH/year 200 in bank a/c, estimate of 300/year

Previous repair work cost 100. 3kg/HH/year

67

No. Scheme Name

Population Total Cost (birr)

Location (Region)

Zone Technology Tariffs Income (Birr) Expenditure

17 Diwera 460 62136 Tigray Central Shallow drilled well

No user fee charged

- 3-4kg/HH/year

18 Belih 500 56,959 Tigray Central Shallow drilled well

- - -

19 Samre Town 9,400 250,162 Tigray Southern Motorized borehole

10cents/jerry can Unverified 50,000 in bank a/c.

40,000 to buy new submersible

pump 20 Adi Harta 400 59,110 Tigray Southern Shallow drilled

well User fee

0.5/HH/month User fee deposited

into bank a/c Guard

1/HH/month 21 Hasselisso 3,640 Estimated

cost 620,674 Dire Dawa 25 km

North East Motorized borehole

User fee not yet agreed on

- Scheme relatively new

22 Adada N/a - Dire Dawa 36 South East

Demonstrati-on VIP HH latrine

- - -

23 Infiltration gallery

24 Adada 2,030 335,915 Dire Dawa 36 km South East

Gravity Spring protection

1/HH/month - -

25 Kalicha School 500 day school

children

- Dire Dawa Roof rainwater harvesting

- - -

26 Ayalegungun 875 Estimated cost 84,465

Dire Dawa 22km South East

Spring protection

1/HH/month - Scheme relatively new

27 Ganda Negeye 60HHs - Harari Sigicha Peasant

Association

Hand dug well 1/HH/month To date 70 collected

-

28 Sigicha Model Project

N/a - Harari Sigicha Peasant

Association

Demonstration VIP HH latrine

- - -

29 Ganda Gudis 700 - Harari 6km North East

Hand dug well under

construction

Proposed user fee of 0.5 HH/month

- -

30 Godene 2 4,000 - Somali Jigjiga Hand dug well - - -

31 Godene 1 4,000 44,083 Somali Jigjiga Hand dug well - - -

32 Godene clinic - - Somali Jigjiga Roof rainwater harvesting

- - -

33 Gebigebo - - Somali Jigjiga Hand dug well - - -

Source: Nos. 1-12 Based on World Bank 2002 and 2003 - RWSS ESRDF Report Super Region Mission Report; 13-34 Based on February 2003 Mission Annex Table A4: ESRDF - Regional RWSS Budget by Year and Region

Region Sum of Approved Totals (Birr)

1989 EC (96/97) 1990 EC (97/98) 1991 EC (98/99) 1992 EC (99/00) 1993 EC (00/01) 1994 EC (01/02) Total

Afar - - 5,111,823 680,000 612,000 3,482,000 9,885,823 Amhara 6,145,956 7,371,679 8,465,812 24,076,207 8,903,718 343,200 55,306,572 Bn. Gumuz 70,613 185,060 1,430,854 1,641,641 2,924,629.0 - 6,252,797 Dire Dawa - - 517,904 - 378,424.0 3,290,207 4,186,535 Gambela - 420,583 678,007 433,256 - - 1,531,846 Harari - 259,659 99,167 40,390 501,950.0 118,243 1,019,409 Oromiya 4,595,533 6,156,521 16,428,767 48,143,743 45,206,822 720,000 121,251,386 Snnprg 5,002,069 3,352,590 6,592,092 26,503,901 15,002,988.0 - 56,453,640 Somali 400,000 378,336 964,974 50,000 6,738,500.0 50,000 8,581,810 Tigray 3,421,989 4,397,500 8,161,450 6,124,500 - - 22,105,439 Total 19,636,160 22,521,928 48,450,850 107,693,638 80,269,031 8,003,650 286,575,257 Source: Compiled by the ESRDF Finance department

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Annex Table A5a: Estimates of (budgeted) NGO Expenditure on Water and Sanitation in Oromiya Region

Name of NGO Total Project Cost (In birr) Care Ethiopia 16,894,696

Menshen for Menshen 12,480,699

CICP, COPY, LVI 2,823,929

OSRA 49,476

Norwegian Church Aid 300,000

Ethiopian Environmental NGO 1,258,079

African Muslim Agency 2,112,711

HCS 4,595,646

Education for Development Association 592,080

BHCVFSO 846,906

ASE 9,035,199

Love to human being Ethiopian AIDS prevention

(LHEAPS) Society 2,223,842

Hope for Rural Childre (HORCO) 1,732,532

Action for Development (AFD) 5,277,869

BETHEL Rural&Urban Development Ass.

