Water Diagnostic Study - UNICEF

Water Diagnostic Study for Eastern and Southern Africa 1.

Water Diagnostic Studyfor Eastern and Southern Africa

Country Screening, Assessment and Potential for Bankable and Blended Finance Projects in the WASH Sector

WASH Section, UNICEF ESARO30 October 2020

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AuthorsDr Samuel Godfrey (PhD, MSc CEng, BA (hons), CEnv, CWem)Regional Advisor, Water Supply, Sanitation, Hygiene (WASH) / Regional Focal Lead Climate, Environment and EnergyUnited Nations Children Fund (UNICEF) East and Southern Africa Regional Office (ESARO)

Farai A. Tunhuma (BEng, MSc, MBA)WASH Specialist – Climate and UrbanizationUNICEF ESARO

José T. Frade (MSc, CEng)WASH Independent Consultant, Former Head of EIB Water and Sanitation

Suggested citation: Godfrey, S. and Tunhuma, F.A. and Frade J.T., Water Diagnostic Study for Eastern and Southern Africa: Country Screening, Assessment and Potential for Bankable and Blended Finance Projects in the WASH Sector. United Nations Children’s Fund Eastern and Southern Africa Regional Office, Nairobi, October 2020

Contributors The authors would like to sincerely thank several contributors, without whom this report would not have been possible. Overall advice, guidance and critical inputs were provided by:

Bo Viktor Nylund, Deputy Regional Director, UNICEF ESARO; Chris Cormency, Chief of WASH, UNICEF Mozambique; Guy Hutton, Senior Adviser WASH, UNICEF NYHQ; Kitka Goyol, Chief of WASH, UNICEF Ethiopia; Matthew Cummins, Regional Adviser Social Policy, UNICEF ESARO; Natalie Vaupel; Senior Adviser Partnerships, UNICEF ESARO; Nicola Dell’Arciprete Partnerships Specialist, UNICEF ESARO; Michele Paba, Chief of WASH, UNICEF Malawi.

Water Diagnostic Studyfor Eastern and Southern Africa

Country Screening, Assessment and Potential for Bankable and Blended Finance Projects in the WASH Sector


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Table of Contents

1.0 Review methodology 7

2.0 Regional economic analysis 102.1 World Bank classification 102.2 Fragile states 10

3.0 Eligibility Screening 123.1 OECD Country Risk Classification 123.2 Country debt levels 123.2.1 IMF Country debt levels 123.2.2 Debt Sustainability Assessments (DSAs). 123.2.3 Real GDP growth projections 133.3 Adherence to Article 96 of the Cotonou Agreement 13

4.0 Screening Results for ESA countries 154.1 OECD Country Risk Classification 154.2 Country debt levels 154.2.1 IMF Country debt levels 154.2.2 Debt Sustainability Assessments (DSAs). 154.2.3 Real GDP growth projections 164.3 Adherence to Article 96 of the Cotonou Agreement 164.4 Eligibility screening results summary 17

5.0 Sector risk assessment 195.1 Institutional framework 195.2 Sector Policy Strategy 205.3 Sector Planning, monitoring and review 205.4 Sector financing 21

6.0 Status of Project Financing on Current UNICEF Programmes 236.2 Potential Blended Finance Projects 236.3 Potential Bankable projects 236.4 Potential Bankable projects for development 23

7.0 Recommendations 257.1 Countries with existing UNICEF WASH programming 257.2 Fragile states 257.3 Upper Medium Income Countries 257.4 Reducing risks for ESA countries 257.5 Project level assessment 25

8.0 Next steps 26

Annex A: Preliminary Report on Potential Bankable Projects in Malawi, Mozambique and Ethiopia 27

Annex B: Eligibility Screening 31

Abbreviations 32

Executive summary The Water Sector Fiscal Diagnostic is an initiative by UNICEF is aimed at providing an analysis of the investment environment in the WASH sector across the Region. The analysis identifying countries with potential for bankable and blended finance projects, based on UNICEF’s own capabilities and relations with strategic partners such as the EU, its investment bank (EIB) and other international financial institution (IFI)s as well as the fiscal environment in the country. This analysis is done with the express intention of enhancing in-country dialogue and project development through addressing bottlenecks to investment such as local capacity, administration, fiscal flows, safeguards and procurement related issues.

In addition to this initial screening of countries, potential bankable and or blended finance projects for development were then identified in Mozambique, Malawi and Ethiopia. With the support of the UNICEF and other WASH sector stakeholders in the countries, country level missions were undertaken to each of the countries from October to December 2019.

The country missions established the level of WASH Sector dialogue in the areas of blended finance and bankable projects at country level as well as determine the readiness of UNICEF COs to engage and attract IFIs and the Private Sector for blended financing of projects at scale, through the development of three (3) bankable projects and their investment cases. In addition, it also provided the prioritized countries support on drafting of bankable projects and related investment cases for both public and private financing and identifying potential investors and possible modalities for further investment in the sector.

Further long-term support will be provided in the drafting of bankable projects and related investment cases for the prioritized countries of Mozambique, Malawi and Ethiopia in order to ensure increased sector and project level financing with IFIs, the public and private sectors.

Water Diagnostic Study for Eastern and Southern Africavi .

11.0 Review methodology The methodology for this review included:

1. Eligibility screening and country risk assessment2. Sector risk assessment 3. Project level assessment

The concept of “the project” presented in this report could include one or more schemes in different locations with hard (infrastructure) and soft (capacity building, software, etc.) components thus meaning also an “investment programme”.

The figure below shows the methodology for the water diagnostics study.

