Criterion for allocation of water supply funds for investment

CRITERION
for
Allocating water supply
investment funds
to
Town Water Supply
and Sewerage Services
by
Loan and Grant
Prepared by:-
Tegenu Zergaw/Dr./

January, 2014
0
Prepared by:
Dr. Tegenu Zergaw, Tel: 0922-876419
MOWIE, WaSH Program Urban National Consultant E mail: tegzer@yahoo.com
 Criterion for allocation of water supply funds for investment

Table of content

Page

1. Introduction ..................................... 2

1.1 Background (policy review) ..................................... 2

1.2 Purposes of the guide line ..................................... 5

1.3 Scope of the guideline ...................................... 5

2 Towns category by 2013 population, .............................. 6

3 Financing urban water supplies, ............................... 7

4 Criterions for selecting towns for loan and grant, (proposals).. 7

4.1. Selection criterions,(proposals) ....................................... 7

4.2. Modalities for categorization of towns .................................. 11

5. Methodology of fund allocation for investment for UWS, ... 13

6. Prerequisites to get investment in loan and grant .................. 15

6.1 Towns applying for investment on loan .............................. 15

6.2 Towns applying for investment on grant .............................. 15

7. Conclusions ............................... 15

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Dr. Tegenu Zergaw, Tel: 0922-876419
MOWIE, WaSH Program Urban National Consultant E mail: tegzer@yahoo.com
 Criterion for allocation of water supply funds for investment

1. INTRODUCTION
1.1 Background

The Federal Government of Ethiopia has declared the "Ethiopian Water Resource
Management Policy" in its proclamation No. 197/2000 on the 9th of March 2000. In this
Policy, the overall objective of urban water supply and sanitation policy has been clearly
defined. The policy emphasizes, among others, decentralization of management and
decision-making of water supply and sanitation to be at the lowest appropriate levels, the
pricing for urban water supplies shall aim at full cost recovery, the need to develop cross-
subsidization strategies as the major pillars of the policy.

To put into action the water resources management policy “Water Sector Strategy" was
prepared in the year 2001. The main objective set out in the strategy is "to secure basis for
the provision of sustainable, efficient, reliable, affordable and user-acceptable water supply
services to the Ethiopian people, including livestock watering, in line with the goals and
objectives of relevant national and regional development policies." To these effects, the
strategy has clearly indicated the financial and economic aspect of the water supply and
sanitation as follows: -
i. Consider water sector as important as other crucial sectors of the economy while
making financial resource allocation decisions at the national level.
ii. Establish financial management rules and feasible arrangements for resource
allocation, cost-sharing and accessing funds for demand driven WSS systems. These
rules and arrangements should define the roles and obligations of various partners
(government, communities, private sector, etc.) in the management of funds to
improve transparency and accountability.
iii. Ensure self-reliance, through the promotion of local self-financing of programs and
projects, based on the overall socio-economic development conditions of local
communities, and through appropriate incentive mechanisms. To this end, engage the
participation of banks, private operators, micro financing institutions, national water
fund, and rural credit services, etc.
iv. Subsidise the capital costs only for communities that are unable to cover the cost of
the basic services so as to ensure social equity; establish financial resource allocation
criteria to access these subsidies based on local socio-economic factors, and
implement phasing out mechanisms of such programs (to promote self-reliance).
v. Establish and implement cost-sharing arrangements to share the capital, O&M and
capacity building costs between government, local communities, consumers, external
support agencies and non-governmental organizations.
vi. Promote the ‘user pays’ principle in accordance with the user’s willingness and
ability to pay for the service, based on costs of services vis-à-vis given socio-economic
conditions of the beneficiaries/users.
vii. Establish criterion to access the financial resources from the government budget to
expand the coverage of WSS services both in urban and rural areas. As a matter of
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 Criterion for allocation of water supply funds for investment
principle, utilise the government resources to strengthen national capacities, to meet
O&M expenditure, and to support the community based initiatives. Undertake
infrastructure development and feasibility studies using the funds acquired from
external sources.
viii. Ensure transparency, fairness, responsibility and accountability in the utilisation
and management of the WSS funds, namely through Community Water Committees
(rural) and Consumers’ Councils (urban), and by conducting regular audits and
inspections by community members who are not members of the water
committees/councils. Establish line of responsibility and authority within these
community-based structures. Institute good contracting arrangements to engage the
consultants and private firms to perform planning, design, implementation and O&M
tasks, and effectively administer these arrangements to ensure quality control.
ix. Promote the development of site specific water tariffs based on financial, economic,
and social equality considerations. Involve local communities in price setting to ensure
that tariff structures are compatible with consumers’ ability to pay, with a view of
providing sustainable services at affordable prices, and based on equitable and
practical guidelines and cost-sharing criteria.
x. Set tariffs in rural areas with the aim of recovering operation and maintenance
costs; while, in urban areas, aim at total cost recovery through time (which covers
operation & maintenance costs, depreciation and debit servicing). Implement
progressive tariff rates in the urban areas that are tied to consumption levels.
Develop mechanisms to continuously update the pricing structure.
xi. Promote rational subsidisation norms based on the severity of local problems, focusing
on the direct beneficiaries and promoting localised initiatives as well as water use
efficiency. Determine a ‘social tariff’ for poor communities which minimally covers
operation and maintenance costs. Develop special flat rate tariffs for communal
services like hand pumps and public stand posts. Consider providing support to cover
“connection fee” in areas where it turns out to be beyond the reach of local
communities.
xii. Provide incentives to local stakeholders such as community groups, manufacturers,
and consulting firms, etc. in terms of concessions in import duties, tax rebates,
subsidies, credit facilities and through other similar economic instruments to
encourage their participation in the planning, design, implementation and
management of WSS systems. / Ethiopian Water Sector Strategy, 2001, PP18-19/

