Strategic Financing Framework and Innovative Financing Mechanisms in the Water Sector in Ethiopia

/ A Case Study in Rural Water Supply Sanitation and Other
African Development bank
Draft Assessment Report on Strategic Financing Framework and Innovative Financing Mechanisms in the Water Sector in Ethiopia /
Target and Solution Groups (TSG) /
10/18/2011 /
A Case Study in Rural Water Supply Sanitation and a brief assessment other subsectors /

Prepared By:-Teklehaimanot Molla

Table of Contents

ACRONYMS

Back ground

Executive Summary

Notes on Financing Mechanisms and Measures

PART 1. COUNTRY WATER SECTOR ASSESSMENT:

1.1.Financing needs of the water sector in Ethiopia

1.2.The 3Ts: current financing policy, sector revenues and mechanisms in country

1.3.Commercial Sources of Finance Used In the Water Sector in Ethiopia

1.4. Financial innovations:

PART 2. Analysis of Innovative Financing Mechanisms in the Water Sector (15-24 pages)

I.Introduction

II.A Similar Case Study on Rural Financing

III.Financing Mechanisms

A.Community Development Fund (CDF)

B.Micro finance institutions

C.Loan from Local Commercial Development Banks

D.Introduction to Other Regional Financers and Donors

PART 3 Respective Duties of Implementation Agencies, With Regards To Water Fund Transfer

I.At Federal Level,

II. At Regional Level

III.At Woreda Level

CONCLUSION

MAJOR FUND FLOW OF PROJECTS IN ETHIOPIA

Annex1. FGE FM Administrative Structures

Annex2. Channel I

Annex 3. Channel Ia

Annex 4. Channel Ib

Annex 5. Channel III

Annex 6 Similar Case Study on Rural Financing

Annex 7 Community Development Fund (CDF)

Annex 8 Micro finance institutions

ACRONYMS

AFDB / African Development Fund
BoE / Bureau of Education
BOFED / Bureau of Finance and Economic Development
BoH / Bureau of Health
BWR / Bureau of Water Resources
CDM / Community Development Fund
CMP / Community Managed Project
MoE / Ministry of Education
MoFED: / Ministry of Finance and Economic Development
MoH: / Ministry of Health
MoU: / Memorandum of Understanding
MWR: / Ministry of Water Resources
NWCO / National WaSH Coordination Office
PMU / Project Management Unit
RWSSP / Rural Water Supply anSanitation Project
WASH: / Water Supplyand Hygiene Education
WoFED / Woreda of Finance and Economic Development
WASH / Water Sanitation and HyginProgramme

Back ground

The 6th World Water Forum will build on four preparatory processes: Thematic, Political, Regional and Grassroots and Citizen’s. AMCOW was selected as Regional Coordinator to drive the preparatory process in Africa. The Regional process aims at (a) mobilizing and engaging stakeholders throughout different regions of the world to catalyze action at regional and local level, and to contribute to the 6th World Water Forum and its outcomes; (b) articulating targets and interests that are relevant to particular regions; and (c) seeking commitments to follow-through and implement specific actions after the 6th World Water Forum.

AfDB, AfWA, AfUR, ANEW and WDA formed a Target and Solution Groups (TSG) for the Regional Target 5, “Develop and implement innovative financial mechanisms including taxes, tariffs, and transfers to meet the MDGs financial requirements by 2015 in all counties ” which was identified in the AMCOW 1st Multi Stakeholder Forum for Africa’s Preparatory Process for the 6th World Water Forum. TSGs are tasked to prepare detailed target action plan, identifying and reporting on solutions contributing to reach the given target and gather commitments for the implementation of these solutions.

The main objective of the assignment is to collect financially successful existing and innovative cases from Ethiopian water sub-sector which could contribute to development of a model framework for national water sector financing mechanisms, including use of the 3Ts (Tariffs, Taxes, and Transfers). The model framework is expected to be one which African counties could follow and build on to develop their own water sector financial mechanism to meet the MDGS financial requirements by 2015.

Executive Summary

Introduction

The overall goal of Water Resources Policy of the Government of Ethiopia is to enhance and promote all national efforts towards the efficient, equitable and optimum utilization of the available Water Resources of Ethiopia for significant socioeconomic development on sustainable basis.

The government of Ethiopia established and promote the use of "Water Fund" for financing water projects. The Fund ensures that national commitments are in place for financing of water projects that involve "consumptive use" of water,ensure the proper utilisation of funds and other resources obtained from different external and internal sources.

