GPOBA Commitment Paper: OBA in Kampala - Water Connections for the Poor February 16, 2008

UGANDA

GPOBA COMMITMENT PAPER

Project name: OBA in Kampala – Water Connections for the Poor (P104943)

The objective of the project is to provide improved access to piped water services to poor households living in slum areas of Kampala, the capital of Uganda. Piped water supply through new yard taps[1] and public water points (PWPs) will be provided by the National Water and Sewerage Corporation (NWSC), a public utility responsible for water supply and sewerage services in Uganda’s large urban centers.

NWSC is “an autonomous public corporation” 100% owned by the Government of Uganda. It is one of the most highly regarded public water utilities in Sub Saharan Africa. The central government, represented by both the Ministry of Water and the Ministry of Finance, maintains a performance contract with NWSC. In turn, NWSC has developed a set of delegated management area contracts through which it monitors performance of its various urban centers. Through these arrangements, NWSC management and staff have incentives to perform efficiently, since their performance will affect their own compensation.

As a public utility, NWSC does have a social mission to serve the poor. NWSC has made efforts to connect and serve the poor moreeffectively(e.g. establishing the Urban Pro-Poor Branch, soliciting pro-poor donor programs) and currently serves about half of the poorest residents of Greater Kampala. But NWSC does not have strong financial incentives to build new connectionsfor Kampala’s growing poorest residents without external funding. Firstly, many of these consumers buy water from NWSC at the “social tariff” which only covers O&M costs (both PWPs as well as yard taps shared by multiple families qualify for this lower tariff). Secondly, the amount of water consumed per capita by the poor is very low. Thirdly, because the poor have less consistent payment behavior, this would require some additional cost to maintain NWSC’s strong collections record (e.g. investment in pre-payment meters).

Therefore NWSC has applied to GPOBA to help connect Kampala’s poorest residents to the water supply network. Through yard taps and PWPs – some of which will involve pre-paid meters – NWSC expects to reach close to full coverage of serving greater Kampala’s urban poor. The total newinvestment to connect an estimated 408,000 people through over 19,000 yard taps and over 800 PWPs (over a 4-year period)is about USD 4.0 million. Of this, GPOBA will contribute 60% per connection, NWSC will contribute 30% per connection, and 10% on average will come from users. All of these connections will be pre-financed on an output-basis by NWSC who will receive GPOBA payments after outputs are independently verified.

Project Fact Sheet

Project Name: OBA in Water for Kampala’s Poor

Scope: Expanding access to water services to poor households in Kampala

Total project costs: approximately US$ 4,000,000(not including TA)

Total GPOBA funding requested: The original application was for a GPOBA investment subsidy of USD 5.5 million, but subsequent investigations and database improvements regarding existing connections and population figures revealed that approximately $2.8 million of GPOBA subsidy funding is required to reach close to full coverage in the targeted slum areas. Including costs for monitoring and verification and grant agreement supervision, the total new GPOBA funds required is $2.81 million:

$2,411,300 for investment subsidies (W3)

$250,000 for monitoring and verification and auditing (W1)

$150,000 for Bank supervision over four years

$2,811,300 TOTAL

Funding leveraged from other sources:

  • GPOBA will contribute 60% of the connection related costs (plus some costs for monitoring and verification and other transaction related costs).
  • NWSC will contribute 30% of the total required cost for the tertiary network and related metering and connection costs.
  • Households will contribute the remaining10% of the connection costs, although labor for digging trenches can be used in lieu of cash when required.
  • NWSC will also fund any new network reinforcements or secondary network extensions (some of which would be made regardless of the GPOBA project) required to undertake the new connections (amount unknown, although initial estimates at about 20% of total project costs).

