3Ts: Best practices and innovative financing in Zambian water sectorPage 1

6th World Water Forum – Africa Target 5 Report

Strategic Financing Framework : 3Ts and Innovative Financing Mechanisms in the Water Sector in African Countries

Case Study: Zambia

Draft, 31stOctober 2011

Prepared by Dr Rolfe Eberhard

Contents

The story of 3Ts and water sector financing in Zambia......

Best practice: Pro-poor urban funding basket......

Best practice: Regulating ring-fenced commercial utilities......

Acknowledgements and resources......

Annexure: World Bank and African Development Bank financing activities in the water sector

The story of 3Ts and water sector financing in Zambia[1]

Adoption of key policy principles in 1994 created the basis for new institutional arrangements

Key milestones in the reform of the water services sector in Zambia were the adoption of seven principles in the 1994 National Water Policy (see text box) and the promulgation of the Water Supply and Sanitation Act in 1997. This was strongly supported by the constitution that stipulates a state obligation “… to provide clean and safe water”. Reforms in the water resources sub-sector followed later, commencing in 2003 and resulting in a new Water Resources Management Act in 2011.[2]

The 1994 policy split water resources from water services and handed the responsibility for water services to the Ministry of Local Government and Housing, while the Ministry of Energy and Water Development retained responsibility for water resources (Principle 1).

A new regulator, the National Water Supply and Sanitation Council,wasestablished under the Minister of Energy and Water Development (Principle 2). All assets of the 46 Water Supply schemes under the responsibility of the water ministry were transferred to local authorities in 1997 (Policy Principle 3).

In support of Principle 4 (cost recovery) and 5 (human resource development), the provision of water supply and sanitation services in urban areas was commercialised. Commercial utilities were formed, owned by local authorities who joined together on a voluntary basis. More than 90% of the urban population live in areas served by the ten Commercial Utilities. The remaining urban population are served by 13 local authorities and six privately run schemes.

A National Irrigation Policy and Strategy was developed in 2006, followed by a National Irrigation Plan. The objectives of the strategy and plan included development of socially desirable and economically viable irrigation schemes; construction of communal bulk water supply systems; facilitation of irrigation infrastructure-development for improved agricultural productivity; establishment of an Irrigation Development Fund to help farmers access funds for irrigation equipment; facilitation of establishment of water rights that are supportive of sustainable agricultural development; and promotion of sustainable utilization of wetlands.

Government responsibilities for water

The Ministry of Energy and Water Development has overall responsibility for the water sector (both water resources and water supply and sanitation), including national water policy formulation and water resources planning and management. The Ministry of Local Government and Housing has the mandate for policy, planning, coordination and funding mobilisation for the water supply and sanitation sub-sector. The Ministry of Health is responsible for health, sanitation and hygiene promotion and the Ministry of Education is responsible for sanitation in schools. The Water Sector Advisory Group, composed of a cross-section of stakeholders in the sector, provides coordinating and advisory functions.

Regulated commercial utilities provide services in urban and peri-urban areas

The ten commercial utilities, responsible to provider water supply and sanitation services in both urban and peri-urban areas, are a key feature and strength of the sector. These utilities are public companies owned by the local authorities and are regulated by the National Water and Sanitation Council. The intention is for these utilities to achieve full cost recovery.

Rural water and sanitation services are provided by the District Councils

Rural water supply and sanitation units within the district governments are responsible for implementing rural water supply and sanitation programmes.Seven Provincial Support Teams support these units.

A national development plan aims to achieve sector goals

Sixth National Development Plan 2011-5 sets out the sector goal, and key programmes and initiatives to achieve this goal: “The sector goal is ‘to achieve 75 percent accessibility to reliable safe water and 60 percent adequate sanitation by 2015 in order to enhance economic growth and improve the quality of life’.[3] In order to achieve the SNDP objective of promoting sustainable water resources development and sanitation, the strategic focus of the sector will be to provide water and sanitation infrastructure and develop skills to ensure effective water resource management and the efficient provision of reliable and safe water and sanitation services”. These goals are to be achieved through five programmes: water resources infrastructure development, climate change adaptation and mitigation, research and development, integrated water resources management, national rural water supply and sanitation programme and a national urban water supply and sanitation programme.

