metadata: authors: 0: author: Foster,Vivien
1: author: Morella,Elvira
count: Ethiopia
docna: 0: docna: Ethiopia's infrastructure: a
            continental perspective
docty: Policy Research Working Paper
subtopic: Sanitation and Sewerage,Engineering,Roads & Highways,Energy Policies & Economics,Water and Human Health,Hydrology,Water Supply and Sanitation Economics,Sanitary Environmental Engineering,Small Private Water Supply Providers,Environmental Engineering,Health and Sanitation,Transport Services,Town Water Supply and Sanitation
teratopic: Transport,Public Sector Development,Infrastructure Economics and Finance,Water Supply and Sanitation,Finance and Financial Sector Development
abstracts: cdata!: Infrastructure contributed 0.6
            percentage points to Ethiopia's annual per capita GDP
            growth over the last decade. Raising the country's
            infrastructure endowment to that of the region's
            middle-income countries could add an additional 3 percentage
            points to infrastructure's contribution to growth.
            Ethiopia's infrastructure successes include developing
            Ethiopia Airlines, a leading regional carrier; upgrading its
            network of trunk roads; and rapidly expanding access to
            water and sanitation.The country's greatest
            infrastructure challenge lies in the power sector, where a
            further 8,700 megawatts of generating plant are needed over
            the next decade, implying a doubling of current capacity.
            The transport sector faces the challenges of low levels of
            rural accessibility and inadequate road maintenance.
            Ethiopias ICT sector currently suffers from a poor
            institutional and regulatory framework. Addressing
            Ethiopia's infrastructure deficit will require a
            sustained annual expenditure of $5.1 billion over the next
            decade. The power sector alone requires $3.3 billion
            annually, with $1 billion needed to facilitate regional
            power trading. That level of spending represents 40 percent
            of the country's GDP and a tripling of the $1.3 billion
            spent annually in the mid-2000s. As of 2006, there was an
            annual funding gap of $3.5 billion. Improving road
            maintenance, removing inefficiencies in power (notably
            underpricing), and privatizing ICT services could shrink the
            gap. But Ethiopia needs a significant increase in its
            already proportionally high infrastructure funding and
            careful handling of public and private investments if it is
            to reach its infrastructure targets within a reasonable time.
geo_reg_key: 517191
repnme: repnme: Ethiopia's infrastructure: a
            continental perspective
display_title: Ethiopia's infrastructure: a
            continental perspective
listing_relative_url: /research/2011/03/13921850/ethiopias-infrastructure-continental-perspective
topicv3: Sanitation m1326453 2000,Water m1326522 137,Transport m1326661 135,Power and Electricity Sector m1327094 515,Road Maintenance m1505354 4031
publishtoextweb_dt: 2011-03-01T00:00:00Z
historic_topic: Transport,Public Sector Development,Infrastructure Economics and Finance,Water Supply and Sanitation,Finance and Financial Sector Development
no_of_pages: 37
author_keys: 0: author_key: 452278
1: author_key: 629037
model_extractions: WPS5595 Policy Research Working Paper 5595 Ethiopia’s Infrastructure A Continental Perspective _Vivien Foster Elvira Morella_ The World Bank Africa Region Sustainable Development Department March 2011
Policy Research Working Paper 5595

# **Abstract**

Infrastructure contributed 0.6 percentage points to Ethiopia’s annual per capita GDP growth over the last decade. Raising the country’s infrastructure endowment to that of the region’s middle-income countries could add an additional 3 percentage points to infrastructure’s contribution to growth.

Ethiopia’s infrastructure successes include developing Ethiopia Airlines, a leading regional carrier; upgrading its network of trunk roads; and rapidly expanding access to water and sanitation.

The country’s greatest infrastructure challenge lies in the power sector, where a further 8,700 megawatts of generating plant are needed over the next decade, implying a doubling of current capacity. The transport sector faces the challenges of low levels of rural accessibility and inadequate road maintenance. Ethiopia’s ICT sector currently suffers from a poor institutional and regulatory framework.