GPOBA Funding Source: DGIS (100%)

Outputs: sustainable access to safe, reliable water services, as evidenced by:

  • Connections:
    – 19,070yard taps; unit cost $174 per connection, therefore a subsidy of $104.40 per connection.
    – 410 standard Public Water Points (PWP); unit cost $383 per connection, therefore a subsidy of $230 per connection.
    – 410PWP with pre-paid meters at $1325unit cost per connection, therefore a subsidy of $795 per connection.
  • Twelve (12) months of billed consumption

Potential beneficiaries:approximately 409,000 people (15 people per yard tap, 150 people per PWP; estimated 5 people per hh)

GPOBA subsidy “efficiency”:$6/person without TA and transaction costs

Returns:FIRR is -5% without subsidy and about 14% with subsidy

EIRR is 41%[2]

Targeting: 1) Geographic targeting: focusing on poor slum areas in Kampala where most households have an income less than UGX 80,000 ($48) per month. 2) Self-selection targeting: subsidizing yard taps and PWPs which the non-poor are not likely to use. 3) Design: connection subsidies are usually pro-poor relative to consumption subsidies.

Grant recipient: NWSC will be the grant recipient and implement the OBA scheme.

Financial Management: GPOBA subsidies will be disbursed directly to NWSC after an independent verification agent has approved the outputs.A Financial Management assessment of NWSC has already been undertaken, and the risk assessment rated as “Low”.

Disbursement: 90% after connection verification, 10% after 12 months service delivery. Duration of project expected to be about 4 years.

Procurement: Procurement assessment made: LOW risk assessed.

Environmental clearance: Category B. ESMF disclosed on Infoshop on November 27, 2007, and locally on December 7, 2007].

Government endorsement: NWSC is 100% government owned. MoF has provided a letter of endorsement for NWSC to sign the grant on its behalf.

Exchange rate: UGX 1650/USD.

Commitment paper date: September, 2007

Commitment paper revised: December, 2007
Panel of Experts Issues raised at Eligibility Stage

1. NWSC size/financials

The Panel stated that it would be interested to know more about NWSC’s financials to get some idea as to the scale of the business – balance sheet, turnover.

Year ending June 30, 2005 / Year ending June 30, 2006
Operating Revenue / $32.6 million (UGX 54 bn) / $35.3 million (UGX 59 bn)
Total Assets / $165 million (UGX 273 bn) / $170 million (UGX 279 bn)

There is substantial debt on the balance sheet from past donor-funded programs, incurred through past NWSC management. This is expected to be written off within the year, pending Parliamentary approval. See Section C.

2. OBA Scheme contribution to service ratio

The Panel asked how much the OBA scheme would contribute to the country’s urban water supply problems.

The OBA scheme would result in close to 100% coverage of those areas that fall under the responsibility of the Urban Pro Poor Branch (UPPB) of NWSC. The UPPB is responsible for those areas where the overwhelming majority of residents are considered very poor (at an income of less than $48 per household per month).

NWSC also serves most other large urban centers in Uganda. Kampala Water accounts for 60% of NWSC’s total connections currently. But as more large towns come under NWSC’s remit, that number is expected to change. There is scope for scaling-up an OBA approach in the other urban centers. (Greater Kampala – the area served by Kampala Water – has only about 50% of Uganda’s urban population.)

3. Cash Flows

The Panel noted that a working connection will be considered ‘complete’ once customers have demonstrated that they have paid their bills for a period of twelve months after a connection is complete and sought clarification that NWSC had accepted such a relatively long service delivery period.

NWSC has accepted that 10% of GPOBA’s contribution to the connection costs will be with-held until after 12 months of demonstrated service delivery. NWSC recognizes the related risks, especially since service is often interrupted because of non-payment. But NWSC’s UPPB is working closely with poor households to adapt to different payment/usage behavior to help minimize potential non-payment problems, such as more frequent payment/billing options.

4. Scheme finance

It was noted that InfraCo were funding a new WWTP in Kampala and the Panel suggested that the IFC Municipal Fund/GuarantCo could be approached to discuss future funding for NWSC.

NWSC is priming itself to be able to take commercial loans, although this process is taking longer than expected. Many donors and related (e.g. World Bank’s sub-sovereign facility through PPIAF) have approached NWSC, and NWSC is considering its options.

