POLICY MONITORING AND RESEARCH CENTRE

PMRC POLICY ANALYSIS ON THE MILLENNIUM CHALLENGE COMPACT ACT No. 6 OF 2013
LUSAKA HEADED FOR IMPROVED WATER SUPPLY, SANITATION AND DRAINAGE SERVICES
Unlocking Zambia's Potential
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Message
from PMRC
PMRCs vision is Unlocking Zambias Potential. We recognize that it is only discussion and debate on social and economic policy issues critical to poverty reduction that ultimately leads to policy reform to support a robust and thriving economy. PMRC's mission is Unlocking Zambias Potential by: Producing high quality, relevant and timely policy analysis, policy monitoring, and reform proposals Promoting and encouraging an informed public debate on critical social and economic policy issues.

PREPARED BY THE POLICY RESEARCH AND ANALYSIS DIVISION

PMRC PMRC POLICY ANALYSIS ON THE MILLENNIUM CHALLENGE COMPACT ACT No. 6 OF 2013

URBAN

RURAL

The Millennium Challenge Act No. 6 of 2013 launches the implementation of the Millennium Challenge Compact Program. This program is as a result of an agreement that was signed by the United States of America acting through the Millennium Challenge Corporation (MCC), and the Government of the Republic of Zambia. The Government has since tasked The Millennium Challenge Account (MCA) Zambia to oversee, manage and implement the MCC program in Zambia. On 21st March 2013, the Millennium Challenge Compact and Program Implementation Agreement was enacted. The major aims of the Act are to: Expand access to and improve reliability of water supply, sanitation and drainage services in select urban and peri-urban areas of the City of Lusaka in order to reduce the incidence of waterborne and water related diseases. Generate time savings for households and businesses

and reduce non-revenue water in the water supply network by improving water supply and sanitation and drainage services and Provide for matters connected to, incidental to, the foregoing.

A total amount of US$339MM has been slated for the program and an initial US$15.2MM will be released to the Zambian government upon signing of the MCC Compact for use to facilitate implementation of the compact. The other funds will be released in phases, upon completion of the respective stages. In comparison, the US$339 is approximately 5% of the 2013 National Budget. The MCC Act has 4 parts as follows: Part 1 Preliminary: - This part highlights the definitions and contexts of the MCC Act, clearly specifying the meaning of each operational term. Part 2- Implementation Framework -This section outlines the oversight and management of the project. It also shows the vesting and delegation of rights and

responsibilities, including a breakdown of the Board Zambia of Directors of the MCA and FY13 also the implementation Population: 13,475,000 and operations procedure of the MCC Program. Part 3-Accounting, Auditing, Tax, Procurement And Economic Freedom Funds-This section lays out the accounting principles, Fiscal Policy Inflation public procurement procedures, audits and records of 8.7 (49%) the MCC Program.-2.8 It (55%) clearly also highlights the tax Median Max. -3.5 15 and fiscal exemptions that the MCC is privileged to 10 0 enjoy and offers procedure of disposal of assets.
5 10

GNI/Cap:

$1,160

(LIC)

For a country to be selected as eligible for an MCC Control of Corruption assistance program, it must demonstrate a commitment to Democratic Rights in its people, just and democratic governance, investments Pass Half Overall and economic freedom as measured by different policy indicators.

Investing in People
n/a

Health Expenditures Primary Education Natural Resource The MCC four step selection process entails: Expenditures Protection 3.55 (80%) Median 2.56 1. Identification
15

Median Median 1.94 of candidate countries

10 10 0

100.0 (100%) 57.4

2. 12 Publishing selection criteria for public75 comment 8

9 6 4 3. 6 Issuing candidate country scorecards 3 2 0 0 50 25 0

Part 4-General Provisions- This part20 explains the funds -5 of the project and also creation of 30 annual reports. It - 10 '07 '08 '09 '10 '11 ' 0 7' 0 8' 0 9 ' 10 ' 11 stipulates regulations and also how the MCC Act can IMF WEO IMF WEO Regulatory Quality Trade Policy be repealed.
0

'06 '07 '08 '09 '10 '08 '09 '10 '11 '12 ' 0 8' 0 9 ' 10 ' 11 ' 12 4. Selection of countries eligible for MCC assistance
WHO UNESCO/National Sources CIESIN/YCELP

The Millennium Median Challenge Compact Act annexes Median 0.00 67.8
Table 1
2 .0 100 80 DESCRIPTION

0.33 (76%)

82.3 (96%)

Girls' Pri Edu Child Health Completion Rate funds from the fiscal A country remains eligible for MCC 82.0 (55%) 108.3 (100%) 51.1 (38%) year in which it was chosen unless funds from that fiscal Median Median Median 79.8 66.8 54.9

Immunization Rates

ANNEX Annex I Annex II

TITLE 1.0 Program - 1.0 Description

- 2 .0 0 .0

year are exhausted or The Board suspends the country 100 110 10 0 from eligibility. 80 85
75

Describes the 5 year 40 MCC program.