Addressing Ethiopia’s infrastructure deficit will require a sustained annual expenditure of $5.1 billion over the next decade. The power sector alone requires $3.3 billion annually, with $1 billion needed to facilitate regional power trading. That level of spending represents 40 percent of the country’s GDP and a tripling of the $1.3 billion spent annually in the mid-2000s.

As of 2006, there was an annual funding gap of $3.5 billion. Improving road maintenance, removing inefficiencies in power (notably underpricing), and privatizing ICT services could shrink the gap. But Ethiopia needs a significant increase in its already proportionally high infrastructure funding and careful handling of public and private investments if it is to reach its infrastructure targets within a reasonable time.

This paper is a product of the Sustainable Development Department, Africa Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at vfoster@worldbank.org and/or cbricenogarmendi@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
POLICY RESEARCH WORKING PAPER NO. XXXX

# Ethiopia’s Infrastructure: A Continental Perspective

## _Vivien Foster and Elvira Morella_

### **Acknowledgments**

This paper draws upon a wide range of contributions from sector specialists from the Africa Infrastructure Country Diagnostic Team; notably, Dick Bullock on railways, Mike Mundy on ports, Heinrich Bofinger on air transport, Maria Shkaratan on power, Elvira Morella on water and sanitation, Michael Minges on information and communication technologies, Nataliya Pushak on public expenditure, and Alvaro Federico Barra on spatial analysis.

The paper is based on data collected by local consultants and benefited greatly from feedback provided by colleagues in the relevant World Bank country teams; notably Kenichi Ohashi (country director), Jeeva Perumalpillai-Essex (sector leader), Yoshimichi Kawasumi (transport), Luiz Maurer (power), Mark Williams (ICT), and Yemarshaet Yemane (local consultant).
# Contents

|**The continental perspective**|**2**|
|---|---|
|**Why infrastructure matters**|**2**|
|**The state of Ethiopia’s infrastructure**|**4**|
|Surface transport|6|
|Air transport|8|
|Water supply and sanitation|9|
|Power|11|
|Information and communication technologies|15|
|**Financing Ethiopia’s infrastructure**|**18**|
|How much more can be done with existing resources?|22|
|Reducing operating inefficiencies|25|
|Annual funding gap|26|
|What else can be done?|27|
|**Bibliography**|**28**|
|General|28|
|Growth|28|
|Financing|28|
|Information and communication technologies|28|
|Irrigation|29|
|Power|29|
|Transport|29|
|Water supply and sanitation|30|
|Other|30|
|**About AICD and its country reports**|**32**|

iii
nfrastructure contributed 0.6 percentage points to Ethiopia’s annual per capita GDP growth over the last decade. Raising the country’s infrastructure endowment level to that of the region’s middleIincome countries could lift annual growth by an additional 3 percentage points. This would represent a significant boost over the growth performance of the mid-2000s, which averaged around 5 percent.

In recent years, Ethiopia has made significant progress in infrastructure, and its infrastructure indicators compare relatively well with low-income country peers. The country developed Ethiopia Airlines (now one of the three main African airlines) and associated regional air transport hubs. It has launched an ambitious investment program to upgrade its network of trunk roads and is establishing a modern funding mechanism for road maintenance. Access to water and sanitation is expanding rapidly (from a very low base) thanks to judicious concentration on intermediate options such as traditional latrines, wells, boreholes and standposts.

The country’s greatest infrastructure challenge lies in the power sector, where a further 8,700 megawatts of generating plant will be needed over the next decade—a doubling of current capacity. In transport, the key challenge is to improve Ethiopia’s exceptionally low levels of rural accessibility and ensure that recent investments in the road network receive adequate maintenance. In information and communications technology (ICT), Ethiopia lags in modernizing its institutional and regulatory framework. By awarding a second mobile license, the country could rapidly expand its mobile penetration rates and raise an estimated $0.5 billion in revenue.