Thus, from the policy and the strategy one can deduce:-

a) Water should be recognized as an economic good means it has value and thus,
gradual full cost recovery (i.e. Operationn, maintenance and investment as well as
expansion costs) should be the direction to be followed.
b) In fixing tariffs the ‘user pays’ principle in accordance with the user’s willingness
and ability to pay for the service is to be applied but based on costs of the services
vis-à-vis given socio-economic conditions of the beneficiaries.
c) The tariffs in urban areas also need to be progressive and tied to consumption levels.

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 Criterion for allocation of water supply funds for investment
d) Full cost recovery also does not mean immediate or permanent disallowance of
subsidies, but subsidizing the capital costs for communities that are unable to cover
the capital cost of the basic services so as to ensure social equity.
e) The need to establish financial resource allocation criteria to access the financial
resources (both local and external) based on local socioeconomicc factors,
f) The Government resources are to be used to strengthen national capacities, to meet
O&M expenditure, and to support the community based initiatives while external
funds are to be used to build infrastructure and carrying out feasibility studies.
g) The Water Resource Development Fund (WRDF), and also, with appropriate
incentives, local banks, private operators, other investors are expected and
encouraged to participate in the development of water supply.

The Government of Ethiopia also has established "Water Resources Development Fund”
(WRDF) in 2002GC, by proclamation No. 268/2002, as an autonomous body to promote the
development of viable Water Supply and Sewerage Services (WSSSs) throughout the
country. It is in charge of financing Urban Water Supply and Sanitation Projects based on
the principle of cost recovery.

In addition to the government budget for urban water supply and sanitation foreign
multilateral and bilateral institutions are also among the financiers of the sub-sector. The
major external financial resources for the water supply sub-sector are the World Bank (WB),
Department for International Development (DFID), the European Investment Bank
(EIB),the African Development Bank (AfDB), Italian International Cooperation, Japan
International Cooperation Agency (JICA), etc. The foreign finance includes both loan and
grant. The loans made available by these international financial institutions are subject to
interest but at concessionary rates. There are usually grace periods before repayment starts
and the periods for repayment are long term although variable from donor to donor and form
amount to amount. Some donors and NGOs also participate only in capacity building works.

The current practice regarding external financing is donors’ sign an agreement with the
government of Ethiopia (represented by the MoFED) and then the MoFED and the WRDF
will get into a subsidiary agreement whereby the funds are channeled to the WRDF.
Similarly the WRDF, in turn, relends the same to the WSSS selected to become beneficiary
of the loan/grant through a secondary lending agreement. The project for which the loan was
granted is then implemented either though the TWSSE or by the regional water bureaus
(RWBs) as the case may be depending of the capacity of the TWSSE.