20

60

Multi-Year multi' 0 7' 0 8 ' 0 9 ' 10 Summaries ' 11 '08the '09 '10 '11 '12 Financial Plan year-financial plan. World Bank/Brookings WGI Heritage Foundation Gender in the Economy Land Rights and Summary Describes 0.65 (69%) the of 0.57 the Median Median 1 components monitoring and Description Of 0 1. 0 plan for the Monitoring And evaluation 2 0 . 8 The program. M&E Evaluation Plan 4 0 .6 Plan can be modified as 6 0 .4 developments change.
0 (100%) Access

The Millennium Challenge Compact 50 Scorecard for 40 35 20 10 25 Zambia (Extract Scorecard for Zambia, Fiscal Year '07 '08 '09 '10 '11 '08 '09 '10 '11 '12 ' 0 8' 0 9 ' 10 ' 11 ' 12 (FY) WHO/UNICEF 2013 - Millennium Challenge) UNESCO CIESIN/YCELP
Figure 1
Political Rights 29 (91%) Min.
40 30 20 10 0 ' 0 7' 0 8 ' 0 9 ' 10 ' 11
Freedom House

60

60

Ruling Justly
Civil Liberties 34 (71%) 17 Min.
60 40 20 0

Freedom of Information 58 (53%)

Annex III

25

Median
20 40 60 80

59

Annex IV

This sets 0 .annex 0 ' 0 8 ' 0 9 ' 10 ' 11 forth ' 12 0 9 ' 10 ' 11 ' 12 Conditions the ' 0 8'applicable PrecedentIFC conditions IFAD/IFC precedent Access to Credit Business Start-Up To disbursement to disbursements of of compact compact implementation 52 (100%) 0.942 (75%) implementation funding other 0.904 than Median Median 23 funding disbursements for MCC 60 1. 0 CIF contracted activities.
10 40 Definition of Terms 20 0 . 8 terms in the Defines 0of program0 and acronyms. .6

0 .2

' 0 7' 0 8 ' 0 9 ' 10 ' 11

Freedom House

10 0

' 0 8 ' 0 9 ' 10 ' 11 ' 12

Freedom House/ONI/FRINGE

Government Effectiveness 0.22 (71%) Median 0.00

2 .0 1.0 0 .0 - 1.0 - 2 .0 ' 0 7' 0 8 ' 0 9 ' 10 ' 11

Rule of Law 0.44 (85%) Median 0.00

2.0 1.0 0.0 -1.0 -2.0 '07 '08 '09 '10 '11

Control of Corruption 0.36 (78%) Median 0.00

2.0 1.0 0.0 -1.0 -2.0 '07 '08 '09 '10 '11

Annex V

Annex VI

This annex sets out 0 .4 ' 0 8 ' 0 9 ' 10 ' 11 the ' 12 ' 0 8' 0 9 ' 10 ' 11for ' 12 mechanisms IFC IFC exempting MCC funding For more information regarding the Millennium Challenge Account from the principal taxes Selection Process and these indicators, please consult MCCs website: imposed by www.mcc.gov/selection otherwise the Government. Government will ensure that all MCC Tax Schedules funding is free from the payment or imposition of any existing of future taxes in or of Zambia. -This includes any interest or earnings on MCC funding from principle taxes otherwise imposed by the government.
10/25/2012 1:55:49 PM

World Bank/Brookings WGI

World Bank/Brookings WGI

World Bank/Brookings WGI

Source:- www.mcc.gov

An eligibility scorecard is produced by the MCC as a basis for funding, however Zambia could become ineligible for funding if certain indicators fell below what MCC deem as the acceptable threshold, even if all other indicators are favorable. This could disrupt continued funding and affect the success of the program. MCC recognizes that a compact-eligible country can generally maintain and improve policy performance, but

Source:- (Millennium Challenge Compact Act No.6 of 2013)

not meet the formal eligibility criteria in a given year due to any one or combination of the following factors: Graduation from the Low Income competition (LIC) to the Lower Middle Income competition (LMIC). Introduction of new indicators or new methodologies. Improvements in the availability or quality of data. Rising income-group medians. Slight declines in performance.

