AFRICAN DEVELOPMENT BANK
Draft Assessment Report on Strategic Financing Framework and Innovative
Financing Mechanisms in the Water Sector in Ethiopia
Target and Solution Groups (TSG)
10/18/2011
Prepared By:-Teklehaimanot Molla
A Case Study in Rural Water Supply Sanitation and a brief assessment other subsectors
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Table of Contents
ACRONYMS ............................................................................................................................................ 3
Back ground .................................................................................................................................................. 4
Executive Summary ...................................................................................................................................... 5
Notes on Financing Mechanisms and Measures .......................................................................................... 0
PART 1. COUNTRY WATER SECTOR ASSESSMENT: ......................................................................... 3
1.1.
Financing needs of the water sector in Ethiopia .............................................................................. 3
1.2.
The 3Ts: current financing policy, sector revenues and mechanisms in country.............................. 5
1.3.
Commercial Sources of Finance Used In the Water Sector in Ethiopia ......................................... 11
1.4. Financial innovations: ......................................................................................................................... 13
PART 2. Analysis of Innovative Financing Mechanisms in the Water Sector (15-24 pages) .................... 17
I.
Introduction ......................................................................................................................................... 17
II.
A Similar Case Study on Rural Financing .......................................................................................... 18
III.
Financing Mechanisms ................................................................................................................... 18
A.
Community Development Fund (CDF) .............................................................................................. 18
B.
Micro finance institutions ................................................................................................................... 22
C.
Loan from Local Commercial Development Banks ....................................................................... 25
Introduction to Other Regional Financers and Donors ....................................................................... 27
D.
PART 3 Respective Duties of Implementation Agencies, With Regards To Water Fund Transfer ........... 28
At Federal Level, ................................................................................................................................ 28
I.
II.
At Regional Level ........................................................................................................................... 29
III.
At Woreda Level ............................................................................................................................. 29
CONCLUSION ........................................................................................................................................... 30
MAJOR FUND FLOW OF PROJECTS IN ETHIOPIA ............................................................................ 31
Annex1. FGE FM Administrative Structures ......................................................................................... 31
Annex2. Channel I .................................................................................................................................. 32
Annex 3. Channel Ia ............................................................................................................................... 33
Annex 4. Channel Ib ............................................................................................................................... 34
Annex 5. Channel III............................................................................................................................... 35
Annex 6 Similar Case Study on Rural Financing ...................................................................................... 37
1
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Annex 7 Community Development Fund (CDF) ........................................................................................ 39
Annex 8 Micro finance institutions ............................................................................................................. 44
2
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
ACRONYMS
AFDB
BoE
BOFED
BoH
BWR
CDM
CMP
MoE
MoFED:
MoH:
MoU:
MWR:
NWCO
PMU
RWSSP
WASH:
WoFED
WASH
African Development Fund
Bureau of Education
Bureau of Finance and Economic Development
Bureau of Health
Bureau of Water Resources
Community Development Fund
Community Managed Project
Ministry of Education
Ministry of Finance and Economic Development
Ministry of Health
Memorandum of Understanding
Ministry of Water Resources
National WaSH Coordination Office
Project Management Unit
Rural Water Supply anSanitation Project
Water Supply and Hygiene Education
Woreda of Finance and Economic Development
Water Sanitation and Hygin Programme
3
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Back ground
The 6th World Water Forum will build on four preparatory processes: Thematic, Political, Regional and
Grassroots and Citizen’s. AMCOW was selected as Regional Coordinator to drive the preparatory
process in Africa. The Regional process aims at (a) mobilizing and engaging stakeholders throughout
different regions of the world to catalyze action at regional and local level, and to contribute to the 6th
World Water Forum and its outcomes; (b) articulating targets and interests that are relevant to particular
regions; and (c) seeking commitments to follow-through and implement specific actions after the 6th
World Water Forum.
AfDB, AfWA, AfUR, ANEW and WDA formed a Target and Solution Groups (TSG) for the Regional
Target 5, “Develop and implement innovative financial mechanisms including taxes, tariffs, and transfers
to meet the MDGs financial requirements by 2015 in all counties ” which was identified in the AMCOW
1st Multi Stakeholder Forum for Africa’s Preparatory Process for the 6th World Water Forum. TSGs are
tasked to prepare detailed target action plan, identifying and reporting on solutions contributing to reach
the given target and gather commitments for the implementation of these solutions.
The main objective of the assignment is to collect financially successful existing and innovative cases
from Ethiopian water sub-sector which could contribute to development of a model framework for
national water sector financing mechanisms, including use of the 3Ts (Tariffs, Taxes, and Transfers). The
model framework is expected to be one which African counties could follow and build on to develop their
own water sector financial mechanism to meet the MDGS financial requirements by 2015.
4
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Executive Summary
Introduction
The overall goal of Water Resources Policy of the Government of Ethiopia is to enhance and promote all
national efforts towards the efficient, equitable and optimum utilization of the available Water Resources
of Ethiopia for significant socioeconomic development on sustainable basis.
The government of Ethiopia established and promote the use of "Water Fund" for financing
water projects. The Fund ensures that national commitments are in place for financing of water
projects that involve "consumptive use" of water, ensure the proper utilisation of funds and other
resources obtained from different external and internal sources.
Water resources are treated as a unitary resource requiring coherent planning for its effective use
and management in order to reflect its economic value. In addition to the public sector main
involvement privatisation of utility services and increased user involvement is promoted
While addressing the financing needs of other subsectors of the water sector this case study
mainly focuses on Rural Supply Water and Sanitation projects
I.
Water Sector Financing
As per the national plan, the estimated cost of water sector ranges from USD 5 to 12 billion for
the years 2011 to 2015. The water sector includes water resources management, irrigation, water
supply and sanitation. The sector share 6 % of the national budget, in average. Due to lack of
information the water financing in the off-government budget, the private sector and selfsupplies in the communities are not incorporated in the above data
USD(000,000)'
Total National Expenditure
Water
2009/10
4,196
249
6%
2010/11
5,415
347
6%
2011/12
6,243
336
5%
2012/13
7,658
476
6%
2013/14
9,497
699
7%
2014/15
11,832
1,019
9%
Total
(20102015)
44,841
3,126
7%
Source: -MoFED Growth and Transformation Plan
The government plan to reduce cost of the sector by decentralizing the planning than the former
centralizing planning and by a continuous study of measures that will result in, economy,
efficiency and effectiveness processes as well as by increasing participation of the private sector.
The government expects that the participation of the private sector would result in better flow of
funds to the sector. In addition this would satisfy one of the main objectives of privatization in
Ethiopia, to get the government relieved from Ordinary concerns and to concentrate on more
strategic issues.
5
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Fund flow from the private sector is the key determinate of the Water Sector Planning next to taxes and
tariff, national priorities, share of the other sector of the economy, regional requirements, growth levels,
availability and transfer of funds from government, donors, International Banks
As under developed economy the rural communities at large and the urban poor are not able to cover
recurring cost water supply not to mention the cost of investment.
Transfer of funds to the user is done through various channels. Most of the programmes use one of the
three types of channels, which base the government administrative structure and banks.
Water Tariff is done by segmentation and price differentials. However, the segmentation is not to the
adequate level and need a systematic analysis based on representative factors
Our assessment revealed that the sources of finance in the water sector are numerous depending on
category of projects, which are mainly, water supply and sanitation, irrigation, hydropower, transport,
industrial use and environment protection.
Conditional on the public and private interest the following are the key players in financing the water
sector in particular: -
Financing
Water
Resource
Management
Water
Supply
and
Sanitation
Irrigation
Hydropower
Investment of the Government of
Ethiopia
Loan and grant from AfDB
Loan and grant from World Bank
Fund flow Global Donor
institutions
Loan from Local Banks
Local and international Investors
in involved in agro industry,
bottling, hydropower, subsectors
sectors
Joint venture with foreign
investors
Loan and transfer from
microfinance institutions
Contribution from regions and
Community Development Funds
Interestingly, a good financing lesson was created by the government in raising funds for Renaissance
Hydroelectric Dam. A considerable amount was collected through

Public unconditional contribution
6
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia





II.
A Case Study in Rural
Water Supply Sanitation
and Other
Sell of five year local bonds, payable in local and foreign currency
Created bank finance incentives for the purchase of bonds
Promise/agreement of local banks co- finance the dam (promises are binding in Ethiopian Law)
In kind promises including skills.
Minimizing costs by utilizing local engineering companies
Selected Financing Mechanism
It is to be noted that in rural dominated Ethiopia the source of water is mainly outside the financing world
as it is sourced from natural environment assisted by human labour, at current pace we have a long way to
go to manage the resource effectively and competently
In fact, the water sector financing is very low compared to the countries natural untapped potential and
the existing demand. At present most of the money is to route to basic water supply and sanitation or
hygiene programmes. Despite the existence abundant rivers, ground water and rain fall, uses for irrigation
agro-industry, energy and for demands of other sector of the economy is at infancy level.
As this case study mainly focuses on Rural Supply Water and Sanitation projects the selection
criteria pay attention on the financing water supply need of the rural Ethiopia while due focus the
needs of other subsectors of the water sector not being overlooked. The selected mechanisms are
1. Community contribution and The Community Development Fund
The Community Development Fund approach is a pioneered and developed in Amhara and
Benishangul-Gumuz Regions
As the Woredas are the lower Ethiopian government administrative body, at grass root level
communities are organized in associations called Kebele administrations. A Woreda have several
kebeles, which are independent of government administration.
This is already considered as accepted channel by the four ministries; Water, Health, Education
MoFED, with the following key features


Fund Transfer: The unique and innovative feature of the CDF approach is that funds for the
physical construction of water schemes are transferred directly to the community by way of a
micro credit institution. This would reduce the delay and risk experienced through banking
transfers. .
Community Financial Management: The communities, through water and sanitation committees
(WASHCO), are responsible for the full development process through planning, financial
management, implementation and maintenance. The unique feature in CDF community
management is that the WASHCO manages not only community-generated funds but the
government subsidy provided for capital expenditures. As learning curve improves, this will lead
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Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
to increased use of funds, increasing community contributions for capital costs and cost
effectiveness.