Although the water sector strategy clearly indicated as there is need to develop criteria on
how to allocate these resources, both local and external funds, especially between towns,
there is no clearly define criteria/modality how loans and grants/subsidies will be distributed
to meet the water policy and strategy objectives. The objective of this study is thus to fill
this gap and propose criteria to be used, by the implementing agencies, in allocation of the
scarce resources made available either in loan or grant to the town water supply and
sewerage services based on their demand. The intention is to propose how to fairly

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MOWIE, WaSH Program Urban National Consultant E mail: tegzer@yahoo.com
 Criterion for allocation of water supply funds for investment
distribute the limited resources mainly foreign fund and meet the GTP and MGD targets in
the urban areas.

1.2 Purpose of the guideline

The main purposes of this guideline are:-

 To set criterion to fairly distribute the scare resources (government budget, loans,
grants etc)
 To identify the gap areas for resources allocation (small ,medium and large towns)
 To put in place uniform resource allocation criterion in all regions and among WS
project implementers (Government, donors, NGOs etc)
 To create fair competition among Town WSSSs
 To increase local stakeholders participation in UWS (Local authorities, Community
etc)
 To build the capacity of TWSSSs
 If sufficient data are collected to classify all towns by loan, partial loan and grant
towns,
 To direct donors and NGOs to areas of resource needs and

1.3 Scope of the guideline

The guideline starts from back ground which reviews the government policy regarding
financing water supply in general and urban water supply in particular. This helps:-

 to know the direction of the government regarding the water supply sector,
 to know the possible financial sources of water supply,
 identify the water sector stakeholders and their roles,
 know what are possible and what are not possible,
 to prepare the proposal in line of the policy ant to get acceptance of the proposals
and its implementation, and
 to let all stakeholders know the policy provisions regarding town water supply
financing.

Chapter two shows the Ethiopian towns' by population and categories. Chapter three
discusses financial sources for town water supplies by sources of finance. Chapter four,
deals with criterions to be used in selecting towns for loans and grants and proposed
modalities for categorization of towns for loans and grants. Chapter five demonstrates
methodology of allocating the scarce water supply funds to the towns in loan and grant.
Chapter six sets some prerequisites needed to be full filled by applying towns to get
investment in loans and grants.

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 Criterion for allocation of water supply funds for investment

2. Towns categories by 2013 population

According to the Ethiopian Central Statistical Authority totally there are 973 towns in
Ethiopia, including pre urban towns, in 2013. CSA defines urban areas as “all capitals of
Regions, Zones and Woredas, and localities with urban Kebeles whose inhabitants are
primarily engaged in non-agricultural activities”. Generally only towns with population
greater/equal to 2000 people are classified as urban and those below are classified as pre
urban towns. Accordingly the number of urban towns in the country is only 885 as shown in
the table below. The total pre urban towns are 88 towns.

Table 1 Towns category by number of population and regions.

URBAN
Pre
Urban Small Medium Large Metropolitan
S/N Region Towns Towns Towns Big Cities
>2,000 >20,000 >50,000 >100,000 >1000,000
<2000 < 20,000 <50,000 <100,000 <1000,000 Total
1 Tigrayi 0 46 6 4 2 - 58
2 Afar 13 30 4 0 0 - 34
3 Amhara 14 162 21 4 3 - 190
4 Oromia 21 304 29 8 4 - 345
5 Somali 18 59 3 1 1 - 64
6 Benshangul 4 18 1 0 0 - 19
7 SNNPR 14 139 18 1 4 - 162
8 Gambella 3 8 0 1 0 - 9
9 Harari 0 0 0 0 1 - 1
10 Addis Ababa 0 0 0 0 0 1 1
11 Dire Dawa 0 0 0 0 1 - 1
Moyale -
12 (special) 1 1 0 0 0 1
Total 88 767 82 19 16 1 885
Source: Compiled from CSA Population size by sex and region: July 2013.

The total Ethiopia's population projection for the year 2013, based on the results of the
May 2007 National Population and Housing Census of Ethiopia, is 86,613,986 of which
43,715,971 are males and 42,898,015 are females. The total urban projected population for
the same year is 15,100,057 people of which 7,517,578 are males and 7,582,497 are
females. Urban population according to this projection constitutes 17.4% of the total
country's population. Thus, addressing the demand of this group of the population whose
demand is relatively very high, compared to the rural population, is a big challenge for the
country to meet the GTP and MDG.

