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AFRICA OPPORTUNITY: Investment into Africa’s Water and Sanitation Sector

Staff Reporter
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AFRICA OPPORTUNITY: Investment into Africa’s Water and Sanitation Sector

Africa’s need for increased Water and Sanitation Infrastructure Investments

Water is an essential human need, and access to clean water and proper sanitation is a fundamental human right. Yet, millions of people in Africa lack access to these basic services. In 2020, the World Bank reported that over 300 million Africans do not have access to clean drinking water, over 700 million live without good sanitation, and more than 800 million lack or have limited access to basic hygiene services.
Africa’s already limited water infrastructure will likely face increased strain as the continent experiences rapid urbanisation. By 2030, more than 350 million Africans will be living in cities, yet currently, cities are already running dry, with the liveability of major cities compromised as bulk water supply runs short. Water insecurity is a major developmental challenge in Africa, exacerbated by the climate emergency and the lack of infrastructure development. For Africa to achieve its Sustainable Development Goals for water and sanitation (which means universal access to safe and affordable drinking water, and equitable sanitation and hygiene, by 2030), it will require improved operations and maintenance, efficient management of water resources, strengthened policy and regulatory frameworks and most importantly, consistent investment into water infrastructure.
The investment gap for water and sanitation infrastructure to achieve water security and sustainable sanitation by 2030 is estimated to be about US$ 50 billion annually. However, the current foreign direct investment (FDI) inflow for water and sanitation ranges between US$ 10 billion and US$ 19 billion a year, well below the amount needed, leaving financial deficits between US$ 11 billion and US$20 billion annually. This deficit has caused significant economic and human development costs, resulting in sub-Saharan Africa losing an estimated 5% of its GDP annually due to water shortages or poor sanitation. If this trend continues, African nations could lose up to US$ 50 billion annually due to climate effects caused by water-related hazards.
As governments play an integral role in repositioning the region’s water security and sanitation, a cross-sectoral political leadership at the highest level of governance should be created with a commitment to increase budgetary allocations for water and sanitation activities. Government funding remains the chief and most important source of funding for these projects and, therefore should be centred around efficient sector management. Therefore, governments will need to establish national investment programs which mobilise domestic resources and create predictable and transparent revenues that are backed by strong and credible institutions. By leveraging private and partner financing, governments can further attract private sector capital where opportunities exist to bridge the accessibility gap.
Additional strategic actions to close the funding gap include exploring innovative financing mechanisms that support climate resilience, impact investing and social impact bonds, and blended public-private financing options to attract private capital. Stronger institutional regulations for water investment will also trigger more incentives besides outlining penalties which will boost water efficiency across various industries. Investment programs should be based on solid institutional policies and regulatory frameworks whereby national investment programs can be effective vehicles to scale up accessibility. These programs can be built if anchored in a stable institutional framework with strong government participation, improved intergovernmental coordination, and strengthened oversight, regulation, and reporting.
With a renewed commitment to water and sanitation, the outlook for infrastructure investment in this sector is positive, with an increase in large-scale private investment expected in the next 2 years. Ultimately, development partners, donors, and the private sector have a unique opportunity to provide technical and long-term financial commitments through public-private partnerships and innovative co-financing mechanisms that support sustainable water and sanitation investments. By working together to transform the investment outlook and improve water and sanitation throughout the continent, there is an opportunity to ensure a peaceful, prosperous, stronger, and equitable Africa, now and in the future.
With a positive outlook on investment trends in water and sanitation, Frost & Sullivan Africa tracks major infrastructure investments throughout the continent.

Accounting and Auditing

Groum Abate
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Hikmet Abdella was appointed as Director-General to the Accounting and Auditing Board of Ethiopia in November 2019. She is widely known for her work as the founding Country Head of ACCA Ethiopia from 2004 to 2013.
Hikmet sits on The Board of Trustees of The Center for Dialogue, Research and Cooperation (CDRC) which is an independent Ethiopia based non-profit think tank, as well as a member of the Board of Directors on the Ethiopian Red Cross.
In 2022 she took part as one of the 50 members of the Destiny Ethiopia Initiative, to envision scenarios of four possible futures for Ethiopia in 2040. Now she is a member of the Women Caucus within the Ethiopian Inclusive Dialogue (EID), hosted in CDRC. Capital’s Groum Abate sits with Hikmet for an insight of the role and works of the Accounting and Auditing Board of Ethiopia. Excerpts;

 

Capital: What is the main role of the Accounting and Audit Board of Ethiopia (AABE)?