Government spending on rural water is centralised

Spending on rural water supply in Zambia by government is largely centralised. Funds are transferred to districts only to a very limited extent. The Rural Public Expenditure review reported that “so far, only one program is piloting a decentralised approach in some selected districts for expenditure decisions delegated to councils for rural water supply investments.”[4]

Although investments inrural water have increased significantly, the efficacy of these investments is not known with confidence

Total annual contributions from the government, development partners and NGOs have increased significantly for rural water supply and sanitation over time – from US$9 million to US$28 million in the period 2005 to 2009.[5] This is attributed to the development of the National Rural Water Supply and Sanitation Programme, launched in 2007. Finding levels have increased notwithstanding the fact that funding arrangements are fragmented (see figure below). There are many parties involved in funding water supply and sanitation services through a variety of implementation arrangements, including national government (Ministry of Local Government and Housing, local authorities, community-based organisations, donors and NGOs.) A recent Public Expenditure Review of Rural Water reported that there were more than 60 different programs and projects in the sub-sector, and that data on facilities built and the operational effectiveness of these facilities is inadequate.[6]

Figure 1: Financial flows in rural water sector[7]

Financial resources for the urban sector appearinadequate relative to the need

The draft National Urban Water Supply and Sanitation Programme estimates investment requirementsto be between US$ 106 to 173 million per year from 2009 to 2015. The Programme anticipates funding of about US$ 50 to 60 million will be available for this, leaving a funding gap.

There are wide discrepancies between budgets and spending

Although the sector investment programmes for the urban and rural water supply and sanitation sectors are used as the basis for budgeting, there is a wide variance between budget and actual releases suggesting that other supply side constraints exist, related to the capacity to spend.[8]

Confidence in government financial systems is low and only a small share of development partner assistance is provided on-budget or as full budget support

Only 6% of development partnership spending on rural water is full budget support. While about 30% of spending goes through the government budget system, but is for specific projects, the majority (over 60% does not go through the government’s budget system – see below.

Table 1: Flow of funds - development partners - rural water supply[9]

The flow of funds in the sector is shown in the figure below.

Figure 2: Organisation of the Urban Water Supply and Sanitation Sector (source: draft NUWSSP)

User contributions

In rural areas, users are expected to make a 10% contribution to the capital costs and to be responsible for operations and maintenance costs. In urban areas, users are expected to pay for the full cost for individual connections, and to pay tariffs that, in the long-run, are expected to recover the full costs of the service. Actual practice differs from policy. The estimate user contributions amount to about $8 million per annum, a small share of total spending.[10]

Concession loan finance

The World Bank, African Development Bank, Danida(recently) and European Investment Bank (recently) provide concession loan finance to the water sector. Lending conditions to government are based on standard IDA loan conditions. Details of some active projects are provided in the Annexure. (KfW, European Union and Jica have provided, and are continuing to provide, grants only.)

Commercial finance

Lusaka Water and Sewerage Company uses local banks to finance investments for the construction of water distribution networks in new areas in and around city. These loansare ring-fenced and the revenue collected from these areas used to replay the loans in the first instance. One drawback with this arrangement is the high interest rates attached to these loans. Lusaka Water and Sewerage Company Water had intended issuing a municipal bond but operational inefficiencies within the utility, large accumulated customer debt,high nonrevenue water and highly subsidized water tariffs were major constraints. These same factors make it hard to increase the levels of investment into the sector.

In water resources, commercial farmers finance the construction of their own dams using commercial loans.The information regarding these kinds of investments is not tracked.

The new urban programme prioritises pooled funding

The National Urban Water Supply and Sanitation Programme (NUWSSP) has been recently released (October 2011). Key points related to the future direction of funding modalities for urban water and sanitation services are as follows:

  • The Devolution Trust fund will continue as independent statutory instrument, parallel to the new NUWSSP management structure in the Ministry of Local Government and Housing.
  • Pooled funding is a priority modality, with the project-based approach to be continued in the transition period and, thereafter, only in exceptional cases (for example, for JICA).
  • Funds for the Commercial Utilities are to go through a dedicated account in the Ministry of Finance and National Planning, and then directly to the Utilities.
  • The detailed financing mechanisms, together with implementation guidelines, are still to be finalized within the next twelve months. The guidelines of the Devolution Trust Fund are to be used as a basis for these guidelines.
  • The Cooperating Partnership will prepare for joint appraisal.

Best practice: Pro-poor urban funding basket

A pro-poor basket fund

The Devolution Trust Fundwas established in 2006 by the Regulator to assist the Commercial Utilities to improve water supply and sanitation services. The Fund is a pro-poor basket fund established specifically for the purpose of providing funds to increase access to water and sanitation services in low-income peri-urban and urban areas, focusing on the ‘last mile’ of the water network – service connections to improve access – and on household sanitation facilities. The fund also has a performance enhancement window to assist the Commercial Utilities to improve their financial viability.

The fund is demand driven

The Trust Fund issues calls for proposals. Proposals are submitted by the Commercial Utilities. The Fund assesses the proposals in terms of a pre-defined set of criteria (for example, cost perbeneficiary and impact on coverage and health). Successful proposalsare granted funding. The management of the project follows a well-defined project implementation framework. The Commercial Utilities enter into a financing agreement with the Fund and funds are released to the utilities based on the project milestones being reached, including reporting on and accountability for expenditure. The utilities are responsible to implement the projects, with a project steering team comprising relevantCommunity-Based Organisations and Local Authorityrepresentatives. The Fund also provides support as and when necessary, and monitors project progress and outcomes.