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MOWIE, WaSH Program Urban National Consultant E mail: tegzer@yahoo.com
 Criterion for allocation of water supply funds for investment

3. Financing urban water supply

Since the fund available from local and external sources, for both loan and grant, is limited
there is a need to prioritize the resource allocation without affecting the right to access to
water. All towns' population has equal right to all sources of financing but different
capacities to be eligible for loans and grants. Thus, it is necessary to have some sort of
screening towns to allocate the scarce resources. The following criterions are proposed to be
used to check eligibility of towns for getting loans for major investments (mainly source and
infrastructural developments). /See table 2 below/

Since infrastructural investment costs are increasing from time to time due to increase in the
prices of materials and service, it is advisable part of the finance to be covered by local
contributions i.e. town authorities, water utility and the community so that the amount of
loan would be lower and hence the water tariff will be affordable. Thus, the amounts of
contributions needed are also proposed per the town category as shown in table 3 below.

4. Criterions for selecting towns for loans and grants

4.1. Criterions for selecting
We proposed the following criterions to be used to screen towns that would qualify for
loans. Since the criterions have different significance, different weights are allocated to each
criterion based on their significances on eligibility for loan. The selection criterion and the
points allocated are presented below.

A. Number of Beneficiaries/ Population/.

The number of town’s population is proposed as major criterion for the loan eligibility test.
Because larger number of the town's population/beneficiaries indicates:-

 There is high demand for water i.e. high consumption and high revenue for the
WSSS,
 Existence of high non- residential water demand,
 Higher affordability and willingness to pay for water,
 Better administrative and management status,
 High water production and sales and lower unit production cost and high probability
for full cost recovery tariff,
 Higher possibility to boost access to water supply i.e. water coverage, to meet
GTP/MDG etc

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 Criterion for allocation of water supply funds for investment

B. Administrative status of the towns.

Current administrative status of the town is another good indicator of the potential of the
town to repay loan by delivering better services. Different administration offices (Regional,
Zonal, and Woreda) do exist in most of the towns. The higher the administration hierarchy
level, the more would be the existence of administration offices having more demand for
water” because:-
 More will be the government workers,
 Higher will be business activities (Hotels, Bar and Restaurants, Cafes, Pensions etc)
 More will be the number of small scale enterprises (bakeries, dairies, breweries,
laundries etc)
 More will be the number of guests, visitors, meetings etc,
All these boosts demand for water and increase the potential of WSSS to raise revenue from
water sale.

C. Current water supply status of the town (coverage)

The existing water supply status of the town is a good indicator to project the volume of
demand in the town. It is estimated based on minimum urban per capita consumption (20l/p
within half kilo meters radius) and the volume of water supplied to the town. The larger the
gap between the available demand and the supply the greater will be the eligibility of the
town for loan.

D. Economic activities in and around the town ( Commercial, Tourist, industrial,

Mining, large scale agriculture, Pilgrim, Education/training center etc),

The type of economic activities in and around the town also has significant impacts on the
water demand of the town. Towns which have more commercial, industrial, tourist and
education centre etc, will have more water demands than others. The more these centers
exist in the town the more will be the demand for water and the possibility of the town to
be eligible for loans.

E. Organizational set up of the water supply service and availability of trained

manpower (Management, Finance and Technical).

Well organized water utilities will have better management and efficient utilization of its
resources and deliver better services. The larger the proportion of trained manpower
(Technical, managerial and financial) the better will also be its efficiencies and service
deliveries. Thus, town with better organizational setup and trained manpower will
efficiently and effectively utilize the loan and will pay back the loan on time and hence
more eligible for loan.