Procurement: A further aspect of community management is that the WASHCO is directly
responsible for procuring the goods and services required for water scheme construction and
installation.
2. Loan and transfer from Micro Finance Institutions
This provides the best mechanism to rural Ethiopia, due to the following, among others:  the Microfinance credit and saving institutions, are available in every woreda and remote
places next to community Development Funds, which operate at grass root community level
 They actively control the borrower or user of funds, due to their proximity,
 They require no collateral, but personal guarantees if large
 Nowadays their lending level is growing
 The public increasingly trusted their operation
 as their performance is visible and poor friendly
 The interest rate is relatively high compared to commercial banks
 Expanding at an increasing rate both in size of assets and office locations
The micro finance institutions have proved that they are fit for the purpose and have practiced it
in several instances, including the water sector.they are already financing businesses related to
the irrigation and water supply and sanitation sub sectors
3. Loan and transfers from Commercial Banks
The commercial banks served as a government and donors water sector fund transfers channel, for many
years and are still indispensible financing mechanisms in regions where microfinances do not perform
well.
There are fifteen banks in Ethiopia, including three government owned Commercial Bank of
Ethiopia, which is the largest Bank, with 423 branches, followed by other two government run
banks, Development Bank of Ethiopia and Construction and Business Bank
After the deregulation of banking service, the private sector is growing faster and innovatively
opening branches with new facilities. However, due to the decision of the government, only
Commercial Bank of Ethiopia is used for the transfers of government involved projects.
8
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
4. Fund flow from Development Partners (DPs) and International and Local NonGovernmental Organizations (NGOs)
This category of donors combines nonrefundable assistance and grants to the sectors. The funds
would flow directly to urban and rural projects through various means
These players have expertise that enables them to effectively implement water programs. Moreover, they
bring additional and alternative experience to the projects and can contribute substantially to lessons
learned and the achievement of best practices.
5. Water work Constructions by Public Regional Financers and Associations
There are unique players in funding the water and other sectors of economy with a recorded
performance. This include
a. Regional Endowment funds
b. Regional Development Associations
These bodies are region specific and are very strong in Tigray and Amhara. Their strength includes but
not limited to




By way of promoters , the agencies convince and managed to collect regular and special massive
public free contributions
Conduct enormous public infrastructural development works, including hundreds of moderate rural
dams, boreholes, water ponds, irrigation facilities and distant water supply service
Innovatively invest in lucrative and strategic developmental businesses (recently a public tender was
made for Iron development
They are proved to mobilize public work resulting in recovering, lost forests, wildlife and related
natural resources including streams, springs, medicinal and holy water and rivers also extending their
seasonal flows.
Conclusion and Recommendation
The funding challenge is enormous for all water-related sectors: Water resources, management, Irrigation
& drainage, Water and the environment, Water supply & sanitation, Hydropower
Even though past funding was not to the adequate level still the financing of the international community
is crucial until a with growth in the economy together with the development of the private sector address
the demand
As the existing investment is very low, compared to the potential, in the near future conditions, though
improved, the goals of the water sector may not be easily addressed by local tapped resources, without
9
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
external financing and mobilizing the public and private efforts through infrastructural development
which are proven way boosting the aggregate demands
Existing resources need to be used more effectively for y capacity building improving efficiency. The
private sectors especially, the microfinances, do show their ability to reach the rural community, reducing
the exaggerated lead time of commercial bank money transfers, to a great extent, as their proximity to the
user community is fair .
Appreciating the achievements and efficiencies, funding agencies are expected to work on leveraging
local private capital while the government facilitates what is expected in the arrangements, towards the
attainment of its strategic plan. The private sector can participate for performance based fee; in the
administration and extension of lines, fee collections, profitable identification and market segmentation
study, with due interest and swiftness than the government bureaucratic structure.
It is not possible to observe the cumulative performance of the financing, as at present consolidation of
works performed by all stake holders is not to the adequate level. In order to recognize the status of the
water sector for present and future plan performance control and decision making, due regard should
be paid as soon as possible.
Recommendation
Developments across the water financing spectrum :  Focus on improving performance of the water sector, also because it is key to attract new
resources from the 3Ts – users are more willing to pay when there is transparency and
fairness in water service provision, the ministry of finance allocates resources according to
past performance.
 Reduce the risk of ODA crowding out repayable finance
 Ensure that low capacity to the use the available funds does not become a bottleneck
 Consider the impact of developments outside the sector on the sector’s financial
sustainability – such as improvements in tax collection by towns, new roads that reduce the
cost of building and servicing water infrastructure in rural areas, or development of local
financial markets.
10
Notes on Financing Mechanisms and Measures
NO
1.
Financing mechanisms and Measures
Subsidy by the government
2.



3.
Community partial contribution for full
Organization and management costs and 10 to
20% capital costs
Contribution through Community development
fund for the works of self-water supply
Public in kind contribution and public works
with very low cost such as; Productive safety net
programme (PSNP) water catchment projects
Microfinance, credit and saving associations
revolving funds loan to community, individuals,
groups for construction of self-water supply and fur
water utilities of rural businesses
These also grant loans to communities for
communities to enable them pay their part of
contribution for RWSSP and WASH
4.
The inistitutes are also being used as a transfer
media to rural areas where banks do not have access
Loan donation and Aid
Features
The aim is to reduce the population who have no
access to clean water
 Rural areas
 Low income groups
 Food and water insecured areas
 Drought and disaster prevention
The beneficiaries are the community themselves. It
is a way towards full cost recovery”
The fund transfer will be speed up. The degree of
usage of funds and follow up of implementation
would be to adequate level due to proximity
Instead of the woreda which have no direct relation
to community, the microfinances can communicate
easily to communities committees, who are project
holders


5.
Tariff by Segmentations of user
 Flat rate social tariff
 Low band then progressive user charges
 Business use tariffs


6.
Funds raised through Business plan focusing a right
mix of the taxes, tariffs and transfers – the “3T”
 This applies to five Towns, including Addis
Ababa, for full cost recovery program and six
sub towns.


Until full cost recovery is sustained
international loan, Aid flows to the water sector
should continue to increase and to align with
country-owned strategies;
They should be used strategically to
complement and reinforce .
Tariffs are set 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).
In the urban areas, after the lower band, tariff
rates are implemented on progressive basis, that
are tied to consumption levels.
These are the ultimate financial sources of
investment for the water sector:
It underlines the importance of strategic
financial planning to find the right mix of the
3Ts for achieving water and sanitation targets,
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia

7.
8.
9.
10.
11.
12.
Woredas allowed for (lower level of government
structure) to use their tax collection and subsidized
the gap by regions.
Saving and reduction of costs through BPR, supply
chain management and decentralization of planning
Charges for sanitation services: by the City and
NGOs
 capital costs of constructing a common toilet
septic tank facilities are shared between
condominium owners
 operation and maintenance cost recovered
Periodically
 fixed and mobile toilets user charges
 a monthly fixed fee is collected from residents
for clearing their garbage
Infrastructural aggregate demand boosting measures,
such as road construction and communication media,
enabling development and then water cost recovery
Local Equity and venture capital and Local bank
loans
Fund flow from NGOs
A Case Study in Rural
Water Supply Sanitation
and Other
and for leveraging other sources of finance.
while ensuring affordability tariffs play in
achieving sustainable cost recovery.
Encourage Woredas to increase revenue from taxes
through innovation which in turn encourages
taxable private sectors development
The measure is to result to a focused operations and
mangement, continuous improvement in reduction
of non-value adding activities, wastes, increased
efficiency and effectiveness thus reduction of costs
 There are indicators that the sanitation charges
are profitable over and above cost recovery,
observing an on and off private sector
involvement. The business man do not leave the
business by their own reason, but they complain
that the kebele communities are interested on
the income.
Surprisingly the measures found to be creating
towns and cause the farmers product prices to
increase, to a great extent, supporting the farmers’
affording capacity..
These source of finance are were private sector
water bottling and the beverage sector
Civil works and water supply and sanitation
services. As they have high level of expertise this
group also contribute a knowledge Sharing scheme
The water resource management sources of finance is similar to the above.
A. Irrigation
No
13.
Financing mechanisms and Measures
Government financing
State owned irrigation projects for agricultural
businesses and resettlement areas.

Capacity building and Promotion of agricultural
growth programs and funds, through Minstry of
Agriculture and rural Development
As part of Boosting aggregate demand
Resettlement of pastoralists by way of irrigated
agriculture
14.
15.
16.
17.
Local bank loans
Loan from Global Finance and government
equity
Loan and transfer from Microfinance
institutions
Foreign government banks finances
Private and governmental irrigation projects
Large farms and the sugar industries
Small private (individual and community)
irrigations
Specially to sugar funds
1
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
18.
19.
Sugar Funds
A centralized Money reserved from the
operating results of government owned sugar
factories
Venture and Owners capital
A Case Study in Rural
Water Supply Sanitation
and Other
Used for expansions and new industry
development
Private sector projects
B. Hydropower
No
20.
21.
22.
23.
24.
Financing mechanisms and Measures
Project types
Investment from Government and Electric
Corporation Sources
Loan from Local banks
loan from Global banks
Bonds in local and foreign currency
Publicly mobilized free contribution
All form of hydropower development
All form of hydropower development
Grand renaissance dam
Grand renaissance dam
Grand renaissance dam
2
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
PART 1. COUNTRY WATER SECTOR ASSESSMENT:
WATER SECTOR FINANCING IN ETHIOPIA
1.1. Financing needs of the water sector in Ethiopia
The government of Ethiopia established and promote the use of "Water Fund" for financing
water projects. The Fund ensure that national commitments are in place for financing of water
projects that involve "consumptive use" of water Ensure the proper utilisation of funds and other
resources obtained from different external and internal sources.
Water resources are treated as a unitary resource requiring coherent planning for its effective use
and management in order to reflect its economic value. In addition to the public sector main
involvement privatisation of utility services and increased user involvement is promoted
1.1.1.
Water sector goals
According to the Federal Democratic Republic water sector strategy (2001) the overall goal of
the Water Resources Strategy is to enhance and promote all national efforts towards the efficient,
equitable and optimum utilisation of the available water resources of Ethiopia for significant
socio-economic development on a sustainable basis. Towards this aim, the following strategic
directions will be adapted with respect to main elements of the strategy.
The major objective of the clean water and sanitation policy is also contributing towards the
alleviation of poverty by facilitating favorable conditions whereby the general public gets access
to reliable and sustainable clean water and sanitation services.
With a view to alleviating this pressing problem the world community has set a Millennium
Development Goal to reduce by half the number of people, who do not have access to potable
water as well as basic health and sanitation services, by 2015.
1.1.2. Estimates of the cost of achieving those goals
The following show share of the water sector from the total expenditure budget of Ethiopia: -
3
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
USD(000,000)'
Total National Expenditure
Water
2009/10
4,196
249
6%
2010/11
5,415
347
6%
2011/12
6,243
336
5%
2012/13
7,658
476
6%
A Case Study in Rural
Water Supply Sanitation
and Other
2013/14
9,497
699
7%
2014/15
11,832
1,019
9%
Total
(20102015)
44,841
3,126
7%
Source: -MoFED Growth and Transformation Plan
The water budget above includes the total of capital and recurring expenditures.Due to lack of
information the water financing in the off-government budget, the private sector and selfsupplies in the communities are not incorporated in the above data.
1.1.3. Efforts to reduce the cost of achieving those goals
The following actions are thought to result in efficiency, among other things :  Decentralizing the planning than the former centralizing planning. The decentralization
do result allocation of more applicable budget
 The supply chain management, which now under study, would play an important role in
ensuring the sustainability of the plan
 The on-going urban water supply services and financial capacity building process would
help institutions to be self-reliant
 The fast growth of roads and other development infrastructure would make easily
accessible the construction sites of the water projects;
 Planned increasing involvement of the private sector
1.1.4. Experiences with strategic financial planning in the water sector
Long term financing plan and Budget has been practiced for more than 40 years in Ethiopia.
Currently all the sector ministries and regional states are required to prepare and deliver their
plans to Ministry of Finance and Economic Development for central planning and approval. If it
is applicable the plan is done in consultaions of other major financers As noted above the country
prepared five years Growth and Transformation Plan
1.1.5. Country-specific factors influencing the financing needs and the emergence of
strategic financial plans
The budget for water is proclaimed under the name of Ministry of Water Resources.
Budget is a two way process in Ethiopia:  Upstream process from woreda to MOFED and A Down Stream process from MoFED to
Woredas.
4
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia


