The water supply in the city of Dar es Salaam in Tanzania is in such poor condition that cholera and other water borne diseases are a problem. A five-year US$164.6 million project aims to rehabilitate the city's water facilities by providing reliable, affordable and sustainable water supply service and improve the sewerage and sanitation services. 

 

 

 

 

 

 

The project is financed through three external sources: the World Bank, the African Development Bank (ADB) and the European Investment Bank (EIB). Other financing is provided by the state-run Dar es Salaam Water and Sewerage Authority (DAWASA) and a private operator, City Water Services (CWS).

Last month CWS took over the responsibility of water supply operations and maintenance, including billing and collection from DAWASA under a 10-year lease contract as part of the government's efforts to attract private businesses into public services.

The project will benefit from formula tariffs to customers. As the system is being built up, revenues will also increase as new customers are added.

Background and rationale

 

Dar es Salaam is the industrial and commercial center of Tanzania. The country is one of the poorest in the world with a population of nearly 36 million. In the past, the World Bank, the International Monetary Fund and other organisations have provided funds to rehabilitate its obsolete economic infrastructure and to alleviate poverty.

 

Infrastructure of urban water supplies, including Dar es Salaam, is old, poorly functioning and unable to meet with increasing demand and emergencies. Maintenance has also been underfunded for many years.

 

Sewerage systems are poor with such problems as broken sewers. According to Deloitte Touche Emerging Markets, financial advisors to DAWASA, almost 60 per cent of the water produced was unaccounted for in 2002 due to leaks in the system and theft.

 

In 1997, urban water systems managed by the Ministry of Water were handed over to independent and autonomous Urban Water and Sewerage Authorities. Local boards set consumer tariffs. DAWASA was also established that year by merging the water supply operations of the defunct National Urban Water Authority and the sewerage activities of the defunct Dar es Salaam Sewerage and Sanitation Department.

 

DAWASA's operational area includes the city of Dar es Salaam, Kibaha and Bagamoyo towns in Coast Region and settlements along the two transmission mains of Upper and Lower Ruvu. The government also established the Energy and Water Utilities Regulatory Authority (EWURA), which will regulate CWS and DAWASA operations.

 

Project

The project involves rehabilitating existing drinking water production, transmission, storage and distribution facilities and waste water collection and treatment facilities. Extending piped water supply service to unserved areas, upgrading the utility’s commercial operations to industry standards, reducing non-revenue water, increasing collection of water and construction of a new 5,000 cubic metre reservoir are also planned.

DAWASA has the overall responsibility for implementing the project. The process of selecting the private operator for DAWASA had been difficult. The government attempted a privatisation in 1997 which resulted in bids that could not be compared as the basis for their preparation was not the same. Another attempt in January 2000 resulted in bids by only two companies with both bids rejected.

Finally, DAWASA assets were leased to a private operator, CWS, for 10 years including a loan to CWS of US$5.5 million over the lease term and US$140 million to finance the infrastructure rehabilitation.

Financing

Total costs of the project are US$164.6 million, which includes expenses such as consultants, future expansion studies and training. The breakdown of financing is listed in the Table below.

Financing for Dar es Salaam Water and Supply and Sanitation Project

3 external financiers:	(US$m)
World Bank	61.5
African Development Bank	48
European Investment Bank	34
Other financiers:
DAWASA	12.6
City Water Services	8.5

 

The lead arranger is the World Bank. In reference to capital improvement projects, the debt/equity ratio is 60/40.

Customers will be charged formula tariffs, which will adjust annually based on inflation and foreign exchange indices. New customers will also be added. A special fund is being created to finance connections for poor, low-use customers.

John Sitton of Deloitte Touche Emerging Markets, Financial Advisor to DAWASA, told Infrastructure Journal there is a problem of non-revenue water due to leaks in the system and illegal connections. Costs will also be reduced once those leaks are repaired and revenues will increase as illegal connections are formalised.

Risks and insurance issues

One of the main risks for the project is currency depreciation. The national currency in Tanzania is the shilling (Tsh) and the government will bear the foreign exchange risk on the financing made available by the World Bank, ADB and EIB. Tanzania’s exchange rate is not controlled by exchange controls or transfer restrictions.

CWS is the operator of the system and carries the risk that DAWASA may not perform. DAWASA is in charge of the rehabilitation of the treatment plants and the transmissions mains. CWS has responsibly for managing the rehabilitation of the primary distribution system and for emergency works to improve the output of the plants and transmissions lines.

The 10-year lease contract has many performance issues which ensure CWS carries out its responsibilities. Eberhard Boemcke, Senior Loan Officer at EIB, Africa, Caribbean and Pacific Investment Facility division, said it specifies the conditions under which water supply and sewage service has to be provided.

“It defines the assets of DAWASA that have to be operated and maintained by the private operator, provides for the connections that have to be built to new customers, the way the consumption has to be billed and how bills have to be collected. Basically this contract stimulates the private operator to be as efficient as possible, to reduce commercial losses and operating costs,” Boemcke said.

Another important issue is the allocation of risk when it comes to replacing assets, i.e. whether DAWASA or CWS is responsible. Large infrastructure items such as pipes fall under DAWASA, but smaller items fall under CWS.

Deloitte’s Sitton noted that the contract is complex and will require interpretation by skilled and knowledgeable participants on both sides.

Conclusion

Historically, urban water supply and sanitation projects in Tanzania had largely ignored institutional development and cost recovery issues, according to the World Bank. But with the creation of the Urban Water and Sewerage Authorities and the formulation of the National Water policy, the government has demonstrated a willingness to address these issues.

Deloitte’s Sitton said the lease model for the project holds promise for similar countries in which rehabilitation to infrastructure is needed. “In poorer countries where the market is still developing, I doubt you are going to have a lot of people coming in and investing the amount of money that is needed to get these systems up and running again or expanded. By splitting the risks, the lease concept has some merit and some promise if it is properly designed and implemented,” he said.

Jill Paul