resulted in a list of priotised sectors deemed to be key to Zambias economic development and thus Government developed and submitted 6 concept papers for MCC consideration. After analysis of the 6 concept papers, MCC and Government elected to focus solely on improvements to the water supply, sanitation and drainage sectors in the capital city Lusaka. The Lusaka Water Supply, Sanitation and Drainage (LWSSD) project was then selected as the main undertaking of MCA Zambia. The objective of the proposed LWSSD project is to increase incomes through improved health and employment opportunities of project beneficiaries through the provision of clean and safe water supply and adequate sanitation and drainage in targeted areas. Specifically, the LWSSD project will rehabilitate and expand Lusaka citys water supply system; expanding and strengthening the backbone distribution line; reduce non-revenue water; and upgrade and replace inefficient distribution lines in order to improve the hours of water supply and reliability of service to the entire city. In sanitation, the LWSSD project will expand Kaunda Square and rehabilitate Chelstone Sewer sheds to reduce the frequent sewer overflows. In drainage, approximately 30km of the Bombay Drain running from Libala South, through parts of the Kamwala trading area, Garden compound and then into the Ngwerere Stream will be improved and rehabilitated to eliminate flooding and other negative health impacts. In addition, the LWSSD will provide technical assistance to increase the ability of Lusaka Water and Sewerage Company (LWSC) and Lusaka City Council (LCC) to maintain and manage their respective infrastructure assets to more effectively and equitably deliver services to Lusaka residents. The proposed MCC-funded investments are designed to address these aims by improving service provider operating efficiency, increasing water storage capacity, enhancing water delivery capacity, upgrading wastewater collection and treatment capacity and quality, and modernising and expanding primary and secondary network components. Overall, the project is expected to generate $273 million in benefits for approximately 1.2 million residents of Lusaka.

If a country does demonstrate a significant policy reversal, MCC may issue a warning, suspension, or termination of eligibility and/or assistance. Because of data lags and gaps, this pattern of actions need not be captured in the indicators for MCC to take action. The selection of the MCC project and focus area dates back to October 2009, when the Government initiated a constraints analysis that identified 3 main binding constraints to Zambias economic growth, within the countrys specific context. The constraints analysis (CA) fulfilled the requirement of the Millennium Challenge Corporation (MCC) for compact funding. This undertaking was to ensure that investments supported by the MCC are directed at areas that would produce significant positive economic growth impact if the constraints were addressed Three Primary Constraints to Poverty Reduction
Figure 2

Low quality of human capital

Poor infrastructure services

Coordination failure

A dapted by:- Policy Monitoring and Research Centre, 2013 from (Analysis of Constants to inclusive growth in Zambia, 2012)

To elicit feedback on these constraints, the Government undertook a targeted consultative process, which included over 500 representatives from government, private sector, civil society as well as donors. Feedback from this process

MCC Project Profile in Lusaka

Figure 3

interest earnings from banks and other financial institutions. In light of the MCC Act compact agreement goal to, reduce poverty through economic growth in Zambia by addressing constraints to economic growth, supporting infrastructure investments and continued institutional strengthening and reform it is PMRCs view, the compact does not address the root causes and challenges of poverty in Zambia. Expanding access to and improving water supply and sanitation in Lusaka and other peri-urban areas, where poverty is less prevalent than in rural areas, is not as effective as addressing poverty and issues of poverty in areas where it is widespread. The issue of waiving Zambian laws such as taxation should also be considered as Zambia negotiates agreements. This is in view of government policies, which should be consistent and promote the development focus for Zambia. The aspect of waving taxes signifies that Zambia cannot collect any revenue from MCA. The United Nations Development Programme (UNDP), World Economic Outlook Journal (2000) defines poverty as lack of basic capacity to participate effectively in society. It means not having enough to feed and cloth a family, not having a school or clinic to go to, not having the land on which to grow ones food or a job to earn ones living, not having access to credit. It means insecurity, powerlessness and exclusion of individuals, households and communities. It means susceptibility to violence, and it often implies living on marginal or fragile environments, without access to clean water or sanitation According to Central Statistics Office (CSO) census report (2012) , the Zambian population from the 2010 census stands at 13,046,508 and from this, 7,978,264 (61%) reside in rural areas while 5,068,234 (39%) reside in urban areas. Lusakas population currently sits at 1,800,000, which is approximately 10% of the Zambian population. The Living Conditions Monitoring Survey (LCMS) 2010 reports that in terms of poverty, apart from Lusaka and Copperbelt provinces, the rest of the regions are fairly remote. The degree of remoteness increases the further away the area is from the line of rail. The remote provinces are characterized by a monoeconomy with poor infrastructure, poor access to social and economic amenities, poor water and sanitation conditions, and low levels of economic activities.