A Case Study in Rural
Water Supply Sanitation
and Other
This would enable participation of the lower group of which factors are very much different
while the government centrally focus on priorities and even rationing of available financial
resources: The region sectoral Bureaus and the Bureau of Finance and Economic Development
(BOFED) will allocate the available resources to the woredas and towns. The Woreda Water
Offices will submit its plan and resources to the Woreda Plan and Economic Office, and
finally to the Woreda Council. Woredas will clearly allocate their yearly and multi-annual
resource budgets within their WaSH plan. The resources come from the Federal Government,
donors, regional and community contribution
MoFED review and allocate the countries resources on priority basis and several parameter,
based on the country’s strategic priority and in line with sector policy and past performance.
In the allocation procedures, MOFED will consider share of the other sector of the economy
regional requirements, availability and transfer of funds from government, donors,
International Banks,
1.2. The 3Ts: current financing policy, sector revenues and mechanisms in
country
1.2.1. Current water financing policy
Acoording to the official Ethiopian Water Resources Management Policy the following
Policy is set on drinking water supply
 Promote self-financing of programmes and projects at the local level.
 Provide subsidies to communities who can not afford to pay for basic services on capital
costs only; based on established criteria and phase out subsidy gradually. The criteria include
living standards both in urban and rural, the growth of townsm the purpose of the
consumption(special charge for business), level of consumption(charges will be made on
progressive basis)
 Enhance self-financed and total cost recovery programmes in urban water supplies.
 Ensure that all water supply undertakings will adequately address costs associated with
operation and maintenance and be based on "cost-recovery" principles.
 Ensure transparency and fairness in the management of water supply services so as to
enhance readiness to pay and participation by the users and communities in the financial
management of systems.
 Ensure responsibility and financial accountability in the management of water supply
services
 Promote the participation of local banks, other investors as well as popular and traditional
self-help social associations (the associaions ranges from small entities in specific
communities to regional associations, Idirs, rural credit services …etc) in the development of
5
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
water supply through appropriate incentive mechanisms; such as arrangement crudities,
assisting in civil works, and provision of materials.
Irrigation financing policy
 Establish norms and procedures for financial sustainability and viability of irrigated
schemes. This include procedures for use of water, preparation of business plan for
recovery and followup,
 Promote credit facilities and bank loans for the development of irrigation schemes. This
is done through arrengements with government commercial banks
 Develop the appropriate cost recovery systems and mechanisms for all irrigation
schemes. User charges, organization and management costs, maintenance costs and long
term recovery of investment costs are among the recovery systems.
1.2.2.
Tariffs and other user contributions– financial resources generated and instruments used
Water Pricing policy


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


Ensure that management of water resources shall be always addressed in conjunction with
basic social equity norms.
Ensure that the price for water should be neither too high (and discourage water use) nor too
low (and encourage abuses and over use of water).
Promote that tariff setting shall be site specific, depending on the particulars of the project,
location, the users, the cost and other characteristics of the schemes. The respective water
offices set the tariffs. There are tarrif setting guidance according to specific towns and
woredas
Ensure that the basic human needs of water for disadvantaged rural communities who cannot
afford to pay for development of water systems, shall be borne by the government, as
appropriate, and in so far as the communities are able and willing to cover the operation and
maintenance costs on their own.
Ensure that pricing for urban water supplies shall aim at full cost recovery and develop crosssubsidization strategies and promote credit services. Towns are required to prepare business
plan for cross subsidization. They set price differential according to level of usage and and
purpose. The difference would be recovered from taxes according to business plan
As willingness to pay by users of water systems is a powerful impetus for financial
sustainability of water resources systems, willingness to pay shall be promoted by, interalia
stating the main objectives, instituting fairness in water systems, promoting transparency and
communications.
6
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
For urban water, the tariff in Addis Ababa for example has the following segments
a. Public Fountain{ - lower rate
b. Progressive rate Domestic Customers monthly charges vary in progressive rate based on
consumption in m3. The bands are
i.
0 to 7 m3(per household? What is the size of the average household in Ethiopia?)
ii. 07 to 20 m3
iii. above 20 m3
c. Non domestic customers
Government and community Contribution to ADB Rural Water Supply and Sanitation
Programme which is similar to the Water Sanitation Hygiene Programme (WASH), an: 


community contributions (10% in labour and/or materials, and sometimes cash Significant cash
contribution by the community of about 5% of the capital cost of the facilities in cash and/or inkind labor.
Within a region, selection criteria for the Participating Woredas shall include, inter-alia, the
water supply coverage, proximity, geographic balance, population, prioritization of water supply
in the Woredas planning process, and level of commitment as reflected in the collection of the
communities’ contribution to the financing of the schemes, and the proposals for O&M cost
recovery for the schemes through user charges. It is reported that the selection procedures are
working well and are in progress
Regional Administrations will cover the Government’s contributions for the activities to be
carried out in their respective regions while the Federal Government will fund the federal tier
activities. Communities in the region depending to their condition contribute 10 to 20% capital
costs while fully cover the organisation and management costs
In case of WASH, in all modalities subsidies are dependent upon up-front community
contributions in cash, labour, and/or in-kind contribution of no less than 15% of the estimated
capital cost of the project. Exception to this may be made in the case of projects supported
through the Productive Safety Net Program. In Community Managed Project , Woreda has
the authority to decide up-front cash contribution amount (usually from 1,000-3,000
Birr/project) to ensure full priority and ownership from the community.
1.2.3. Taxes – financial resources generated and instruments used
Tax and Tariff for water are made area specific and depend on regions and level of growth of
town. Regional towns share experience of the city of Addis Ababa. The City administration
release the following information to the public
7
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
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A Case Study in Rural
Water Supply Sanitation
and Other
Aiming at ensuring complete coverage in water supply for the city of Addis
Ababa, from the current 73pc coverage authorities’ claim there is, councilors of
the Addis Ababa City Administration have approved 1.4 billion Br to the sector
last week, an amount claiming from the city’s 11.8 billion Br budget for the
2011/12 fiscal year
“It is the first time that the city administration allocates such an amount in order
to improve water supply,” Haile told Fortune
The city administration plans to cover part of its expenditures from tax
collections; 5.5 billion Br, 7.7pc more than last year, is expected from businesses
in the city as profit tax, while 6.2 billion Br is expected in non-taxable incomes.
The latter has seen an increase of 56.5pc from the last fiscal year, and is expected
to come from municipality services and loans.