Addressing Ethiopia’s infrastructure deficit will require a sustained annual expenditure of $5.1 billion over the next decade. This level of investment is well beyond what the country can afford, however, as it represents more than 40 percent of GDP and is three times the already impressive infrastructure spending of around $1.3 billion that the country managed during the mid-2000s. The power sector alone would require $3.3 billion per year to develop, of which $1 billion would be designated for investments needed to permit regional trade in power and exploit the country’s comparative advantage in the generation of electrical power.

Ethiopia faces one of the more challenging infrastructure situations of any country in Africa. The spending needed to upgrade the country’s infrastructure platform and realize its power export potential is very large relative to the size of the economy. As of 2006, the gap between available and needed funds was $3.5 billion per year. While there are some inefficiencies in the system (estimated at around $0.5 billion per year), Ethiopia’s infrastructure is relatively efficient, compared with that of other countries. Savings could be achieved by improving road maintenance and, to a lesser extent, by addressing the underpricing of power. But even if all inefficiencies were eliminated, a huge annual funding gap of $3 billion would remain. The only likely way to close that gap will be to allow the country more time to reach its infrastructure targets and to prioritize public investments in the interim. There is also some potential for reallocating public resources away from the ICT sector and allowing these assets to be developed by private investors.

Unless the funding gap is closed, the development of a sound infrastructure platform for the country could be unacceptably delayed by up to 30 years.
ETHIOPIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

# The continental perspective

The Africa Infrastructure Country Diagnostic (AICD) has collected and analyzed extensive infrastructure data for more than 40 Sub-Saharan countries, including Ethiopia. The results are presented in reports on various infrastructure sectors—ICT, irrigation, power, transport, water and sanitation—and policy areas, including investment needs, fiscal costs, and sector performance.

This country report presents the key AICD findings for Ethiopia. This will allow its infrastructure situation to be benchmarked against that of other African nations that, like Ethiopia, are low-income countries, with particular emphasis on immediate regional neighbors in East Africa.

Several methodological issues should be borne in mind. First, the cross country nature of the data collection creates an inevitable time lag. The period covered by the AICD runs from 2001 to 2006. Most technical data are presented for 2006 (or the most recent year available), while financial data typically are averaged over the available period to smooth out the effect of short term fluctuations. Second, cross country comparisons require standardization of the indicators and the analysis to ensure consistency. Therefore, some of the indicators may be slightly different from those that are routinely reported and discussed at the country level.

# Why infrastructure matters

During the 2000s, Ethiopia’s annual economic growth has averaged 4.8 percent, compared with only 0.5 percent in the previous decade. Notwithstanding this improvement, current annual growth levels still fall short of the sustained 7 percent needed to meet the Millennium Development Goals. Improved structural and stabilization policies generated an estimated 4.2 percent of Ethiopia’s improved per capita growth performance during the 2000s, and improvements in the country’s infrastructure platform over that period contributed up to 0.6 percentage points to growth. This was due almost entirely to the introduction of mobile telephony in Ethiopia. Simulations suggest that if Ethiopia’s infrastructure platform could be improved to the level of the African leader, Mauritius, annual per capita growth rates could increase by 3.8 percent. This potential impact would come equally from improvements to transport, power, and ICT infrastructure (figure 1).

Evidence from enterprise surveys suggests that infrastructure constraints are responsible for an estimated 50 percent of the productivity handicap faced by Ethiopian firms. The remainder is caused by governance, red tape, and financing constraints. Power is by far the infrastructure constraint that weighs most heavily on Ethiopian firms (figure 2).

2
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ETHIOPIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE The least developed infrastructure links are those to the southeast of the capital. Ethiopia’s infrastructure networks are largely isolated from those of neighboring countries. On the transport side, a reasonable road corridor from Addis Ababa to neighboring Djibouti provides access to landlocked Ethiopia’s major port. There is also a rail corridor, although it is currently idle. Otherwise, Ethiopia’s infrastructure networks provide no meaningful connectivity with neighboring Kenya, Uganda, Sudan, and Eritrea.

This report begins by reviewing the main achievements and challenges in each of Ethiopia’s major infrastructure sectors, with the key findings summarized below (table 1). Thereafter, attention will turn to the problem of how to finance Ethiopia’s outstanding infrastructure needs.

