AFRICAN DEVELOPMENT BANK

Public Disclosure authorized Public Disclosure

MANZINI REGION WATER SUPPLY AND SANITATION PROJECT

APPRAISAL REPORT

Disclosure authorized Disclosure

Public Public

RDGS/AHWS

November 2018

TABLE OF CONTENTS

Currency Equivalents ...... i Project Summary ...... iv Results Based Logical Framework ...... vi I– STRATEGIC THRUST AND RATIONALE ...... 1 1.1 Project Linkages with Country Strategy and Objectives ...... 1 1.2 Rationale for Bank’s Involvement ...... 1 1.3 Donor Coordination ...... 2 II - PROJECT DESCRIPTION ...... 3 2.1 Project Objectives and Components ...... 3 2.2 Technical solution retained and other alternatives explored ...... 4 2.3 Project type ...... 5 2.4 Project cost and financing arrangements ...... 5 2.5 Project’s Target Area and Population ...... 7 2.6 Participatory process for project identification, design and implementation ...... 7 2.7 Bank Group Experience, Lessons Reflected in Project Design ...... 8 2.8 Key performance indicators ...... 8 III – PROJECT FEASIBILITY ...... 9 3.1 Economic Performance ...... 9 3.2 Environmental and Social impacts...... 9 IV – IMPLEMENTATION ...... 11 4.1 Implementation Arrangements ...... 11 4.2 Implementation Schedule ...... 11 4.3 Procurement Arrangement ...... 11 4.4 Financial Management and Disbursement Arrangements ...... 12 4.5 Monitoring ...... 13 4.6 Governance ...... 13 4.7 Sustainability ...... 14 4.8 Risk Management ...... 15 4.9 Knowledge Building ...... 15 V – LEGAL INSTRUMENTS AND AUTHORITY ...... 16 5.1 Legal instruments ...... 16 5.2 Conditions associated with Bank’s intervention ...... 16 5.3 Compliance with Bank Policies ...... 16 VI – RECOMMENDATION ...... 16 Appendix 1: Map of Eswatini showing Appendix 2: Eswatini’s Comparative Socio-Economic Indicators Appendix 3: Table of AfDB’s Portfolio in the Country (July 2018) Appendix 4: Key related projects financed by the Bank and other development partners in the country Appendix 5: Justification of Government’s Level of Counterpart Funding Contribution

Currency Equivalents August 2018

1 UA = US Dollar (USD) 1.40487 1 UA = Eswatini Lilangeni (SZL) 18.3833 South African Rand (ZAR) 18.3833 1 ZAR = Eswatini Lilangeni (SZL) 1 1 USD = SZL 13.08541

FISCAL YEAR

1st April - 31st March WEIGHTS AND MEASURES 1metric tonne = 2204 pounds (lbs) 1 kilogramme (kg) = 2.200 lbs 1 metre (m) = 3.28 feet (ft.) 1 millimetre (mm) = 0.03937 inch (“) 1 kilometre (km) = 0.62 mile 1 hectare (ha) = 2.471 acres

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ACRONYMS AND ABBREVIATIONS

ADF: African Development Fund NDS National Development AfDB: African Development Bank Strategy CP: Cooperating Partner NGO: Non-governmental ESAP: Environmental and Social Organization Assessment Procedures O&M: Operation and Maintenance ESEA: Eswatini Environmental PCR: Project Completion Report Authority PIT: Project Implementation Team ESIA Environmental and Social PRSP: Poverty Reduction Strategy Impact Assessment Plan ESMP Environment and Social PRSAP: Poverty Reduction Strategy Management Plan and Action Program EWSC Eswatini Water Services RBCSP: Result Based Country Corporation Strategy Paper GOE Government of the Kingdom RWSS: Rural Water Supply and of Eswatini Sanitation HDI: Human Development Index SACU: Southern Africa Customs IMS: Information Management Union System SADC: Southern Africa IPR: Implementation Progress and Development Community Results Report SAG: Sector Advisory Group IWRM: Integrated Water Resources SDG: Sustainable Development Management Goal MDG: Millennium Development RMC Regional Member Countries Goal UA: Unit of Account MIC Middle Income Country UNICEF: United Nations Children's MNRE: Ministry of Natural Resources Fund and Energy USD: United States of America MOEPD Ministry of Economic Dollar Planning and Development WB: World Bank MOF: Ministry of Finance MOH: Ministry of Health ZAR: South African Rand MOU: Memorandum of Understanding WSS: Water Supply and Sanitation

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Project Summary

Project Overview–Manzini region is the most populous region in Eswatini. The water utility (EWSC) has been faced with a challenge to provide water supply and sanitation services to unserved areas in the Manzini Region, in particular the peri-urban areas of , , Mthongwaneni, and Mafutseni. The purpose of this Project is to improve the well-being of the inhabitants and spur economic growth in the Manzini Region through extension of the provision of adequate safe water supply and improved sanitation services. The objective of the Project is to meet the potable water requirements of Manzini and surrounding areas and reduce the risk of environmental pollution of the groundwater through provision of appropriate sanitation services. The project is based on development of more reliable and sustainable water sources in the area, and promotion of more environmentally friendly solutions for sanitation. The project is estimated to cost ZAR 807.53 million, to be financed by the Bank and the Government of the Kingdom of Eswatini (GOE)/Eswatini Water Services Corporation (EWSC). The project will be implemented over a period of four years.

The project area has an estimated population of 76,467 (2017), of which 52% are women, projected to grow to a total of 106,172 by 2047. The project is to expand access to water supply and sanitation services in the four peri-urban areas of Manzini and promote the development of the area in line with the national agenda. The project promotes inclusive growth by providing adequate services to the entire population, including those living in urban, peri-urban and adjacent rural areas. It is based on development of more reliable and sustainable water sources and promotion of more environmentally friendly solutions for sanitation. While sewerage system will be developed in the urban area, those in peri-urban and adjacent rural areas will be equipped with appropriate knowledge to provide for their own improved sanitation facilities. The project beneficiaries have participated in the preparation of the project and this collaboration will continue throughout implementation.

Needs Assessment - The Government of the Kingdom of Eswatini (GoE) is set to achieve sustainable economic development, social justice and political stability as enunciated in its Vision 2022 and presented in the National Development Strategy (NDS 1997-2022) and Poverty Reduction Strategy Action Programme 2006-2022 (PRSAP). The NDS and the PRSAP address adverse poverty and envisage universal access to water supply and sanitation services by the year 2022, ahead of SDG target dates. The project is part of the national sector portfolio of activities aimed at improving environmental health and part of GOE’s priorities to address the required major investments for rehabilitation and expansion of the water supply and sanitation services into growing urban and peri-urban areas of major towns. It is part of the broader effort by Eswatini to achieve the Sustainable Development Goals (SDGs).

Bank’s Added Value - The Bank’s support will contribute the much needed resources to support the ongoing Government’s efforts to fulfil its commitments to meet Vision 2022 and SDGs regarding provision of essential services of water supply and sanitation. Financing the proposed project will further consolidate Bank’s position in Eswatini as a partner of choice for the sector. The proposed project will contribute significantly to the required sector financing outlined in EWSC’s Investment Master Plan. The project will build on impacts of a similar ongoing Bank support and expand services to the peri-urban areas where most of disadvantaged segment of the population live. The Bank’s support in the design and preparation of the project demonstrated its added value in reaching out to its RMCs to attain universal access to water and sanitation services, and broader development agenda. The Bank’s continued close involvement, in particular its Regional Office, RDGS, during implementation will assist in timely delivery of these much needed water and sanitation services to the beneficiaries in the deprived area. Bank’s involvement will further consolidate its continued support for the sector in the region.

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Knowledge Management - The knowledge gained in the design and implementation of several operations, in particular the ongoing Ezulwini Water Supply and Sanitation Project in Eswatini and other operations in the region has been taken into account in the design of this project. In the same pattern, the knowledge that will be generated by this Project will be instrumental in designing and managing similar operations in the country and in the region. The project offers interesting lessons on inclusiveness and extension of basic water supply and sanitation services to inhabitants in the peri-urban areas of Manzini. The lessons learnt and experience gained will be captured during project follow-up at the implementation stage. These will be documented for dissemination in workshops, discussions and seminars. These documents will be made available for analysis and will be shared both within the Bank and with other development partners as well as RMCs.