Figure 1: Methodology of the regional water diagnostics study

Eligibility screening and country risk assessment

The eligibility screening and country risk assessment looks at the macro economic environment at country level. It looks at the current economic and income status of the country, its vulnerability, the future economic growth and the government ability to borrow and service debt as governments are often responsible to taking on loans with government institutions through their ministry of finance procedures. The indicators reviewed during this initial analysis’s included a review of

• World Bank classification (income) and Fragile States Index• OECD Country Risk Classification (credit risk)• IMF country debt levels and Debt Sustainability Assessment• Real GDP growth projections (IMF’s World Economic Outlook database) • Adherence to Article 96 of the Cotonou Agreement

CHAPTER 1

Review Methodology

REGIONAL WATER DIAGNOSTIC STUDY

IDENTIFICATION OF COUNTRY PROJECTS: EXAMPLES

ELIGIBILITY SCREENINGCOUNTRY RISK

METHODOLOGY• World Bank classification (income) and

Fragile States Index• OECD Country Risk Classification (credit risk) • IMF country debt levels and Debt

Sustainability Assessment• Real GDP growth projections (IMF’s World

Economic Outlook database)• Adherence to Article 96 of the Cotonou

Agreement

SECTOR RISK SCOPING OF PROJECTS

Sector Level Assessment• Institutional, legal, regulatory• Alignment with national policies (e.g. SDGs)• Service providers framework• Tariff policy and practice• Financing and Investment

Project Level Assessment• Economic, financial (ERR, cost recovery)• Utility capacity and financial sustainability• Technical factors (demand, technology,

O&M)• Environmental (impact, climate resilience)

• Social (impact, affordability, equity, gender)

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Sector risk assessment

After understanding the macroeconomic perspective of the countries through eligibility screening and country risk assessment, the next step of the review was to undertake a sector risk assessment. This assessment focused on how the water sector is structured in the country and how this impacts its ability to generate revenue for investment and operations and maintenance of infrastructure. For a banking and development institutions such as the EIB, there is a need to ensure safeguarding, risk mitigation and ring fencing of funds to ensure that debts can be serviced accordingly. The sector risk assessment was undertaken at country level and reviewed performance against indicators such as the: -

• Institutional, legal, regulatory• Alignment with national policies (e.g. SDGs)• Service providers framework• Tariff policy and practice• Economic, financial (ERR, cost recovery)

After the Eligibility screening, country risk assessment and sector risk assessment, a number of countries were identified in which project level discussions, assessment and further development. This analysis identified identified potential projects in LICs which potentially have a lower capacity to service the debt. These potential projects and cases could be further developed in partnership with UNICEF. Development of these projects would then focus on: -

• Utility capacity and financial sustainability• Technical factors (demand, technology, O&M)• Environmental (impact, climate resilience)• Social (impact, affordability, equity, gender)

This report will only cover the Eligibility screening, country risk assessment and sector risk assessment leading to the identification of countries for further engagement on bankable project development.

2CHAPTER 2

Regional economic analysis


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2.1 World Bank classification

Based on the World Bank classification, the majority (60%) of the countries in ESA are categorized as Low-Income Countries (LIC)s with a Gross National Income (GNI) per capita of USD 1,005 or less. Six countries are Lower Middle-Income Countries (LMIC) following the change of status of Zimbabwe in 2019, and three are Upper Middle-Income Countries (UMIC).

Over the past five years, only three countries in ESAR have been reclassified, Angola has moved from to an UMIC to a LMIC, whilst Kenya has graduated from a LIC to a LMIC with an estimated GNI per capita at around US$2,000 in 2018 and Zimbabwe was upgrade from LIC to LMIC GNI per capita at around US$1,710 in 2018. Furthermore, it is interesting to note that, South Sudan vacillated between LIC and LMIC status following independence in 2011 and it was classified as a LIC in 2016.

Figure 2: Income classification in ESA 2019

Low Income Lower Middle Income

Upper Middle Income

Burundi Angola BotswanaComoros Kenya NamibiaEritrea Lesotho South AfricaEthiopia Swaziland Madagascar Zambia Malawi ZimbabweMozambiqueRwandaSouth Sudan

TanzaniaUganda

2.2 Fragile states

The Fragile States Index2 is a report released by the Fund for Peace and the magazine, Foreign Policy. This report has been released annually since 2005. The primary purpose of this report is to assess the vulnerability of sovereign states throughout the world. All sovereign states that are members of the United Nations are included in the report when enough data is available except for Taiwan, Kosovo, Western Sahara, Northern Cyprus, and the Palestinian Territories.

The report uses indicators across four categories (social, cohesion, economic and political) to determine if a state is vulnerable to conflict or collapse. 12 different indicators are used to determine the vulnerability of the states. These factors include human rights, public services, demographic pressures, refugees and internally displaced persons, and security.

The higher a state is ranked on the list, the more vulnerable it is. From the 2018 Index, 3 of the top 10 most vulnerable states are in ESA and include: -

• South Sudan• Somalia• Zimbabwe

2.0 Regional economic analysis

1https://unctad.org/en/PublicationsLibrary/wesp2019_en.pdf 2http://worldpopulationreview.com/countries/fragile-states-index/

3CHAPTER 3

Eligibility Screening


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The eligibility screening was done at country level based on the methodology outlined, including a review of the country’s IMF Rating, its debt levels and adherence to Article 96 of the Cotonou Agreement. The findings at the different stages of eligibility screening are shown below.

3.1 OECD Country Risk Classification

This classification method assessing country’s credit risk and classifying countries in connection with their agreement on minimum premium fees for official export credits. The Organisation for Economic Cooperation & Development (OECD) Country Risk Classification measures the country credit risk and the likelihood that a country will service its external debt.

The index uses a scale of eight risk categories to determine a country’s credit risk. Zero (0) being the rating for High Income OECD countries and other High-Income Euro zone countries whose risk of default is treated low and 7 being the highest level of risk.