**Table 1. Overview of achievements and challenges in Ethiopia’s infrastructure sectors**

||Achievements|Challenges|
|---|---|---|
|Air transport|One of top three African carriers<br>Major regional air hub|Improving air traffic control at Addis Ababa Bole International Airport<br>Developing domestic air transportation|
|ICT||Modernize regulatory framework<br>Award a second mobile license<br>Rebalance ICT tariffs in line with costs|
|Power||Undertake huge investment program<br>Address underpricing of power|
|Surface transport|Major investment in trunk network<br>Sound Road Fund in place|Improve rural accessibility<br>Concession railway|
|Water resources||Develop additional water storage<br>Develop viable areas for irrigation|
|Water and sanitation|Rapid expansion of coverage|Address utility inefficiencies|

# Surface transport

## **Achievements**

The length of the trunk network is more than adequate. Ethiopia’s road density indicators look relatively low by some standards, but the trunk network provides basic regional and national connectivity. It links the capital to the coast as well as the international border crossings and the internal provincial capitals.

In recent years, Ethiopia has dedicated three percent of GDP to road investments. This is one of the highest shares in Africa, although the absolute value of this spending (approximately $5 per capita annually) is comparable to what other East African countries are investing. The investment program focuses mainly on rehabilitation, upgrading, and widening of the trunk network. These efforts have brought the quality of Ethiopia’s trunk network level with other low-income countries in Africa: 88 percent of the paved network and 60 percent of the unpaved network is in good or fair condition (table 2).

Ethiopia has established a sound system for funding road maintenance. The country has made great strides with institutional reforms. Its Road Fund meets most of the good practice design criteria. Yet the fuel levy of around $0.08 per liter (most of which takes the form of earmarked VAT transfers) is only about half the $0.16 per liter that would be needed to adequately finance the country’s road maintenance needs (figure 4). Ethiopia’s relatively high required fuel levy reflects the country’s low traffic volume.

6
<!-- Start of picture text --> Ghana<br>Tanzania<br>Kenya<br>Ethiopia<br>0 5 10 15 20 25 30 35<br>US cents per liter<br>@ optimal levy for maintenance plus rehabilitatio<br>0 optimal levy for maintenance<br>B actual fuel levy<br>implicit fuel levy<br><!-- End of picture text -->
ETHIOPIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE other neighboring countries. The government of Ethiopia plans a major investment program to upgrade the rural road network once work on the trunk network has been completed. In rolling out this program, it will be important to prioritize areas with high agricultural potential to improve food security.

Ethiopia’s rail corridor needs major rehabilitation. The rail corridor between Addis Ababa and the Port of Djibouti has deteriorated and fallen into disuse. Plans for a major rehabilitation program include a new railway concession. More than half of Sub-Saharan Africa’s rail corridors have been awarded as concessions in recent years, and the clear lessons emerging from this experience may be relevant to Ethiopia. On the whole, rail concessions have been effective at improving operational performance and boosting traffic. Nevertheless, due to intense competition with the road sector and relatively low volumes of traffic overall, they have generally failed to raise adequate revenue to finance major rehabilitation programs without substantial public sector support. It is therefore important for governments to go into rail concessions with realistic expectations as to what they can achieve and to identify additional sources of public financing for major investments.

As a landlocked country, Ethiopia depends on the Port of Djibouti to handle its imports and exports and will benefit from improvements there. The port is both a major transit port for Ethiopian cargo and a potential major container transshipment hub in East Africa, and it has attracted a _whole port concession_ that includes substantial greenfield development commitments. DP World, the Dubai-based international terminal operator, has a 20-year agreement to manage and invest in the port. This has made the port much more efficient, and the main components are in place to deliver new port capacity. A a new oil terminal is in operation, and a new container terminal opened for business in 2009. With the injection of foreign expertise and resources, Djibouti has, since the beginning of the millennium, markedly improved the port’s operations and competitive position and has mapped out its future development.