(BRUDA) 206,300

HCFSO 326,702

Walal Devt. Association (WDA) 2,499,802

World Vision 64,889,421

FHI-ETH 6,563,599

SHDI 1,979,201

MSF-Holland 1,057,575

DAIE 571,960

Total 138,318,224 Source: Oromiya Region Bureau of Disaster Prevention&Preparedness Addis Ababa Annex Table A5b: Estimates of (budgeted) NGO Expenditure on Water and Sanitation in Tigray Region

Name of NGO Total Project Cost (In birr)

Adigrat Catholic Secrete rate 37,816,857

Ethiopian Evangelical Church Mekan Yesus 8,653,913

World Vision 42,746,195

Ethiopian Orthodox Church 23,454,167

Tigray Development Association 1,000,000

Relief Society of Tigray 393,671,995

Total 507,343,127 Source: Tigray Regeion Bureau of Disaster Prevention & Preparedness, Mekele

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Annex Table A5c: Estimates of (budgeted) NGO Expenditure on Water and Sanitation in Amhara Region

Name of NGO Total Project Cost CPAR Etiopía 18,925,588 Ethiopian Evangelical Mekaneyesus 5,396,441 ASE 19,871,194 CCF 18,978,892 World Vision Ethiopia 89,100,920 AARDR 990,777 EOC/DICAC 64,265,726 Menshen for Menshen 98,003,580 Shoa Community Devt. Association 630,900 Save the Children Norway Ethiopia 7,800,000 GRRDA 144,361 CPP 1,676,721 AJJDC 117,669 ORDA 17,517,004 Lutheran World Federation/EECMY 11,249,144 Plan International 22,134,756 COOPI 9,830,541 MSF/CH 3,344,619 Total 389,978,833 Source: Amhara Region Bureau of Disaster Prevention and Preparedness, Bahir Dar Annex Table A5d: Estimates of (budgeted) NGO Expenditure on Water and Sanitation in SNNPR Region Name of NGO 2000 2001 ACS 3,939,630 2,112,000 Action Aid Ethiopia 11,013,910 525,629 COWDO 5,996,700 2,398,175 EECMY 2,116,178 798,370 GOAL Ethiopia 417,332 273,500 Self Help Dev. 1,000,000 110,000 CDSE 566,641 566,641 World Vision 12,817,727 13,401,386 GPSDO 1,495,000 280,000 Apostolic Vicar 4,350,316 1,502,345 EKHC 18,628,936 2,412,031 ERSHA 518,100 113,838 Inter Aid France 3,703,700 1,270,900 Wonta RDA 70,580 70,580 Concern 98,000 NCA 7,000,000 1,750,000 Mary Joy 72,000 32,000 RLO 98,730 32,910 Water Action 16,661,122 5,364,058 Church of Christ 1,454,972 530,000 SIM 282,425 90,310 Agri Service Ethiopia 1,740,554 588,807 FMM Ethiopia 388,311 388,312 Farm Africa 1,321,399 1,321,399 HOPE IDA 2,134,260 711,420 Total 97,886,523 36,644,611 Source: Southern Region Bureau of Water & Mineral Resources Development, Awassa.

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Table A6: Investment Requirements to Meet Coverage Targets – Three Scenarios

(million birr in 2002 prices) Time Period Coverage

Target (%)

Urban (excluding

Addis Ababa)

Addis Ababa

Coverage Target

(%)