Water resources are treated as a unitary resource requiring coherent planning for its effective use and management in order to reflect its economic value. In addition to the public sector main involvement privatisation of utility services and increased user involvement is promoted

While addressing the financing needs of other subsectors of the water sector this case study mainly focuses on Rural Supply Water and Sanitation projects

  1. Water Sector Financing

As per the national plan, the estimated cost of water sector ranges from USD 5 to 12 billion for the years 2011 to 2015. The water sector includes water resources management, irrigation, water supply and sanitation. The sector share 6 % of the national budget, in average. Due to lack of information the water financing in the off-government budget, the private sector and self-supplies in the communities are not incorporated in the above data

USD(000,000)' / 2009/10 / 2010/11 / 2011/12 / 2012/13 / 2013/14 / 2014/15 / Total (2010-2015)
Total National Expenditure / 4,196 / 5,415 / 6,243 / 7,658 / 9,497 / 11,832 / 44,841
Water / 249 / 347 / 336 / 476 / 699 / 1,019 / 3,126
6% / 6% / 5% / 6% / 7% / 9% / 7%

Source: -MoFED Growth and Transformation Plan

The government plan to reduce cost of the sector by decentralizing the planning than the former centralizing planning and by a continuous study of measures that will result in, economy, efficiency and effectiveness processes as well as by increasing participation of the private sector. The government expectsthat the participation of the private sector would result in better flow of funds to the sector. In addition this would satisfy one of the main objectives of privatization in Ethiopia, to get the government relieved from Ordinary concernsand to concentrate on more strategic issues.

Fund flow from the private sector is the key determinate of the Water Sector Planning next to taxes and tariff, national priorities, share of the other sector of the economy, regional requirements, growth levels, availability and transfer of funds from government, donors, International Banks

As under developed economy the rural communities at large and the urban poor are not able to cover recurring cost water supply not to mention the cost of investment.

Transfer of funds to the user is done through various channels. Most of the programmes use one of the three types of channels, which base the government administrative structure and banks.

Water Tariff is done by segmentation and price differentials. However, the segmentation is not to the adequate level and need a systematic analysis based on representative factors

Our assessment revealed that the sources of finance in the water sector are numerous depending on category of projects, which are mainly, water supply and sanitation, irrigation, hydropower, transport, industrial use and environment protection.

Conditional on the public and private interest the following are the key players in financing the water sector in particular: -

Financing / Water Resource Management / Water Supply and Sanitation / Irrigation / Hydropower
Investment of the Government of Ethiopia
Loan and grant from AfDB
Loan and grant from World Bank
Fund flow Global Donor institutions
Loan from Local Banks
Local and international Investors in involved in agro industry, bottling, hydropower, subsectors sectors
Joint venture with foreign investors
Loan and transfer from microfinance institutions
Contribution from regions and Community Development Funds

Interestingly, a good financing lesson was created by the government in raising funds for Renaissance Hydroelectric Dam. A considerable amount was collected through

  • Public unconditional contribution
  • Sell of five year local bonds, payable in local and foreign currency
  • Created bank finance incentives for the purchase of bonds
  • Promise/agreement of local banks co- finance the dam (promises are binding in Ethiopian Law)
  • In kind promises including skills.
  • Minimizing costs by utilizing local engineering companies
  1. Selected Financing Mechanism

It is to be noted that in rural dominated Ethiopia the source of water is mainly outside the financing world as it is sourced from natural environment assisted by human labour, at current pace we have a long way to go to manage the resource effectively and competently

In fact, the water sector financing is very low compared to the countries natural untapped potential and the existing demand. At present most of the money is to route to basic water supply and sanitation or hygiene programmes. Despite the existence abundant rivers, ground water and rain fall, uses for irrigation agro-industry, energy and for demands of other sector of the economy is at infancy level.

As this case study mainly focuses on Rural Supply Water and Sanitation projects the selection criteria pay attention on the financing water supply need of the rural Ethiopia while due focus the needs of other subsectors of the water sector not being overlooked. The selected mechanisms are

  1. Community contribution and The Community Development Fund

The Community Development Fund approach is a pioneered and developed in Amhara and Benishangul-Gumuz Regions

As the Woredas are the lower Ethiopian government administrative body, at grass root level communities are organized in associations called Kebele administrations. A Woreda have several kebeles, which are independent of government administration.

This is already considered as accepted channel by the four ministries; Water, Health, Education MoFED, with the following key features

  • Fund Transfer: The unique and innovative feature of the CDF approach is that funds for the physical construction of water schemes are transferred directly to the community by way of a micro credit institution.This would reduce the delay and risk experienced through banking transfers. .
  • Community Financial Management: The communities, through water and sanitation committees (WASHCO), are responsible for the full development process through planning, financial management, implementation and maintenance. The unique feature in CDF community management is that the WASHCO manages not only community-generated funds but the government subsidy provided for capital expenditures. As learning curve improves, this will lead to increased use of funds, increasing community contributions for capital costs and cost effectiveness.
  • Procurement: A further aspect of community management is that the WASHCO is directly responsible for procuring the goods and services required for water scheme construction and installation.
  1. Loan and transfer from Micro Finance Institutions

This provides the best mechanism to rural Ethiopia, due to the following, among others: -

  • the Microfinance credit and saving institutions, are available in every woreda and remote places next to community Development Funds, which operate at grass root community level
  • They actively control the borrower or user of funds, due to their proximity,
  • They require no collateral, but personal guarantees if large
  • Nowadays their lending level is growing
  • The public increasingly trusted their operation
  • as their performance is visible and poor friendly
  • The interest rate is relatively high compared to commercial banks
  • Expanding at an increasing rate both in size of assets and office locations

The micro finance institutions have proved that they are fit for the purpose and have practiced it in several instances, including the water sector.they are already financing businesses related to the irrigation and water supply and sanitation sub sectors

  1. Loan and transfers from Commercial Banks

The commercial banks served as a government and donors water sector fund transfers channel, for many years and are still indispensible financing mechanisms in regions where microfinances do not perform well.