The city council has approved the plan to collect from taxes on the assumption
that the tax collection will improve as the city’s revenues collection department
has merged with the Federal Revenues and Customs Authority (ERCA) six
months ago. ERCA hopes to collect close to 90 billion Br in the coming budget
year from direct and indirect taxes sources.
The federal government established a water fund for management of the financing of water
works. The Fund requires towns to prepare business plan in order to enable them cover costs,
including water, from various source of funds.
All towns and rural areas, which cannot cover cost of water and investment through tax and
tariffs, are subsidized
1.2.4. Transfers – financial resources generated and instruments used
Funds flow in to the projects all sectors, including water, and within the projects to the various
project institutions which will handle project funds, are presented in the table below. The
channels were working for over ten years.
Fund flow
Description Of The Fund Flow
Mechanism
Channel Ia Development partner funds will be deposited in to a single pooled foreign
- currency “designated Account” and then transferred to pooled Birr
8
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
account to be held by MoFED. MoFED will track the allocation among
the various partners (Multi donors) using appropriate ledger accounts.
From the pooled local currency account, MoFED will transfer funds to the
separate local currency accounts to be opened by regional BOFED. Each
Woreda and other implementing entities will open separate local currency
accounts in which to receive funds from their respective regions.
Channel Ib
Each development partner funds will be deposited into a speparte foreign currency “designated Account” and then transferred to pooled Birr
account to be held by MoFED. MoFED will track the allocation among
the various partners (Multi donors) using appropriate ledger accounts.
From the pooled local currency account, MoFED will transfer funds to the
separate local currency accounts to be opened by regional BOFED. Each
Woreda and other implementing entities will open separate local currency
accounts in which to receive funds from their respective regions.
Channel II
Development partner funds will be deposited in to a single pooled foreign
- currency “designated Account” and then transferred to pooled Birr
account to be held by Sectoral Minstry. The Ministry will track the
allocation among the various partners (Multi donors) using appropriate
ledger accounts. From the pooled local currency account, the Minstry will
transfer funds to the separate local currency accounts to be opened by the
regional Bureaus. Each Woreda and other implementing entities will open
separate local currency accounts in which to receive funds from their
respective regions.
Channel III
Donors/financers make the fund flow directly to Implementing agencies
Note that channel I and II financial management is pooled at Woreda level, where WOFED
Manages the accounting system for the sectoral projects operating in a specific woreda
Instead, at present, the government and World Bank agreed to channel Water fund transfers to
Community Development Fund through microfinance institutions than Woreda Finance and
Development Office, depending circumstance. This is found to remove delays in transfer and
timely use of funds with more proximity of the user. Full discussion is given at CDF section of
this report
The chart in the next page shows the available funding Routs: -
9
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Water funding Routs
UN Agency Funding
MOFED
Government
Central
Tresury
Multilateral
funding
AAWSA
Bilateral Funding
Ministry of
W&E
International NGOs
Micro
Finances
Ministry of
Health
Regional BOFED
WSA Urban
Projects
Water Fund
Regional Water Mines
and Energy Bureaus
Woreda Finance
NGOs
125 NGOs in the
Sector
Woreda Water Desk
Communities (Projects)
Note See annexes for individual channel flow
Country-specific factors affecting the mix of the 3Ts
10
A number
of Donors
providing
direct
budget
support
accounting
for about
one third
of all aid
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
All of the revenue mechanisms
Aloccations to water depends not only on requirement but also on other external factors. In
addition to taxes and tariffs and transfers, National Priorities, share of the other sector of the
economy regional requirements, growth levels, availability and transfer of funds from
government, donors, International Banks, the private sector, extent of community contribution in
kind are key determinates of the Water Sector financing.
As under developed economy the rural communities at large and the urban poor are not able to
cover recurring cost water supply not to mention the cost of investment.
1.3. Commercial Sources of Finance Used In the Water Sector in Ethiopia
1.3.1. Loans
1.3.1.1 Commercial bank loans
After the deregulation of banking service the following commercial banks are being
established in the private sector, which are growing faster and innovatively opening
branches with new facilities
At present there are fifteen banks in Ethiopia, including three governments owned. The
government runs Commercial Bank of Ethiopia, which is the largest Bank, Development
Bank of Ethiopia and Construction and Business Bank
Water bottling and beverage industries share increasing proportion from towns water
supply
1.3.1.2. IFI loans: with sovereign guarantees, direct lending to sub-sovereigns
As an example huge dams and hydroelectric plants were financed by the following, in
addition to the Ethiopian government and EEPCo: - World Bank, Chinese, Italy and EIB,
Italy, Exim Bank of China, FairFund, Chinese
1.3.1.2. Microcredit loans
The following microfinance funds are practiced in Ethiopia
11
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
a) Microfinance and Credit Saving Institutions
There are twenty two microfinance institutions in Ethiopia. The institutions provide
loans to private self water supply, construction of wells and irrigations
b) Community Development Fund and Community Managed Programme
c) Regional Development Associations: - Founded on publicly raised funds (public fee
contributions), these are relatively huge funds, involved with various infrastructure
development activities, including water works, education and health.
d) Managed funds and Farmers Credit
e) Equb (traditional regulated regular periodic group saving and repayable by lottery
turn by turn each member the sum of the specific week, month and monthly
contribution in a) and
f) Edir (Traditional Associated Community Self governance .
g) Endowment Funds for rehabilitation
h) Revolving Funds
1.3.2. Bonds
The Ethiopian government vow to fully finance a new grand hydroelectric project on the Nile
River, which cost 80 billion birr (around 4. 8 billion US dollars at the current exchange
rates). The grand project has an estimated capacity of producing 5,250 megawatts of
electricity when completed in 2017. It is being constructed 20 to 40 kilometers at the east of
Sudanese border.
While much of the funds comes from the government the following funding are being used
a. Public mobilization
National Council for the Dam is established and events are to being held to enable other
members of the society and the Ethiopian Diaspora contribute their share in the support.
Accordingly the public servants, private and from students and public institutions continue to
support in cash and promise
public mobilization coordination councils for the dam is extended up to districts and
localities to enable saving bond purchases from credit and savings institutions, in the areas
where there are no banks.
b. Local bonds
• A five year bond, with 5% interest, is being purchased by local investors
12
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
•
A Case Study in Rural
Water Supply Sanitation
and Other
Public servants and the private sector workers for the support they have made for the dam
earlier by donating their salary, the donation was changed to saving bond purchase to
ensure sustainable development.
c. Bonds to Diasporas and Foreigners
With a minimum USD 500, a Corporate Bond named EEPCO Millennium is issued by
Ethiopian Electric Power Corporation( EEPCO), by the Agent: Commercial Bank of
Ethiopia (CBE). The currencies applied are USD, Pound Sterling, Euro and other
convertible currencies
The bond is guaranteed by the Government and is to mature in 5, 7 and 10 years with at
interest rates of 4%, 4.5 % and 5% respectively.
Additional Benefit:
• The bond can be used as a collateral for loans in local currency.
• Income Tax: Interest income earned from the bond is free from any income tax.
To this date 7.8 Billion Birr was issued for the Dam
1.3.3. Equity (from local or international capital markets)
Capital markets are not practiced in Ethiopia. However any foreign investor can make its
accessible capital market source among other financing. Full information is not available
in this regard
Large companies which are listed in capital markets of different countries were working
in joint venture or entering in to Ethiopian market by establishing companies envolving
including water bottling, agricultural farms which use huge borhole in dry land and
irrigation from large river and lakes, not to mention other industries.
Local venture capital institutions are at an emerging stage and is involved in many
including agriculture water bottling, real-estate, beverages etc. these include access
capital, Habsha
1.4. Financial innovations:
(Blending grants, guarantees and insurance products, grouped financing vehicles,
credit ratings, project preparation facilities)
13
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia








A Case Study in Rural
Water Supply Sanitation
and Other
Co-financing of loan specially by the three government banks are being provided for
huge commercial projects
With regards to water, energy and irrigation, recently, both government and private
commercial, construction and development banks held meetings and reach agreement
to finance the country’s huge Dam. The exact arrangement of the financing is not yet
publicized.
Guarantees and insurance bonds are long being practiced for both international and
local contracts., including water consulting and construction works This applies for
governmental and private sectors.
Credit rating of customers is solely practiced for internal use of individual banks and
there are no standardized acceptable common sue of ratings. It is repeatedly noted
that rated and favored customers by one bank has been found corrupted by regulatory
bodies. However, banks consider strength and good history of the borrower as one of
their evaluation. Moreover, government enterprises are considered as low risk
borrowers. Depending on the sectors, there are also facilities which are supported by
government incentives. For many years farm based and exports have good access to
bank grants. There are several government business enterprises which finance their
irrigation from commercial banks. The hydropowers are also some of the examples.
Options for Private Sector Participation
o Management contracts through concessions to full-fledged privatisation of
energy, water and sanitation utilities and state-owned public transport companies
(Tele and others).
Consultant outsourcing
Other public sector projects
Afforestation and Reforestation and other environmental measures resulted in new
water sources, recovery of lost stream and other natural resources which cannot be
easily determined in monetary terms
It is to be noted that despite several privatization and deregulation of government
business enterprises, still the government play a good proportions in huge utilities; water,
electricity (Dams and hydro plants), telecommunication and sugar (which encompasses
all the water subsector in addition to cane farming and factory), cement, airlines, townspublic transport, metal industries, construction, River valleys agriculture, real-estate etc.
1.4.1. Country-specific factors limiting the flows of repayable finance for the water
sector
14
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
The government policy incorporates clause to Promote credit services, by the government, for
water resources development undertakings
Except for water supply and sanitation subsector, there is a reasonable bank and other types
of finances. Other sub sectors especially , dam, ponds and irrigation for farms, hydro electric
dams, non-domestic users (business which water as utilities), beverage industries including
water bottling have good bank and credit financing.
Like any country water in Ethiopia is considered as free goods until the current
introduction of water bottling companies, which created a supply push huge demand,
which attract the commercial banks to provide repayable loans including for export
businesses
Among factors limiting the flows of repayable finance for the water sector







Existence of large population which cannot afford to cover cost of water and facilities
The National Bank of Ethiopia, the regulatory body highly focused and allocate to
external funding and appears that less practical attention is provided on innovative
financing mechanism
The attractive water sector policies regarding enhancing self-financing schemes, in water
supply, irrigation, hydropower and many other, and associated credit facilities and loans,
is not well communicated to the private sector. Details to be implemented are not
readyand explained to the public
private sector has little interest on water business as the opportunity cost is high
compared to the general market.
The historical poor performance indicators/deficit is discouraging in the absence of a
proper due diligence, aiming at operation quality improvement, cost saving measures
and cash flow improvement. A proper due diligence should be prepared summarizing
key issues to perform financial evaluation on segment basis.
Infrastructure investments tend to be capital intensive and lumpy, and have long gestation
and even longer payback periods (in this regard the private sector can participate in the
incremental cost management, including working capital mangement and extension of
supply lines)
These private sector risks are many and varied: among the risks a&b below are more
important to Ethiopia
a. demand for the services provided may turn out to be lower than expected;
b. tariffs may be too low and not permitted to adjust to reflect costs;
c. the condition of infrastructure may turn out to be worse,
d. Delays of construction longer, and costs higher than anticipated.
e. Other risks include the
i. financial risk of currency devaluation,
15
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
ii. legal risks in dispute resolution, and
iii. the political risk of asset appropriation.
As a result of one or more of these risks, the private contractor may be unable to recover
costs and earn a reasonable profit. Indeed, how these risks are quantified and mitigated
turns out to be the key to private sector participation in infrastructure projects. The
principle is that whoever controls a particular risk best should assume it and be
compensated for it.