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Results Based Logical Framework

Country and Project name: Eswatini – Manzini Region Integrated Water and Sanitation Project. The purpose of the project is to provide improved water supply and sanitation services to the people in Manzini Region. PERFORMANCE INDICATORS MEANS OF RESULTS CHAIN RISKS/MITIGATION MEASURES VERIFICATION Indicator Baseline Target Access to improved water supply sources (% pop) 74% (2015) 100% (2030) Enhanced quality of life through Access to improved sanitation facilities (% WSS sector M&E universal access to improved water pop) 57% (2015) 100% (2030)

report; Water Point and sanitation sources Under five mortality per 1000 80 (2013) 60 (2030) Mapping report, JMP Reports, JMR

IMPACT National Statistics

Access to safe water supply in Proportion of people using safe and reliable Risk: There is a risk of the Government failing to timely project area water supply in the project area (%) allocate adequate resources for the sector, especially 90% (2022) 22% (2017) taking into account that some of the older systems also >52% women require sustained rehabilitation and upgrading. To

OUTCOME EWSC statistics and minimize the risk, constant dialogue between the Improved access to sewer in project Proportion of people using sewer facilities in the Annual Report government and development partners including the Bank area project area (%) 0 % (2017) 25% (2022) Water Point Mapping will be maintained together with efforts to mobilize report adequate resources. In addition, GoE will be required to Improved sanitation in project area Proportion of people using improved sanitation make budgetary allocation for counterpart contribution. (VIPs/sceptic tanks/etc) facilities in the project area (%) 75% (2022) 35% >52% women Improved performance of EWSC EWSC's Staff efficiency ratio: # Staff/1000 Customers 11 10 (2022) Component 1: Water Supply By 2022)

Infrastructure Intake works (unit) 0 1

OUTPUT - transmission system (raw and clean water) 57,000m • Risk: Willingness of consumers to pay increased tariff Water treatment plant (capacity) 0 12,000 m3/d for services. A detailed tariff and affordability study, which will allow for social tariffs, supported by Water supply systems constructed Service Reservoirs (2No.) 0 23,500m3 sensitization campaigns will mitigate such a risk. distribution system 0 100km EWSC report, Project Metered connections (No.) 1051 7000 progress Water kiosks in peri-urban and rural areas 0 25 reports, supervision • Risk: The project could run the risk of delayed uptake Distribution of roller jerrycans to communities 0 100 mission reports of the service connections especially for the sewerage Component 2: Sanitation by 2017 system. In order to mitigate this risk, connection works Sewerage reticulation and outfall sewer system will be built into and carried out as part of the overall built (meters) 0 15,000 sewer laying contract, and connection charges recovered Sewage Treatment Plant constructed 0 2,200 m3 from sanitation bills. In addition well-targeted Sanitation system constructed Sewer Connection (no.) 0 500 sensitization campaigns together with health and hygiene Public onsite sanitation facilities for peri-urban 0 20 education will be carried out to minimize the risk. areas constructed (gender sensitive)

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Component 3: Institutional Support and Project Management ( by 2022) Guidelines for mainstreaming gender in water 0 Guidelines supply and sanitation operationalized

Number of Internships for female 0 15 engineers/technicians %of female management staff at EWSC 30% in 2018 40% Water & Sanitation Communication Strategy 1 Study on Institutional Transformation 1 - Improved Institutional Relevant staff trained (#women) 60 (30) performance of EWSC - Raise Awareness on water and No. of beneficiaries sensitized on hygiene sanitation related issues promotion, HIV/AIDS, environment, gender - and governance (# women) 42 000 COMPONENTS INPUTS ZAR (‘000) Component 1 : Water Supply Infrastructure Development Component 1: 599,847 Component 2: Sanitation Component 2: 113,674 Component 3: Institutional Support and Project Management Component 3: 94,007

Total Total 807,528

KEYACTIVITIES

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Project Implementation Schedule

ESWATINI: MANZINI REGION WATER SUPPLY AND SANITATION PROJECT IMPLEMENTATION SCHEDULE 2018 2019 2020 2021 2022 2023 Activity 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 Board Approval Publication of GPN Signing Effectiveness Launch Mission ◊ Consultancy Services for Water Supply* RfP/bidding & contract award Design, Tender Doc prep and Tendering Supervison of water supply works Consultancy Services for Sewerage* RfP/bidding & contract award Design, Tender Doc prep and Tendering Supervison of water supply works Water Supply Works Bidding & contract award Implementation Defect Liability Period Sewerage Works Bidding & contract award Implementation Defect Liability Period Promotional Sanitation Implementation ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ Institutional Support Performance Agreement II Gender and Social Equity Str. Mainstreaming ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ Training and Capacity Building ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ Sensitization and Promotion ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ ◊ Mid Term Review ◊ Financial Audit (siubmission) ◊ ◊ ◊ ◊ ◊ Project Completion ○ * - Tendering process started with Advance Contracting procedure.

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REPORT AND RECOMMENDATION OF THE MANAGEMENT OF THE AFDB GROUP TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN TO THE GOVERNMENT OF THE KINGDOM OF ESWATINI FOR THE MANZINI REGION WATER SUPPLY AND SANITATION PROJECT

Management submits the following Report and Recommendation on a proposed AfDB loan of ZAR 719.70 million to finance the Manzini Region Water Supply and Sanitation Project in Eswatini.

I– STRATEGIC THRUST AND RATIONALE

1.1 Project Linkages with Country Strategy and Objectives

1.1.1 The Government of the Kingdom of Eswatini (GoE) is set to achieve sustainable economic development, social justice and political stability as enunciated in its Vision 2022 and presented in the National Development Strategy (NDS 1997-2022) and in Poverty Reduction Strategy Action Programme 2006-2022 (PRSAP). The NDS and the PRSAP address adverse poverty and envisage universal access to water supply and sanitation services by the year 2022, ahead of SDG target dates. The PRSAP endeavours to reduce inequalities and disparities amongst the citizens and regions of the country. The GoE puts emphasis on affording equal opportunity to all citizens regardless of sex or race to access social and economic services in order to enhance their development. The proposed project is conceived within the Vision 2022 of the NDS, specifically within the macro strategic areas of Human Resources Development, Industrialization and Environmental Management, and promoting gender equality in decision making. The project is aligned to the Environmental Health, Growth and Development pillars of the PRSAP. The proposed project is in line with the Water Act (2003) and the draft Water and Sanitation Policies which are expected to be ratified by first quarter of 2019. The project is part of the national sector portfolio of activities aimed at improving environmental health and part of GOE’s priorities to address the required major investments for rehabilitation and expansion of the water supply and sanitation services in the fast growing urban and peri-urban areas of the major towns. It is part of the broader effort by the Government of Eswatini to achieve the Sustainable Development Goals (SDGs).

1.1.2 The Bank’s Country Strategy Paper (2014-2018) is anchored on two pillars: (i) Supporting Infrastructure Development for Sustainable and Inclusive Growth and (ii) Strengthening Governance and Institutional Capacity. The proposed project intervention is anchored on Pillar I as the provision and improvement of key water and sanitation facilities will contribute directly to supporting infrastructure development for sustainable and inclusive growth. The project is also consistent with the Bank’s Ten Years Strategy (2013-2022) focussing on the High 5s priorities, mainly on improving quality of life of people. It also conforms to the Bank's Integrated Water Resources Management (IWRM) Policy, whose aim is to accelerate access to improved water supply and sanitation in Africa in a sustainable way. In addition, the project is in line with the Bank’s Urban Development Strategy (2011), whose aim is to enhance interventions in the urban sectors of its regional member countries (RMCs) with the objective to transform the viability and competitiveness of African cities to ensure that they perform their role as real engines of economic growth and social development. The proposed project also considers gender as integral part of its intervention and recognizes the role played by women in the sector as emphasized in the Bank’s Gender Strategy (2014-18) and reiterated in the Bank’s IWRM policy.

1.2 Rationale for Bank’s Involvement

1.2.1 The Manzini region is the most populous region in Eswatini and the specific Project beneficiary areas of Nhlambeni, Manzini South, Mthongwaneni, and Mafutseni have got a

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population of 76,467 (2017) and the area is predominantly peri-urban and rural features with enormous potential for further development. The water utility (EWSC) has been faced with a challenge to provide water supply and sanitation services to these unserved areas in the Manzini Region. Inadequate water and sanitation services have therefore become a major constraint for the growth of the area. Water supply in the area is inadequate and unreliable and most of the residents in the area rely on private boreholes and in most cases unsafe. In these four areas, only 22% receive reliable water services from EWSC and the remaining rely on poorly managed or unsafe borehole and rural systems or use unsafe surface water. Access to improved sanitation is estimated at 35% below the national average of 57%. The proposed project is therefore conceived to expand access to water supply and sanitation services in the greater Manzini areas in the Manzini region and promote the development of the area in line with the national agenda for achieving the Sustainable Development Goals (SDGs). The project therefore complements other multi-sectoral development efforts of the GOE and strategic expansion of EWSC services for universal access. In order to strengthen the policy framework and synchronise efforts, the GOE prepared new Water, Sanitation and Hygiene Policies and these are expected to be approved in 2019.

1.2.2 The Bank’s involvement in the water and sanitation sector in Eswatini is built on its extensive experience in the sector and in the Region and its comparative advantage in its cumulative wealth of experience and positive achievements in the implementation of water projects in the Region. The Bank has got ongoing operations in Eswatini in the water and sanitation sector: Ezulwini Water Supply and Sanitation Project and Mbabane-Manzini corridor (Nondvo dam) study. The Bank’s support will contribute the much needed resources to support the ongoing Government’s efforts to fulfil its commitments to meet Vision 2022 and SDGs regarding provision of essential services of water supply and sanitation. The proposed project will further consolidate the Bank’s position in Eswatini as a partner of choice for the sector. It will contribute significantly to the required sector financing outlined in EWSC’s Investment Master Plan, and will build on impacts of the ongoing Bank interventions and further expand services to the Peri-urban areas where most of disadvantaged segment of the population live.