Hikmet Abdella: This is a very important question as I feel the role of AABE is not very clear in the market.
Ethiopia has no specific reporting framework before establishment of AABE. Most entities prepare their financial statements based on tax laws and/or USA/UK GAAP partly. To alleviate the problem, International Financial Reporting Standards (IFRS) were enacted via Proclamation number 847/2014 as financial reporting framework for Ethiopia. AABE was established by the regulation number 332/2014 with a mission to oversee the accountancy profession in Ethiopia.
AABE is established with the following roles and duties: issue standards and directives relating to financial reporting and auditing and ensure compliance therewith; register and license auditors and authorized accountants; receive and register financial statements of reporting entities; review and monitor the accuracy and fairness of financial statement to enforce compliance with the reporting standards; conduct quality assurance reviews of audit firms to determine whether they have complied with the applicable auditing standards; among others.

Capital: What are the challenges of accounting and auditing practices in Ethiopia?

Hikmet Abdella: To improve the accountancy profession in Ethiopia to the level it reached in some African countries in particular and to the global level in general, much should be done by all the stakeholders. The major challenge is the absence of adequate number of professional accountants in the country. The number of professional accountants is not greater than 600 for a country with over 120 million populations. This has negative impact on the quality of financial statements prepared by reporting entities and on the quality of audit. In addition AABE has limited professional so that it monitors quality of financial statements and assure the quality of audit via reviews.
To overcome the capacity challenge, trainings have been provided both for the reporting entities and auditors. However, in the long run, AABE has been working on a law to establish – Ethiopian Institute of Certified Public Accountants (ETICPA) and will be presented to Cabinet to produce professional accountants locally. As Professional Accountancy Organization (PAO) to be recognized by International Federation of Accountants (IFAC), it is believed that the institute will help to reduce the shortage of professional accountants and play dominant role in improving the quality of financial reports and audit.
In addition, there is lack of professionals in asset valuation and actuary science. The inputs from these professions are paramount for improvement of the quality of financial information. We are working with World Bank to provide trainings as short term solution and discussions are undergoing with stakeholders on how to develop the professions in the country in the long run.

Capital: What are the major milestones that you have delivered since you joined the organization?

Hikmet Abdella: Even though there is much to be done,, we have made some progress so far. The road map for adoption of IFRS is revised and a good number of companies have adopted IFRS. As per the revised roadmap; adoption of full IFRS is up-to June/July 2023 and June/July 2024 for adopters of IFRS for SMEs. Review of Financial statements and audit quality assurance reviews have been started and progressing well, and review findings were communicated to the public to take lesson out of it. Trainings were provided to AABE’s staff and consultants were hired to enhance the capacity of AABE. In collaboration with World Bank; trainings were provided for federal and regional Government owned Enterprises on IFRS. In addition, training on new insurance standard (IFRS 17) to be applied from 1st January 2023 was provided for insurance companies and auditors. Master audit manual was prepared by international consultant for auditors, so that they can customize to their own context and assure the quality of audit.
We are working with regional and continental accounting organizations and support our accountants and auditors to involve in different training, discussion and experience sharing forums. For example we actively work with Pan Africa Federation of Accountants (PAFA) which is established with aim to enhance the quality of professional accountancy services in Africa. In addition Ethiopia has been chosen to be the vice Chair of African Forum for Independent Accounting and Auditing Regulators (AFIAAR).

Capital: What is the purpose of good corporate governance and how are the standards of governance enforced?

Hikmet Abdella: The purpose of good corporate governance practice is to increase investor confidence by giving assurance that companies are both ethically and effectively run. The standards of governance are enforced:

Capital: What is the role of audit Committee in the establishment of good corporate governance?