MCC Project Fact file: Total Project Amount - US$ 339m Project beneficiaries Approx - 1.2m Residents of Lusaka Total Project Monetary benefits - US$ 273m

Source:- Policy Monitoring and Research Centre, 2013

The MCC Act also specifies that all eligible entities and individuals of the MCA program in Zambia will be exempted from the following taxes by issuance of statutory instruments (SIs) from the Ministry of Finance. Schedule A-Corporate Income Tax- on any income derived from the MCC funding, in accordance with the Income Tax Act. Schedule B-Personal Income Tax on income earned from the MCC Funding, in accordance with the Income Tax Act. Schedule C-Withholding Tax: - a general tax of 15% withheld at the source of payment in connection with interests, dividends, royalties etc. Schedule D-Value Added Tax (VAT)- a consumptionbased tax that is levied in the supply chain at each point where value is added to a good or service. Schedule E-Excise Duty On Fuel- tax on particular goods and services according to their value or quality. Schedule F-Customs Duty And Tariff Taxes- charged on the customs value of imported capital equipment and raw materials (05%), intermediate goods (15%), and finished goods (25%). Schedule G-Import Tax-a tax collected on the VAT Division and is applied to imported goods that attract VAT. Schedule H-Medical Levy (1%) is charged on all

Population Distribution- Rural vs. Urban

Figure 4
8 million 7 million 6 million 5 million 4 million 3 million 2 million 1 million 0

The needs of the people in the rural areas range from: food, safe drinking water, sanitation facilities, good health services, proper shelter, education, access to information and basic services. The Government has laid out developmental programs according to the Sixth National Development Plan (SNDP) 2011-2016, aimed at eliminating poverty and thus programs such as the MCC should have been channeled and designed according to the pressing concerns that the government wants to achieve, especially eliminating poverty in the needy districts and provinces. The MCC programs individuals and entities eligible will be exempted from paying different forms of taxes and procurement fees of the laws of Zambia. These include exemption from corporate income tax, personal income tax, withholding tax, value added tax (VAT), excise duty on fuel, customs duty and tariff taxes, import, medical levy, the property transfer tax, the control of Goods Act, the local Government Act. The MCC will enjoy tax relief and all the revenue that would have been collected by the government that could have been channeled into Zambian driven developmental projects will not be collected. In conclusion, PMRC views the MCC as a valuable program in uplifting the water and sanitation situation in Lusaka but with concern of the poverty gap in the other provinces. The criteria of selecting Lusaka province above Western, Eastern, North Western and Luapula provinces raises the need for clear priotising of developmental projects in relation to positive impact on the lives of the people and in line with Zambias national strategic goals of poverty reduction.

7,978,274 (61%)
Rural

5,068,234 (39%)
Urban

Source: - Living Conditions Monitoring Survey (LCMS) (2010)

The LCMS (2010) concluded that poverty has continued to be more of a rural than an urban phenomenon. This is more the case in the predominantly rural provinces such as Luapula, Eastern, Western and Northern Provinces. The majority of the poor have continued to face extreme levels of poverty particularly in the rural areas of the country. Results have shown that the most poverty-hit areas are in the rural areas of Luapula, Eastern, Western and North Western Provinces. The major components to relieve poverty especially in the rural areas are: Access to nutritious food Access to better housing and Empowerment for families to be able to live above $1.5 (ZMW 7.5) per day.

The more pressing needs of the Zambians especially in the rural areas require attention and thus raises the question of project prioritization. This builds the need for critical reflection, research based evidence and the need for clear priority setting, and addressing root cause, when projects aimed at reducing poverty in Zambia are implemented. Poverty by Province
Figure 5
90 80 70 60 50 40 30 20 10 0

Bibliography Central Statistics Office (CSO) The Zambia Population Census Report, 2012. Central Statistics Office (CSO) The Living Conditions Monitoring Survey (LCMS) 2010

Percentage

North Western

Copperbelt

Southren

Northren

United Nations Development Programme (UNDP) World Economic outlook, Journal, 2000
Luapula Eastern Western

Central

Lusaka

24.4% 34.3% 60.9% 67% 67.9% 75% 77.9% 80.4% 80.5%

Millennium Challenge Account Zambia (MCA) An Analysis of Constants to inclusive growth in Zambia, 2012

Source: - Adapted by PMRC from the Living Conditions Monitoring Survey (2010)

LUSAKA HEADED FOR IMPROVED WATER SUPPLY, SANITATION AND DRAINAGE SERVICES

Unlocking Zambia's Potential

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