Expansion and increasing needs of urban water supply and sanitation, and the inability of
the public sector to mobilize the needed resources ( this is a capacity issue not only
mobilizing but also use of funds). Poor level of use of funds were observed not only in
the water sector but also in others
Low infrastructure and remoteness the rural Ethiopia to do holistic finance
The limitation of the financial sector. The private sector financial institutions are at
emerging stage and mostly town based
Except a rare arrangement, Donors money are limited to be transferred only through
the government owned Commercial Bank of Ethiopia
Capacity issues: - human resource, financial resource
16
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
PART 2. Analysis of Innovative Financing Mechanisms in the Water Sector (15-24 pages)
I.
Introduction
As an emerging market economy, traditionally the governments have been the primary source of
financial resources for investments in the water and energy sectors. The service was provided by
state enterprises, usually at a subsidized price and the state contributed and/or mobilized the
financial resources for investment in maintenance and supply expansion.
A second reason why state control and public provision was thought to be the appropriate model
was the public good feature of clean water and sanitation in terms of public health, as well as the
environmental externalities of energy and water resource development and use.
The experience of public provision and financing has been disappointing in terms of quality of
service, coverage and costs. Furthermore, the traditional sources of financing dried up as public
utilities piled up larger and larger deficits due to poor cost recovery, governments faced
increasingly tight fiscal constraints and official development assistance (ODA) failed to keep up
with expanding needs.
As government and regional state have many things to do, with priority, the allocation of shared
resources physical and financial resources, as well as operation and management is of very much
vulnerable for risk of not meeting plans.
A growing financing gap and the build-up of unmet demands for improved quality of service and
expanded coverage forced governments and public utilities to seek private capital both at home
and abroad, through both debt and equity participation by the private sector.
At the same time, technological progress and institutional innovations made possible a wide
spectrum of private sector participation, ranging from management contracts through
concessions to full-fledged privatisation of energy, water and sanitation utilities and state-owned
public transport companies.
As noted in the previous section the source of finance vary and include the following
i.
ii.
iii.
iv.
v.
vi.
vii.
World bank African Development Bank and related Donors Managed Funds
Community Development Fund
Micro finance institution
Loan from Local Commercial Development Banks
International Financial Institution and Foreign governments Loans
Insurance Sureties and Investments
Donors Fund
17
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
viii.
II.
A Case Study in Rural
Water Supply Sanitation
and Other
Equity (from local or international capital markets)
A Similar Case Study on Rural Financing
In year 2007 the World Banks sponsored assessment of the systems utilized for transferring
Productive Safety Net Programme (PSNP) cash resources within the Ethiopian banking system 1.
The PSNP is working with communities in food insecured areas, by way of public work,
including water development. The payment include payroll for public work and direct payments
for disables. The following were the findings of the assessment, among other: The result of the study indicates that compared to the commercial banks, the microfinance
institutions are competent for rural fund transfers, lending to private and community self water
supply
III.
Financing Mechanisms
A. Community Development Fund (CDF)
As the Woredas are the lower Ethiopian government administrative body, at grass root level
communities are organized in associations called Kebele administrations. A Woreda have several
kebeles, which are independent of government administration.
The Community Development Fund approach is a pioneered and developed in Amhara and
Benishangul-Gumuz Regions.
A.1. Financing mechanism
The following is extract from The WaSH Implementation Framework, a document which is
signed by four ministries of the Ethiopian government; the Ministry of Water and Energy, Ministry of
Health, Ministry of Education and the Ministry of Finance and Economic Development and by observers:
- the Development Assistant Group’s (DAG) Water Technical Working Group and For the Civil
Society Organization (CSOs) of the WaSH Sector
1
The assesment was conducted by the writer of this report
18
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
The World Bank mainstreamed the CDF Approach into the National Water Sanitation and
Hygiene (WaSH) Program (WaSH Growth & Transformation Plan/Universal Access Plan
(GTP/UAP)) for its wider application.
The WASH objective is interestingly exactly similar to the Rural Water Supply and Sanitation
fund of the African Development Fund (AfDB).
A.2. Key characteristics/Features of the CDF Approach



Fund Transfer: The unique and innovative feature of the CDF approach is that funds for the
physical construction of water schemes are transferred directly to the community by way of a
micro credit institution. This would reduce the delay and risk experienced through banking
transfers. .
Community Financial Management: The communities, through water and sanitation committees
(WASHCO), are responsible for the full development process through planning, financial
management, implementation and maintenance. The unique feature in CDF community
management is that the WASHCO manages not only community-generated funds but the
government subsidy provided for capital expenditures. As learning curve improves, this will lead
to increased use of funds, increasing community contributions for capital costs and cost
effectiveness.
Procurement: A further aspect of community management is that the WASHCO is directly
responsible for procuring the goods and services required for water scheme construction and
installation.
A.3. Background and Rationale for Mainstreaming
Steps in Mainstreaming


Integration: In this National WaSH Implementation Framework the principles and basic
procedures of the CDF approach are built into the WaSH program as part of the Community
Managed Project (CMP) funding mechanism.
It is presented as alternative funding mechanism to the existing Woreda Grant which is hereby
known as the Woreda Managed Project (WMP) funding mechanism which includes regional and
national managed projects on behalf of Woredas or towns.
The preconditions, however, are considerable and include:

that the region and the woreda have negotiated fund transfer arrangements with an established
financial intermediary at both levels
19
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other

that the region and the woreda have put in place the necessary capacity building and technical
assistance provisions to equip and backstop WASHCOs and to train and support woreda and
finance institution personnel for the special requirements of CMP

that hydro-geological conditions permit low cost technologies

that there is reasonable expectation that a sustainable supply chain for local procurement can be
developed

that there are a sufficient number of communities in the region/woreda selecting CMP to make it
a viable option

that the applicant communities are sufficiently cohesive to undertake community project
management and later to sustain management of operations and maintenance

that the cost and complexities of the preferred or required technologies and the project size fit
within the parameters of the CMP
A.5 Impacts of adoption
At Amara and Benshagul regions it is found to be a user friendly approaches with the above
positive attributes.
A.5.1 Financial flows generated
As noted above the CDF approach managed to generate the interests of the World Bank and
managed funds of the NGOs and civil society groups. For many years, In the Amara region,
CDF and the Credit and Saving Association were working together, to satisfactory level. the
adoption will materially impact the works of the microfinance institution and the rural Ethiopia,
positively.
A.5.2. Other impacts
The approach will creates confidences of other funding agencies to water and other sector. The
proximity of this institutions to the users will reduce the time gap between decision making and
implementation, absolutely impacting resource efficiency
A.5 Conclusions: pros, cons and replicability
20
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
The advantage and the disadvantages of the financing mechanisms are sufficiently detailed
above. The exceptional importance of the CDF is its user friendly approach and proximity to the
project, with fast delivery
21
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
B. Micro finance institutions
There are twenty two Microfinance and credit andsaving institutions in Ethiopia. Compared to
other credit service providers, these are uniquely granting microcredits to Rural Ethiopia, in
addition to their presence in the town
B.1
The financing mechanism
Proclamation No. 40/1996, titled “A proclamation to provide for the licensing and supervision of
the business of microfinance institution”, and the directives issued by the National Bank of
Ethiopia (NBE), constitute the major legal and regulatory framework which is used to regulate
and supervise the microfinance industry.
The financing mechanism include: 




Direct ledning to borrowers from their own funds. This depends with request of the individual
Where cooperative, associations and group of individuals apply, the MF provided the loan based
on adequate documentation of their agreement.
Managing other funds: - based on agreement of other financers the MF provide the borrower as
per the terms of the lender with minimal fee
Managing revolving funds: -This may be as per the MF budget or other funder requirement. The
repayment of the loan will be utilized to lend the remain members and cooperatives based on
planned round and priority
Being a transfer of media: - Donors and government for areas unreached by banks with high risk
of physical transfer of money, the MF are good risk mitigating tools in addition to the efficiency
of opperations
B.2







Key characteristics of the financing mechanism:
They are available in every woreda and remote places next to community Development
Funds, which operate at grass root community level
Due to their proximity, they actively control the borrower
They require no collateral, but personal guarantees if large
Now a days they lending level is growing
The public increasingly trusted their operation as their performance is visible and poor
friendly
Their interest rate is relatively high compared to commercial banks
Too much office work for small amounts
22
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
B.3.
A Case Study in Rural
Water Supply Sanitation
and Other
Impacts of Adoption
By now, the Microfinance institutes already dominate the rural economy including attracting the
fund transfers of the dominant players in the water sectors, through the Community Development
Funds



The adoption has tremendously improved findings of various sectors of the rural economy. In the
water sector the institute assists: Provision of finance to business, community and individuals self-water supply developments.
This include, small irrigation, pumps, sprinklers, well, water systems, tankers, canal civil works,
sanitation.
In addition to their own funds the institute lend borrower from revolving fund which is also
benefiting communities for water system construction.
They are being means of alternative government and donor fund transfer means to the rural
Ethiopia where commercial banks have no access
B.4.
The process of adoption and implementation Provision of funds
In order to avoid duplication, please see Section A: -(CDF) of this report.
B.5.
Conclusions: pros, cons and replicability
The establishment of the regulatory framework for microfinance industry has helped to lay out
the roadmap for the development of the finance sector. The provision allowing MFIs to mobilize
small savings from the public has enabled them to finance a substantial portion of their portfolio
from internally generated sources.



However, more issues should be addressed, in that: Developed knowledge and capacities are not utilized as the huge MFI are working and limited in
respective administrative region, even though they observe good opportunities elsewhere. This
defeats the free business purpose and avoided competitiveness and related strategies, which is the
key art for creative knowledge.
Weak competition means monopoly, which results in poor choice to borrower and inefficiencies
can be concealed by creative profit generated from unreasonably high interest rate. The poor
need to have sufficient number of service providers from which to choose.
While the interest rate ceiling on credit has been removed, a minimum on interest to be paid for
savings persists, hampering savings mobilization in remote rural areas.
23
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia

A Case Study in Rural
Water Supply Sanitation
and Other
As foreign investment is not allowed the Ethiopian MFIs still have less way of learning new
insights from foreign banks,
The regulatory framework needs to find ways and means of helping the MFIs become more
competitive and efficient in delivering flexible financial services to the majority poor, the
regulatory mechanism also needs to be better equipped to supervise and monitor the industry.
24
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
C. Loan from Local Commercial Development Banks
There are fifteen banks in Ethiopia, including three government owned Commercial Bank of
Ethiopia, which is the largest Bank, with 423 branches, followed by other two government run
banks, Development Bank of Ethiopia and Construction and Business Bank
The other commercial banks were being established after the deregulation of banking service.
The private sector is growing faster and innovatively opening branches with new facilities
C.1
Financing mechanism
Based on strict adherence of regulations and universal commercial bank operations as well as
their policies and procedures, the commercial banks provide loan, advances and overdraft, to
individuals, the private and public sector. After observing the request, the banks rely mostly by
considering collaterals and guarantee than the strength of the business. As a result the acquisition
of depreciated collaterals cannot recover delinquent loans. Banks also observe borrowers
capability to administer the loan and the project.
C.2 Key characteristics of the financing mechanism:
The funding potentials of the banks is not to be exaggerated as funding of large project can erode
possibilities to other clients. Specially, this is serious to the private banks. Banks have to observe
the Nation Bank criterion for the level of reserve they hold, and the level of the lending they can
make.
•
The government banks, have experience of co-financing of huge projects they though they have
still limitation for the fund size,

