Country Context

The Republic of Zambia is a landlocked country in south-central, sub-Saharan Africa. It gained independence from the United Kingdom in 1964 and has maintained relative political stability since that time.. Lusaka Province is home to the city of Lusaka, the national capital. The country has a wealth of natural resources, minerals, land, and wildlife. Zambia had one of the fastest growing economies in Africa from 1994 to 2014, with real GDP growth averaging roughly 6.7 percent per annum[[CIA World Factbook. https://www.cia.gov/library/publications/the-world-factbook/geos/za.html]]. Despite this growth, widespread and extreme rural poverty and high unemployment levels remain significant problems, made worse by a high birth rate, a relatively high HIV/AIDS burden, market-distorting agricultural and energy policies, and growing government debt. In 2010, over 60 percent of Zambia’s population lived below the poverty line, and the country suffered from an HIV/AIDS prevalence rate over 14 percent[[2010 Zambia Census, https://www.zamstats.gov.zm/phocadownload/2010_Census/2010%20Census%20of%20Population%20National%20Analytical%20Report.pdf]].

Zambia’s population, estimated at more than 16 million[[Republic of Zambia, Central Statistical Office, http://www.zamstats.gov.zm/phocadownload/Dissemination/Zambia%20in%20Figure%202018.pdf]], is richly diverse with a total of 73 distinct ethnic groups. Urbanization is a pressing development and economic growth issue across sub-Saharan Africa, and Zambia is no exception. Almost half of the country’s population is now concentrated in urban areas, including Lusaka, which has experienced rapid, and often unplanned, urban and peri-urban growth.[[CIA World Factbook. https://www.cia.gov/library/publications/the-world-factbook/geos/za.html]] At independence in 1964, the population of Lusaka was just over 100,000, or less than 4 percent of the country’s population. But by 2011, Lusaka was home to more than 1.8 million people—over 10 percent of Zambia’s total population—and the city’s population was projected to more than double by 2035.[[Central Statistical Office, Republic of Zambia projected increase of population from 2011 to 2035 as reported on opendataforafrica.org]] This rapid population growth in Lusaka has occurred without complementary investments in infrastructure, including water supply and sanitation.[[Sanitation refers to both sewer services and on-site solutions (including pit latrines and septic tanks).]]

MCC’s engagement with Zambia dates back to 2004. As one of the first countries to be selected for a threshold program, Zambia partnered with MCC to reduce opportunities for corruption in three government entities (Ministry of Lands, Zambia Revenue Authority, and the Immigration Department of the Ministry of Home Affairs), reduce administrative barriers to business and investment, and improve border management of trade. The $22.7 million threshold program, implemented by the U.S. Agency for International Development, was signed in 2006 and concluded in 2009. Achievements included establishing a one-stop shop that automated procedures for business registration and tax payment, reducing processing times for customs operations, and developing a Corruption Prevention Toolkit for the Anti-Corruption Commission.[[MCC Zambia Threshold Program Final Status Report, https://assets.mcc.gov/content/uploads/2017/05/report-2010001048501-zambia-threshold-final-status.pdf]] The positive and productive experience of the threshold program demonstrated Zambia’s ability to successfully partner with MCC.

Developing a Compact

The MCC Board of Directors selected Zambia as eligible to develop a compact in December 2008. MCC and the GOZ then conducted a nationwide analysis to identify the main factors that were limiting inclusive growth in the country. The analysis of binding constraints in Zambia was completed in 2011, before MCC had established current constraints analysis guidance and standards. For this analysis, the GOZ proposed and MCC assented to applying an “Inclusive Growth Diagnostics” framework.[[The methodology is set forth in Elena Ianchovichina and Susanna Lundstrom (2008), “What are the Constraints to Inclusive Growth in Zambia?” (Policy Note; Report No. 44286-ZM).]] Operationally, this analysis (1) aimed to identify constraints to more inclusive growth and significant poverty reduction, and (2) also attempted to answer the question of why Zambia’s growth rate had not accelerated in recent years.