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 Criterion for allocation of water supply funds for investment

F. Financial status of the WSSS (Profit/loss for the past five years).

i. Existence of cost recovery water tariff,

As indicated above, the government’s water policy for urban water supply is to be at cost
recovery tariff. Thus, the existence of cost recovery or close to cost recovery tariff in the
town is an indicator of the willingness to pay and affordability of the town's population to
implement the policy. It also helps to forecast the revenue potential of the town without
changing the tariff and the possibility of further raising the tariff. Thus, it is a good indicator
of eligibility test.

ii. Financial performances of the TWSSS

The trend of the WSSS financial status is also a good indicates whether the water utility is
operating as a business organization or not. It also indicates whether the water utility has
good experience and potential to recover its costs including loan and service charges or not.
It is also a manifestation of its financial autonomy.

Thus, total annual water sales revenue of the TWSSS should be greater or equal to the
annual total expenditure for the water production. The WSSS that showed (for at least the
past three to five years) positive income statement will be eligible for loan because it
indicates good financial management and potential for loan repayment.

G. Strengths of the WSSS Management and Town Water Board

The strengths of WSSS management staff (Manager, Finance , Operation & Maintenance
etc heads) in terms of appropriate training and work experience shows the capacity of the
water utility to run the new scheme and its loan management. To be considered as strong
management the TWSSS management has to:-
i. have the minimum qualification and experiences for the posts of assignment,
ii. have regular management meeting,
iii. created good relation and working environment in the WSSS,
iv. call meetings and discuss on the WSSS plan and performances at least every six
months.
v. have good relations with its customers.

The existence of strong and well functioning town water board also manifests the
availability of good supervision at local level to control and also assist the water supply and
sewerage service in the implementation of investment and in repayment of the loan. It is
also an indication of the autonomy level of the water board and the water utility.

Strong relation and good working environment is also needed between the TWSSS and the
water board. This will come only when both works as per the guidelines and manuals
provided. This will happens also if they start signing performance contract agreement
annually based on business plan and work accordingly.
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 Criterion for allocation of water supply funds for investment

To be considered strong the town water board has to:

i. have regular meetings where all/majority of the board members participate,

ii. have monitoring tools to control and supervise the WSSS,
iii. receive reports and evaluate the performances of WSSS at least every quarter,
iv. signed performance contract agreement with the TWSSS,
v. call the town community, at least once every year, to discuss on the town’s
water supply and sanitation issues.

Thus all these need to be considered to qualify the town for loans.

H. Existence of business plan for the water utility.

Business plan is a document prepared by WSSS’s management to summarize its operational

and financial objectives for the near future (usually one to five years) and to show how they
will be achieved. It serves as a blueprint to guide the town water supply service’s policies
and strategies, and is continually modified as conditions change and new opportunities
and/or threats emerge.

Business planning supports the process of transition of town water utilities from financial
dependency on government to financial autonomy. It supports the process of improving
short-term financial management of the utility and of managing long-term financial
planning to achieve financial sustainability. Good “business plan” also helps good
management and good management practices help to reduce long-term financial risks in
planning for the future expansion and improvement of water supply and sanitation systems.

Hence, all water supply and sewerage services are expected to have recent feasible business
plan and should work accordingly. Thus, WSSSs that go for loan should at least have
business plan and some years of experience in using the business plan to be eligible for loan.

I. Availability of WS Feasible Study, Final Design and Bid documents

To use immediately the loan fund the WSSS need to have recently studied feasibility study
and final design that are appraised and accepted by the regional water bureau or others
delegated to do so. If not appraised it is necessary to appraise the viability of the water
supply project study and design in terms of market availability, technical feasibility,
financial soundness, economic viability, social desirability and environmental impacts.

Without such document it is difficult to guarantee/ approves loans for water utilities due to
shortage of fund and high demand for such loans. Most of the eligibility data and
information are also obtained from this document. Thus, it is a prerequisite for any
application. Those with ready and viable feasibility study documents should get priority for
loan.

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 Criterion for allocation of water supply funds for investment

J. Availability of local contribution (willingness for contribution)

The town beneficiaries and local authorities’ willingness and affordability to contribute to
cover part of the investment cost for the town water supply will lessen the tariff and
strengthen the sense of ownership on the town water supply. The larger the local
contribution the lesser will be the tariff and the loan and loan service charges. Thus, those
towns that could raise more local financing need to be encouraged. The availability of local
contribution is another prerequisite for any request for financial request.