Since the local banks should strictly follow the rules of the NBE the political risk will be low.
The NBE as a regulatory body has its own supervision mechanism for adherence of requirement
C.3 Impacts of adoption
Regarding the water sectors, there are many types of funding mechanisms and projects facilitated
by the banks. As noted above the banks provided
To mentions some of the water sector loans based on projects
No
Project type
25
Borrowers
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
a.
Hydropower loan for dam and operations
b.
Irrigation projects
c.
Well and Ponds
d.
e.
Water bottling and beverage industries
Many types of loans to businesses and
individuals backing for wells, reservoirs,
cannels, use and sewerage systemes
A Case Study in Rural
Water Supply Sanitation
and Other
Government Several dams
of Ethiopian Electric
Corporation
Government Several loans
to Ethiopian Sugar
Corporation: -many projects
Private floriculture and
horticulture
Private sector loans
Private and public
There is no adequate nationally consolidated information, quantifying the loan fund flow, from
local banks, to water projects, at least at current capacity. Even the contributions of regions and
communities are not determined for value and incorporated in the consolidated statements of the
huge RWSSP and WASH
C.4 The process of adoption and implementation
Key barriers to its adoption and implementation
 It is being used in the histry of fund flow. The major weakness is distance to the rural
Ethiopia
 Private commercial Banks are not involved in government project funds transfer
Success factors in its adoption and implementation
 Strong institutional framework
 Hundreds of branches in all over the country
 Low risk bank, never exposed to loss
C5 Conclusions: pros, cons and replicability
The commercial banks served as the water sector fund transfer channel for many years and are still
indispensible financing mechanisms in rural areas where microfinances do not perform well.
However, their size and performance is weak e in financing huge irrigation and hydropower thus need to
be strengthen
26
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
D. Introduction to Other Regional Financers and Donors
There are unique players in funding the water and other sectors of economy with a recorded
performance. This include
a. Regional Endowment funds
Regional Endowment funds are funds which are contributed to perform business related to
strategic development works of which profit would be used for diversification and expansion
purposes
b. Regional Development Associations
Regional development association are involved in non-business related development works, water, health,
education etc.
These bodies are region specific and are very strong in Tigray and Amhara. Their strength includes but
not limited to Convince and Managed to collect regular and special massive public free contributions





Conduct enormous public infrastructural development works, including hundreds of huge dams,
boreholes, water ponds, irrigation facilities and distant water supply service
Innovatively invest in lucrative and strategic developmental business (recently a public was done
for Iron development
They are proved to mobilize public work resulting in recovering, lost forests, wildlife and related
natural resources including streams, springs, medicinal and holy water and rivers also extending
their seasonal flows.
Have access to the rural society
Have play to perform and facilitate ancillary works related to the national projects
This is a good sample for fund raising development project by mobilizing the public. In a
repeated farewells and telethons it was observed as the pubic emotionally contributes hundred
millions in a few days
To conclude farther and recommend their use in a competent manner, there is a need to critically
review their work by official means.
27
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
PART 3 Respective Duties of Implementation Agencies, With Regards To Water
Fund Transfer
I.


At Federal Level,
The MoFED will be responsible for the overall financial management aspect of the program. It
opens special foreign currency accounts for the program, receives funds from the donors,
release funds to beneficiaries, collect reports from the beneficiaries and consolidate and report
on the use of funds to donors, government and other stakeholders.
The MoFED at the federal level will transfer funds to the Federal implementing agencies and
BoFED bank accounts, based on approved plan and bundget
Sectoral Ministries
The sectoral ministries for water supply and sanitation are of water, education and Health
 As per the FGE procedures All the Sectoral Ministries are to report to MoFED., on
financial maters of the Programme
 The sectors ministries, MWR, MoH and MoE will be responsible to manage the fund
transferred from MOFED and to prepare regular financial reports to MOFED, in
accordance with section VII of this manual. The National Water Sanitation and Hygine
(Programme) Coordination Office will facilitate in line with its delegated authority.
Duties and responsibilities of the National Programme Steering Committee for Waters and
the Water Fund:

Plan revenues by source of funds. The source of funds federal, regional governments and
communities, donors, borrowings from international financers
The Water fund pays every effort to find and match and improve the fund flow to the
need from different sources.
However, Except those funds contributed directly to the accounts managed by the water
fund namely federal government contribution, world bank and its donors managed funds
and AfDB contributions performance of other player such as regional government and
community contradictions, USAID, Water Aid, UnICEF. UNISCO, UNDP etc and local
NGO are not systematically being consolidated

It also approves budgets or resource distribution for Programme activities and submit to
MOFED. The allocation will be as per budget requests and criteria noted above
28
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
The criteria embrace the water supply coverage, proximity, geographic balance,
population, prioritization of water supply in the Woredas planning process, and level
of commitment as reflected in the collection of the communities’ contribution to the
financing of the schemes, and the proposals for O&M cost recovery for the schemes
through user charges. It is reported that the selection procedures are working well and
are in progress


Through its Programme technical team, ensure that regions have compiled and submitted
their physical and financial reports on time.
Initiate financial and physical performance auditing
II.
At Regional Level

The BoFED will be responsible to ensure that a suitable accounting System covering
both regional, towns and woreda level, is established. Each region will prepare
monthly, quarterly and annual reports which will be sent to the Federal level.
Regional Water Programme Steering Committee:
-
Approve budget appropriated to each woreda and submit to BoFED
Regional Water Programme Technical team:
-
III.
Ensure that money appropriated to each woreda is received on time
Ensure that reports are submitted to respective ministers on time.
At Woreda Level
At Woreda level players are Woreda Water Sectoral office: Woreda Water Programme
Team and the Communities (Kebeles), with their detailed respective duties
29
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
CONCLUSION
The funding challenge is enormous for all water-related sectors: Water resources, management, Irrigation
& drainage, Water and the environment, Water supply & sanitation, Hydropower
Even though past funding was not to the adequate level still the financing of the international community
is crucial until a with growth in the economy together with the development of the private sector address
the demand
In the near future condition though improved the goals of the water sectors cannot be easily addressed by
local tapped resources, without external financing and mobilizing the public and private effort through
infrastructural development which are proven way boosting the aggregate demands
Existing resources need to be used more effectively for y capacity building improving efficiency. The
private sectors especially the microfinances do show their ability to reach the rural community, reducing
the exaggerated lead time of money transfer, to a great extent .
Appreciating the achievements and efficiencies, funding agencies are expected to work on leveraging
local private capital while the government facilitate what is expected in the arrangements, towards the
attainment of its strategic plan.
Communities and Associations






Give incentive for the existing group and encourage the formation of associations to wards
development works, including the water sector
Continuously provide awareness kills, s and knowledge transfer programs. to this extent fast civil
work training will impact small developments and maintenance
Arrange and provide low interest rate credit
Encourage and give incentive for group borrowing made for a common service development
Create competitive environment by encourage the private sector microfinance institutions to
reach the rural community
Increasingly advocate quality social services to be provided to the community by investors in the
social sector. This can be done by development work assisted by public work or Provide soft loan
or contribution to Community Development Fund
In order to facilitate a permanent self-financed water and supply,



Increasingly advocate quality social services to be provided to the community by investors in the
social sector.
This can be done by development work assisted by public work or Provide soft loan or
contribution to Community Development Fund
The promotion to this contributions should be communicated to all players in the sectors
30
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Annex I
MAJOR FUND FLOW OF PROJECTS IN ETHIOPIA
Annex1. FGE FM Administrative Structures
FGE Adminstrative Structures
MoFED
BoFED
WoFED
31
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Annex2. Channel I
Channel I Fund Flow
DPs, Banks (ADB, IDA,
…)
MOFED
Segregated Designated Foreign
Currency Account at NBE
Pooled Birr account
at MoFED NBE
Sector Ministries &
Federal Implementing
Agencies
Direct Payments
BoFEDs
WOFEDs
Suppliers
32
Regional Implementing
Agencies
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Annex 3. Channel Ia
Channel Ia Fund Flow
DPs, Banks (ADB. IDA,
…)
MOFED
Segregated Designated Foreign
Currency Accounts at NBE
Pooled Birr account
at MoFED NBE
Sector Ministries &
Federal Implementing
Agencies
Direct Payments
Regional
Bureau of
the Sector
WOFEDs
Suppliers
33
Other Regional
Implementing Agencies
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Annex 4. Channel Ib
Channel Ib Fund Flow
DPs, Banks (ADB.IDA,
…)
MOFED
Pooled Foreign Currency Account
at NBE
Pooled Birr account
at MoFED NBE
Sector Ministries &
Federal Implementing
Agencies
Direct Payments
Regional
Bureau of
the Sector
WOFEDs
Suppliers
34
Other Regional
Implementing Agencies
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Annex 5. Channel III
Channel II Fund Flow
DPs, Banks (ADB. IDA,
…)
Government ,
MOFED
Pooled Birr account
at Sector
Ministries, NBE
Segregated Designated Foreign
Currency Account at NBE
Other Federal
Implementing
Agencies
Direct Payments
Regional
Bureau of
the Sector
WOFEDs
Suppliers
35
Other Regional
Implementing
Agencies
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Channel III Fund Flow
DPs, Banks (ADB. IDA,
…)
Birr Bank account
at Implementing
Agencies
Segregated Designated Foreign
Currency Account
Federal Implementing
Agencies
Regional
Implementing
Agencies
Direct Payments
WOFEDs
Suppliers
36
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Annex 6 Similar Case Study on Rural Financing
In year 2007 the World Banks sponsored assessment of the systems utilized for transferring
Productive Safety Net Programme (PSNP) cash resources within the Ethiopian banking system 2.
The PSNP is working with communities in food insecured areas, by way of public work,
including water development. The payment include payroll for public work and direct payments
for disables. The following were the findings of the assessment, among other:  The commercial Bank of Ethiopia is the only bank allowed to perform the banking
transfer.
 There is a considerable difference between the branch structures of CBE, which is based
on business and former administrative structure and that of woredas, which is based
Government Administration.
 Commercial bank had only 180 branches in the Country, out of which 24 are in Addis
Ababa, while Oromia region alone has over 250 woredas, leave alone the total number in
the country. Each woreda have many number of remote Kebele/communities
 In all the regions instances are many where there is a single bank which serves many
woredas. In some areas CBE branch serve more than seven far away Woredas Finance
and Economic Development Offices, (WOFED).
 Even though woredas in towns do not share, in all the regions, there is a repeated
comment that the Woredas were unable to withdraw timely the amount said to be
transferred from regions. However, during a visit it was observed that problems were
temporary and there are no outstanding chronic issues
 In case of Woredas with no banking infrastructure, the Bank does not inform the exact
amount of money, when the woredas call.
 There is a need to make a double trip. One to bring the advice to the woredas and then to
take the check and withdraw