ACRONYMS AND ABBREVIATIONS

DAC / Development Assistance Committee
DANIDA / Danish International Development Association
EIRR / Economic Internal Rate of Return
FIRR / Financial Internal Rate of Return
GPOBA / Global Partnership on Output-Based Aid
IDAMC / Internally Delegated Area Management Contract
ISO / International Organization for Standardization
KfW / Kreditanstalt für Wiederaufbau
MOF / Ministry of Finance
MWE / Ministry of Water and Environment
NWSC / National Water and Sewerage Corporation
OBA / Output-Based Aid
O&M / Operating and Maintenance
PWP / Public Water Point
UGX / Ugandan Shillings
UPPB / Urban Pro Poor Branch
USD / United States Dollars
VAT / Value Added Tax

OBA in Water for Kampala’s Poor

Table of Content

A. STRATEGIC CONTEXT AND RATIONALE

A.1. Country and sector issues

A.2. Rationale for GPOBA involvement

A.3. Higher level objectives to which the project contributes

B. PROJECT DESCRIPTION

B.1. Project development objective and key indicators

B.2. Project Components

B.3. Financial and economic analysis

B.3.1. Financial Analysis

B 3.2 Economic Analysis

B.4. Lessons learned and reflected in project design

C. IMPLEMENTATION

C.1. Institutional and implementation arrangements

C.2. Monitoring and evaluation of outcomes/results

C.3. Sustainability

C.4. Critical risks/ possible controversial aspects (and measures to mitigate them).

Annex 1. project costs and disbursement schedule

Annex 2. Financial Management (OP/BP 10.02)

Annex 3. Disbursement (OP/BP 12.00)

Annex 4. Procurement (OM, July 15, 2002).

Annex 5. Environment and Social Safeguards (OP/BP 4.01).

Annex 6. Results framework and monitoring mechanisms.

Annex 7. Map and Table of target communities in KAMPALA

Annex 8. Project preparation and supervision

A. STRATEGIC CONTEXT AND RATIONALE

A.1. Country and sector issues

Ugandans are poorby most standards. Uganda is an OECD DAC 1 country. GNI per capita in the country is about US$280 – the world average is $7,011, and the average in Sub Saharan Africa is $746.[3] The average income in the slum areas where this project is situated is less than $48 per household per month – or, with 5 people per household, annual per capita income of $115.

In 2005, only 60% of the Ugandan population had access to an improved water source, although the rate is higher on average for urban residents.[4] The figure for those living in urban slums covered by the UPPB and the target population of this project is worse, at about 55% coverage. The goal of the Ugandan government is for at least 70 percent of all urban residents to have safe drinking water by 2005 and 100 percent by 2015.

But budget ceilings imposed by the government to meet macro-economic targets have placed severe limitations on what the water sector is allocated annually. The major power crisis faced by the country has led to a greater percentage of the budget being allocated towards alleviating the power crisis, constraining the water sector even more. And, the costs related to providing improved water services are high – fuelled by increased power costs, but also by the high cost of materials due to Uganda’s land-locked position.[5]

Therefore, there is a substantial gap between what poor households are willing and able to pay for improved water services and the actual cost of providing these services. Yet there are clear social and economic imperatives for providing clean water to the poor, including improving health and hygiene, reducing disease, and also thereby increasing productivity and possibly fueling growth.

A.2. Rationale for GPOBA involvement

This project meets the eligibility criteria established by GPOBA and its Panel of Experts, as described below.

a)Targeting the poor – This project is very well targeted. 1) Geographic targeting: focusing on poor slum areas in Kampala where most households have an income less than UGX 80,000 ($48) per month. 2) Self-selection targeting: subsidizing yard taps and PWPs which the non-poor are not likely to use. 3) Design: connection subsidies are usually pro-poor relative to consumption subsidies.

b) Shifting performance risk to the provider – This project shifts substantial performance risk to the provider. There are no up-front payments. 90% of the GPOBA subsidy is provided after connections are certified to be working by an independent verification agent. The remaining 10% is with-held until after 12 months of service delivery. NWSC will have to pre-finance all of these costs, either by taking a loan, or financing through its available cash flow, and by carefully managing receivables/payables.