There are fifteen banks in Ethiopia, including three government owned Commercial Bank of Ethiopia, which is the largest Bank, with 423 branches, followed by other two government run banks, Development Bank of Ethiopia and Construction and Business Bank

After the deregulation of banking service, the private sector is growing faster and innovatively opening branches with new facilities. However, due to the decision of the government, only Commercial Bank of Ethiopia is used for the transfers of government involved projects.

  1. Fund flow from Development Partners (DPs) and International and LocalNon-Governmental Organizations (NGOs)

This category of donors combines nonrefundable assistance and grants to the sectors. The funds would flow directly to urban and rural projects through various means

These players have expertise that enables them to effectively implement water programs. Moreover, they bring additional and alternative experience to the projects and can contribute substantially to lessons learned and the achievement of best practices.

  1. Water work Constructions by Public Regional Financers and Associations

There are unique players in funding the water and other sectors of economy with a recorded performance. This include

  1. Regional Endowment funds
  2. Regional Development Associations

These bodies are region specific and are very strong in Tigray and Amhara. Their strength includes but not limited to

  • By way of promoters , the agencies convince and managed to collect regular and special massive public free contributions
  • Conduct enormous public infrastructural development works, including hundreds of moderate rural dams, boreholes, water ponds, irrigation facilities and distant water supply service
  • Innovatively invest in lucrative and strategic developmental businesses (recently a public tender was made for Iron development
  • They are proved to mobilize public work resulting in recovering, lost forests, wildlife and related natural resources including streams, springs, medicinal and holy water and rivers also extending their seasonal flows.

Conclusion and Recommendation

The funding challenge is enormous for all water-related sectors: Water resources, management, Irrigation & drainage, Water and the environment, Water supply & sanitation, Hydropower

Even though past funding was not to the adequate level still the financing of the international community is crucial until a with growth in the economy together with the development of the private sector address the demand

As the existing investment is very low, compared to the potential, in the near future conditions, though improved, the goals of the water sector may not be easily addressed by local tapped resources, without external financing and mobilizing the public and private efforts through infrastructural development which are proven way boosting the aggregate demands

Existing resources need to be used more effectively for y capacity building improving efficiency. The private sectors especially, the microfinances, do show their ability to reach the rural community, reducing the exaggerated lead time of commercial bankmoneytransfers, to a great extent, as their proximity to the user community is fair .

Appreciating the achievements and efficiencies, funding agencies are expected to work on leveraging local private capital while the government facilitates what is expected in the arrangements, towards the attainment of its strategic plan. The private sector can participate for performance based fee; in the administration and extension of lines, fee collections, profitable identification and market segmentation study, with due interest and swiftness than the government bureaucratic structure.

It is not possible to observe the cumulative performance of the financing, as at present consolidation of works performed by all stake holders is not to the adequate level. In order to recognize the status of the water sector for present and future plan performance control and decision making, due regard should be paid as soon as possible.

Recommendation

Developments across the water financing spectrum : -

  • Focus on improving performance of the water sector, also because it is key to attract new resources from the 3Ts – users are more willing to pay when there is transparency and fairness in water service provision, the ministry of finance allocates resources according to past performance.
  • Reduce the risk of ODA crowding out repayable finance
  • Ensure that low capacity to the use the available funds does not become a bottleneck
  • Consider the impact of developments outside the sector on the sector’s financial sustainability – such as improvements in tax collection by towns, new roads that reduce the cost of building and servicing water infrastructure in rural areas, or development of local financial markets.

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Strategic Financing Framework and Innovative Financing Mechanisms in the Water Sector in Ethiopia

/ A Case Study in Rural Water Supply Sanitation and Other

Notes on Financing Mechanisms and Measures

NO / Financing mechanisms and Measures / Features
/ Subsidy by the government / The aim is to reduce the population who have no access to clean water
  • Rural areas
  • Low income groups
  • Food and water insecured areas
  • Drought and disaster prevention

/
  • Community partial contribution for full Organization and management costs and 10 to 20% capital costs
  • Contribution through Community development fund for the works of self-water supply
  • Public in kind contribution and public works with very low cost such as; Productive safety net programme (PSNP) water catchment projects
/ The beneficiaries are the community themselves. It is a way towards full cost recovery”
/ Microfinance, credit and saving associations revolving funds loan to community, individuals, groups for construction of self-water supply and fur water utilities of rural businesses
These also grant loans to communities for communities to enable them pay their part of contribution for RWSSP and WASH
The inistitutes are also being used as a transfer media to rural areas where banks do not have access / The fund transfer will be speed up. The degree of usage of funds and follow up of implementation would be to adequate level due to proximity