The assessment is undertaken by a group of country risk experts from Export Credit Agencies, who meets several times a year to update the list of country risk classifications. Every country is reviewed whenever a fundamental change is observed and at least once a year, thereafter the list of country risk classifications3 is publicly available and published on the OECD website after each meeting; however, the meetings themselves and the exchanges and deliberations that take place are strictly confidential.

The Country Risk Classification takes place through the application of a two-step methodology: with the first step assessing the payment experience reported by the Participants, the financial situation and the economic situation based primarily on IMF indicators using the Country Risk Assessment Model (CRAM) which produces a quantitative assessment of country credit risk.

Thereafter, the CRAM results are analyzed by country risk experts from OECD Members to integrate factors not fully considered by the model. This could lead to an adjustment (upwards or downwards) of a country compared to the CRAM results. Any adjustment is made through consensus among Experts. The ESAR

country results are shown Annex B.

3.2 Country debt levels

3.2.1 IMF Country debt levels

The county debts levels are based on IMF central government debt levels4 for 2017. This index or percentage of debt level is a measure of the total stock of debt liabilities issued by central government as a share of the gross domestic product. This results in a percentage referred to as the debt level.

3.2.2 Debt Sustainability Assessments (DSAs).

Debt “sustainability” is often defined as the ability of a country to meet its debt obligations without requiring debt relief or accumulating arrears. the Debt Sustainability Assessments (DSAs) was developed by the IMF developed in 2017/18. The IMF periodically carries out the debt sustainability assessments (DSAs) which are summarized in Article IV country reports and result in a ranking (low, medium, high or in debt distress). The main objective of the assessment is to help guide the borrowing decisions of LICs, provide guidance for creditors’ lending and grant allocation decisions, and inform IMF and World Bank analysis and policy advice.

One should note that the DSAs are not applied to all countries, and they are done rather randomly (i.e. there is no set timeframe for conducting them which is problematic since levels of debt distress can be quite volatile). To assess debt sustainability, debt burden indicators are compared to indicative thresholds over a projection period. There are four ratings for the risk of external public debt distress :

• low risk, generally when all the debt burden indicators are below the thresholds in both baseline and stress tests;

• moderate risk, generally when debt burden indicators are below the thresholds in the baseline scenario, but stress tests indicate that thresholds could be breached if there are external shocks or abrupt changes in macroeconomic policies;

• high risk, generally when one or more thresholds are breached under the baseline scenario, but the

3.0 Eligibility Screening

3http://www.oecd.org/trade/topics/export-credits/arrangement-and-sector-understandings/financing-terms-and-conditions/country-risk-classification/4https://www.imf.org/external/datamapper/CG_DEBT_GDP@GDD/AGO/BWA/COM/BDI/ERI/SWZ/ETH/KEN/LSO/MDG/MWI/MOZ/NAM/RWA/ZAF/SSD/TZA/UGA/ZMB/ZWE?year=2017


country does not currently face any repayment difficulties; or

• in debt distress, when the country is already experiencing difficulties in servicing its debt, as evidenced, for example, by the existence of arrears, ongoing or impending debt restructuring, or indications of a high probability of a future debt distress event (e.g., debt and debt service indicators show large near-term breaches or significant or sustained breach of thresholds).

The findings of the debt sustainability levels are shown in Annex B.

3.2.3 Real GDP growth projections

The IMF’s World Economic Outlook database (April 2019) provides information on the projected annual change in real per capita general government revenue over the 2019-2022 period. This gives an indication of the potential generation of new revenue. Revenue generation is critical to ensure that there are sufficient cash flow for a country to meet its debt payment requirements.

3.3 Adherence to Article 96 of the Cotonou Agreement

The Cotonou Agreement5 is a treaty between the European Union and the African, Caribbean and Pacific Group of States (“ACP countries”). It was signed i June 2000 in Cotonou, Benin’s largest city, by 78 ACP

countries (Cuba did not sign) and the then fifteen Member States of the European Union. The EIB, as an EU institution operates in the ACP countries under the Cotonou Agreement.

The Cotonou Agreement is aimed at the reduction and eventual eradication of poverty while contributing to sustainable development and to the gradual integration of ACP countries into the world economy. The revised Cotonou Agreement is also concerned with the fight against impunity and promotion of criminal justice through the International Criminal Court.

Article 96 of the Cotonou Agreement, also known as the non-execution clause, provides for consultations on human rights where political dialogue under articles 8 and 9 (4) of the Agreement have been exhausted. Failure to “fulfil an obligation stemming from respect for human rights” triggers European Union-ACP States to enter into “consultations that focus on the measures taken or to be taken by the Party concerned to remedy the situation”. If consultations fail, “appropriate measures” such as aid suspension could follow (art. 96 (2) (a)).6

Non-adherence to this article can result in reduced funding, aid flows and support into countries. The article has been applied about 15 times since 2000, following violent government overthrows, escalation of violence or human rights violations7.

6https://www.ohchr.org/Documents/Issues/Development/RTDBook/PartIIIChapter19.pdf7https://www.consilium.europa.eu/en/policies/cotonou-agreement/


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4CHAPTER 4

Screening Results for ESA countries

4.0 Screening Results for ESA countries

The results of the screening process for ESAR countries are as follows:

4.1 OECD Country Risk Classification

Screening in terms of the OECD Country Risk Classification shows that:

Comoros has no data available, while Botswana is well rated at 2; with 2nd level of minimum risk of default and Namibia is a moderate risk country rated at 4, with the rest of the ESA countries are high risk or extremely high risk

Risk of default is 7, which is the highest level of risk in 10 ESA countries namely Burundi, Eritrea, Ethiopia, Madagascar, Malawi, Mozambique, Somalia, South Africa, South Sudan and Zimbabwe

Risk of default is 6, which is the second highest level of risk in 8 ESA countries namely Angola, Eswatini, Kenya, Lesotho, Rwanda, Tanzania, Uganda and Zambia

4.2 Country debt levels

4.2.1 IMF Country debt levels

The IMF country debt levels are measured as a percentage. The percentage of debt level is a measure of the total stock of debt liabilities issued by central government as a share of the gross domestic product.