1.3 Donor Coordination 1.3.1 Eswatini receives external development funding from different development partners. There are two levels of donor coordination, namely national and sector level donor coordination. National level coordination is led by the Ministry of Economic Planning and Development and Ministry of Finance. Major donors are the US Government (in health), the EU (in agriculture, water and capacity building), Kuwait Fund, and Arab Fund for Development. The AfDB played a key role in galvanizing donor support for reforms in Eswatini. With the Bank support, the capacity of the Aid Coordination and Monitoring Section (ACMS) in the Ministry of Economic Planning and Development was strengthened to enhance its capacity to coordinate development assistance and ensure country ownership. At sector level, Eswatini receives funds from several development partners including non-governmental organisations in the water and sanitation sector. The sector working group has developed a WASH Forum through which sector dialogue is held, as a forum for collaboration and to co-ordinate activities in the sector among the key stakeholders. Such forums and annual joint sector reviews have been held regularly since 2016. During the fiscal year 2017/18, the total volume of Overseas Development Assistance (ODA) flows into Eswatini was about USD180 million, of which less than 10% was for water and sanitation sector. The development partners active in the sector include European Union, Taiwan Government, United States Government, UNICEF and several NGOs. It is to be noted that the Bank is one of the main supporters of the water sector in Eswatini. Currently it is supporting the GoE/EWSC in the implementation of Ezulwini Water Supply and Sanitation Project (US$ 23 million) and Mbabane Manzini Corridor (Nondvo dam) Study using MIC TAFGrant and AWF Grant. These projects are

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expected to be completed by end of December 2019. The Bank continues to maintain close working relationships with the cooperating partners through dialogue and consultations during missions and other platforms. In addition, the Bank and the EIB/EU will continue collaboration and synergy in the sector in the preparation and implementation of the Nondvo dam study.

Table 1: Development Partners’ Support Size Sector or subsector GDP Exports Labor Force Water and Sanitation 1%* Players - Public Annual Expenditure (average)**

Government Donors [UA m] [UA m] 36.34 12.92 % 73.8% 26.2% AfDB China (Taiwan) 1.0% EU 24.7% UNDP &UNCEF 0.5%

Level of Donor Coordination Existence of Thematic Working Groups Yes Existence of SWAPs or Integrated Sector Approaches Yes, in Progress for Rural AfDB's Involvement in donor coordination*** Yes, M

II - PROJECT DESCRIPTION

2.1 Project Objectives and Components

2.1.1 The water and sanitation sector goal is to provide adequate water and sanitation services to all citizens and to contribute to economic development and poverty alleviation. In this regard, the GoE aims at achieving universal (100%) access to water supply and improved sanitation services by the year 2030 (SDG target).

2.1.2 The Manzini region is the most populous region in Eswatini. The water utility (EWSC) has been faced with a challenge to provide water supply and sanitation services to unserved areas in the Manzini Region covering portions of Nhlambeni, Manzini South, Mthongwaneni, and Mafutseni. The purpose of the proposed project is to provide sustainable water supply and sanitation services to support the national agenda and is in line with the strategic direction of EWSC. The purpose of this Project is to improve the well-being of the inhabitants and spur economic growth in the Manzini Region through the provision of adequate safe water supply and improved sanitation services. 2.1.3 The specific Project objective is to meet the potable water requirements of Manzini and surrounding areas and reducing the risk of environmental pollution of the groundwater through provision of appropriate sanitation services. The project will increase access and use of improved water supply and sanitation services to the residents of Manzini Region. In addition, the project will support EWSC to strengthen its institutional performance through pertinent capacity building interventions. The project will also support EWSC to strengthen its policy and implementation of crosscutting issues including gender mainstreaming as part of the utility’s Corporate Social Responsibility. The project will comprise the following three components: (i) Water Infrastructure Development; (ii) Sanitation and Hygiene Improvement; and (iii) Institutional Capacity Building and Project Management. Table 2.1 below provides a summary of components and outputs, with more details provided in Annex B2.

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Table 2.1: Project Components and Activities No. Component Est. Cost Details name (’000 ZAR) 1 Water Supply 599,847 Construction of an intake structure on Lusushwana river to Infrastructure abstract raw water using a low flow gauging weir; Installation of 400 mm diameter raw water gravity main to a treatment plant; Construction of conventional water treatment plant with a capacity of 12ML/day near ; Installation of low lift pumps to transfer raw water to WTP Installation of high lift pumping station on clear water well at WTP Installation of 8.1km of 500 mm pumping mains from the high lift pumping station at the WTP to the service reservoirs at Mhlaleni; Construct 2 treated water service reservoirs of size 8.5ML at Mhlaleni and the other sized 15ML at Hhelehhele Installation of 13km of 500mm gravity main from Mhlaleni reservoir to Hhelehhele reservoir; Installation of 36km of gravity mains of 400mm from the two reservoirs to the distribution areas in Sidvokodvo and Ngculwini areas; 100km of reticulation 6000 connections and 25 communal Kiosks 2 Sanitation 113,674 Construction of a waste water treatment plants in Sidvokodvo area with capacity of 2.2ML/d Construction of 15km of sewer collector system with diameters ranging from 160mm to 355mm. A total of 370 sewer property connections. Provision of demonstration latrines where the poor live i.e. in the rural and peri-urban areas, No. 15 Public improved sanitation facilities and facilitate/support to construct 6144 household sanitation facilities Conduct public awareness campaigns and carryout health and hygiene education for the communities and schools in the project area. 3 Institutional 94,007 In-house training to address crosscutting issues (gender and Support and governance, environment and well as HIV/AIDS), procurement, Project project management and financial management; Management sensitization and public awareness campaign (on water and sanitation, gender, environmental and social issues), Institutional support (covering strategic planning and performance management, and E&S). Environmental and Social Management Plan (ESMP), and the Abbreviated Resettlement Action Plan (ARAP) implementation; Training and capacity building; On the job training of the EWSC staff, and internship program (especially to encourage female interns); Project management comprising engineering services for design and supervision, and support to Project Implementation Team. Total 807,528

2.2 Technical solution retained and other alternatives explored

2.2.1 The water system in Manzini gets its treated water from a treatment plant at Matsapha with a capacity of 34ML per day. This water is supplied to Manzini and Matsapha towns as well as surrounding areas. Only 22% of the people living in the four project beneficiary areas (Nhlambeni,

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Manzini South, Mthongwaneni, and Mafutseni) receive services from the system. Further expansion of the system was not possible due to the limited water production and demand exceeding supply by almost 50%. It was therefore imperative that the expansion is accompanied with abstraction and treatment facilities. The rationale for the chosen alternative to construct a new water treatment facility and expand the network was based on: (i) availability of surface water from the Lusushwana river throughout the year due to the presence of a hydroelectric dam up-stream which releases regulated water; (ii) expanding existing treatment plant at Matsapha is not possible due to limitation of land; and (iii) no good quality of ground water exists in the area – salinity and metals presence. The foregoing factors have informed the development of the proposed scheme with a treatment capacity of 12ML per day, transmission, storage and distribution infrastructure. The project will have provisions for both individual connections as well as communal water kiosks to cater the needs of all segments of the population.

2.2.2 With regards to sanitation, the project will focus on hygiene and sanitation promotion and marketing. This is expected to create demand as opposed to the supply driven approach. The focus will be on onsite sanitation as appropriate in the context of development of the areas. The water borne sewerage system is chosen for only limited areas in light of the development of the settlement. EWSC will provide technical as well as critical material assistance for the construction of household latrines following the sensitization and awareness campaigns to the disadvantaged and vulnerable groups. Furthermore, public facilities will be built in communal areas and schools in the project beneficiary areas. Table 2.2 below presents technical options, which were analysed as part of finding the optimal solution to address the challenge being faced by Manzini Region.

Table 2.2: Project alternatives considered and reasons for rejection Alternative name Brief Description Reasons for Rejection Abstracting Ground Instead of expanding the Manzini Water from the boreholes in these areas is known Water water system, the alternative is to to be saline and presence of heavy metals. improve the existing boreholes An overwhelming expression of interest by the and drill more communal people for the expansion of piped water system boreholes by EWSC as integrating the area in the urban system is seen removing inequality in services. Expansion of the This alternative is to expand the Water production from the current treatment Existing system existing 34ML plant at Matsapha plant is not sufficient for expanding the system and expand the system and expanding the treatment plant itself is not possible due to due limitation of space and settlements around the facility Sewerage System Provision of water borne This option is not feasible in the four areas sewerage system with a treatment generally, as it will be expensive to service the facility for the sewage area due to the nature of the settlement. This option is only adopted partially for a specific location at Sidvokodvo (railway station).

2.3 Project type

2.3.1 The project is part of the Government’s priority investment operation and will be implemented as a stand-alone investment project by the water utility – EWSC.

2.4 Project cost and financing arrangements

2.4.1 The estimated total cost of the project is ZAR 807.528 million (UA 43,93 million), net of taxes and duties, of which ZAR 523.95 million (65%) is in foreign currency and ZAR 283.58 million (35%) in local costs. Table 2.3 below provides a summary of the project costs by

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component. These costs are derived from available studies on the project with details of unit rates derived from experience with similar ongoing projects in the country and region. The estimates include physical contingency of 10% and price contingency of 3% per annum.

