First Joint Annual Review – JAR 2005/06

1. Republic of YemenMinistry of Water and EnvironmentNational Water Sector Strategy and Investment Program NWSSIP 2005-2009 First Joint Annual Review – JAR 2005/06 Findings and Recommendations of the Urban Water Supply and Sanitation Review Team

2. NWSSIP - JAR 2005/06Target population • Urban population end of 2004 was 5.585 million, increased to 5.864 end of 2005 • Urban population share end 2004 was 28.4% and its growth rate (5% pa) is well beyond national average • More than 40 registered urban utilities under LC & NWSA umbrella represent approx. 90% of total urban population • 84% of population belong to the 23 utilities which are decentralized under LC umbrella; process thus well on track • Additional 2 approved LCs are awaiting legalization • Total staff working 7.500 in 2005, about 11% professionals plus 19% with at least high school or vocational training certificates

3. NWSSIP - JAR 2005/06Budget performance • NWSSIP annual investment target of USD 150 million missed by far • USD 134.5 million were formulated as budget request • USD 65.1 million were approved (50% of requested amount) • USD 45.2 million were disbursed (77% of approved amount) • However, physical completion rate of planned projects was 71%, indicating that cash-flow was a limiting factor • Recurrent budget approval rates below requested funds, but due to a high percentage of fixed costs and availability of own revenues, approved budgets were overspent • In average, 86% of requested budgets approved (USD 47 million) • In average, 109% of approved budgets spent (USD 52 million) • Approval ratio goes down to < 70% and disbursement ratio goes > 135% in some cases

4. NWSSIP - JAR 2005/06Urban service coverage • Achieved water supply coverage end 2005 = 58%, with 457,000 house connections reaching a population of 3.428 million • 130 million cbm of water produced, 62 l/c/d reached the population (in average slightly below NWSSIP targets); • Most utilities have rather regular water supply, but in some critical areas supply constraints are dramatic • Achieved sewerage network coverage end 2005 = 32%, with 250,000 house connection reaching a population of 1.875 million • All sewerage networks connected to treatment plants (under planning, construction and mostly already operating) • NWSSIP water supply target of 71% network coverage achievable with enhanced capacities and additional financial resources • NWSSIP sewerage target of 52% network coverage needs to be reduced to 42% and non-network based sanitation needs to be considered seriously in addition

5. NWSSIP - JAR 2005/06Cost and output • Average cost per house connection estimated in NWSSIP was USD 2,170 • Average cost for 25,385 water and 32,380 sewerage house connections in 2005 was an extremely economical USD 780 • Overall cost trend upwards (average cost per HC in latest complex UWSS project in Sa’ada in the range of USD 4,000 each) • Benchmarking and larger variety of technological choices are needed • Urban interventions should focus on highest value-for-money

6. NWSSIP - JAR 2005/06Operational and financial efficiency • In 2005, most utilities cover their O&M cost with own revenues • Billed revenue in average covered 120% of O&M cost (av. 2005) • Collected revenues covered 107% of O&M cost (average 2005) • Collection efficiency 98%, UFW 29.4 % (end 2005) • Many utilities have accumulated reserves for replacement of electromechanical equipment • USD 13 million are deposited on depreciation accounts (for electromechanical replacements) • USD 35 million virtual funds as depreciation reserve in balance sheets • Full cost coverage as sub-sector goal not achievable in the short term • Non-domestic (commercial, industrial, government) water share 16.2%, overall water use efficiency 85% (15% technical losses) • More attention is to be given to water and STP effluent quality aspects

7. NWSSIP - JAR 2005/06Institutional capacities • Staff training efforts are reasonable, but can be improved • Average of 0.7 days of in-country, mostly on-the-job training per year provided to all 7.500 staff working in the sub-sector (4.3 days per year if limited to professional / technical staff) • 5.200 person/days of graduate / post-graduate training provided out-of-country (medium and long-tern courses) • UWSS as launched its PIIS with 19 utilities affiliated so far; feeds into sector M&E • HRD inventory and assessment study started as baseline for a sector wide HRD strategy • Several institutional support / capacity building programs ongoing • JAR brought about a number of weaknesses of managerial capacities which need to be addressed urgently • Establishing baselines and coverage data, statistics in general • Understanding of financial management and accounting • Monitoring and evaluation of plans and actions • Language and computer skills

8. NWSSIP - JAR 2005/06Poverty relevance • The poor get a fair share of water at affordable prices • All utilities use a block tariff systems that cross-subsidizes, sometimes heavily, the consumption of the first 10 cbm/month considered the “lifeline” for the average family • In average, 61% of clients of utilities consume up to the lifeline quantity, thus their whole water bill is subsidized • This principle is not threatening the financial sustainability of utilities, since it accounts for an average of 10% of revenues only • On the average, these clients consume 31% of total or 37% of domestic water sold • Networks are by far the most economic water source for all purposes • Average household expenditure for water in the range of 4-7%, about 25% of what is spent on QAT • The system has a number of issues to be addressed • The block tariff can be designed with a more pro-poor focus • Tariff adjustments are too irregular, and periods of validity are too long, which undermines real value of collections in a high inflation environment • Mobilizing additional resources on the way to full cost coverage is not really the basis for tariff adjustments

9. NWSSIP - JAR 2005/06Key recommendations • Update baseline on urban population and service area • Assess and improve managerial capacities especially in critical utilities • Study financial accounting data by independent expert • Legalize and launch independent operations of approved LCs • Clarify relations between LCs and utilities within the governorates • Implement recommendations of study on independent regulator • Increase speed of project preparation and implementation and initiate steps toward a program-based approach • Increase investment funding and disbursement in line with updated NWSSIP targets, aligned with mid-term results framework • Address the cost-coverage issue through further improvement of operational efficiency and realistic tariff adjustments