• No data is available for Ethiopia, Somalia and Tanzania • Botswana has a debt level of 14.3%, which is the lowest in the ESA countries• Eswatini, Comoros, Lesotho, Madagascar, Uganda, Rwanda, Namibia are within the

25-50% range of indebted• While Burundi, South Africa, Kenya, Malawi, South Sudan, Zambia and Angola are

between 50 to 65-% • Zimbabwe is above the 50% line and is rated at an indebtedness of 82.3%• Mozambique and Eritrea are indebted above 100% at 102.1% and 131.2% indebtedness

4.2.2 Debt Sustainability Assessments (DSAs).

Debt “sustainability” Assessment show the risk of a country failing to meet its debt obligations without requiring debt relief or accumulating arrears. The following are the results of the latest assessment of 16 July 2019:

• No data - Angola, Botswana, Burundi, Eswatini, Namibia, South Africa, Eritrea, Somalia• Tanzania, Uganda and Rwanda are low risk meaning that generally all the debt burden

indicators are below the thresholds in both baseline and stress tests; • Kenya, Lesotho, Madagascar, Malawi, Comoros are moderate risk meaning stress tests

indicate that thresholds could be breached if there are external shocks or abrupt changes in macroeconomic policies

• Ethiopia and Zambia are high risk as one or more thresholds are breached under the baseline scenario, but the country does not currently face any repayment difficulties;

• Mozambique, South Sudan and Zimbabwe are in debt distress, as they already experience difficulties in servicing their debts. Evidence of this could be through the existence of arrears, ongoing or impending debt restructuring, or indications of a high probability of a future debt distress event.


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4.2.3 Real GDP growth projections

The IMF’s World Economic Outlook database (April 2019) provides information on the projected annual change in real per capita general government revenue over the 2019-2022 period. This gives an indication of the potential generation of new revenue. The map below shows the potential generation of new revenue.

Figure 3: The Real GDP growth for 2019 to 2022

In general, all the ESA countries show a potential increase in revenue generation. This would offset any additional debt taken by the countries. A much more country specific analysis would need to be undertaken once actual projects and their financial requirements and mechanism are identified. The detailed findings are as follow: -

• Burundi, Eswatini, South Africa, Angola, Lesotho, Zambia are projected to have a real GDP growth of between 0-3%

• Comoros, Namibia, Somalia, Botswana, Mozambique, Zimbabwe, Tanzania, Eritrea, Madagascar, Malawi are projected to have a real GDP growth of between 3 to 6%

• While the highest growth of 6 to 10% is anticipated for Uganda, Kenya South Sudan, Ethiopia and Rwanda

4.3 Adherence to Article 96 of the Cotonou Agreement

The ESAR countries are largely compliant with Article 96 of the Cotonou Agreement. Article 96 procedures were instituted on only two of the twenty-one countries in the region; being Zimbabwe (2002) and Madagascar (2010). With the adoption of appropriate measures under Article 96 of the revised Cotonou Agreement by Council Decision 2002/148/EC as last amended by Council Decision 2014/96/EU, based on the conclusion of Article 96(2) consultations with the Republic of Zimbabwe on 11 January 2002, EU assistance to Zimbabwe was reoriented mainly to programmes and projects in direct support of the population, in particular in social sectors such as health and education (and from 2010 onwards to projects in support of the reforms contained in the Global Political Agreement).

While for Madagascar, the Presidential and legislative elections of December 2013 ended five years of transition and marked the return of Madagascar to constitutional order. These elections allowed for the lifting of Article 96 appropriate measures under the Cotonou Agreement, which in turn led to the resumption of full EU cooperation in May 2014.


4.4 Eligibility screening results summary

The summary of the eligibility screening shows that:

Income: Low (12 countries, i.e. > 50% of ESAR) Lower-middle(6) and Higher-middle (3)

Country risk: 10(>50%) of 18 countries have the highest levelof risk (7) and 9 countries have level 6

Country debt: 8 (about 50%) of 18 countries have a debt below50% and other 7 countries <65%

Debt sustainability: 13 countries with data, of which 5 in debtdistress or high debt distress, 5 with moderate, and 3 low

Real GDP: annual change over the 2019-2021 is 4% or more in 12countries (57%) and 6 countries <3%

Fragility: 3 (South Sudan, Somalia, Burundi) of the top 10most vulnerable States are in ESAR


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5CHAPTER 5

Sector risk assessment

5.0 Sector risk assessment In order to a rapid assessment of the water sector, recent findings of the recent UNICEF ESA in the 21 countries was made based on reports for WASH in Schools Report8 and Wash in Health Care Facilities Report9 was used. These two studies undertaken in the 21 ESA countries in 2018 and 2019 respectively captured the sector risk at country level and reviewed performance against indicators such as the: -

• Institutional, legal, regulatory• Sector policy and strategy • Tariff policy and practice• Economic and financial

The results for institutional, legal, regulatory and sector policy and strategy the ESA countries are shown in the figures 4 and 5 below:

Figure 4: Institutional Arrangements in the Wash Sector Figure 5: Sector Policy and Strategy