K. Affordability and willingness of the town community to use the water supplied.

The willingness and affordability of the town population to pay higher tariff than the
prevailing tariff is very crucial to be sure the loan will be repaid. The proportion of the
population that could pay more than operation and maintenance cost of the water supply
i.e. more than the public tap users is a good indicator. It indicates the volume of cross
subsidies needed and the potential for cross subsidies. In the town where public tap users
are high the level of cross subsidy will be high and vice versa. The higher the level of cross
subsidy needed the lower will be the eligibility of the town for loan. The total volume of
water sold at public taps and 1st band from all water sold is a good indicator.

L. Mode of service in the town

The dominant mode of service in the town is also another indicator whether the water
supply and sewerage service could pay the loan back or not. A good indicator is the water
consumption ratio of non residential connection to residential connection. The higher the
ratio, the better will be the potential for cross subsidy and loan repayment guarantee and
vice versa.

M. UFW (past five years.)

Higher unaccountable for water (UFW) shows the inefficiency level of the water supply
and hence low capacity to repay loans. Thus, it is a good indicator for eligibility of the
water utility for loan, i.e. the lower the UFW the larger would be the eligibility of the town
for a loan.

4.2 Modalities for categorization of the towns

The weights and point allocation proposals and town categories as per the points squared
are presented in the tables below.

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 Criterion for allocation of water supply funds for investment

TABLE 2:- SELECTION CRITERION FOR TOWN WATER SUPPLY

AND SEWERAGE SERVICES FOR LOAN AND GRANT

S/N Indicator Weight Category Points

Description
(%) (%)
Number of 1. > 50,000 30
population in the 2. Proportional (if (X/50*
town (CSA) 50,000 gets 30% 30)
Number of beneficiaries /
A 30 , then how much
town population
X will gets?
Example 25,000
will get 15 point
Status of the town Administrative 1. Regional 5
B ( Regional, Zonal, importance/status 5 2. Zonal 3
Woreda ... capital) 3. Woreda 1
% of total town’s 1. >90% 0
population that get 2. > 75% <90 1
Current water supply sufficient safe 3. > 50% < 75 3
C status of the town water 5 4. < 50% 5
(Coverage)

Availability of 1. Large Industrial/

Economic activities in high water Higher
and around the town consuming Educational 5
( Commercial, Tourist, customers (as 2. Transit/ tourist
D 5
Industrial, Pilgrim, source of income town 3
Transit, Higher Education and potential for 3. Commercial/Pilg
center) town’ growth) rim 2
4. Others 1
Available trained % of trained 1. > 50% 5
manpower of the WSSS (> Diploma) 2. > 30 - 49% 4
E 5
(Management, Finance permanent staffs 3. >10 < 29% 2
and Technical) 4. < 10% 1
Operation ratio : 1. >1 0
Financial Status (Cost Total O&M cost 2. =1 1
F recovery in the past 3- 5 over total revenue 5 3. >0.9 <1 2
years) from water sells 4. >0.75 < 0 9 3
(in Birr) 5. <0.75 5
Education and 1. Strong WSSS
Strengths of water supply experience of management +
G management and Town management staff 5 strong TWB 5
Water Board and well 2. Strong WSSS
functioning of management +

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 Criterion for allocation of water supply funds for investment

town water boards weak TWB 3

3. Weak WSSS
management +
weak TWB 0
Feasible business 1. Existence of BP
plan report and &
greater than 2 implementation 5
years of experience
experience in 2. Existence of BP
using the business but no BP
Existence of business
H plan 5 implementation 3
plan for the water utility
experience
3. Non existence of
BP and non-BP
implementation 0
experience

1. Availability of
Study for the new WS Feasible
WS investment study documents 10
Availability of WS (feasibility & final 2. Non-
I 10
Feasible study documents design) Availability of
WS Feasible 0
study documents

Contribution as % 1. > 30% 5

Availability of local
of the investment 2. > 20 but < 30% 3
J contribution (willingness 5
required 3. > 10 % < 20% 2
for contribution)
4. < 10% 0
% of the town 1. > 90% 5
Affordability and
population that 2. > 75% but <
willingness of the town
K afford to pay full 5 90% 3
community to use the
cost recovery tariff 3. > 50% < 75% 1
water supplied
(PT ) 4. < 50% 0
Ratio of non 1. > 40% 5
residential 2. >30% < 40% 3
L Mode of service consumption to 5 3. >20 < 30% 1
residential 4. < 20% 0
consumption (%)
As % of the total 1. < 20 % 10
M UFW (past five years) water produced 10 2. >20% < 30% 5
3. > 30% 0

Total 100 Total points acquired

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 Criterion for allocation of water supply funds for investment

5.0 Methodology for allocation of fund for investment in urban

water supply
All towns applying for loans and grants should submit data/information and evidences
regarding these criterions. Depending on the total points obtained by the town, we propose
the following modality in selecting competing towns for water supply investment financing.