Table 2.3: Project cost estimates by component [‘000 ZAR] % Foreign Components Foreign Local Total Exchange Water Supply Infrastructure 368,595 139,050 507,644 72.6 Sanitation 43,990 52,210 96,200 45.7 Institutional Support and 30,973 48,588 79,561 38.9 Project Management Total Base Costs 443,557 239,848 683,405 64.9 Physical Contingency (10%) 44,356 23,985 68,341 64.9 Price contingency (3% per annum)36,033 19,749 55,782 64.6 Grand Total 523,946 283,582 807,528 64.9

2.4.2 The Project will be financed by AfDB and GoE as shown in the financing plan presented in Table 2.4 below. The total Bank Group financing is ZAR 719.698 million. The AFDB funds will be used to finance part of all three components of the project. GOE/EWSC will finance the balance ZAR 87.83 million covering local costs of the total project of component 2 and 3 of the project. Details of AfDB financing are provided in Annex B2. The Bank appraisal mission discussed and agreed with the relevant Ministries on the above financing and the proposed conditions stated in Section V of this document. GoE/EWSC contribution shall also include contributions in kind.

Table 2.4: Sources of financing [‘000 ZAR] Source Total % AfDB 719,698 89.1% GoE/EWSC 87,830 10.9% Total 807,528 100.0%

Table 2.5: Project cost by category of expenditure [‘000 ZAR] Category Total % Works 553,844 81.0 Services 41,761 6.1 Miscellaneus 87,800 12.8 Total Base Costs 683,405 100.0 Physical Contingency 68,341 Price contingency 55,782 Total 807,528

Table 2.6: Expenditure schedule by component [‘000 ZAR] Components 2019 2020 2021 2022 Total Water Supply 101,529 203,058 101,529 101,529 507,644 Sanitation 20,420 30,980 22,400 22,400 96,200 Institutional Support and Project Management 26,154 17,802 17,802 17,802 79,561 Sub-Total 148,103 251,840 141,731 141,731 683,405 Physical Contingency 14,810 25,184 14,173 14,173 68,341 Price Contingency 4,887 16,871 14,457 19,567 55,782 Total 167,801 293,895 170,361 175,471 807,528

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2.5 Project’s Target Area and Population

2.5.1 The project will focus on the expansion of water supply system and improvement of sanitation infrastructure and hygiene practices in the Manzini Region, which is the most populous region in Eswatini. The project will support in expanding water and sanitation services to the unserved areas in the peri-urban areas of Manizini, in particular four Tinkhundlas (Administrative Districts) which include the following communities: , Mafutseni, Manzini South, Nhlambeni. The project area has an estimated population of 76,467 (2017), which will benefit upon completion of the project.The proposed project is conceived to expand access to water supply and sanitation services in Manzini region and promote the development of the area in line with the national agenda and strategic expansion of EWSC services.

2.5.2 It is expected that about 52% of the beneficiaries will be female and they will be the most to benefit from it. The provision of potable water supply and decent sanitation will spur socio economic development and help people live dignified lives and be healthy. On top of the productivity gains through reduction in time spent for collection of water, reduced sickness time and reduced burden on health care, and ripple effects of sustainable service provision, the project will create more than 300 temporary jobs during the construction phase and this will indirectly benefit businesses and other service providers in the area and 15 permanent jobs during the operation of the scheme. Furthermore, all of the Kiosk operators will be women (two for each of 25 kiosks) and will receive basic training in managing kiosks including basic numeracy/accounting. EWSC, the utility will also benefit from the project through the institutional support in the form of staff training provided under the project.

2.6 Participatory process for project identification, design and implementation

2.6.1 The preparation of the project involved extensive consultations with various stakeholders, including project beneficiaries, line ministries, District Council, DPs and private businesses, which started from early June 2016 at the early stage of the project conception to ensure that the main beneficiaries including water consumers and the general public were kept informed of the proposed development. Further consultations and data collection were conducted to discuss the challenges and inform the proposed solutions and various alternatives considered. The objectives of the consultations were to raise awareness on the project and to highlight other issues such as the grievance redress mechanism, confirmation of the implementation arrangements and institutional framework for environmental and social issues management. The consultations continued during feasibility preparation (2016/7), Environmental and Social Reconnaissance Survey (2017) and the Bank’s project preparation and appraisal missions (2018).

2.6.2 A cross section of stakeholders and affected communities: women, men, youth, and people with special needs were also consulted and their views integrated into the project design. Some of the views expressed during consultations included (i) deep appreciation for a reliable water supply for all people in the area (ii) need for beneficiaries to be involved in the project preparation and implementation (iii) affordability of services (iv) need for consultations especially women when determining the location and running of water kiosks. Some of the major outcomes of these consultations helped to promote more inclusiveness, including the need for careful planning of extension of services with full involvement of the beneficiaries in the process. Water kiosks will also be constructed for those without house connections and promotional sanitation facilities provided in areas that are not covered by the sewerage system. Another major outcome of the consultations is the overriding need to ensure that vulnerable households, including neighbourhood care points would be supported. Through consultations and presentations, the relevant Government bodies and ministries (Ministry of Health, Department of Gender Affairs, Eswatini Environment Authority, Department of Water Affairs, Ministry of Natural Resources and Energy) were kept closely informed of the findings and progress of the studies. The ESMP and ESIA processes also

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have a legislative requirement to consult all stakeholders which include public and private institutions, CSOs, NGOs, the community and any other interested and affected parties. Close beneficiary participation will continue during implementation.

2.7 Bank Group Experience, Lessons Reflected in Project Design

2.7.1 The Bank’s current (July 2018) active portfolio in Eswatini comprises of ten operations in five sectors with a total commitment of UA 115.7 million with an overall disbursement rate of 25 %. The overall performance of the country’s portfolio in July 2018 was rated as satisfactory with implementation objectives and development outcomes scores of 3.3 and 3.4 respectively. In the water sector, the Bank is currently financing implementation of Ezulwini Water Supply and Sanitation Project (US$ 23 million) and Mbabane Manzini Corridor (Nondvo dam) Study with satisfactory implementation progress, and expected to be completed by end of 2019. Key lessons learnt from the on-going projects under implementation in Eswatini as well as lessons reflected in PCRs elsewhere have been taken into account in formulating the project. Some of the key lessons included:

(i) Removing inequality in service provision between the urban and peri-urban is critical for inclusive development and opening up new opportunities. In this regard the project main focus is service provision in the peri-urban areas with flexible designs for individual connections as well as communal kiosks;

(ii) The use of country structures ensures seamless coordination and builds sustainable capacity in the institutions. The project will be implemented through existing structures within EWSC thereby creating the capacity for implementing more projects;

(iii) While sustained hygiene promotion and sanitation marketing will bring desirable behavioural changes and construction of improved sanitation facilities, there will still be disadvantaged and vulnerable groups of the society who require targeted support. In this regard EWSC will provide technical assistance and critical materials for construction of household sanitation facilities and will fully finance public facilities in schools and at communal locations.

2.8 Key performance indicators

2.8.1 The project will be monitored using Key Performance Indicators (KPIs) reflected in the Project’s Results Based Matrix which are in-line with the Bank’s Core Sector Indicators (CSIs) and the national sector M&E framework. The project’s Result Based Matrix reflects the KPI of the project at input, output, outcome and impact levels. At impact level these include advancement towards universal water and sanitation coverage at national level. The outcome objectives will be measured through monitoring access to potable water and number of service connections within the project area. For sanitation, this will be measured through proportion of people using improved sanitation facilities and number of connections made to the sewerage network. The output of the project will mainly be measured through production capacity for treated water and volume of wastewater removed and treated, key facilities constructed, and trainings and capacity built (disaggregated by gender). EWSC through the Project Implementation Team (PIT) will monitor and report the project’s achievements against the identified performance indicators. The PIT/EWSC will undertake a validation exercise at commencement of the project and project closure to collect end-line data. The project implementation schedule and procurement plan will also be monitoring tools for activities leading towards outputs.

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III – PROJECT FEASIBILITY

3.1 Economic Performance Table 3.1: Key Economic Figures EIRR 16.7% and NPV Lilangeni (SZL) 234.53 million (at 12% base case) NB: detailed calculations are available in Annex B7

3.1.1 The economic analysis of the project has been undertaken by comparing “with project” and “without project” of the various costs and benefits that will accrue to the beneficiaries of the improved water supply and sanitation services in Manzini and surrounding areas. The proposed project will promote environmental health, which will enhance the quality of livelihood and well- being of the beneficiary population. The economic returns are measured in terms of the benefits which accrue to beneficiaries in the form of regular and adequate drinking water supply, improved sanitation services, and a general improvement in living conditions. The costs side includes capital investments, periodic replacement costs, and incremental operating and maintenance costs. All costs and benefits are considered net of duties and taxes. In addition, the economic life of the investment is estimated at 25 years. The project’s economic rate of return is estimated at 16.7%. The value is higher than the opportunity cost of capital of 12% and thus the project is considered economically viable. Sensitivity analysis to test the robustness of the EIRR was carried out to determine the impact of adverse variations. The EIRR changes to 14.0% assuming that investment cost increases by 20%, and changes to 13.1% assuming that the benefits of the project are decreased by 20%. The analysis shows that the project is economically viable and socially beneficial for Eswatini. Annex B7 shows the assumptions and the calculations of the EIRR.