5.1 Institutional framework

Institutional framework is the main instrument required to implement the sector policies, systems, and processes to be used by the public organisations to legislate, plan, regulate and manage their activities efficiently and to effectively coordinate with others to fulfill their mandate. Strong institutional framework allows governments to have a clear mandate and leadership with functional national and sub-national coordination platforms for WASH. The institutional arrangements shape water-related decision making in implementing sector policies, strategies, plans and investment driving behaviours related to water sharing and use. The institutional arrangements are a precondition for the successful implementation of all the WASH tools and are critical for ensuring funds flow necessary to cover the investment needs in the sector and support sector good governance. The results show that of the 21 ESA countries, only 4 countries have a strong institutional framework, 6 have a fairly strong institutional systems, while the remaining 10 have a weak institutional system.8https://www.unicef.org/esa/reports/scoping-study-wash-schools-programming9https://www.unicef.org/esa/reports/wash-health-care-facilities


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5.2 Sector Policy Strategy

A strong water sector requires sector policy processes to be in place outlining the principles, rules, and guidelines for the sector to reach its long-term goals. This allows the sector to then develop strategies in line with the set policies. The regulation of the sector (including regulation of tariffs, performance and standards) will then be applied within these set policies allowing for achievement of service delivery targets whether provided by the private or public

sector. Where funding is required from development banks or private sector, the regulation of tariffs, quality of services and contracts are crucial for opening the space for PPPs in the water sector as well as ensuring all parties can perform their agreed roles and deliver on their mandate. The results for the sector policy and strategy assessment show that of the 21 ESA countries, 7 countries have a strong policy and strategy, 6 have a fairly strong policy and strategy, 6 have a weak policy and strategy while the remaining 2 countries did not have sufficient data available.

5.3 Sector Planning, monitoring and review

In order to ensure successful investment and cost recovery for the sector, sector planning, reliable database, performance monitoring and review is critical. Governments must have functional national and sub-national WASH monitoring system, learning and performance review processes. An assessment of the ESA countries in this area 4 countries have a strong sector planning, monitoring and review systems and processes, 6 countries are fairly strong, and 9 countries have week sector planning, monitoring and review systems, while the remaining 2 countries did not have sufficient data available. The spread of the countries and their performance is shown in Figure 6.

Figure 6: Planning Monitoring and review Figure 7: Sector Financing


5.4 Sector financing

Financial sustainability of sector and service providers is a determinant of the provision of reliable and safe water supply. The sector should have financing strategies that estimate the investments needs, the available financial resources and ways to mobilise new resource to keep the balance, manage and minimise the funding gap. Proper tariff systems and financial discipline in the sector allows water utilities to cover operating costs and generate cash surplus and expand, which is vital for meeting new investment requirements and for responding to renewal or rehabilitation needs. Weak financial management systems can pose risks to sector viability and sustainability. Structuring pricing and subsidies to meet social, economic, and/or technical objectives, promoting efficiency, strengthening the collection of payments, and enforcing accountability for performance are important challenges.

During this analysis it was critical to review whether there are functioning public finance systems that work in both public and private sector institutions, and innovative mechanisms for resource mobilization for WASH are in place. In addition, governments had to show increased national and sub-national budget allocation for WASH services delivery. Figure 7 shows the financing profile of the WASH sector in ESA. The ESA sector financing profile shows that all ESA countries except for Ethiopia have a weak water sector financing profile. This means that except for Ethiopia who has a strong WASH sector financial system, the rest of the ESA’s 20 countries are unable to sufficiently mobilize funding for the sector.


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6CHAPTER 6

Status of Project Financing on Current UNICEF Programmes

6.0 Status of Project Financing on Current UNICEF Programmes

To understand the level of uptake of EU delegation financing within the ESA region as well as the status of potential projects in the different UNICEF Country Programmes, a survey was sent out to all 21 countries. This survey examined the uses of EU grants and financing from other EU countries at country as well as level financing from the EIB and bilateral funding from agencies from EU countries in the ESA countries. The aim of this quick assessment was threefold: -

• Firstly, to assess existing projects on potential application of other financing mechanisms in future phases of implementation

• Secondly to determine the government partners and their appetite for blended finance projects in the region and level of development of these projects

• Thirdly ideas on bankable projects in which UNICEF is already involved and their stage of development.

A total of 10 out of the 21 ESA countries with active water programmes responded. Of these ten, only three countries (Zimbabwe, Eswatini and Tanzania) did not have any bankable or blended finance potential projects under discussion. The findings of these surveys are detailed in the next section of the report. In addition, UNICEF Country offices have considerable investments in WASH projects financed by European Union Delegation grants (non- ECHO funding).

6.2 Potential Blended Finance Projects

Blended finance refers to using mix of public funds such as grants from government, concessional loans and guarantees from IFIs and philanthropic contributions with private funds - loans from commercial banks, equity from pension and investment fund or bonds from utilities to finance a project. Three potential blended finance projects were identified by the in Malawi, Mozambique and Angola. All projects are currently at project development stage.

6.3 Potential Bankable projects

A bankable project is one that has sufficient collateral, future cashflow, and high probability of success, to be acceptable to institutional lenders for financing. Potential bankable projects were identified in Malawi, Ethiopia and Angola. All projects are currently at Concept Development Stage.

6.4 Potential Bankable projects for development

The results for the quick survey show that the UNICEF Country offices have potential bankable projects that can be leveraged to develop blended finance and bankable projects in Angola, Ethiopia, Malawi and Mozambique. With sufficient technical support and project preparation support this existing work can be advanced to support introduction of IFI financing instruments through the collaboration with UNICEF.


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7.1 Countries with existing UNICEF WASH programming

Based on the information received from countries on potential bankable and blended finance projects, Angola, Ethiopia, Malawi and Mozambique have been selected for further country level diagnostic analysis. These countries are within the LIC, LMIC and UMIC country groupings. No fragile country has been identified. As the diagnostics study is being undertaken due consideration of the screening results is required as it will impact the: -

• Nature of financing options available to the country and its water institutions

• Level of debt possible • Application of other financing tools such as

guarantees, grants and subsidies• Structuring of project to determine which

institution would be able to take on debt

A preliminary report attached as an Annex on potential bankable projects in Malawi, Mozambique and Ethiopia has been developed to stimulate dialogue within the sector and the process of project development. Further work will be needed to further develop these projects for bankability and or blended financing.