Rural Total Total per annum

2000 76 14 Ambitious Scenario Up to 2005 83 2,194 399 17 1000 3,593 719 2005-2010 91 1,591 1527 23 1800 4,918 984 2010-2015 98 2,148 1740 31 2600 6,488 1298 2015-2020 99 2,936 1740 42 3200 7,876 1575 2020-2025 100 3,029 1740 60 5000 9,769 1954 Total up to 2025 11,898 7146 13600 32,644 1306 Total (million US$) 1451 872 1659 3,982 159 Moderate Scenario Up to 2005 79 700 399 19 586 1,685 337 2005-2010 87 1272 1527 23 1009 3,808 762 2010-2015 89 1745 1740 28 1446 4,931 986 2015-2020 90 1804 1740 33 1829 5,373 1075 2020-2025 92* 2041 1740 40 2624 6,405 1281 Total up to 2025 7562 7146 7494 22,202 888 Total (million US$) 890 840 881 2,611 104 Low Scenario Up to 2005 70 750 100 14 400 1,250 250 2005-2010 70 750 100 14 600 1,450 290 2010-2015 70 750 100 15 700 1,550 310 2015-2020 70 750 100 15 800 1,650 330 2020-2025 70 750 100 16 1000 1,850 370 Total up to 2025 3750 500 3500 7,750 310 Total (million US$) 441 59 412 912 36 Source: World Bank 2003a, table 7 to 9, based on projections in the Interim Master Plan prepared under the Environmental Support Program Notes: For the moderate scenario, World Bank (2003a) estimates were scaled down for the period 2020-25 as the IMP assumptions provided for doubling of expenditure during that period.

Notes and sources for Table 2.3 Based on information reported in Annex 1 of WSPAF (2002): Access to safe water: Share of population with reasonable access (distance/time) to an adequate amount (20 lpcd) of safe water (World Development Report, 2000). 1993-99 or the latest available year. Access to sanitation facilities: Percentage of population with access to sanitation facilities (ADI, p. 316). 1993-97 or the latest available year. Adult Illiteracy Rate: Percentage of population 15 and above who are illiterate (WDR, 2000, p. 276). For 1998. Net enrollment – primary : Ratio of no. of children enrolled to no. of children of official school age in population (UNESCO data) – 1990-94 or the latest available year. Malnutrition: Percentage children under five years of age suffering from moderate to severe underweight (ADI, p. 315) – 1990-97 or the latest available year. Infant Mortality Rate (IMR): Number of children who have died between birth and first birthday expressed per 1000 live births (IDG, p. 14). For 1998. Under-5 mortality rate: No. of deaths of children under 5 yrs of age per 1000 live births in a given year. ADI, p. 313, for 1998.

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Annex 3: List of Persons Met

1. H.E. Ato Shiferaw Jarso, Minister for Water Resources, Government of Ethiopia 2. Ato Mesfin Tegene, Vice Minister for Water Resources, Government of Ethiopia 3. Ato Gulilat Berhane, Head, Department of Planning and Projects, Ministry of Water Resources,

Government of Ethiopia 4. Ato Mohammed Abdul Wahid, Chief Economist, Ministry Water Resources, Government of Ethiopia 5. Ato Tesfaye Wolde Meheret, Coordinator of the Water Sector Strategy and Development Program

activities, Ministry of Water Resources, Government of Ethiopia 6. Ato Jemal Mohammed, Head, Macro Department and Secretariat, PRSP, Ministry of Finance and

Economic Development, Government of Ethiopia 7. Ato Yohannes G/ Medhen, Head, Department of Rural Water Supply and Sanitation Services, Ministry of

Water Resources, Government of Ethiopia 8. Ato Getachew Adem, Head, Welfare Monitoring Unit, Ministry for Finance and Economic Development,

Government of Ethiopia 9. Ato Zenaselase Siyum, Central Statistical Authority, Government of Ethiopia 10. Ato Gedlu Sima, RWSS Team Leader, Ethiopia Social Rehabilitation and Development Fund (ESRDF),

Ethiopia. 11. Dr. Nicholas Taylor, Development Administration Officer, DFID, Ethiopia. 12. Ato Girma Hailu, Assistant Resident Representative (Programme), UNDP, Ethiopia. 13. Matteo Marchisio, Programme Officer, Water and Environment Unit, UNDP, Ethiopia. 14. Aslam Chaudhary, Consultant, UNDP, Ethiopia. 15. Ato Kebede Asrat, Director, Christian Relief and Development Association (CRDA) 16. Wro Adey Abede, Information Officer, CRDA 17. Dr. Berhanu Adnew, PRSP Officer, CRDA 18. Jan Lobeek, Project Director, Environmental Support Project, Component on National WSS Master Plan,

DHV consultants, 19. Jaap Butter, Technical Coordinator, Environmental Support Project, Component on National WSS Master

Plan, DHV consultants 20. Ato Getachew Abdi , MWR Coordinator, Environmental Support Project. 21. Surjit Singh, Resident Representative, World Bank Resident Mission 22. D. Subba Rao, Senior Economist, World Bank Resident Mission 23. Ato Getahun Gebru, Sr. Operations Officer (Edu/ESRDF), World Bank Resident Mission 24. Ato Negede Lewi, Sr. Operations Offi cer (Infrastructure), World Bank Resident Mission 25. Dr. Gebreselassie Okubagzhi, Sr. Health Specialist, World Bank Resident Mission 26. Eyeruselm Fasika, Research Analyst, World Bank Resident Mission 27. Gerry Garvey, Consultant, Kampsax A/S.