3.2 Environmental and Social impacts

3.2.1 The Project was validated as a Category 2 on 06 July 2018 in line with the AfDB’s Integrated Safeguards System (ISS) and Environmental and Social Assessment Procedures (ESAP) due to localized and temporal nature of the environmental impacts associated with it, which can be mitigated through the implementation of an environmental and social management plan. The provision of improved water supply and sanitation services will create an enabling environment for improved economic and social development, such as the reduction of water borne diseases and creation of employment opportunities. Negative impacts pertain mainly to the construction phase, including clearance resulting in disturbances and loss of fauna and flora, as well as impacts during the operation phase including sludge production, leaks and spills of wastewater leading to possible groundwater pollution, damage to natural habitats as well as public health hazards. All impacts will be mitigated as per the Environmental and Social Management Plan (ESMP) developed in accordance with national and AfDB requirements. Costs associated with ESMP implementation have been reflected in the overall Project costs. 3.2.2 The majority of water and wastewater pipelines and infrastructure will primarily run along existing servitudes and/or be located on public Swazi Nation Land (SNL) with no need to relocate people during or after project implementation. However, access to private properties and displacement of economic activities will be required. It is expected that an estimated 31 farms will require compensation for land slated to be the location of the new wastewater treatment plant, thus requiring an Abbreviated Resettlement Action Plan (ARAP) developed in accordance with national and AfDB requirements. Any additional economic and/or physical displacements identified as a result of final project design or change in scope are to be reflected in a revised ARAP. Costs associated with ARAP implementation are to be borne by the project proponent and proof of compensation to affected parties to be submitted to the Bank prior to commencement of any civil works.

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3.2.3 The ESMP and ARAP summaries have been disclosed on the Bank’s website and Public Information Centre on 23 and 24 October 2018, respectively. Climate Change 3.2.4 The Project has been classified as Category 2 in terms of Climate Risk in accordance with the Bank’s Climate Safeguards System. On climate change, the Project will deliver adaptation benefits in relation to water resources management that is sustainable in the face of climate change impacts, particularly given the threat of significant water stress facing the country as a result of high inter-annual rainfall variability in both dry and wet years and expected decrease in annual run-off volumes on the one hand, and increasing demand projects on the other. Provision of safe and reliable water is therefore intended to alleviate the impacts of climate change on the receiving population.

Gender

3.2.5 According to UNICEF data estimates, 40 % of rural population does not have access to basic water services and rely on unimproved, unreliable and surface water sources. Women in Eswatini like in other countries face particular challenges regarding access to water being the ones responsible for household water provision. Women consulted during appraisal indicated that collection of water takes up to 2 hours per trip. This time increased during dry seasons when they have to dig out riverbeds for water. The lack of safe, separate and private sanitation and washing facilities in schools is one of the main factors preventing girls from attending school, particularly when menstruating. UNICEF estimates that only 58 % of the population in both rural and urban areas have access to safe sanitation facilities. At one school visited during appraisal, teachers reported of recurrent school closures due to irregular water supply

3.2.6 The project has been classified as a category two according to the Bank’s Gender Marker System. The project will increase access to household water supply in project areas. The project will also reduce distances and time spent to water sources by women thus releasing their time to undertake productive activities and schooling for girls. Water supply in schools in the target area will contribute to quality of education reducing school closures, and improved hygiene and sanitation. In addition to the benefit of water supply to homes, the following interventions will be implemented to strengthen gender mainstreaming: (i) Sensitization in schools and communities on hygiene and sanitation, (ii) to address affordability of water for poor households, twenty-five water kiosks will be constructed in densely populated areas without private connections. The distribution of the kiosks will be determined through consultations with communities. The kiosks will be operated by women, therefore providing an enterprise opportunity. The design of the kiosks will be appropriate for use by women and children, and will include washing troughs for laundry. EWSC will provide water to kiosk operators at an affordable set price, (charged on the public connection rate), regardless of consumption. (iii) Distribution of roller jerrycans to communities surrounding the water kiosks to ease the transportation of water. (iv) A target of 50% jobs for women of the approximately 300 jobs to be created during construction period and (v) Community sensitization on gender, hygiene and sanitation will be undertaken.

3.2.7 Under the on-going Bank financed Ezulwini water and sanitation project, EWSC developed a gender and social equity strategy. The strategy seeks to mainstream gender internally at EWSC with a focus on employment and workplace equity. EWSC currently employs 90 women, who represent 17% of the workforce. Women currently occupy 30% of EWSC’s managerial positions. While some notable results have been achieved the number of female staff working at EWSC still remains below national targets. Under this project, EWSC will continue to implement the gender strategy as follows; (i) Development of guidelines for gender mainstreaming in water supply and

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sanitation, (ii) implementation of an internship programme for female technicians/engineers, and (iii) implementation of the gender strategy to increase female management staff to at least 40% from the current 30%. Involuntary resettlement

3.2.8 No Involuntary resettlement will arise as a result of this project.

IV – IMPLEMENTATION

4.1 Implementation Arrangements 4.1.1 The implementation of the Project will use existing institutional arrangements. The Ministry of Finance (MoF) of the GOE shall be the borrower of the AfDB loan, while the EWSC will be the Executing Agency (EA) of the Project. The MoF will pass the resources to the EWSC through a subsidiary financing agreement on terms and conditions acceptable to the Bank. The overall coordination of the project and reporting obligations to GOE and the Bank will be the responsibility of EWSC. EWSC has implemented projects of similar size and has the experience and capacity to implement the Project. The Executing Agency will be responsible for the procurement, financial management, monitoring and reporting and overall project management functions. An internally constituted Project Implementation Team (PIT), comprising a Project Coordinator who is a Water Supply and Sanitation Engineer, Water Supply Engineer, Procurement/Contracts Management specialist, Environmental and Social Specialist (with knowledge of current gender issues), and an Accountant will be responsible for the implementation of the Project. EWSC has an internal mechanism in place for ensuring implementation, supervision and reporting of the ESMP. In addition, both the consultants and the contractors will have environmentalist experts on board who will be supervised by the EWSC’s environmentalist, and by the social expert and community liaison officer. The PIT shall also oversee the implementation of the gender strategy, implementation of the crosscutting issues and awareness raising, promotional sanitation, and Hygiene Education sub- components in the peri-urban areas using the existing institutional structures.

4.2 Implementation Schedule

4.2.1 The project will be implemented over a period of 48 months from January 2019 after the signing of the loan agreements. Implementation of the major works will commence during the third quarter of 2019 and Mid Term Review (MTR) will be conducted in the fourth quarter of 2020. The expected physical completion of the project is by 31st December 2022.

4.3 Procurement Arrangement

4.3.1 The Country’s procurement regime is governed by the Public Procurement Act, 2011 (PPA 2011). The PPA 2011 is broadly consistent with international standards and best practices in procurement. However, the Regulations and National Standard Bidding Documents (SBDs) to accompany the Act are not approved yet. Consequently, procurement of Works and Consulting Services, under the Project, will be carried out in accordance with the Bank’s Procurement Framework for Bank Group-Funded Operations, dated October 2015, using Bank’s Procurement Methods and Procedures (PMP).

4.3.2 A Procurement Risk and Capacity Assessment (PRCA) was undertaken to (i) evaluate the risks associated with the borrower procurement system, the sector capacity which includes the capacity of the local industry, the project complexity and design, and the procurement capacity of the Executing Agency; (ii) set up risk mitigation to be exercised by the Bank and the Borrower; and (iii) form a judgment on the adequacy of procurement methods and procedures, as well as controls

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being used by the Borrower in the use of funds and contract management. The detailed PRCA is outlined in the Technical Annexes.

4.3.3 In order to accelerate implementation of the project, the Bank has approved GoE’s application for advance contracting and retroactive financing for the procurement of (i) engineering services for design, tendering and supervision for water supply works and (ii) engineering services for design, tendering and supervision for wastewater works in line with the Procurement Framework The procurement procedures shall be in accordance with the Procurement Framework in order for the eventual contract(s) to be eligible for Bank Financing, and the Bank shall review and provide guidance the process used by the Borrower. The Borrower undertakes such advance contracting and retroactive Financing at its own risk, and any concurrence by the Bank with the procedures, documentation, or proposal for award(s) does not commit the Bank to provide Financing of the project. If the contract(s) is/are signed, reimbursement by the Bank of any payments made by the Borrower under such a contract signed prior to signature of the Financing Agreement is only permitted within the limits specified in the Financing Agreement.

4.4 Financial Management and Disbursement Arrangements

Financial Management

4.4.1 The overall conclusion of the FM assessment is that EWSC’s capacity to handle the FM aspects of the project satisfies the Bank’s minimum requirements as per the Bank FM guidelines. The Agency has handled Bank-funded (Ezulwini Sustainable Water and Sanitation Service Delivery) and the performance has been found generally satisfactory. The agency is generally adequately staffed. The agency utilizes a functional computerized accounting system (Accpac) to record and process transactions and prepare reports. The reports have been prepared on a timely manner and audit reports submitted to the Bank within the stipulated requirements. No material instances of internal control failures were noted during the previous audit an indication of a strong internal control environment. The control environment from budget preparation, execution, monitoring and reporting were found to be adequate. In that regard, the Bank will make uscoe of the existing systems within EWSC (while closely monitoring and providing assistance as required) under the overall responsibility of the Director, finance department, to handle the project’s FM including accounting for the project resources and submitting the required financial reports to the Bank. The project accountant assigned from the agency will handle day to day financial management of the project and will be part of the Project Implementation Team (PIT). In accordance with the Bank’s financial reporting and auditing requirements, the project will be required to prepare and submit to the Bank, Interim Financial Reports (IFRs) as part of the Interim Quarterly Progress Report (IQPR) no later than 45 days after the end of each quarter. In addition, the project will be required to prepare separate project annual financial statements which will form the entry point for external audit due diligence. The overall FM risk for the project is assessed as Moderate (Details in Annex to the PAR B4)

4.4.2 Disbursement arrangements: Disbursement from the AfDB resources for the development of water supply infrastructure and sewerage system as well as associated engineering consulting services shall be through Direct Payment method. Other disbursement procedures (especially reimbursement method of disbursement) could also be used if necessary. The entire disbursement process will be in accordance with Bank Disbursement rules as contained in the Disbursement Handbook (2012). The Bank will issue a Disbursement Letter and its contents will be discussed and agreed with the borrower during negotiations. Detailed FM and disbursement arrangements are also included in the Technical Annex B.4.