7.2 Fragile states

For three fragile and vulnerable states in ESA (South Sudan, Somalia and Zimbabwe) a different approach will be needed. All three show an increase in real GDP growth at 6.9%, 4,2% and 3.5% respectively signaling economic growth. The water sector therefore would require technical assistance and financing for maintaining existing infrastructure and extension of services as part of conflict prevention and assistance.

7.3 Upper Medium Income Countries

The upper middle-income countries in ESA such as Namibia, South Africa and Botswana provide an opportunity for UNICEF to work on the provision of services in urban settlements and slums particularly

in South Africa and Namibia. This will help to uphold advances made on MDG’s and ensure sustainable services are provided in line with set SDG’s targets for the countries. In Botswana, efforts could be placed upon building resilience in response to the potential climate change impacts on the country’s and impact on water services provision.

For these countries a potential technical assistance can be provided to government departments or targeted secondary cities. Financial packages can also be developed considering their economic capacities and debt repayment abilities.

7.4 Reducing risks for ESA countries

The assessment of the 21 countries show that the countries still require strengthening of Institutional, legal, regulatory, sector policy and strategy, tariff policy and practice and economic and financial systems. These enabling environment areas would need to be strengthened for countries to be ready for investment through bankable project development as well as blended financing mechanism.

7.5 Project level assessment

It is recognized that at country level, the extent of risk related to debt and country risk classification are very high. To move forward the water sector projects it is critical to take this into consideration in selecting the type of financing to be applied to projects; private sector investment and government related funding through loans, grants and subsidies instruments can be applied. The type of blending mechanisms and ring fencing required can only be developed at a project by project basis. In order to establish the project level financial risks, financial modelling and structuring is required. The objective of the project level assessment of risks and measures available to reduce and mitigate risks of the various project options needs to be undertaken, as investments are made key lessons learnt, and documented so that the sector can leverage the required financing.

7.0 Recommendations



apte

r 8: N

EXT

STEP

S

This analysis sets a basis for further development of bankable projects within UNICEF. At a project level and based on the screening results of the water diagnostics study and ability to effectively engage the sector within the required timeframes, 3 countries; work will continue in Ethiopia, Malawi and Mozambique with the aim of undertaking detailed development of three bankable projects. This bankable project development phase will include undertaking a scoping missions in-country and identify potential bankable projects for IFI /UNICEF financing. The three (3) bankable projects, with accompanying business/investment cases will be developed which will be geared toward acceptance by International Finance Institutions (IFIs) and presentation of investment case to identified IFI and/or private investor(s). Anticipated deliverable from this analysis will includes a) project document (per country); b) investment case (per country) and c) presentation of investment case to identified IFI and/or private investor(s). In addition, UNICEF will aim to source preparation funds from partners for the development of 3 bankable projects addressing the EIB’s investment criteria.

During the development stages for the bankable projects, key learnings will be captured in order to enhance knowledge and institutional capacity not only within UNICEF and for the benefit of partner countries and institutions. At institutional level, UNICEF will put in place capacity building measures that will provide Country Offices with the requisite skills for identification and development of bankable projects at scale. This initiative will allow bankable projects to be nurtured and ensure that where possible projects developed have a blend of public and private financing. UNICEF call on all government partners, the private sector and interested IFIs to partner with us in this journey.

Further long-term support will be provided in the drafting of bankable projects and related investment cases for the prioritised countries of Mozambique, Malawi and Ethiopia in order to ensure increased sector and project level financing with IFIs, the public and private sectors.

8.0 Next steps


1. INTRODUCTION

This report contains the summary of the development of the three bankable projects in Mozambique, Malawi and Ethiopia undertaken with the support of the UNICEF and other WASH sector stakeholders in Mozambique and Malawi from 21 October to 01 November and in Ethiopia from 02 to 06 December 2019.

The aim of this activity was to establish the level of WASH Sector dialogue in the areas of blended finance and bankable projects at country level as well as determine the readiness of UNICEF COs to engage and attract IFIs and the Private Sector for blended financing of projects at scale, through the development of three (3) bankable projects and their investment cases. In addition, support was also provided to countries prioritized during the WASH diagnostics Study (Mozambique, Malawi and Ethiopia) in the drafting of bankable projects and related investment cases for both public and private financing and identifying potential investors and possible modalities for further investment in the sector.

The concept of “the project” presented in the reports could include one or more schemes in different locations with hard (infrastructure) and soft (capacity building, software, etc.) components thus meaning also an “investment programme”.

2. PROJECT IDENTIFICATION

The process of identification was driven by the following objectives or pre-requisites; i) the availability of a project under preparation by the CO; ii) satisfy the assignment requirements – bankability and blended finance; iii) promote collaboration with EIB and or other international finance institutions. The conditions found for each country were substantially different and some of the objectives could not be achieved for reasons explained below. In summary, the most favourable conditions were found in Malawi where the three objectives could be achieved whereas in Ethiopia there were no conditions to meet the three pre-requisites.

Malawi

Following the scoping study Malawi CO is already piloting a co-finance collaboration with EIB. An exchange of ideas for collaboration between the EIB and UNICEF is ongoing. the role of promoter is now with the NWRB, and a potential project that was later considered not convenient for several reasons but was used as the basis for development of a larger project.

The joint work of the CO with the Consultant in close consultation with the EIB led to the definition of a project that would respond to the EIB objectives, could be bankable and promote private sector participation, namely for operation and facilitate blended finance. It was agreed to launch a scoping study that will define in more detail the project, assess its feasibility, the participation of private sector in the medium to long term, as well as creating a fund to promote blended finance.