WSP MISSION To help the poor gain sustained access to improved water and sanitation services. WSP FUNDING PARTNERS The Governments of Australia, Austria, Belgium, Canada, Denmark, Germany, Italy, Japan, Luxembourg, the Netherlands, Norway, Sweden, Switzerland, and the United Kingdom, the United Nations Development Programme, and The World Bank. ACKNOWLEDGEMENTS This assessment of Resource Flows in the water sector in Ethiopia has been done as a part of the regional themati c work on sector finance by the Water and Sanitation Program Africa. It is the second study in a series of studies in six countries. This report has been prepared by Water and sanitation Program task team comprising Meera Mehta (Task Manager),Thomas Fugelsnes, Kameel Virjee, Tesfaye Bekalu and John Ondari. Ato Belete Muleneh also provided key inputs and feedback. Field studies in Ethiopia were done by Ato Tekalign Tsige. We have benefited from information and insight provided by a number of different colleagues and stakeholders in Ethiopia. Particular thanks are due to the colleagues from the Ministry of Water Resources, from other federal and regional organization, Non-governmental Organizations, Development partners and the World Bank. Ministry of Water Resources, Helen Pankhurst, Ethiopia country representative of WaterAid and Jean Doyen of WSP -Africa provided valuable feedback on the draft report. While these colleagues have helped in improving the paper, the responsibility for any errors or omissions and interpretations remain with the authors. Production Assistance: Jecinter Hezron and Florence Makokha

Africa Region

World Bank Hill Park Building Upper Hill Road Nairobi Kenya Phone: +254-20-3226306 Fax: +254-20-3226386 E-mail: [email protected]

The WSP Working Papers disseminate the findings of work in progress to encourage the exchange of lessons and experiences on water and sanitation issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The findings, interpretations, and conclusions expressed in the papers are entirely those of the authors. Dissemination of the material is encouraged and the Water and Sanitation Program will normally grant permission promptly. For questions about this report, including permission to reprint portions or information about ordering more copies, please contact the Water and Sanitation Program by e- mail. The WSP Working Papers are available online at http://www.wsp.org.

Other Sector Finance Publications by WSP-AF Sector Finance and Resource Flows Publications Strengthening Budget Mechanisms for Sanitation in Uganda Sector Finance and Resource Flows Assessments for Water Supply – A pilot application for Kenya Water Supply and Sanitation Sector Finance and Resource Flows Assessment: Zambia PRSP Publications – Available online at www.wsp.org Water and Sanitation in PRSP Initiatives-A Desk Review of the Emerging Experience in Sub -Saharan Africa (SSA) Water supply and Sanitation in Poverty Strategy Papers in Sub -Saharan Africa: Developing a Benchmarking Review and Exploring the Way Forward Factors behind the Poor Integration of the Water and Sanitation Sector in PRSPs in Sub -Saharan Africa-Lessons from Uganda, Malawi and Zambia-Brief (with ODI at www.odi.org.uk) Sector Financing-Global and Regional Reviews - Available online at www.wsp.org The challenge of Financing Sanitation for Meeting the Millennium Development Goals Meeting the Financing Challenge for Water Supply and Sanitation (Full Report) Meeting the Financing Challenge for Water Supply and Sanitation (Summary) Financing Small Water Supply and Sanitation Service Providers: Exploring the Micro-Finance Option in Sub-Saharan Africa Financing the Millennium Development Goals for Water and Sanitation: What will it take? Synthesis paper for Global WASH Forum

About The Sector Finance and Resource Flows Series The Sector Finance and Resource Flows reports are based on country studies on water and sanitation sector financing in Africa. The aim is to provide assistance to sector leaders, policy makers and development partners to help African countries meet the Millennium Development Goals on water and sanitation through: rationalizing allocation of public funds, leveraging non -public resources and improving targeting of required subsidies.

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