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4.4.3 Auditing Arrangements: The executing agency (EWSC) has been audited by a private auditor. No major issues were noted in the previous audit. The ongoing Bank-funded project’s audit has been done by the EWSC corporate external auditors. The audit reports for the ongoing project have been submitted to the Bank annually on a timely manner. In line with the current practice, the proposed project will be audited by the EWSC corporate auditors. Therefore the audit cost will be borne by EWSC as part of counterpart contribution. The annual audited financial statements including the auditor’s opinion and management letter will be submitted to the Bank not later than six months after the end of each fiscal year. The detailed auditing arrangements are included in the Technical Annex B.6.

4.5 Monitoring 4.5.1 The Executing Agency (EWSC) will be responsible for the overall monitoring and supervision of the Project activities including ESMP implementation. It will produce monthly, quarterly and annual progress reports on the status of the various project activities, financial and procurement status, asset management, stakeholder participation, safeguard, risks and mitigation measures and the progress towards meeting the project’s targets as reflected in the project result- based logical framework. Besides submission of the reports to the Bank, the reports will also be shared with the relevant government’s bodies, especially the Ministry of Natural Resources and Energy and the Ministry of Economic Planning and Development, so that the results can feed into the country’s National Data System. The project mid-term review will enable EWSC, the Government and the Bank to re-examine the implementation arrangements and further strengthen the system if necessary. Once the project approaches substantial completion, a completion report will be prepared by EWSC that includes details of project implementation, financial management, procurement, asset, safeguard and measures of the achievements of the project against the indicators in the log frame. The project completion report will also provide lessons learnt for future operations. All reports will be prepared and submitted according to the Bank’s requirements. The data will be entered into the Implementation Progress and Results Report (IPR) in timely manner.

4.5.2 The Bank shall also conduct regular project monitoring through supervision missions. The project implementation schedule is presented in Annex A1. A summary of the main milestones is presented below:

Table 4.1 : Key Project Milestones Timeframe Milestone Monitoring Process/feedback loop October 2018 Request for Proposals RfPs approved and issued to firms (Advance Procurement) October 2018 Loan Negotiations Loan Negotiations with GoE/EWSC November 2018 Board Approval Financing Approval March 2019 Signing of Agreements Financing agreements signed April 2019 Effectiveness for first Declared effective by the Bank disbursement April 2019 Launching Launching workshop organised July 2019 Works commencement First works contract signed December 2020 Mid Term Review Mid Term Review conducted December 2022 Completion of Project Commissioning and project completion report

4.6 Governance

4.6.1 The executing agency, EWSC, was established in 1992 with the sole right and obligation to provide water services in urban and peri-urban areas in Eswatini. The Corporation is a public enterprise mandated by the Water Services Corporation Act No.12 of 1992 to provide water and sanitation services in its mandated areas. EWSC is regulated by the Government of Eswatini (GOE) through the Ministry of Natural Resources and Energy (MNRE) and the Public Enterprises Unit

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(PEU) under the Ministry of Finance. The Corporation is committed to complying with best practices of corporate governance as prescribed by King IV and other international codes of conduct. EWSC complies with the requirements of the Public Enterprises (Control and Monitoring) Act No. 8 of 1989 and the Water Services Act No. 12 of 1992. In order to enhance the corporate performance and governance aspects of all parastatals in the Country, GOE uses performance agreements with the utilities. In this regard, preparation of the fourth five year PA covering the period 2019 to 2023 is in progress. The borrower will submit evidence of signed fourth performance agreement with EWSC and this will be one of the conditions of the AfDB financing agreement. In October 2017 the Government promulgated a new PFM Act to enhance efforts to align and comply with the international standards, ensure fiscal discipline, increase efficiency and ensure accountability in all Public Enterprises.

4.6.2 The Project implementation shall fall within the ambit of EWSC’s existing Governance structures. A tender committee exist to among others oversee implementation of capital projects, and the project shall fall in this category. Procurement for Bank financed components shall follow the Bank’s procedures and rules, which in part, will ensure fairness and transparency in the procurement process. The PIT will also include an expert with adequate experience in procurement and contract management. Furthermore, two internationally recognized engineering firms will be recruited, as part of the project, to assist with procurement and then supervise the construction works. These shall reinforce transparency and accountability during tendering and award of contracts. The Bank through RDGS shall also closely monitor the procurement activities under the project and shall provide assistance whenever necessary.

4.7 Sustainability 4.7.1 The Government’s commitment to the development of the water and sanitation sector in the country is demonstrated by its inclusion as one of the key sectors targeted for increased support under the country’s NDS/PRSAP. GOE also encourages full ownership and participation by the beneficiaries in the provision of the services, taking into account gender sensitivity and environmental & social safeguard in the process, in order to ensure their effectiveness and sustainability.

4.7.2 The executing agency, EWSC is a well-managed and functioning utility with a good performance record. The Utility employs modern systems in the management of its operations and has been instrumental to the country’s high rates of access of water supply and sanitation services in urban areas. It is able to achieve over 90% revenue collection, and is striving to further reduce the level of Non Revenue Water (NRW) , currently estimated at 27% of production to attain the target of 20% by 2022. This indicator is well below the industry’s average (NRW of about 30%). The Corporation has policies, systems and procedures in place to ensure effective sustainability of the facilities constructed under the project. Furthermore, the design of the project is based on the same technology used in the existing systems.

4.7.3 EWSC collects adequate revenue to manage the water supply and sanitation services in its mandated area. The tariff structure used by EWSC has been adopted since the establishment of the Corporation in 1992, from the then Eswatini Water Services Board (SWB). In 2016, EWSC updated its tariff structure following a recommendation of a detailed Tariff and Affordability study conducted to assess its tariff structure and to ensure tariffs reflect efficient cost of service provision, taking into account the social nature of these services and affordability. The current water supply and sanitation tariff enables the utility to generate adequate funds to operate and maintain the water supply and sewerage system. The provision and enhancement of the water supply and sanitation infrastructure in Manzini and surrounding areas will increase the water and sanitation revenue of EWSC. The current tariff level, average of SZL 12.0/m3 for water and SZL 11..0/m3 for sewer services is higher than the operations and maintenance cost recovery, estimated at SZL 7.5/m3 and

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SZL 4.5/m3 for water and sewer services, respectively. At completion of the project, the incremental revenue (SZL 34 million) generated from the project will more than offset the incremental recurrent costs (SZL 12 million). Consequently, there will not be any need for budgetary support or subsidies from GOE for operations and maintenance of the project.

4.8 Risk Management 4.8.1 One of the challenges the project may face is lack of willingness by the beneficiaries to pay for the new services. This is particularly so for the majority who hitherto have not been benefiting from any public water supply and sanitation services. This risk will be mitigated by introduction of tariffs that take into account affordability by different categories of beneficiaries, and cross subsidization. In addition, the project will include public awareness and extensive sensitization campaigns to get beneficiaries on board.

4.8.2 The project could also run the risk of delayed connections to the sewerage system. This is common with new sewerage projects which can take a long time before attaining a critical mass of household/premises sewer connections. To ensure that delays in house connections do not occur, customers will be connected as the sewers are laid under the project. Connection works will be built into and carried out as part of the overall sewer laying contract, and connection charges gradually recovered from sanitation bills. In addition well-targeted sensitization campaigns together with health and hygiene education will be carried out to further minimize the risk.

4.8.3 The GOE has so far done well in providing the bulk of its people with the essential services of water supply and sanitation. Further it has set itself tight targets of covering the entire population. This calls for timely allocation of adequate resources for the sector. There is therefore a risk of the Government failing to make this timely allocation of enough resources especially taking into account the fact that some of the older systems also require rehabilitation and upgrading. To minimize the risk, constant dialogue between the Government and development partners including the Bank will be maintained together with efforts to mobilize adequate resources. The other related risk is the availability of counterpart budget. This risk is mitigated by having (EWSC) the executing agency (financially autonomous entity) as the contributor including contributions in kind.

4.9 Knowledge Building 4.9.1 The project is expected to generate considerable knowledge and experiences that will add value and build up lessons for the design and management of similar projects, to be replicated throughout the country as well as to other RMCs in Africa. The lessons learnt will be documented including documentation on project design, procurement, environment and social aspects as well as gender mainstreaming of the EWSC. Bank supervision missions, quarterly and annual progress reports, mid-term review, audit and completion reports will also provide an opportunity to capture knowledge on relevant aspects of the project. These documents will be made available for analysis and will be shared both within the Bank and with other development partners as well as RMCs.