Mozambique

In Mozambique, the CO has launched recently a feasibility study of a package of 30 new water supply schemes and the concept of a Small Towns Water Fund to mobilise blended finance that would be use to fund the package. The feasibility study will be completed in the mid of 2020 and financial support to a detailed study of the Fund is not yet available thus not enabling the Consultant to provide any detailed valuable advice of their feasibility until the two studies will be completed. Therefore, the Consultant defined and proposed a new project with better bankability conditions and suggested the creation of a revolving fund to attract private financial resources and blended it with public resources. The concept of the fund requires more information and time not considered in the ToR thus out of the scope of the assignment.

The revolving fund would play the same role of the Water Fund that although feasible seems more complex thus more difficult to be accepted and based on assumptions with a higher risk of failing or taking longer to be made available. The proposal does not intend to replace the project and fund under

Annex A: Preliminary Report on Potential Bankable Projects in Malawi, Mozambique and Ethiopia

Water Diagnostic Study for Eastern and Southern Africa28 .

consideration by the CO who could develop it based on the conclusions of a detailed study of the Water Fund that did not yet start at the time of the mission due to lack of financial support. The opportunity to develop a close collaboration with EIB seems weak as the project identified by the Bank to support the sector is aiming at the reconstruction of systems affected by the Idai and Kenneth cyclones and its scope will be proposed by the Cabinet of Reconstruction post-cyclones.

Ethiopia

In Ethiopia there were no conditions to identify a concrete project. UNICEF has no new project in preparation and the major donors have already committed funds to specific investment (World Bank, AFD, AICS) or have limited they support to very specific objectives, e.g. support WASH systems in drought-prone areas that are important but not at the core of a bankable project requiring blended finance (KFW). The EIB is interested in continuing to support the sector but has not yet identified a new project. In view of this situation, the Consultant proposed a broader investment programme with hard and soft components that could be considered in the future by UNICEF in collaboration with other IFIs. It is proposed to keep a close contact with the EIB who might have the most favourable conditions for collaboration with UNICEF in a future project.

The proposals made in one country could be used for another country. The proposals made for Mozambique and Ethiopia to strengthening the services provision framework, i.e. the capacity of the utilities by clustering, merging and promote private sector participation could also benefit from crossing ideas and the proposals made.

3. SCOPE OF THE PROJECTS PROPOSED

The detail of the projects varies significantly between the countries for the same reasons mentioned in the previous chapter. In Malawi the components of the project have been identified and proposed jointly by the CO and the Consultant in agreement with the EIB but will require a scoping study. In Mozambique, the CO has already a project under preparation and the Consultant proposed a new project that could be developed further by UNICEF if considered valid after a more detailed assessment based on data that is available but not provided to the Consultant. In Ethiopia it was proposed a broad definition of a potential investment programme – a sort of “virtual project” with several components that could be all

included or partially depending on the future interest of donors.

4. BANKABILITY

The bankability of the projects was assessed but not in detail, e.g. at this stage with the information available it is not yet possible to estimate the financial feasibility of the projects through the calculation of the FRR, NPV or AIC. However, the Consultant considers that the notion of bankability is much wider than the financial profitability and should include other aspects, namely through a risk assessment. Therefore, the concept of bankability is developed below.

The Business Dictionary provides a good broad definition of bankability in the context of the assignment that has the objective of engaging and attracting IFIs and the private sector for financing of bankable projects as follows:

“A bankable project (or proposal) that has sufficient collateral, future cashflow and high probability of success to be acceptable to institutional lenders for financing”

Financial analysis, which should be carried out as the key part of master planning and feasibility studies, should demonstrate that a project is “bankable” in terms of financial sustainability, such that it will attract funding from donors and lending agencies. The analysis may involve an iterative process involving technical development, economies of scale, formative research and tariff structures and phasing”.

In the context of the assignment the above definition would mean the acceptance by IFIs and/or private sector of the proposed project, which implies the need to assess several factors of acceptance and risk: country, sector, promoter and project.

Financial bankability is interpreted by the Consultant as the capacity of the borrower – government and/or promoter to payback the debt of a loan borrowed for the funding of a project. For the WASH sector in developing countries, the government is usually the borrower due to his access to concessional loans under sovereign risks and the lack of creditworthiness of the promoters - a utility owning its assets or an asset holding company but with no rating or very low rating implying a high cost of borrowing not compatible with low tariffs . Therefore, the bankability is conditioned mainly by the country risk, i.e. the capacity of the government to assume a debt and serve it.

The performance of the sector and the promoter is


also important, namely if the government will on-lend the loan to the promoter who has to pay it back partially or totally to the government. It also matters for the international financing institutions (IFIs) either multilateral or bilateral who want to support the development of the WASH sector under international agreements or commitments, e.g. achieving the SDGs. The lack of a positive impact on the development of the sector and strengthening of the capacity of the promoter is also a reputational risk for an IFI. Therefore, sector and promoter performance and its risk could be considered as part of the bankability concept.

The project risk should be assessed and taken into consideration when referring to the bankability due to its relevance in achieving the expected positive outcome from the technical, environmental and social perspective to the economic and financial sustainability. The country, sector and promoter risk could be low but it is the project that determine if it will contribute to the country economic development, the financial sustainability of the promoter, the acceptability by the population and the stakeholders of the environmental and social benefits.

5. RISK ASSESSMENT

By applying the concept of bankability described in the previous chapter, the Consultant undertook a risk assessment as follows:

Country risk: It was used the results of the diagnostic study undertook by UNICEF ESARO for the 21 countries in the Eastern and Southern Africa region and presented in the EIB-UNICEF conference call on 15.11.2019. For the other risks the following factors were assessed.

a) Sector

• Institutional, legal, regulatory• Alignment with national policies (e.g. SDGs)• Service providers framework• Tariff policy and practice

b) Promoter:

• Utility capacity• Financial sustainability

c) Project

• Technical factors (demand, technology, O&M)• Environmental (impact, climate resilience)• Economic, financial (ERR, cost recovery)• Social (impact, affordability, equality, gender)

The project in Malawi has low and acceptable risks easy to mitigate whereas in the other two countries the main risks are associated with the low capacity of the promoters.