# Air transport

## **Achievements**

Ethiopia is a regional leader in air transportation. Ethiopia Airlines, one of Africa’s three top international carriers, has an extensive network across the continent and a safety record up to international standards. This public company has been successful because it has been allowed to operate at arm’s length from the government and in line with sound commercial principles. Linked to the ascendancy of the national airline, Addis Ababa Bole International Airport has become one of the three main international gateways for Sub-Saharan Africa.

## **Challenges**

There is scope for improving air traffic control at Addis Ababa Bole International Airport. The land and airside infrastructure at the airport is of good quality and generally adequate to handle current traffic levels and anticipated growth. Air traffic control is its greatest weakness, as there is no air traffic surveillance technology in place. Safety in air transport would greatly benefit if aircrafts were equipped with satellite-based technologies such as the ADS-B (Automatic Dependent Surveillance – Broadcast), which allow an aircraft's precise location to be determined .

8
ETHIOPIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE The limited development of domestic air transport is striking. In contrast to Ethiopia Airlines’ highly developed international network, domestic air transport plays a relatively minor role. As tourism becomes more important for the country, it may be necessary to devote greater attention to developing domestic services.

# Water supply and sanitation

## **Achievements**

From a very low base, access to improved water and sanitation is rising rapidly. The majority of Ethiopia’s population relies on unimproved water and sanitation; 68 percent use surface water and 62 percent practice open defecation (table 3). These rates are almost twice as high as the benchmark level for low-income countries in Africa and represent a major public health risk. The deficit on the water side is largely explained by very low reliance on boreholes (10 percent in Ethiopia compared with 38 percent for the benchmark). The deficit on the sanitation side is largely explained by low coverage of traditional latrines (35 percent in Ethiopia compared with 48 percent for the benchmark).

**Table 3. Benchmarking access to water and sanitation and water utility performance**

||Unit|Ethiopia|Low-income countries|
|---|---|---|---|
|Access to piped water|% pop|6.0|10.1|
|Access to stand posts|% pop|15.8|16.1|
|Access to wells/boreholes|% pop|9.9|38.3|
|Access to surface water|% pop|67.9|33.8|
|Access to septic tanks|% pop|2.1|5.3|
|Access to improved latrines|% pop|0.9|9.3|
|Access to traditional latrines|% pop|34.7|47.9|
|No sanitation|% pop|62.2|37.1|
|Domestic water consumption|liter/capita/day|29.8|72.4|
|Revenue collection|% sales|97.0|96.0|
|Distribution losses|% production|22.0|22.1|
|Cost recovery|% total costs|47.0|56.0|
|Total hidden costs as % of revenue|%|132.7|121.2|
|Tariff (US cents per m3)|Ethiopia|Scarce water resources|Other developing regions|
|Residential tariff|23.41|60.26|30 – 600|
|Non-residential tariff|42.22|120.74|. .|

_Source_ : Banerjee and others 2008; and Morella and others 2008.

Rural water reforms have contributed to success in expanding improved water. Approximately 2.4 percent of Ethiopia’s population is gaining access to some form of improved water every year, and reliance on surface water is in decline (figure 5). This stands in contrast to the rest of Sub-Saharan Africa, where access to improved water is largely stagnant, and reliance on surface water is growing. Some African countries have achieved success in this area by implementing a combination of reforms in rural water provision. Ethiopia has adopted some of these reforms including an explicit rural water policy, a dedicated central budget funding, and a cost recovery policy for rural water. But the country lacks some 9
<!-- Start of picture text --> 2.0<br>na<br>a”<br>o<br>e<br>eS<br>As]<br>‘=|<br>5<br>S 1.0<br>5<br>s<br>s<br>a.<br>i)<br>a<br>—<br>)<br>&<br>&<br>2 0.0<br>=<br>i]<br>—<br>e<br>ic<br>5<br>=<br>r=<br>CS<br>-1.0<br>piped supply public standposts wells/boreholes surface water<br>@Ethiopia OSub-Saharan Africa<br><!-- End of picture text -->

