How Zambia’s inefficient commercial water utilities are slowing down progress in service coverage and what to do about it

The Global Water Security and sanitation Partnership * supported the completion of the Zambia Water Supply and Sanitation Sector Diagnostic that was completed in June 2020.

Zambia aims for universal access to safe and affordable water and sanitation services by 2030. Yet, Zambia is one of the countries that missed the MDGs for water and sanitation and is projected to miss the more ambitious SDGs. Access levels remain stubbornly low as the data and a visit to many densely populated peri-urban quarters or rural villages quickly show. As of 2020, only two-thirds of Zambians had access to basic water services, and about half had access to basic or limited sanitation.  These access rates have remained almost stagnant over the past fifteen years. You would be right to blame low public investment in the sector as the reason for this slow progress. After all, Zambia’s spending on water and sanitation has averaged only 0.3 percent of GDP over the past decade.  But a recent diagnostic of the country’s flagship water and sanitation investment programs revealed an interesting fact: the urban water sub-sector, which is dominated by water utilities, is better funded compared to the rural water sub-sector. Between 2013-2018 alone, Zambia was able to mobilize US$925 million for theNational Urban Water Supply and Sanitation Program (NUWSSP) compared to US$50 million for rural. Most of the financing comes from donors in the form of loans and grants for specific projects. From 2011 to date, Zambia has committed close to US$3 billion to NUWSSP, which is about 67 percent of the total 2030 investment requirement, but service coverage rates continue to lag.

Why? We hear you ask. Put simply, the sector has focused on infrastructure rather than on strengthening the institutions that fix the pipes to pursue an efficient and sustainable system for service provision. In the urban sector, capital investments have focused on large bulk water projects. With rehabilitation and expansion of aging water distribution networks, critically in small towns and peri-urban areas (areas of high population growth), not receiving the same attention. This has resulted in most of the increased production being lost in leaky networks, undermining the access expansion efforts. 

Zambia's chronically inefficient water utilities are creating a fiscal burden and making it harder for the Government to finance the sector. During the period 2001-2017, Zambia's Commercial Utilities (CUs) lost an estimated US$858 million due to high levels of non-revenue water (water lost through leaks, or water not billed or both) and low bill collection efficiency  (see Figure 1). Such losses have steadily increased and most losses (US$554 million) occurred during the period 2011-2017, temporally coinciding with large investments in bulk water coming online. This loss is equivalent to about 20 percent of the total capital so far invested in NUWSSP. From a public finance perspective, the inefficiencies have resulted in 'hidden costs' or unintentional implicit subsidies to the CUs that can be considered an illegitimate claim on public resources. Unlike direct subsidies which are formally allocated and recorded on the utilities' books, 'hidden' costs, although accumulated by CUs, go unrecorded, thereby creating a fiscal burden on the government. There is evidence that CUs are compensating for these hidden costs by reducing investment in maintaining their assets. They also delay or forego essential maintenance and repairs – actions that trigger a downward spiral of significant deterioration in assets, declining service quality, and increasing cost for each unit of service provided. When this happens, losses increase substantially, and more investment is required to carry out repairs. This vicious cycle—which begins with hidden costs and proceeds to asset deterioration—means that when the government finally absorbs the costs, it does so at the cost of adding to the national debt or reducing funding for other programs. 

What can be done? The government and the NUWSSP must therefore shift its focus from financing large infrastructure to financing improvements in the efficiency of CUs to enhance their cashflows and enable them to contribute to the capital needed to expand access. Improvements in organizational efficiency should be systematically accompanied by an enabling optimization of the sector’s institutional and governance arrangements in the medium to long-term.  

The Government should have a deliberate strategy to use public finance to incentivize efficiency improvements in CUs by linking financing to improvements in operational efficiency. Future concessional funding to CUs under NUWSSP should be linked to improvements in efficiency. Improvements in operational efficiency would improve financial performance and enable CUs to contribute to capital investments through improved cash flows. Data from the National Water Supply and Sanitation Council (NWASCO) shows that average tariffs for CUs in Zambia are well above average  Operation and Maintenance costs and can cover some financial costs. However, high levels of losses and operational inefficiencies are preventing CUs from achieving necessary financial strengths to access private capital. Therefore, any future capital injection by Government of the Republic of  Zambia  in NUWSSP must consider interventions to improve the efficiency of CUs, which would make them more creditworthy and thus increase their chances of mobilizing private capital. In short, our analysis provides overwhelming evidence to support a shift in the focus of the urban water and sanitation sector towards efficiency improvement. 

One practical way to operationalize such a shift is to require CUs seeking public financing to define investment packages that balance the reduction of inefficiencies against the development of new water sources. The sources of CU inefficiencies are well known. These are technical inefficiencies (i.e., physical water losses caused by leaking pipes), commercial inefficiencies (i.e., revenue losses caused by meter inaccuracies, illegal use, unmetered consumers, and non-payers), and organizational inefficiencies (caused by over-staffing, costly and outdated HR policies). The potential efficiency-improving interventions are many, ranging from lowering leakage and replacing customer meters to reducing staff costs and optimizing the organizational structure. The relative costs and returns from each intervention depend on the characteristic of each CU. Our analysis of all the 11 CUs in Zambia showed that the priority interventions with the shortest payback period (less than five years) involve introduction of technology, such as supervisory control and data acquisition systems for plant operations, automatic meter reading and automatic metering infrastructure, to save on staff costs.  It is estimated that CUs as whole could increase their revenues to US$88 million per year (0.4 percent of the GDP) by reducing NRW to 25 percent and improving collection efficiency to more than 90 percent. 

This analysis and the evidence provided is not just pertinent to the Zambia context. This is an issue worldwide. Investing in capital infrastructure without paying adequate attention to operational efficiency is a recipe for disaster.

•    The GWSP is a multi-donor fund within the World Bank that produces cutting-edge research and analytics to create and deliver urgent, practical, and innovative solutions.