6. FUNDING. SOURCES AND BLENDED FINANCE

Funding of the project in Malawi would come from the EIB with likely co-funding from ABEDA who is currently supporting a feasibility study for a new centralised sewerage and wastewater treatment system in the city of Mzuzu, where part of the identified and proposed project will be located. The EIB will be fund up to 50% and will be in charge of identifying any co-funding for the remaining part.

In Mozambique and in Ethiopia the funding sources were not yet identified but the possibility of EIB supporting the project in Mozambique is remote in the short term as a framework loan will be soon signed to fund a project of different nature. However, if the feasibility and acceptability by UNICEF of the project proposed by the Consultant is confirmed, the EIB might be interested to support it in the medium term, as other IFIs and when the current debt distress situation will improve and let Government be in condition to borrow concessional loans.

The chance of creating a blended finance mechanism is high in Ethiopia if taking the advantage of the WRDF and the recognition at top level as expressed in the last MSF of the importance of blended finance to reduce the sector funding gap.

In Mozambique, the Small Towns Water Fund would create the conditions for promoting blended finance but if it will not be accepted and take too long to be approved, the proposed simpler revolving fund could play that role in a country where the concept of that type of financial mechanism is known and applied but in a simpler way.

In Malawi, the use of private resources with the use of a sanitation revolving fund is also foreseen in the business model for the operation of the FSM systems that will be detailed by the scoping fund. Promoting blended finance at the level of Water Boards might be more difficult as they have been strongly supported by concessional loans from IFIs but the number of major donors seems to be progressively reduced and could push the government to promoting blended finance.


7. COLLABORATION WITH EIB AND THE ROLE OF UNICEF

The potential collaboration with the EIB was well explained in the previous chapters: high in Malawi, low in Mozambique in the short term and uncertain in Ethiopia but with higher chance if UNICEF keeps a close contact with the EIB.

The UNICEF long and fruitful experience in the WASH sector in the three countries gives the opportunity to use the proposed projects to continue in the same path started already in Malawi with the scoping study.

Moving forward

It should be noted that this review feeds into the process for capacity building of UNICEF teams as well as their counterparts. Using the Regional as well as country level information on the projects identified in the three countries findings will be used to understand the local context and capacity needs of UNICEF COs to engage and attract IFIs and the private sector for blended financing of projects at scale, through the development of three (3) bankable projects.

Further long-term support will be provided in the drafting of bankable projects and related investment cases for the prioritised countries of Mozambique, Malawi and Ethiopia in order to ensure increased sector and project level financing with IFIs, the public and private sectors.

This means that the success and accomplishment of this process is not fully dependent on the merits of the three identified projects but more on building capacity of the COs in understanding the requisites and of bankability and funding with blended finance when identifying and drafting new projects with those goals.

From the perspective of sector strengthening and capacity building, the results are positive and there are conditions to develop bankable projects and create conditions for blended finance in the three countries. However, the probability of succeeding and time required vary significantly between the countries as well as the chances to strengthen collaboration with the EIB. More detailed studies should be undertaken and a scoping study launched for the project in Malawi as it is a good example that could be followed for the other two countries.


Annex B: Eligibility Screening

World Bank classification

OECD Country Risk Classification Methodology (Oct 2018-Feb 2019)

Country Debt Levels in %

Adherence to Article 96 of the Cotonou Agreement

IMF Debt Sustainability Assessments (DSAs) or the Risk of debt distress

Projected annual % change in real per GDP over the 2019-2021

Angola Lower Middle Income

6 65.0 No data 2.2

Botswana Upper Middle Income

2 14.3 No data 4

Burundi Low Income 7 51.7 No data 0.5

Comoros Low Income -5 32.4 Moderate 3.1

Eritrea Low Income 7 131.2 No data 4.5

Eswatini Lower Middle Income

6 28.8 No data 0.9

Ethiopia Low Income 7 no data High 7

Kenya Lower Middle Income

6 54.2 Moderate 6.2

Lesotho Lower Middle Income

6 33.7 Moderate 2.8

Madagascar Low Income 7 36.0 2010 Moderate 5.1

Malawi Low Income 7 54.8 Moderate 5.5

Mozambique Low Income 7 102.1 In debt distress 4

Namibia Upper Middle Income

4 42.0 No data 3.1

Rwanda Low Income 6 40.5 Low 8.2

Somalia Low Income 7 no data No data 3.5

South Africa Upper Middle Income

7 53.0 No data 1.8

South Sudan Low Income 7 62.7 In debt distress 6.9

Tanzania Low Income 6 no data Low 4.3

Uganda Low Income 6 40.0 Low 6.1

Zambia Lower Middle Income

6 63.1 High 2.9

Zimbabwe Low Middle Income

7 82.3 2002 In debt distress 4.2

10https://www.imf.org/external/pubs/ft/dsa/dsalist.pdf


Abbreviations

ABEDA Arab Bank for Economic Development in Africa

AFD Agence Française de Développement

AIC Average incremental cost

AICS Italian Agency for Development Cooperation

CO Country Office

FRR Financial Rate of Return

FSM Faecal Sludge Management

IFI International Financing Institution

MSF Multi Stakeholders Forum

NPV Net Present Value

NRWB Northern Region Water Board (Malawi)

SDGs Sustainable Development Goals

TOR Terms of Reference

UNICEF United Nations Children’s Fund

WRDF Water Resources Development Fund (Ethiopia)