4.9.2 The executing agency will enhance its knowledge of the Bank’s procedures and safeguards to ensure adequate preparation and successful implementation of development projects, and be able to replicate the same in its future development programs. EWSC, as a Utility that provides professional assistance and support to similar utilities in the region, will act as an agency of dissemination of lessons learnt in partnering with the Bank to implement this important project. Similarly, the Bank will share with other RMCs as well as internally, the lessons learnt from the experience of implementing its first water supply and sanitation project in Eswatini.

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V – LEGAL INSTRUMENTS AND AUTHORITY

5.1 Legal instruments The legal instrument for the Project will be a loan agreements between the African Development Bank and the Kingdom of Eswatini.

5.2 Conditions associated with Bank’s intervention

A. Conditions Precedent to Entry into Force of the Loan Agreement

(i) The Loan Agreement shall enter into force subject to the fulfilment by the Borrower of the provisions of section 12.01 of the General Conditions Applicable to Loan Agreements and Guarantee Agreement of the African Development Bank.

B. Conditions Precedent to First Disbursement of the Loan:

(i) Provide evidence of a signed subsidiary financing agreement between the Borrower and the Executing Agency relating to the proceeds of the Loan, on terms and conditions acceptable to the Bank;

C. Other Conditions: (i) The Borrower shall, on annual basis, provide to the Bank, evidence of budgetary commitment to cover its counterpart contribution;

(ii) The Borrower shall, cause the Executing Agency to submit to the Bank the full Environmental and Social Impact Assessment (ESIA) and Comprehensive Management Plan (CMP) in form and substance satisfactory to the Bank and, shall confirm to the Bank approval of the ESIA/CMP by the Eswatini Environmental Authority, prior to the commencement of the civil works for water supply and waste water;

(iii) The Borrower shall, prior to the commencement of any civil works for the water supply and sewerage works under the Project, submit evidence, acceptable to the Bank, of having acquired all land and/or rights with respect thereto required for carrying out the civil works for the water supply and sewerage works and has compensated the owners of all such land in accordance with national legislation, the Environmental and Social Management Plan (ESMP), and the Abbreviated Resettlement Action Plan (ARAP); and

(iv) The Borrower shall provide, by no later than 30 June 2019, copies of valid and duly executed performance contract between the Borrower and the Executing Agency’s Board of Directors covering the period between 2019 and 2024.

5.3 Compliance with Bank Policies

This project complies with all applicable Bank policies.

VI – RECOMMENDATION

Management recommends that the Board of Directors of the Bank approve the proposal for an AfDB loan of ZAR 719.70 million to the Government of the Kingdom of Eswatini for the purposes and subject to the conditions stipulated in this report.

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Appendix 1: Map of Eswatini showing Manzini Region

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This map was provided by the African Development Bank exclusively for the use of the readers of this Aide Memoire. The names used and the borders shown do not imply on the part of the Bank and its members any judgment concerning the legal status of a territory nor any approval or acceptance of these borders.

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Appendix 2: Eswatini’s Comparative Socio-Economic Indicators

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Appendix 3: Table of AfDB’s Portfolio in the Country (July 2018)

Sector Name Long name Status Finance project Window Approval Commit Entry into Effective 1st Planned Window Amount Disb. Age of date ment date force disb project Amount Disb. Ratio Project completion date Agriculture LOWER USUTHU SMALLHOLDER OnGo P-SZ-AAC-005 [ ADB ] 04/05/2016 10/26/201 2/23/2017 4/6/2017 31/12/2021 24.4 2.2 IRRIGATION PROJECT II 6 44,147,186.4 10,777,269.1 Agriculture 24.4 2.2 Total 44,147,186.4 10,777,269.1 Finance LINE OF CREDIT TO ESWATINI APVD P-SZ-HAA-001 [ ADB ] 1205/2017 (blank) (blank) (blank) 19/01/2028 0.0 1.2 DEVELOPMENT FINANCE 18,327,310.3 - CORPORATION Finance Total 18,327,310.3 - 0.0 1.2 Multi-Sector STATISTICAL CAPACITY BUILDING OnGo P-SZ-K00-003 [ ADB ] 01/02/2012 4/24/2012 4/24/2012 9/9/2013 31/12/2018 61.5 6.5 PROGRAMME - PHASE II (SCB II) 490,600.0 301,887.6 Multi-Sector Total 490,600.0 301,887.6 61.5 6.5 Power ENERGY SECTOR TECHNICAL OnGo P-SZ-FF0-001 [ ADB ] 08/12/2014 6/8/2015 6/8/2015 12/14/2015 01/10/2018 33.5 3.6 ASSISTANCE PROGRAM 717,652.0 240,361.2 Power Total 717,652.0 240,361.2 33.5 3.6 Transport MANZINI-MBADLANE HIGHWAY OnGo P-SZ-DB0-012 [ ADB ] 28/05/2014 11/25/201 6/2/2015 7/7/2015 31/12/2019 38.0 4.1 PROJECT 4 32,632,574.3 12,411,268.7 Transport MANZINI-MBADLANE HIGHWAY OnGo P-SZ-DB0-012 11/28/201 6/2/2015 6/2/2015 31/12/2019 20.6 4.1 PROJECT 4 1,200,000.0 246,554.6 Transport 33,832,574.3 12,657,823.3 29.3 4.1 Total Water EZULWINI SUSTAINABLE WATER OnGo P-SZ-E00-005 [ ADB ] 18/06/2014 11/25/201 4/22/2015 5/22/2015 31/12/2020 36.2 4.1 Sup/Sanit AND SANITATION SERVICE 4 16,361,077.0 5,921,494.3 DELIVERY Water MBABANE MANZINI CORRIDOR OnGo P-SZ-EAZ-002 [ ADB ] 21/12/2015 3/22/2016 3/22/2016 3/22/2016 31/05/2020 18.2 2.6 Sup/Sanit (NONDVO) MULTIPURPOSE DAM 797,416.0 144,745.1 STUDY Water MBABANE MANZINI CORRIDOR OnGo P-SZ-EAZ-001 [OTHERS 21/12/2015 2/11/2016 2/11/2016 4/5/2016 31/05/2020 1,060,893.6 191,872.2 18.1 2.6 Sup/Sanit MULTIPURPOSE DAM FEASIBLITY ] STUDY Water Sup/Sanit Total 18,219,386.6 6,258,111.6 24.1 3.1 Grand Total 115,734,709.5 30,235,452.8 25.0 3.2

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Appendix IV: Key related projects financed by the Bank and other development partners in the country Project Date and Intervention Areas Rating Lessons Learned Amount Komati Downstream 2002-2013 Agriculture development – *** Important to have a strong and well composed Development Project UA 11.91m 4200ha of irrigated land Implementation Unit; (ADB) Need for frequent monitoring missions comprising the right UA 4.95m Infrastructure Development – ** mix of staffing; (NTF) Roads, pump stations and Important to have the beneficiaries on board as early as portable water supply possible at the commencement of the project and their role Project Management ** during the implementation process clarified. Need to have occasional workshops to familiarize the implementing agency with Bank rules and procedures Lower Usuthu Small 2003 – 2007 Upstream works including **** Need to have a strong project implementing unit; Irrigation Project UA 10.20m design services and Where communities are involved it is vital to have them on construction of civil works board and their participatory role clarified upfront; including 3 dams, and Competent consulting services are vital for smooth distribution system implementation of the project. Development of relevant *** Policy and Legal framework; Environmental Mitigation **** Project Management ****

Mbabane Bypass Road 2003 - 2010 Civil Works including **** Compensation and resettlement if any should be finalised Project UA 37.70m rehabilitation of a 5km of well before the affected contracts are awarded. existing dual carriageway and Procurement process and strategy should be understood and construction of a new 6km of agreed upon by all concerned parties; dual carriageway; Ensure early appointment of the annual Audit consultant. Engineering Services for *** design and works supervision Project Management – project *** implementation unit

Water and Sanitation 2007 - 2012 Feasibility Study for Water Lessons Emerged: Study for Lavumisa- Supply and Sanitation for the Need to have an early launching mission to clarify the Nsalitje Corridor UA 0.46m Lavumisa-Nsalitje corridor implementation process including procurement of the services;

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Ezulwini Water 2007 - 2012 Lessons Emerged: Supply and Water Supply works Need to ensure to include financing of Sanitation UA 0.46m engineering consultant to undertake detailed Sanitation (both design and supervision of works, if necessary sewerage system and through advance contracting. promotional sanitation Mbabane-Manzini 2017-2020 Feasibility Study for the Lessons Emerged: (Nondvo dam) Study development of Need to have dedicated study/program manager who UA 2.0m multipurpose dam in the will champion the timely start up of the study Mbabane Manzini corridor.

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Appendix V: Justification of Government’s Level of Counterpart Funding Contribution

Introduction

The Kingdom of Eswatini’s contribution to the Manzini Region Water Supply and Sanitation Project of USD 6.71 million represents 11% of the total project cost, which is less than the recommended 50% minimum counterpart funding, in accordance with Bank’s 2008 Policy on Eligible Expenditures for Bank Group Financing. The policy stipulates that “AfDB may finance more than 50% of the total project costs on a case-by-case basis and up to a limit that does not exceed 100%.”