This analysis identified three binding constraints: 1) the low quality of human capital; 2) poor infrastructure services, including electricity, rail transportation and rural and peri-urban water; and 3) coordination failures where the country fails to provide sufficient complementary goods and services to help private investors be profitable and competitive, such as lack of investment in infrastructure in high return areas. In consultation with the Government of Zambia, MCC ultimately selected the binding constraint of water and sanitation in rural and peri-urban areas to underpin the compact.

While difficult to attribute the identification of this particular constraint exclusively to the use of the “Inclusive Growth Diagnostics” framework, using this framework arguably placed greater emphasis on poor target beneficiaries than would have otherwise been the case.[[For example, following the approach in the source cited in note 9 above.]] The binding constraint of water and sanitation in rural and peri-urban areas, was supported by key findings, including low water consumption by rural households, low water and sanitation availability in peri-urban areas, outbreaks of waterborne and water-related disease, and high time costs of obtaining water. Moreover, relieving the binding constraint of water and sanitation in rural and peri-urban areas had the potential to foster both more inclusive and more rapid growth.

The GOZ conducted a targeted consultative process to disseminate the findings of the constraints analysis. They engaged with more than five hundred individuals from government, the private sector, civil society, and donor organizations. Feedback from these consultations resulted in high levels of consensus and a list of six prioritized sectors that were key to Zambia’s economic development. Following an extensive internal and external peer review process, MCC and the GOZ decided to focus solely on the GOZ’s capacity to provide necessary water supply, sanitation, and drainage services within urban and peri-urban areas of the capital city of Lusaka.[[The compact largely addressed peri-urban areas. Although urban water was not identified as binding during the constraints analysis, some urban investments were built into the project due to both (a) the connected nature of water, sewer, and drain networks that make it infeasible to totally isolate urban from peri-urban areas, and (b) the importance of urban areas to the utility’s revenue model.]] Though the interconnectedness of the water supply network implied that a substantial proportion of Lusaka’s residents would benefit from the project, MCC’s investment included previously unserved consumers, extending water distribution lines to a number of Lusaka’s peri-urban areas (see section below, “Moving Water to the Consumer”).

The constraints analysis and consultative process demonstrated that without significant investment in the overstretched and under-resourced water sector, the rapid urbanization of Lusaka would continue to risk the health and lives of vulnerable people, leading to loss of productivity and wage earnings. Further, this analysis concluded that without substantial investment within the water sector, Zambia would not meet the United Nations Millennium Development Goal to reduce the proportion of people without sustainable access to safe drinking water by 50 percent by 2015. Zambia also lagged behind its peers in water supply coverage to its population, with cities (including Lusaka) experiencing serious water shortages. The GOZ and MCC thus designed a single-sector compact to address the water, sanitation, and drainage issues within Lusaka through major infrastructure improvements and institutional strengthening. This included both the water utility—Lusaka Water and Sewerage Company (LWSC)—that is the provincial utility responsible for the management of Lusaka’s water and sanitation assets and for the provision of water and sanitation services, and the local city council—Lusaka City Council (LCC)—whose responsibilities include maintaining Lusaka’s drainage assets and managing solid waste.

MCC and the GOZ signed the $354.8 million MCC Zambia Compact on May 10, 2012. At signing, the compact was MCC’s largest urban and water compact. MCC’s support of Lusaka’s water sector offered the opportunity to profoundly affect the city’s and country’s development, and efforts to build a healthier and more productive Zambian society. Following the signing, the GOZ created Millennium Challenge Account–Zambia (MCA) to implement the compact.[[Under MCC’s country ownership model, governments receiving MCC assistance are responsible for implementing the MCC-funded programs. Partner governments establish units known as accountable entities referred to as MCAs to manage implementation for compact projects.]] The compact entered into force on November 15, 2013.