2
In some distant areas and instances travel time to Banks can take two to three days and in
a risky paths where there are no vehicles transfers, sometime taking up to six hours travel
The following is an example, which express the scale and depth off the problems, at a
sample woreda of a region, as narrated by worda officer: i.
Transfer information is not available until advice is issued
ii. A week to bring the slip
iii. Another arrangement to prepare the check
iv.
There is a withdraw limit of Ministry of Finance and require many round
trip to withdraw the balance
The assesment was conducted by the writer of this report
37
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
v.
A Case Study in Rural
Water Supply Sanitation
and Other
Many days will take the cahier to go to every kebele. And take 2 to 4 days
in one kebele
The following were some of the recommendations, which are still reigning: 











Negotiate and convince the bank to open at least the smallest sub standard, three man
branch in woredas where there is no bank. There is a strong reason to advocate since
funds run by woredas are so large. The external auditors have found out that a single
cashier was managing about 79 separate funds. This is also a national concern for which
CBE was established for.
It is to be noted that most of the CBE branches were opened where the national
infrastructure was very poor and with very small amount of transaction compared with
the current demand and PSNP funds. CBE also has duties to work for national objectives
With its own internal issues Commercial bank of Ethiopia did not show reasonable
growth in recent past. One of the objectives of the Bank is to promote banking business
in the Country.
Special operations can be negotiated, in order to speedup transfers. This is possible if cost
of the bank is covered to reasonable extent.
It is better to use the other Commercial banks in the Absence of CBE. If there are, like
Awash Bank in kuni/Dedes Woreda
Special banking service can be negotiated. Projects are temporary to decide opening of
new banks
Use of micro finance institutions( this is separately discussed)
Establishment of temporary negotiated banks can be established after study.
BoFED should take the issue seriously as delay especially in reacting to bank error is
expensive. It is the only one to address the issue as it is a signatory.
Employ Advance-Instruction procedures to the banks, based on the budget. Alternatively
the instructions could be done as soon as information is received that the MoARD
instructed the MoFED, for allocation of transfers.
Agree with banks to make money available based on a schedule of withdrawal for
specific transfers. On the Bank side, advance instruction for next transfer is said to be
possible based on negotiation.
In order to reduce risk of loss of unutilized large amount of cash in safe, in areas where
there is no bank, study possibilities of adopting revolving fund to be replenished based on
the volume of payment transactions woredas can manage, on predetermined period, for
example, in a fortnight (fifteen days). Then arrange with bank to make money available
every fifteen days.
38
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia


A Case Study in Rural
Water Supply Sanitation
and Other
Negotiate upgrading measures with bank branches which administer large number of
woredas,
The marketing department of the bank is responsible for expansion and new branch
opening decision. A contact to this department can immediately resolve inconveniences,
if their recent plan would address to cover reasonable number of areas
Annex 7 Community Development Fund (CDF)
As the Woredas are the lower Ethiopian government administrative body, at grass root level
communities are organized in associations called Kebele administrations. A Woreda have several
kebeles, which are independent of government administration.
The Community Development Fund approach is a pioneered and developed in Amhara and
Benishangul-Gumuz Regions.
A.1. Financing mechanism
The following is extract from The WaSH Implementation Framework, a document which is
signed by four ministries of the Ethiopian government; the Ministry of Water and Energy, Ministry of
Health, Ministry of Education and the Ministry of Finance and Economic Development and by observers:
- the Development Assistant Group’s (DAG) Water Technical Working Group and For the Civil
Society Organization (CSOs) of the WaSH Sector
The Framework incorporates the lessons learned from a number of water, sanitation and hygiene
projects implemented in Ethiopia over the past decade and builds on the foundations these
projects have laid. An example of this is the application of the highly decentralized Community
Development Fund (CDF) approach that empowers communities to manage funds and to directly
manage the construction of water points and school and health post sanitation facilities. It also
engages NGOs as partners in WaSH ensuring that their overall contribution including their
experiences working with the people imbues the program as a whole.
The World Bank mainstreamed the CDF Approach into the National Water Sanitation and
Hygiene (WaSH) Program (WaSH Growth & Transformation Plan/Universal Access Plan
(GTP/UAP)) for its wider application.
The WASH objective is interestingly exactly similar to the Rural Water Supply and Sanitation
fund of the African Development Fund (AfDB).
A.2. Key characteristics/Features of the CDF Approach
39
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia



A Case Study in Rural
Water Supply Sanitation
and Other
Fund Transfer: The unique and innovative feature of the CDF approach is that funds for the
physical construction of water schemes are transferred directly to the community by way of a
micro credit institution.
Community Financial Management: The communities, through water and sanitation
committees (WASHCO), are responsible for the full development process through planning,
financial management, implementation and maintenance. The unique feature in CDF
community management is that the WASHCO manages not only community-generated funds
but the government subsidy provided for capital expenditures.3
Procurement: A further aspect of community management is that the WASHCO is directly
responsible for procuring the goods and services required for water scheme construction and
installation.
A.3. Background and Rationale for Mainstreaming
Steps in Mainstreaming






Integration: In this National WaSH Implementation Framework the principles and basic
procedures of the CDF approach are built into the WaSH program as part of the
Community Managed Project (CMP) funding mechanism.
It is presented as alternative funding mechanism to the existing Woreda Grant which is
hereby known as the Woreda Managed Project (WMP) funding mechanism which
includes regional and national managed projects on behalf of Woredas or towns.
If the existing Woreda Grants are channelled to the community and community is
managing the projects and funds, then this part of the Woreda Grant funding mechanism
belongs to the category of Community Managed Projects.
The provision of the Community Managed Project mechanism is, essentially, demanddriven. However, in order to foster this demand it is necessary for regions and woredas to
include the introduction and application of CMP in their strategic planning and to
undertake a program of CMP awareness building.
As CMP is “taken up” and appears in Woreda WaSH Annual Plans, the Region will
transfer the required funds to the intermediary finance institution from the investment
budget line (CDF approach) or the Region/Woreda transfers the investment funds to the
community directly.
Where pre-conditions are met communities/Kebeles are free to choose which funding
mechanism they wish to adopt.
The preconditions, however, are considerable and include:

that the region and the woreda have negotiated fund transfer arrangements with an
established financial intermediary at both levels
40
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other

that the region and the woreda have put in place the necessary capacity building and
technical assistance provisions to equip and backstop WASHCOs and to train and support
woreda and finance institution personnel for the special requirements of CMP

that hydro-geological conditions permit low cost technologies

that there is reasonable expectation that a sustainable supply chain for local procurement
can be developed

that there are a sufficient number of communities in the region/woreda selecting CMP to
make it a viable option

that the applicant communities are sufficiently cohesive to undertake community project
management and later to sustain management of operations and maintenance

that the cost and complexities of the preferred or required technologies and the project
size fit within the parameters of the CMP
A.4. Awareness & Capacity Building and Technical Assistance:
Recognizing that the pre-conditions set out above could be prohibitive – especially in fast
tracking the wider adoption of CMP - provision has been made within the National WaSH
Program to:

build awareness among all partners and other stakeholders of the advantages of the CMP
for potential scaling up where it is viable;

integrate into WaSH capacity building materials, manuals and training curricula for all
WaSH actors the values, skills, practices, tools and procedures required for the effective
application of the CMP mechanism;

ensure that in the first years of CMP expanded application special provision is made for
technical assistance to the WaSH Management and Coordination Offices at the national
Harmonization of Support:
With CMP as an integral part of the one National WaSH Program and with the harmonization of
donor contributions in support of that program through the Consolidated WaSH Account –
donors will and have, effectively, become supporters of CMP.
The CDF approach is no longer donor or region-specific. It is an integral, expanding and
evolving component of the one National WaSH Program.
41
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
A.5 Impacts of adoption
At Amara and Benshagul regions it is found to be a user friendly approaches with the above
positive attributes.
A.5.1 Financial flows generated
As noted above the CDF approach managed to generate the interests of the World Bank and
managed funds of the NGOs and civil society groups. This will materially impact the works of
the microfinance institution and the rural Ethiopia, positively.
A.5.2. Other impacts
The approach will creates confidences of other funding agencies to water and other sector. The
proximity of this institutions to the users will reduce the time gap between decision making and
implementation, absolutely impacting resource efficiency
A.6. The process of adoption and implementation