The recommendation is for the Bank to finance up to 89% of the project cost. The basis for this recommendation is that the country is currently facing a challenging macroeconomic environment characterised by low growth and mounting fiscal imbalances. Economic growth has remained subdued since 2011, with real GDP growing by an average 1.3% per year in 2011-2016. The economy’s recent growth trajectory has been weak, with growth declining to 1.9 % in 2017 from 3.2 % registered in 2016 and is projected to further soften to 1.3 percent in 2018. The subdued growth is mainly due to adverse effects of drought conditions and a sharp reduction in the Southern Africa Customs Union (SACU) revenues that continue to linger, emanating from an economic slowdown in . It is also, in part, because of lack of competitiveness, low investment, high cost of doing business, and fiscal challenges. The fiscal deterioration has largely been because of the Government maintaining higher spending against a prolonged decline of the revenue base, particularly SACU that has resulted in liquidity challenges and accumulation of domestic arrears.

Against this background, reducing Eswatini’s financing contribution to this project will provide the needed fiscal space for the Government to implement its development programmes to support inclusive growth as the country embarks on consolidating the budget and returns to fiscal stability. The justification for the reduced Government contribution is further strengthened on the considerations highlighted below.

The Government’s commitment to implement a national development programme

The 1997 National Development Strategy (NDS) sets out Eswatini’s development objectives until 2022. To operationalize the NDS, the Government has formulated the 2013-2018 Program of Action as its medium-term framework. The POA commits to addressing Eswatini’s development challenges that include low economic growth, unemployment, widespread poverty, high incidence of HIV/AIDS and weak institutional capacity. The POA articulates eight focal areas: (i) Economic prosperity; (ii) Agricultural and environmental sustainability; (iii) Education; (iv) Health; (v) Service delivery; (vi) Infrastructure; (vii) Governance; and (viii) Corruption. Since POA will expire at the end of 2018, the Government is developing its consolidated National Development Plan, covering the period 2018-2022, expected to be ready by the end of 2018.

The Government recognizes that infrastructure makes a vital contribution to effective productive and trade processes in the economy. Despite its middle-income country (MIC) status, Eswatini still faces many infrastructure bottlenecks in transport, electricity, water, and telecommunications, all of which increase the cost of doing business. To increase the country’s productive capacity and support growth in the long term, the country needs to address its infrastructure shortcomings. In this regard, Eswatini has equipped itself with the strategy and policy instruments it needs to do so; but an enormous investment in infrastructure is still required.

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Eswatini has a National Water Policy, which envisages water playing a catalytic role in poverty reduction in the country through various interventions, and is an engine for development, which ensures sustainable economic prosperity. To achieve this goal, water has to play its role in the attainment of the country’s objectives of social equity, food security, peace and stability, energy security, safety from water related disasters, environmental sustainability, improved tourism and recreational activities and industrial development.

The Country’s financing of infrastructure

Notwithstanding the obtaining fiscal challenges, the Government of Eswatini gives priority to infrastructure as evidenced by its budget allocations for capital spending. In FY 2018/19, Government allocated SZL 5.6 billion (about USD 0.5 billion), or 26% of the total budget to capital spending. In addition to the Government budget appropriations, Eswatini relies on other traditional funding sources, such as loans from multilateral development banks (MBDs), to finance its infrastructure projects. Private investment has been insignificant. Eswatini’s long term Vision envisages a 100% good quality water coverage by the year 2022, and in order to achieve this, enormous investment in water and sanitation infrastructure is required. However, due to fiscal constraints, Government is finding it increasingly difficult to finance infrastructure projects, which presents a challenge in meeting some of the Vision 2022 targets and 2030 Sustainable Development Goals (SDGs).Eswatini’s capital budget allocations have been softly growing in recent years in relation to the increasing share of the capital budget. However, the share of water and sanitation infrastructure allocation in the capital budget has not been consistent in the last five fiscal budgets, as it fluctuated between 9% and 21% percent (Table 1).

Table 1: Infrastructure financing in Eswatini (SZL million) – water and sanitation Fiscal Year 2014/15 2015/16 2016/17 2017/18 2018/19 Total capital budget (SZL million) 3,610.42 3,725.28 3,897.34 5,579.44 5,603.74 Capital budget allocation to water & sanitation infrastructure (SZL million) 328.24 392.55 799.19 509.01 1,097.72 Share of water & sanitation infrastructure in the capital budget (%) 9% 11% 21% 9% 20% Source: Ministry of Finance

The budget situation and debt levels

Eswatini’s fiscal policy has been under considerable pressure in recent years. Lack of an independent monetary policy tool has led the Government to use fiscal policy as a countercyclical tool in recent years to boost economic activity and employment. The Government pursued an expansionary fiscal policy after the 2010/11 fiscal crisis, mainly supported by the rebound of revenues from SACU. Expenditures expanded even further owing to increased recurrent spending, particularly in public sector wages, and a revival of capital expenditures.

A fiscal crunch occurred in 2016/17 due to a marked 22% decline in SACU revenues leading to a significantly wider deficit of 12.3% of GDP. To finance the fiscal deficit, Government has borrowed from the domestic markets and resorted to central bank financing, as well as accumulating domestic arrears that threaten the banking sector’s stability and potentially crowd out the private sector. The fiscal outturn in 2017/18 was a slightly lower fiscal deficit of 8.2% of GDP mainly due to a surge in SACU revenues. Revenue collections and grants are projected to slow down by 2.6% to reach SZL 16.4 billion (Table 2), while total expenditures are planned at SZL 21.6 billion, almost equal to the level of 2017/18, deepening the deficit.

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Table 2: Public Finance (SZL million) Fiscal Year 2014/15 2015/16 2016/17 2017/18 2018/19 (p) Tax revenue and grants 14,743.57 14,462.42 14,288.47 16,845.78 16,403.96 Total expenditure & net lending 15,304.43 17,198.33 19,778.78 21,779.35 21,596.14 Overall balance -560.86 -2,735.91 -5,490.31 -4,933.58 -5,192.18 Source: Ministry of Finance

The Government is committed to improve the country’s fiscal position through implementing a raft of reforms aimed at consolidating the fiscus. The budget for 2018/19 fiscal year, announced by the Minister of Finance on 1 March 2018, is aimed at achieving fiscal consolidation and fiscal sustainability in order to create fiscal space to support investment and socioeconomic spending. In this regard, the Government is pursuing a number of strategies to enhance revenue and reduce expenditure, as well as implementing public financial management reforms that should reduce the fiscal deficit. Narrowing the fiscal deficit is, therefore, contingent on fully implementing the measures proposed for boosting revenues. These include collection of licence fees from mobile companies; raising the value-added tax (VAT) rate from 14% to 15% to align with the new rate announced by South Africa; introducing a levy on bank revenue; reviewing user fees and fuel tax; and introducing an import levy on non-SACU used vehicles.

Reflecting the underlying fiscal imbalances, Eswatini’s public debt rose rapidly in recent years. Total public debt reached 20.1% of GDP in March 2018 (from 17.8% in March 2017). The rise in debt mainly reflected an increase in domestic debt, which stood at 12.3% of GDP in March 2018 (from 10.4 % in March 2017) while external debt was 7.8% of GDP in March 2018 (compared to 8.3% in March 2017). By end June 2018, public debt had further surged to 20.8 % of GDP (Table 3).

Table3: Public Debt (percentage of GDP) Year (Ending March) 2014/15 2015/16 2016/17 2017/18 2018* Total public debt 16.7 16.1 17.8 20.1 20.8 Domestic public debt 7.7 6.3 10.4 12.3 12.4 External public debt 9.0 9.9 8.3 7.8 8.4 Source: *As of 30 June 2018

External debt has been primarily incurred to finance large capital projects; domestic debt was raised, largely through central bank advances, treasury bills and Government bonds, to enable the Government to meet its obligations. Because it became increasingly difficult for the Government to raise enough domestic revenue to fund major capital projects through bond issuance, Eswatini was compelled by its fiscal constraints to increase external borrowing. While Eswatini’s debt policy does not impose limits on external debt, domestic debt is capped at 35% of GDP, and the current levels are well within the ‘statutory’ debt limit. The total debt level remains far below the SADC convergence level of 60% of GDP. This notwithstanding, there are concerns regarding the speed with which debt has risen in a relatively short time, and about the accumulation of domestic arrears, which could adversely affect the stability of the banking sector. In addition, the sluggish economic growth could adversely affect future debt service, and debt service could crowd out critically needed public investments. The Government is, therefore, exploring various options to bridge the financing gap. In order to improve debt management, the Government established a Debt Management Unit (DMU) in April 2015 and is in the process of developing a Debt Management Policy and Medium Term Debt Strategy (MTDS)

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underpinned by analytical work on debt sustainability levels, with the support of the Macroeconomic and Financial Management Institute (MEFMI).

The 2017 IMF Article IV Consultation report, states that in terms of debt sustainability, “Eswatini’s public debt ratio is relatively low but has been rising rapidly due to recent large fiscal deficits, which are also exerting upwards pressure on external debt. Under staff baseline, which includes substantial fiscal adjustment, debt sustainability analysis (DSA) indicates that sustainability indicators would remain below stress thresholds and both debt level and gross financing needs would be resilient to shocks. In absence of adjustment, debt level and gross financing needs would rapidly reach unsustainable levels, pointing to the need for fiscal adjustment. With fiscal adjustment, external debt would also remain low although sensitive to current account exchange rate shocks.”

Based on the foregoing, the recommendation is for the Bank to finance 89 % of the Manzini Region Water Supply and Sanitation Project cost, while the Government of Eswatini and EWSC finances the remaining 11 %.

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