Hikmet Abdella: The role of the Audit committee is:

  • To increase public confidence in credibility and objectivity of published financial information
  • To assist directors in their responsibilities in respect of financial reporting
  • To strengthen the independent position of company’s external auditors

Composed of individuals who serve on an organization’s board, an audit committee is responsible for ensuring an organization operates in an ethical environment and complies with laws and regulations.
Charged with oversight of financial reporting, risk management and internal controls, audit committees also are responsible for selecting the accounting firms that serve as their organizations’ external auditors as well as for maintaining relationships with their organization’s own internal audit team.
The essential nature of corporate governance and audit committee responsibilities normally be reinforced by low in many countries where Ethiopia currently does not have such enforcement. The luck of such codes is affecting the country in terms of attracting more investors and their confidence to invest for long term.

Capital: What are the impacts of the establishment of Capital Market on the development of accountancy profession?

Hikmet Abdella: The operation of capital market requires quality financial information. We consider this progress as opportunity for the development of accountancy profession. As and Ex-Offico board member of Ethiopian Capital Market Authority, we will work together to prepare professional accountants including auditors for such endeavors. For example, AABE is working with IFC to write Corporate Governance codes which will improve quality of financial reports and audit.
In order to play some role in attract foreign direct investment and for sustainable development, AABE will adopt International Sustainability Standards as issued by International Sustainability Standards Board (ISSB) in the near future. The standards deal with Environmental (e.g. climate), Social and Governance (ESG) disclosures.

Capital: You mentioned that Auditors are reviewed as per its regulatory mandate to monitor the External Auditors work in Ethiopia? What is the process to do so?

Hikmet Abdella: AABE is responsible to review the quality of the work of external auditors in Ethiopia and enhance the quality of financial reporting to protect the public interest. AABE, in its structure has well trained Audit quality Review team responsible to plan and execute the audit quality review as per the international standards for audit.
AABE had developed manuals and procedures for reviewing the work of the auditors. Those manuals are developed based on the requirement of the international standards and are amended when there are changes in the international standards. The standard is used to evaluate the quality of the auditors at the overall firm level and at each engagement level. The former criteria are used to evaluate the auditors in the area of leadership, Ethics, human resource, procedure to acceptance new client, Engagement performance and monitoring the audit firm as a whole. The later criteria are used to evaluate engagement of the auditor on each audit work as selected for the review.
The audit process from audit planning to the audit reporting stages will be reviewed as per each international standard on auditing relevant to sections of the working papers including each financial statement sections. If there are significant deficiencies in the working papers under review, the reviewer is required to summaries those deficiencies with standard template for further discussion with the auditor and other reviewers. Once all deficiencies are discussed and agreed with the auditor, draft report is prepared. The draft report will be sent to the auditor with action plan templet guiding the auditor on the improvement areas. Report will be finalized when the auditor replies the action plans for improvement.
The International standard on quality control (ISQC1) and international standard on auditing (ISA 220) have been used as a criterion for reviewing the quality of auditor’s work. Since 15th December 2022, The International standards are revised and updated by the new versions of international standards on quality management (ISQM 1 and ISQM 2) where there is a significant shift from ‘’quality control’’ to ‘’quality management.’’ AABE is currently working to update its manual with changes in the standards.

Capital: Can you walk me through the process of selecting Audit firms for review?

Hikmet Abdella: Audit firms are selected for quality review based on pre visit assessment questionnaires and available data on the size of the audit firm in terms of number of clients, nature and size of their audit clients and other information available at the time of selection.
The selected audit firms will be allocated into the quarterly plan for each reviewer in AABE. Each reviewer is required to plan the review process and officially agree and confirm dates with the auditor selected for review. The Reviewer communicates clearly all the required information including sample client working papers and audit reports to be ready in advance. The Reviewers required select at least two audit client’s files per audit partners. The selection of audit files considers the legal form of the client, client’s annual revenue, audit fee charged for the audit and other available information to the reviewer. I would like to highlight here that this is the first time since the private audit forms have been established in Ethiopia, that reviews are taking place so you can imagine the positive impact it is having in the market.

Capital: How do you ensure that the audit process remains independent and objective?

Hikmet Abdella: Independence is one of critical essentials to ensure the quality of any audit. In the audit quality review, independence of the auditor is reviewed under ethics section. Requirement of the ethical standards such as independence declaration by each staff and partners will be checked with documentation at the firm level and engagement level. Partners or staff members should not be involved with audits where there is conflict of interest which can impair their independence or objectivity. Auditors are expected to have policies and procedures to maintain their independence and objectivity. They have to adhere the ethical standards to identify and mitigate ethical threats to independence and objectivity. If deficiencies found in the review are related with independence, the outcome of the review will be ‘’unsatisfactory’’ with a follow up investigation by the legal department of AABE.