the acceptance of the fund by the four ministries and the key players in the sector indicate
the strength of the links to overarching financing policy or strategy of the country
Criteria used to select the financing mechanism : - As indicated above the criteria to
select the financing mechanism include; trust, efficiency, unprecedented proximity to the
rural community , experience, political acceptability, etc
Key barriers to its adoption and implementation. The main barriers are already
challenged. The transferring mechanisms of the institutions is coherent with the learning
curves of two decades, which is not yet discovered by any of the competing credit
institute and the age old commercial banks. In an interview with the general manager of
one of the subject I understood that they have means and tools of transferring funds even
when peace becomes challenging.
Success factors in its adoption and implementation: - the critical success factors are
already mentioned in the criteria used in selecting mechanisms. Also include; leadership,
community involvement, less corruption history
The lessons learned in its adoption and implementation is noted in the introduction above
42
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
A.5 Conclusions: pros, cons and replicability
The advantage and the disadvantages of the financing mechanisms are sufficiently detailed
above. The exceptional importance of the CDF is its user friendly approach and proximity to the
project, with fast delivery
43
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
Annex 8 Micro finance institutions
There are twenty two Microfinance and credit andsaving institutions in Ethiopia. Compared to
other credit service providers, these are uniquely granting microcredits to Rural Ethiopia, in
addition to their presence in the town
The following is List of Microfinances
Outstanding as of 30 June 2011
No
Name
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
B.1
ACSI
ADCSI
AVFS
Benishangul
Buusaa Gonofaa
DECSI
Degaf
Dire
Eshet
Gasha
Harbu
Letta
Meklit
Metemamen
OCSSCO
OMO
PEACE
SEYAMFI
SFPI
Sidama
Wasasa
Wisdom
Gross Loan
Portfolio
USD
108,204,381
33,520,166
885,538.00
3,250,672
3,615,229
109,399,291
78,943.00
963,077.00
2,400,238
1,260,218
1,407,969
283,266.00
1,874,083
804,205.00
74,595,865
36,813,225
2,642,360
280,132.00
3,004,563
2,299,867
5,072,600
7,567,759
Number of
borrowers
USD
659,635
156,148
17,359
27,816
42,146
396,648
1,270
5,923
24,116
14,119
17,974
925
13,557
14,154
502,540
280,232
17,206
2,169
33,335
32,867
42,276
56,302
The financing mechanism
Proclamation No. 40/1996, titled “A proclamation to provide for the licensing and supervision of
the business of microfinance institution”, and the directives issued by the National Bank of
Ethiopia (NBE), constitute the major legal and regulatory framework which is used to regulate
and supervise the microfinance industry.
In the proclamation, microfinance business is defined as “an activity of extending credit, in cash
or in kind, to peasant farmers or urban small entrepreneurs.” The NBE is empowered to license,
44
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
supervise and regulate the delivery of financial services to the rural and urban poor through
microfinance institutions.
The financing mechanism include: 
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B.2
Direct borrowing to borrowers from their own funds. This depends with request of the
individual
Where cooperative, associations and group of individuals apply, the MF provided the
loan based on adequate documentation of their agreement.
Managing other funds: - based on agreement of other financers the MF provide the
borrower as per the terms of the lender with minimal fee
Managing revolving funds: -This may be as per the MF budget or other funder
requirement. The repayment of the loan will be utilized to lend the remain members and
cooperatives based on planned round and priority
Being a transfer of media: - Donors and government for areas unreached by banks with
high risk of physical transfer of money, the MF are good risk mitigating tools in addition
to the efficiency of opperations
Key characteristics of the financing mechanism:
B.2.1 Unique features of the microfinances institutions includes:  They are available in every woreda and remote places next to community
Development Funds, which operate at grass root community level
 Due to their proximity, they actively control the borrower
 They require no collateral, but personal guarantees if large
 Now a days they lending level is growing
 The public increasingly trusted their operation as their performance is visible and
poor friendly
 Their interest rate is relatively high compared to commercial banks
 Too much office work for small amounts
B.2. 2 Funding potential, predictability of funds, political acceptability, level of complexity
to design and administer it, capacity demands, cost of implementation,
sustainability, pre-conditions required
The sub-subject is well explained in the following assessment, a historical practical exposure
text: 45
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
An assessment study conducted by us, during year 2007, with respect to possible alternative
World Bank fund transfers channels, revealed the following edited experiences and achievements
of the dominating five regional MFIs in four regional states. Compared to present status of the
institutes, the accomplishments are still active and are not exaggerated as an obvious growth has
been observed, since then, in terms of both quantitative and qualitative attributes. The
circumstances and features are indispensible input and interestingly account the appetite,
objectives and purpose of this report, innovative funding mechanisms: I.
Tigray Region Micro Finance
The MFI working in Tigray Region is Dedebit Credit and Saving Institute (DCSI) The following
information was obtain the following information from the then General manger Our Comment
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DSCI was established 13 years ago (now eighteen years)
Fast transfer services in communities of 29 woredas
Well established uniform system in 120 operational offices and staffed and opened
offices all over Tigray, indicating existence in several communities of a single woreda
(average of five office in a woreda) : 1500 staff members, most of them a finance experts (average of 12 staff member in an
office)
Fully decentralized
Head Quarter focus only on consolidation work and problem solving
Administer loan, savings. Current loan of birr 900 million (June 30 2010 record show
USD 109 Million or Birr 1.7 Billion)
The institute is already working on behalf of others (fiduciary and trust works)
Managed Up to 70,000 pensioners and no complain and already being requested to
handle Governments payroll. Payroll of many is being be served for a fee charge of Birr
2.5 per individual pensioner. (The larger the exposure unit the rate can be negotiated
substantially).
A Regional NGO, REST is implementing a Safety Net Program with DCSI
Run special rural package programme of 300,000 people
Transfer service can be done within an hour. A fast transfer, claimed to be perhaps the
fastest in Africa rural challenging areas. Transfer fee rates would be per the commercial
bank of Ethiopia (CBE), (this excel the CBE as DCSI works in communities beyond the
reach and area specific knowledge of CBE,) .
Any negotiation will cover risk and reward
Claimed to be the best networked MFI, with woredas and communities in the country,
compared to other Ethiopian MFIs
The institute has different investment and money market wings, in addition to the Micro
Finance
Management rated its staff as highly committed, loyal and skilled workers
An individual staff member serve up to 800 clients
46
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia


A Case Study in Rural
Water Supply Sanitation
and Other
The institute have intensive experience and is able to design innovative systems for
special issues
Statements can be provided to the clients every month
The General Manager suggested that, as we already have being engaged in identical area, are
equipped and readily presented to manage transfers if asked for. The institution is very organized
and can handle both transfer and payment to beneficiaries with negotiation. And these words are
shared by all regional MFIs of Ethiopia, not to re-mention in the following sub sections.
II.
Amhara Credit And Saving Institute (ACSI)
The following information was obtained from the them Deputy Manager
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Offices are available in all of the woredas and there are woredas where they have over one
branch
Owned 90 offices and 30 own buildings are in progress, including the Head Office Building.
Other offices are rented
The institute is already in what the commercial banks grade risky area, for security reason
Except problem solving operations operations and decision making procedures are
decentralized
Arrears, portfolio risk is only 1.5%, while the international is 2-3%
2005 accounts are audited
NBE monitored even in November 2006
Quarterly report to NBE is being performed
Internal auditors are permanently assigned in all sub-branch office and performing pre-audit
It has 2065 workers
A minimum of 6 staff members are available in sub-branches offices. The minimum six are: a) Coordinator
b) Finance officer
c) Two cahiers
d) Internal auditor and
e) A filed worker
We are going to assign vehicles in all the centers
They have confidence and ready to work with PSNP transfers, even at kebele/communities
level. Also ready to open accounts for beneficiary. The public worker can withdraw at any
time. This is also a good control mechanism
Currently they are already doing similar transfer work with Food Security by charging 2%
Proved to work in what is risk area to Commercial banks
Negotiating by as a function of volume of work, ACSI, the Amhara Credit and Saving
Institute is responsible for managing other funds for a fee of 1to 2.5% fee.
47
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia

III.
A Case Study in Rural
Water Supply Sanitation
and Other
The microfinance institution can be responsible for receiving money transfer and transfer
directly to the woredas
Southern Nations and Nationalities and People (SNNP) Micro Finance Institutions
Unlike to other regional, there are two micro finance institutions players in the region: - the Omo
Credit and Saving Institute and Rural Finance Fund
III.1. Omo Credit and Saving Institute
We obtain the following information from the Deputy manger
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Our Comment
They run business in 64 woredas out of 104 and plan additional 20 and more.
There is cash holding limit at Woreda therefore the Omo use banks over and above the limit
Likely that PSNP service can be done through negotiation.
OMO is handling pension payments in many Woreda
Operationally self sufficient
Not yet start own money transfer system. Even not yet planned
They working for Netherlands SOS Sahil fund
Pension funds for 38,000 beneficiaries at Birr 2/personeach
Even though the institute does not cover all areas, it can manage transfer.
However, they have no transfer products, they are using the commercial banks, for risk
avoidance as opposed to Amhara & Tigray
III.2
SNNPR Rural Finance Fund
We obtain the following information from the then General manger and the Planning and credit
Dept head
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At present they have approved plan at Woreda level but not functional
At this moment there is no account even at Woreda level
It is a Government institute
The operation cost is being covered by the Government
There is a problem of execution
This was being an institute under establishment. The fund will be a good alternative in future
since we have structure in all of the WoredasIt cannot be assigned for the intended purpose
IV.
Oromia Micro Finance
48
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
We obtain the following information from the then Finance manger
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Out of 253 woredas , 198 offices are being opened at woredas level. Decision is already
made to open in the rest of the woredas.
Woredas which have no Micro finance office are served through one man satellite office.
There are 17 Zonal Offices and branch woredas as per the Government structure
Currently there are about 188,000 loan customers
Experience in other fund management
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The focus is on the normal operation of microfinance and insurance operations and managing
of fiduciary and other funds were not practiced like the Amhara and the Tigrayregional
saving and credit institutes
However, very small funds were managed at Arsi-Bale zones
We will start managing others after our part is achieved sustainably
We have no our own transfer tool, but use commercial banks for transfer purposes, including
for retransfer of excess fund over a limit of branches. We have no a transfer product
Any organ of the state can open account and operate its funds in the Microfinance branch
with negotiation.
Even though the institute does not cover all areas, it can manage it in the nearest future.
B.3.
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Impacts of Adoption
By now, the Microfinance institutes already dominate the rural economy including
attracting the fund transfers of the dominant players in the water sectors, through the
Community Development Funds
The adoption has tremendously increase varios sectors of the rural economy
B.4. The process of adoption and implementation Provision of funds
In order to avoid duplication, please see Section A(CDF) of this report.
B.5.
Conclusions: pros, cons and replicability
The establishment of the regulatory framework for microfinance industry has helped to lay out
the roadmap for the development of the sector. The provision allowing MFIs to mobilize small
49
Strategic Financing Framework and Innovative Financing
Mechanisms in the Water Sector in Ethiopia
A Case Study in Rural
Water Supply Sanitation
and Other
savings from the public has enabled them to finance a substantial portion of their portfolio from
internally generated sources.
Subsequent improvements in the regulatory framework include
 The revision of the loan size ceiling for individual borrowers,
 The revision of repayment periods on loans from one year to two years, and
 Removal of the interest rate ceiling on credit, avoids some of the key regulatory problems
faced by the industry.
However, more issues should be addressed, in that:  Developed knowledge and capacities are not utilized as the huge MFI are working and
limited in respective administrative region, even though they observe good opportunities
elsewhere. This defeats the free business purpose and avoided competitiveness and
related strategies, which is the key art for creative knowledge.
 Weak competition means monopoly, which results in poor choice to borrower and
inefficiencies can be concealed by creative profit generated from unreasonably high
interest rate. The poor need to have sufficient number of service providers from which to
choose.
 While the interest rate ceiling on credit has been removed, a minimum on interest to be
paid for savings persists, hampering savings mobilization in remote rural areas.
 As foreign investment is not allowed the Ethiopian MFIs still have less way of learning
new insights from foreign banks,
•
•
•
•
•
Credit for small-scale borrowers
Some institutions offer technical assistance and business development advice
E.g. Grameen Bank, Bangladesh
The role of government in MFIs is to provide the enabling environment for private sector
participation, through (Llanto 1999):
• Deregulated interest rates;
• Emphasis on long-term sustainability of MFIs;
• Provision of the infrastructure to make the local economy viable;
• An appropriate regulatory framework for MFIs.
Relevance to SLM
• Cooperation programmes between extension agencies and MFIs to finance SLM
practices
• Reaching out to MFIs (as well as traditional FIs) to introduce SLM practices and
their business and development potential
The regulatory framework needs to find ways and means of helping the industry become more
competitive and efficient in delivering flexible financial services to the majority poor, the
regulatory mechanism also needs to be better equipped to supervise and monitor the industry.
50