At a Glance

Original Amount at Compact Signing: $354.8 million
Amount spent: $332.1 million

Signed: May 10, 2012
Entry Into Force: November 15, 2013
Closed: November 15, 2018

Estimated benefits at the time of investment correspond to $292.6 million of project funds, where cost-benefit analysis was conducted:

1,241,959Estimated beneficiaries at the time of signing over 20 years
$229.8 millionEstimated net benefits at the time of signing over 20 years

Overview of Economic Rate of Return (ERR) and Beneficiaries

Activity		Estimated Economic Rate of Return over 20 years	Estimated beneficiaries over 20 years	Estimated total benefits over 20 years
Project level	At the time of signing	13.7%	1,241,959	$229.8 million
	Updated (August 2013 - at Entry Into Force (EIF))[[For discussion of the ERR update at EIF, see the Explanation of Results subsection of the Project Results section.]]	17.0%[[These figures are from https://assets.mcc.gov/content/uploads/2017/05/mcc-err-zambia.xlsx.]]	1,230,413	$292.1 million
	Updated ERR (March 2019)	13.7%	1,199,962	$258.3 million
	At compact closure	9.7%	1,199,962	$240.9 million

At the time of signing and at Entry Into Force, MCC calculated one ERR encompassing the compact’s two activities, the Infrastructure Activity and the Institutional Strengthening Activity. MCC’s initial economic model accounted for the benefits of reduced exposure to waterborne diseases from contaminated drinking water and flood waters, reduced flooding damages, lower costs of providing water when non-revenue water is reduced, and the impact on women and children of reduced time spent collecting water.

The August 2013 ERR version reflected refinements in MCC’s methodology regarding the opportunity cost of time and incorporated newer data sources. Incorporating newer data sources also increased the estimate of overall benefits; on net, these changes increased the ERR from 13.7 to 17 percent.

In March 2019, based on implementation experience to date, MCC introduced more moderate projections of adoption rates,[[The adoption rate is the percentage of eligible households who choose to connect to the new water supply and sewerage infrastructure.]] reducing these from 100 percent to 80 percent. This revised figure was viewed as ambitious but still achievable. That change, coupled with higher costs associated with investments in improved drainage, caused the ERR to decrease to 13.7 percent.

Finally, the closeout ERR incorporated a number of revisions and refinements:

Due to widespread contamination of the water supply that was not discovered until implementation, all health-related benefits were zeroed out, leaving only time savings benefits.
Updated wage data from the latest Zambia Labor Force Survey (2017 vs 2013) increased the ERR slightly.
Two benefit streams in the original ERR relating to improvements in the central pumping system and pipe network were omitted from the closeout ERR due to newly-emergent measurement or data collection problems:
- Estimated benefits from increased supply due to reductions in non-revenue water
- Time savings associated with overall improvement in reliability of water supply

These benefit streams were replaced with an estimate of the value of lost water associated with the possible failure of the central pumping system; this value is more easily evaluated via monitoring of asset maintenance.

Finally, MCC first computed an ERR for the Institutional Strengthening Activity at closeout since data had newly become available to support a corresponding ERR calculation.[[MCC has recently increased its focus on cost-benefit analysis of policy and institutional reform interventions and developed new methodologies for this work. For the Zambia closeout ERR developed a standalone estimate of the benefits associated with the compact’s Institutional Strengthening Activity.]] Under the (conservative) assumption that the Institutional Strengthening Activity would bring about only small increases in asset lifetimes, the ERR of the Institutional Strengthening Activity is 19 percent.

In MCC’s early days, ERR calculations for infrastructure investments assumed optimal maintenance of MCC-financed assets. MCC has found, however, that suboptimal maintenance is often the root cause of problems which its investments in new or rehabilitated infrastructure aim to solve. This realization has led, in turn, to more conservative expectations and assumptions concerning future maintenance spending by partner countries in MCC’s economic analysis. In Zambia, for instance, the original ERR calculations made somewhat optimistic assumptions regarding the maintenance of assets installed by MCC and the corresponding trajectory of benefits over time. In the closeout ERR, in contrast, the magnitude of the ERR varies depending on assumptions about the adequacy of maintenance to sustain benefits over time.[[Alternative assumptions regarding the quality of maintenance and the evolution of benefits would change the Zambia Project ERR as follows: If benefits fell linearly to zero over 30 years, the ERR decreases to 3.8%. If benefits fell to zero over 20 years, the ERR decreases to -1.5%.]]

The MCC Zambia Compact is projected to have 1,199,962 beneficiaries in Compact Year 20, of whom nearly three-fourths are poor. The average beneficiary benefits by $169 in present value terms over an estimated 20-year economic life of the compact’s Lusaka Water Supply, Sanitation and Drainage Project. Overall, the Project had a 9.7 percent ERR at compact closure.