Treasury bond reels in over 25 billion birr

Muluken Yewondwossen
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The uptake of commercial banks to buy government’s new debt instrument, treasury bonds, on a monthly basis proves beneficial as over 25 billion birr has been amassed thus far, the Finance Ministry reveals.
Whilst disclosing the third quarter performance of the 2022/23 budget year, Ahmed Shide, Minister of Finance (MoF) in his appearance at parliament disclosed that the government introduced the financial instrument to diversify its budgetary source to fill its expenditure.
It is well known that following the deterioration of budgetary support from external partners in the last couple of years, the central government had resorted to alternative policies like using domestic sources to bridge its budget gap.
As the Finance Minister explained, despite relations with foreign partners now bouncing back owing to the peace agreement signed in Pretoria, South Africa between the government and TPLF, the external financial support is yet to improve. Ahmed further cited that the financial support and credit from the World Bank is taking the biggest portion, while there are several agreements and commitments with partners to provide financial access.
In his address, the Minister applauded the support of the World Bank and highlighted that due to dry flow from external finance, the government had reluctantly resorted to using local sources like direct advance (DA) and Treasury bill (T-bill).
Ahmed stated that in order to reduce the access to direct advance, a new reform instrument had been rolled out to mobilize resources from domestic sources, “This instrument is very promising and will aid in minimizing the use of DA from the Central Bank.”
As part of the new policy, the government through the National Bank of Ethiopia (NBE) introduced a 20 percent Treasury bond that became effective on November 1, 2022.
As per the new directive ‘MFAD/TRBO/001/2022’, all banks except the Development Bank of Ethiopia (DBE), a state owned policy bank, were set to invest 20 percent of their loan portfolio in Treasury bonds, for their loans and advances.
The treasury bonds were issued to each bank on a monthly basis having a maturity period of five years with each bond having two percentage points higher than the minimum saving deposit rate which is currently at seven percent.
About three years ago, the government took a firm decision to do away with taking DA, which was one of the key elements engulfing inflation. Government planned to do by capitalizing on another instruments like T-bills to fill its budget gap. To attain the target, the T-bill market was revised to become market driven which then attracted significant players with huge amounts of finance that propelled the government to desist in using direct advance.
However, when the northern Ethiopia conflict began in November 2020, a ripple effect in the form of pressure from foreign development partners occurred which led to suspension of financial promises. The government then was derailed and ended up taking huge amounts of DA from the central bank, particularly in the past and current budget year.
At the same time, in the current budget year, the government has started using the Treasury bond as an additional alternative.
The Minister said that in the stated period, 194.6 billion birr was sourced from domestic financial instruments; DA, T-bill and treasury bond to cover the budget gap.
He said that the new instrument, Treasury bond, has now amassed 25.6 billion birr since becoming effective.
In the budget year, it was expected that USD 2.5 billion would be disbursed from development partners through loans and donations. However, only 70 percent or USD 1.8 billion was met with a breakdown of; USD 1.3 billion in loans and USD 426.3 million in grants.
“The main reason for this stems from the pressure of partners in connection with the northern Ethiopia conflict,” Ahmed said.
He added that in the budget year, about 7.7 billion birr in direct budget support was expected from development partners, but no actual flow has been registered thus far.
In the first nine months of the budget year, 29 billion birr has been paid as foreign debt to which the Minister disclosed that it covered the whole commitment that was expected to be paid. Similarly, in the stated period, the government had targeted to settle 59.4 billion birr for domestic debt, while the actual performance was 33.3 billion birr or 56 percent of the target, “The main reason for the reduction of the domestic debt payment is because some obligations were pushed to long term bonds.”
In the reporting period, the government introduced a fiscal deficit management to regulate domestic debt mainly for the conversion of T-bills to long term government bonds.
According to the Minister, in the budget year, public projects mainly roads that are projected to consume 18.2 billion birr have been transferred to the coming budget year on an aim to mitigate the public expenditure constrains.