Two funding windows – a general fund and a performance enhancement fund

The general fund is open to all licensed Commercial Utilities and is intended to fulfil the main purpose of the fund – funding new connections and sanitation for poor households in urban areas.More specifically, the purpose of the General Fund isto facilitate funding for investment in appropriate low-cost technologies inwater supply and sanitation for low-income urban areas, andto assist with establishing sustainable management systems for theseinstallations/facilities, in areas that have had no water or with very limited supply (below20% coverage) for both peri-urban and low-cost areas, with interventions that include water kiosks and individual householdconnections.[11]

The performance enhancement fund is available to Commercial Utilities who have successfully implemented projects with funding from the general fund and have proven efforts to improve WSS situation for urban poor within past twelve months, to assist utilities to improve their commercial viability through reducing operational costs and/or increasing revenues. This money is provided as a grant or concession loan.

Appropriate standards and choice of technology

A uniform minimum standard of 40 litres per person per day is used and there is a policy to ensure that this standard is available to all, even the lowest income groups. Availability is measured by the regulator (hours per day). Water kiosks are made available for a designed maximum number of households per kiosk to reduce walking distance (within 300 meters), and avoid congestion and long waiting times. The standard includes a minimum pressure and care is taken in the detailed design of the kiosks.

Sound governance is secured through a well-structured Committee

The Fund management reports to the Devolution Trust Fund Committee. The Committee reports through theBoard of the Regulator to the Minister. The composition of the Committee ensures participation in decision-making by nationalgovernmental and non-governmental stakeholders in thesector. The decisions of the Committee are made independently of the Board of the regulator.

Professional management and accounting

The Fund is managed and run by a small professional team. The fund maintains its own accounts and publishes separate financial statements. It is audited by independentauditors according to international standards under theauspices of Zambia’s Auditor General.

Funds come primarily from development partners

Most of the money for the Fund comes from grants from Cooperating Partners(German Development Cooperation, DANIDA, and EU).These partners have signed a joint Memorandum of Understanding to coordinate their activities, related to the disbursement of funds,monitoring and reporting, and to undertake joint reviews. Government has contributed about 3% of the funds to date.

Outcomes

Approximately 800 000 people have been provided with sustainable access to safe and reliable water supply by the Fund in peri-urban and other low-income areas, through 55 projects, in the period 2006 to May 2011.[12]

Affordability

There is limited flexibility in household budgets among poor people to absorb a large increase in water charges. Therefore, the fund provides a full subsidy for the infrastructure and there is no recovery of capital costs through the tariff. The kiosks supply water in terms of a regulated tariff. A subsidised lifeline tariff is applied at kiosks. The operations and maintenance costs of the kiosks are covered from cross-subsidies from utility revenue from other users.

Scale

The Fund has received contributions of about US$4 million per year (on average) in the five-year period to date.[13] The fund therefore represents a small fraction (less than 4%) of the urban water sector’s investment needs (over US$100 million per annum).

Projects are monitored throughout the project cycle and impact assessments are undertaken

Monitoring involves the Fund’s social and technical consultants. The commercial utilities must submit monthly reports, a completion report and, thereafter, quarterly reports for two years. The social and technical consultants undertake onsite inspection visits which may be planned or unannounced. All projects are visited on completion. Impact assessments are undertaken six months and two years after project completion.

Sanitation projects are more challenging

The initial focus of the fund was on water. However, the Zambian Water and Sanitation Act obliges Commercial Utilities to provide sanitation services to defined service areas and sanitation coverage is very low – more than 70% of households do not have acceptable sanitation. Consequently, a sanitation concept was developed and piloted. The Fund works only with legally mandated commercial utilities. Target communities make informed choices for the most appropriate option using a demand-responsive approach. A community participatory assessment methodology is used and interventions are at both the household and public level. However, implementation of the sanitation projects has been more challenging compared to water projects with delays in project implementation and completion. This leads to poor outcomes, including vandalism, the need to redo work, budget overruns, frustration at the community level and reduced political will to fund further projects.

Ensuring good contracting performance is an on-going challenge

The performance of the technical and social contractors is assessed. Contractors must score at least 65% in order to be eligible for new service contracts. Assessments undertaken in the 2010/11 financial year resulted in five out of eight, and four out of ten technical and social contractors respectively qualifying for new service contracts. The negative impacts of poor technical contractor performance include delays in completion, variation orders on works, theft of materials on site, wrong specs for equipment, design-based variation orders on materials and poor quality works. The negative impacts of poor quality social contractor performance include the need to retraining vendors, omission of certain activities, vandalism, high vendor turnover and mismanagement of social activity budgets.[14]