c) Private financing leveraged – Private financing leveraged is likely to be minimal as NWSC is a fully public utility. NWSC is considering taking a commercial loan to help fund this or other capital investment projects. But it is not clear that it will be ready to do so in time for this GPOBA pilot. NWSC will contract out all pipe-laying and trench digging to the private sector.

d) EIRR and FIRR – The cash flow analysis undertaken demonstrates that making the connections to the urban poor without a GPOBA subsidy is not financially viable for NWSC, with a negative FIRR[6]. However, with the GPOBA subsidy, the FIRR is attractive, but not inordinately high, at 14%. The EIRR is high at 41%: as most of the production capacity and primary and secondary networks are in place, the economic returns to connecting the urban poor through a tertiary network/household connection subsidy are in the triple digits.[7]

e) “Value for money”/ subsidy per capita – Value for money is high, as subsidy per capita is low, at $6 (not including transactions costs). This is partly because the project relies on yard taps, many of which are shared, and public water points which are used by 15 and 150 people, respectively. This approach is appropriate to best target the poor in a manner that suits their consumption patterns and is affordable to them. Also, the GPOBA pilot is particularly efficient because the production facilities and most of the networks are in place and running well with sufficient capacity.

f) Sustainability – Tariffs for low income users cover all O&M costs. Users are also required to contribute 10% of the connection costs to demonstrate ownership, which should enhance sustainability.

g) Implementation capacity – NWSC has strong implementation capacity, and is considered to be one of the most efficiently managed and operated public water utilities in Sub Saharan Africa, with sustained improvements made over the past eight years. For example, NWSC’s collection (including arrears) in 2006 was over 90%. Its’ staff/connection ratio was 7 staff for every 1000 – a drop from 27 to 1000 eight years ago – while its customer base nearly trebled at the same time Several NWSC towns have become ISO certified, and NWSC is in the process of becoming ISO certified.

h) Innovation – This project is innovative because it involves OBA with a water utility in Sub Saharan Africa. In addition, this utility is fully public – GPOBA’s first public utility pilot in Sub Saharan Africa. Further, if NWSC does take a commercial loan in relation to this project (or for another capital investment project at the same time) this will be another milestone.

i) User contribution – User contribution for owners of yard taps is about $30 per tap– i.e. over 17% of the connection cost, and about 63% of a family’s monthly income. However, because on average three households “share” a yard tap, the contribution amounts to about 21% of a household’s monthly income. But in addition to this connection fee and the consumption tariff, owners of yard taps must pay a monthly service charge (see section on tariffs below).Altogether, this amounts to a significant portion of a poor household’s income. In order to make the user contribution affordable, NWSC offers the option that poor households can help dig trenches in lieu of some of their cash contribution – an option which many choose to take. Over-alluser contribution for connection costs is 10% because PWPs do not involve connection charges. (Note that there are also monthly service charges for PWPs.)

j) DAC/Frontier preference – Uganda is an OECD DAC 1 and IFC Frontier country.

A.3. Higher level objectives to which the project contributes

  • This project contributes to Uganda’s goal of meeting the MDGs.
  • This project contributes to greater commercial practices to be undertaken by a public water utility.
  • If successful, this project can provide lessons for future OBA schemes in the water sector in Sub Saharan Africa – whether public or private.

B. PROJECT DESCRIPTION

B.1. Project development objective and key indicators

The objective of the project is to provide access to piped water services to poor households living in slum areas of Kampala, the capital of Uganda, in an output-based manner. Improved access to piped water for Kampala’s urban poor should result in better health and hygiene for beneficiary households and result in positive externalities for society as a whole. Improved access to water sources should also lead to less time spent collecting water from more distant points or more costly sources, thereby leaving more time for productive uses as well as savings for either more water consumption (which is a good thing since the current level of consumption is below WHO recommendations) or other basic necessities.