Gov’t sets record straight on Forex liberalization, devaluation

Metasebia Teshome
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Ministry of Finance strongly signals that there are no plans of forex exchange liberalization or devaluation at the moment.
“No considerations are being made to liberalize foreign exchange or devaluation at the moment,” underlined, Ahmed Shide, Minister of Finance, as the Nation engages with the International Monetary Fund (IMF) and World Bank to improve the exchange-rate system.
“Forex liberalization is important down the line,” said the Minister, mid this week speaking at Big 5 construct Ethiopia event adding, “There are diverse experiences around countries regarding forex exchange rate arrangement. There is no plan to immediately go to forex liberalization as we need to take diverse global experiences to tailor it to our own national context both politically and economically.”
It is well know by now that the foreign-currency shortages have plagued the country and led the authorities to restrict allocations to private industry. Foreign currency deficit has led to a thriving black market exchange, fuelling already-problematic illicit financial flows in the country. The black market limits the inflow and facilitates the outflow of legitimate foreign currency.
The IMF specialists, who paid visit to Ethiopia on April 7, 2023, avowed that they had decided to support Ethiopia’s second Homegrown Economic Reform (HGER 2.0) which stated that the exchange market would be gradually liberalized in the coming three years. Also there are rumors that the government is in a bid to fundamentally reform the exchange regime that leads to the unification of the official and parallel markets soon.
The country has an official exchange that’s currently at about 54 per dollar with little changes since the start of the year; contrast to the parallel rate that’s almost double.
“We need to reform the Forex exchange arrangement regime as part of the home grown economic plan (HGER),” sensitized the Minister.
Efforts are also ongoing from the government’s side to restore expected support to the economy and HGER II reform program which is expected to be introduced in the coming couple of months.
Last month, Ethiopian macroeconomic policy makers were engaged in a series of discussions with the IMF and World Bank.
“The Central Bank is working on reforming strategies as part of the HGER agenda and we’re also in discussion with international partners like IMF and World Bank and we will continue with our discussion, but there is no immediate consideration either to liberalize forex market or devaluation,” maintained the Minister with regards to strategies being deployed.
“To reflect critically down the line, the whole package of economic reform is more important and it is not only about forex but also the whole micro economy issues that need to be addressed and synchronized in a way that it will contribute significantly to coordinate to the balance including that of forex,” Ahmed elaborated.
“As part of sustaining the economy, the government is also opening the closed market,” said the minister indicating that the banking sector will be open within couple of months.
Ethiopia’s foreign currency shortage is exacerbated by ongoing instability. Massive government spending on the war resulted in a foreign exchange reserve outflow of US$307 million during the 2020/21 fiscal year. The conflict obstructed foreign currency inflow by limiting tourism and foreign direct investment. It also affected Ethiopia’s access to hard currencies by triggering economic sanctions and the suspension of aid and international loans.
As experts reflect, the Ethiopian government is expected to come up with further commitments particularly in political issues so as to get support from the international organizations, which are dominated by western allies.
As reserves dwindled over the course of 2022, the government has been applying administrative measures to control foreign exchange flows by foreign exchange rationing, which has became even more acute in 2022.
On its latest sub-Saharan Africa Regional economic outlook, IMF emphasized depreciation of sub-Saharan African currencies including Ethiopia against the US dollar, pushing up public debt stock, and aggravating inflation. IMF said weaker currencies make the fight to curb inflation harder given sub-Saharan Africa’s dependence on imports. According to the report countries in the region have recorded an average of 8 percent depreciation of their currencies in 2022 exacerbating the financing crisis by increasing the external debt service burden.
On the implications, the IMF said when currencies weaken against the US dollar, local prices rise, as much of what people buy, including essential items like food, and imports.
The financial institution said more than two-thirds of imports are priced in US dollars for most countries in the region.
Policymakers can take several steps to mitigate possible adverse impacts on the economy as a result of the necessary currency adjustments. In countries where inflation is aggravated by the exchange rate pass through, tighter monetary policy are said to help alleviate the pressure by keeping inflation expectations in check and stem capital outflows while attracting inflows. Where fiscal imbalances are key drivers of exchange rate pressures, fiscal consolidation are said to help to rein in external imbalances and contain the increase in debt related to currency depreciation.

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