Table 3 Town categories and water supply Investment by sources of finance

Investment
Contributions Grant for
Category Range Local WSSS Tariff
Loan Town Capacity
Authority Own Investment
community building
fund
Full cost
1 >75% 70% 15% 10% 5% - 5%
recovery
> 50 % Full cost
2 50% 20% 5% 5% 20% 10%
< 75% recovery
O&M +
50% of the
3 < 50% - 30% - 10% 60% 20%
annual
depreciation

As shown in the table above those towns that have squared 75% and more will qualify for
loan and the tariff will be full cost recovery tariff. These towns will get 70% of the
investment in loan and the remaining (30%) will be covered by local contributions as
indicated in the table. The rationale is to encourage local administration and community
participation and to ease pressure on water tariff. The towns’ will get 5% of the investment
cost in grant for capacity building.
Towns in category 2 (those squared >50% but less than 75%) will get 50% of the investment
in loan and the remaining 50% through local contributions. Tariff will be cost recovery tariff
and they get 20% of the investment in grant. They will also get 10% of the investment cost
in grant for capacity building.
The last category towns (less than 50%) mainly the small towns, will not qualify for loan
and their tariff will cover O&M costs and half of the investment cost/grant/ as a saving for
future investments. For these towns 60% of the total investment will be covered by grant
and the remaining by local contribution. Since capacity of these towns is believed to be low
and the volume of investment is also relatively smaller 20% of the total investment is
proposed for capacity building through grant.
For all towns category, grants are fully subsidy and will not be considered in the water tariff,
while the contributions will be fully or partially considered in the tariff depending on
socioeconomic situation of the town and the affordability and willingness to pay of the
town’s population. It will be the decision of the town water board and local authorities to
14
Prepared by:
Dr. Tegenu Zergaw, Tel: 0922-876419
MOWIE, WaSH Program Urban National Consultant E mail: tegzer@yahoo.com
 Criterion for allocation of water supply funds for investment
decide on the volume of subsidy when setting tariff. The towns will get loan at WRDF
interest rate but will not pay interest on the contributions.

6. 0 Preconditions to receive loans and grants

6.1 Towns applying for investment in loan

The town applying for investment in loan should fulfill the followings to get loan.
a) Present recently studied and appraised feasibility study and final design report.
b) Submit guarantee letter for availability of required local contribution,
c) Have legally established strong town water supply office and town water board.
d) Minute of meeting of Town/Woreda council, which indicates the willingness of
the town community to take a loan and repay the loan,
e) Agreement of the town water board to revise its tariff to cost recovery tariff.
f) Not received loans in the past 10 years and no significant remaining unpaid loan,
g) Audited financial report for the past three years,
h) It has to have recently studied business plan,
i) loan grantee from the regional water bureau or from appropriate administrative
body

6.2 Towns applying for investments in grant

The town that applies to get investment in grant should fulfill the following preconditions
to get the grant.
a) Availability of legally established water supply service office and permanent key
staffs,
b) Recently studied water supply feasibility study and design,
c) Guarantee, from the Town/ Woreda council, for availability of required local
contributions,
d) The town has not got an investment grant for the past ten years,

7. Conclusions
All the above proposals are in line with the water resources management policy and strategy
and their implementation helps to meet the water policy targets. They will also help to meet
the GTP and MDG targets of 100% urban water supply coverage by addressing the fast
growing urban population demands.

Thus, all stakeholders of urban water supply should discuss and comment on the criteria and
if agreed should follow the guideline during the allocation of the meager urban water supply
fund.

15
Prepared by:
Dr. Tegenu Zergaw, Tel: 0922-876419
MOWIE, WaSH Program Urban National Consultant E mail: tegzer@yahoo.com