Ethiopia Water Supply Sector Resource Flows Assessment

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Ethiopia Water Supply Sector Resource Flows Assessment Sector Finance Working Papers: No 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

2

3 CONTENTS Abbreviations Acknowledgments Executive Summary iii i iv 1 Approach to Water Sector Finance Assessment in Ethiopia Regional Study of WSS Resource Flows Study Objectives and WSS Finance Assessment Approach in Ethiopia Issues Regarding Information 2 2 Institutional Mapping Service Providers In Ethiopia Policy and Institutional Context of Water Services Provision Status and Population Coverage by Water Service Providers in Rural and Urban Areas Summary of Key Issues 14 3 Sector Financing Arrangements An Overview of the S ector Financing Arrangements Analysis of Current and Emerging Channels and Sources of Funds for Water Service Providers Summary of Key Issues 29 4 WSS Sector Finance Adequacy Assessment Government and MDG Coverage Targets Related Financial Requirements (In) Adequacy of Current Financial Flows Summary of Key Issues 35 5 The Way Forward Filling the Critical Information Gaps in Resource Flows Analysis 5.2 Developing a Comprehensive Financing Strategy Sectorwide Assessment of the Information and M&E Systems 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 Figure 2: Emerging Financial Arrangements-Main Financing Challenges Figure 3: Resource Flows by Channels of Finance & iv v 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 (%) Figure 2.3-b: Shares of Served/Unserved Population (%) Figure 3.1: Emerging Financial Arrangements-Main Financing Channels 17 Figure 3.2-a: Flows through Channels of Finance: Recurrent Expenditure Figure 3.2-b: Flows through Channels of Finance: Capital Expenditure 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

4 List of Tables Table 1: Channels of Finance Used for Development and Recurrent Expenditures Table 2: Coverage and Capital Expenditure in Three African Countries vi 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, Table 2.6: Regional Variations in Source of Water Used for Rural Water Supply, Table 2.7: Non Functioning Schemes by Types in Rural Areas (1996) 12 Table 2.8: Water Supply Status in Urban Areas, Table 3.1: WSS Resource Flows Matrix, Expenditures in and 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 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 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 Table 4.3: Coverage and Capital Expenditure in Three African Countries 34 Table 4.4: Per Capita Expenditures by Different Water Service Proivders 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 Table A1b: Analysis of Urban Water Supply Schemes in Oromiya Region Table A2: Estimation of Recurrent Expenditure for Urban Water Supply in Ethiopia 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 54 Region Table A5d: Estimates of (budgeted) NGO Expenditure on Water and Sanitation in SNNPR 54 Region Table A6: Investment Requirements to Meet Coverage Targets-Three Scenarios 55

5 ABBREVATIONS Exchange Rate 2000/ /2002 $US 1 = 8.1 birr $US 1 = 8.2 birr AAWSA CPC CRDA CSA DPPC ESP ESRDF FINNIDA GOE HDW HHICE HIPC MBH MDG MEDAC M&E MFI MoFED MWR NGO NRW NWSDP O&M PIP PPA PRSP RWB RWS RWSS SAR SCM SDP SDW SIMS SPD SWB TWSU UWASNET UWSS VWC VWSC WB WMS WMU WSDP WSP WSS Addis Ababa Water and Sewerage Authority Community Planning Committee Christian Relief Development Association Central Statistical Authority Disaster Prevention and Preparedness Commission Environmental Support Project Ethiopian Social Rehabilitation and Development Fund Finnish International Development Agency Government of Ethiopia Hand Dug Well Household Income Consumption and Expenditure Survey Heavily Indebted Poor Countries Motorized Borehole Millennium Development goals Ministry of Economic Development and Cooperation Monitoring and Evaluation Micro-Finance Institutions Ministry of Finance and Economic Development Ministry of Water Resources Non-Governmental Organizations Non-Revenue Water National Water Sector Development Plan Operations and Maintenance Public investment program Participatory Poverty Assessments Poverty Reduction Strategy Paper Regional Water Bureau Rural Water Supply Rural Water Supply and Sanitation Staff Appraisal Report Supply chains and maintenance Sector Development Program Shallow Drilled Well Sector Information Management Systems Spring Protection Development Scheme Water Board Town Water Service Unit Uganda Water and Sanitation NGO network Urban Water Supply Services ( utilities ) Village Water Committees Village Water and Sanitation Committee Water Board Welfare Monitoring Survey Welfare monitoring unit Water Sector Development Program Water Service Providers Water Supply and Sanitation 1

6 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. 2

7 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. 3

8 Figure 1: Reported Water Supply Coverage Water Supply Coverage in Ethiopia 1998 Share of Served/Unserved Population 1998 (in percent) (in million persons) Urban Rural Source: Table 2.4 based on ESP Source: Figure 2.3 based on ESP Served Population Unserved Population Urban areas Rural areas 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 The closing of ESRDF will have large implications for financing of rural water supply, and mechanisms will 4

9 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 Government Budgets Special Funds Direct Mobilization by WSPs Donors Loans/ grants Federal Regions 1. Federal Budget Block transfers Regional Government 2. Regional Budget Ministry of Water Resources Regional Water Bureau Loans 5. WRDF 4. ESRDF Channel of Finance Block transfers Budget allocations/ Development grants Cities & Towns Addis Ababa City Gov. Municipality Development Grants AA Water & Sewerage Authority Off-budget funds Internal generation Loans Small Towns Block transfers Urban Water Supply Service Small Towns 6. Internal Generation User Charges / Internal Surplus Woredas Villages /kebelles Woreda Gov. 3. Woreda Budget Woreda Water Desk Village Water & Sanitation Committee 7. Off-Budget Donors 8. Community Contributions 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 , declining to 558 million Ethiopia Birr ($68 million) in Separate estimates at woreda level were not available. 5

10 Table 1: Channels of Finance used for Development and Recurrent Expenditures fiscal year (Total Expenditure in million Birr and Percentage of total) Channels of Finance Recurrent (% of total) Development (% of total) Total (% of Expenditure (million birr) total) Federal Budget Regional Budget Ethiopia Social and Rehabilitation Development Fund (ESRDF) NGOs/ Off-budget Internal Generation through User Charges Communities/Households capital contribution na Total Total Expenditure (in million birr) Total Expenditure (in million US dollars) 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: and (in million birr) Recurrent Expenditure Capital Expenditure Federal Budget Regional Budget ESRDF NGOs/Off budget donors Internal Generation (user charges) Community Contributions 0.0 Federal Budget Regional Budget ESRDF NGOs/Off Internal Community budget donors Generation Contributions (surplus/ 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 ). 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 6

11 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 Country Population (millions) Coverage (%) Development Expenditure Per capita Dev. Expenditure (US$) Sector Expenditure (million US$) Total Population Uncovered Population as a share of GDP (%) Ethiopia Kenya Zambia 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 7

12 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 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 8

13 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 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 sce narios 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. 9

14 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. 10

15 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 Water and Sanitation Program Africa

16 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) 12

17 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 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. 13

18 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 throu gh their zonal offices 5.In rural water supply, a parallel change emphasizing community based schemes within a demand responsive approach was introduced by the ESRDF since 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 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. 14

19 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 upo n 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. 15