<!-- Start of picture text --> 4.0<br>na<br>an<br>o<br>5S 3.0<br>As)<br>s<br>=<br>=<br>= 2.0<br>i<br>s<br>= 1.0<br>i)<br>2.<br>—<br>)<br>S 0.0<br>&<br>)<br>=E -1.0<br>s<br>eo<br>i}<br>Z -2.0<br>rH<br>As)<br>-3.0<br>septic tanks improved latrines _ traditional latrines no sanitation<br>@Ethiopia OSub-Saharan Africa<br><!-- End of picture text -->
<!-- Start of picture text --> Nigeria<br>Ethiopia<br>Tanzania<br>Kenya<br>Uganda<br>South Africa<br>Cape Verde<br>0 50 100 150 200 250 300 350 400<br>% of revenues<br><!-- End of picture text -->
ETHIOPIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

**Table 4. Ethiopia has the potential to export significant amounts of power**

|||Net Revenue<br>||Required Inves<br>|tments<br>|
|---|---|---|---|---|---|
||Exports (TWh pa)|($m pa)|(% GDP)|($m pa)|(% GDP)|
|DRC|51.9|519|6.1|749|8.8|
|**Ethiopia**|**26.3**|**263**|**2.0**|**1,003**|**7.5**|
|Guinea|17.4|174|5.2|786|23.7|
|Sudan|13.1|131|0.3|1,032|2.7|
|Cameroon|6.8|68|0.4|267|1.5|
|Mozambique|5.9|59|0.8|216|2.8|

_Source:_ Rosnes and Vennemo 2008. Note: net revenue based on illustrative profit margin of $0.01 per kWh.

# **Challenges**

It will take time for Ethiopia to develop its substantial hydropower capacity. Ethiopia has one of the most underdeveloped power systems in Sub-Saharan Africa. Its installed generation capacity is less than 10 megawatts per million of population, which is less than half of the (already low) low-income country benchmark (table 5). Power consumption, at 33 kilowatt-hours per person per year, is about one-third of the (also already low) low-income country benchmark. Access to electricity at 12 percent is below the already low benchmark for low-income countries in Africa; although urban access to electricity is actually exceptionally high at 86 percent, the rural majority of the population has almost no access to power. Ambitious plans exist to expand electrification over the coming years.

**Table 5. Benchmarking power infrastructure and capacity, access, and utility performance**

||Unit|Ethiopia|Low-income countries|
|---|---|---|---|
|Installed power generation capacity|MW/mil. people|9.8|24.4|
|Power consumption|kWh/capita|33.6|99.5|
|Power outages|day/year|44.2|40.6|
|Firms’ reliance on own generator|% consumption|6.9|17.7|
|Firms’ value lost due to power outages|% sales|0.9|6.1|
|Access to electricity|% population|12.0|15.4|
|Urban access to electricity|% population|86.0|71.0|
|Rural access to electricity|% population|2.0|12.0|
|Growth access to electricity|% population/year|0.4|1.4|
|Revenue collection|% billings|96.5|88.2|
|Distribution losses|% production|22.0|22.1|
|Cost recovery|% total cost|46.0|90.0|
|Total hidden costs as % of revenue|%|132.7|121.2|
|Tariff (US cents per kWh)|Ethiopia|Predominantly hydro<br>generation|Other developing regions|
|Power tariff (residential at 75 kWh)|4.07|10.27||
|Power tariff (commercial at 900 kWh)|8.26|11.73|5.0 – 10.0|
|Power tariff (industrial at 50,000 kWh)|4.76|11.39||

_Source_ : Eberhard and others 2008.

12
<!-- Start of picture text --> Congo, Dem. Rep. of<br>Tanzania<br>Ethiopia<br>Uganda<br>Kenya<br>South Africa<br>0 100 200 300 400 500 600<br>% of revenues<br><!-- End of picture text -->
ETHIOPIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

# **Water resources**

# **Challenges**

Closely related to the development of hydro-power is the management of water resources. Ethiopia suffers from exceptionally high hydrological variability, which is a major drag on the economy. Frequent droughts and floods seriously affect the agriculture sector’s productivity and on average cost the economy about one percentage point of GDP growth per year.

Ethiopia will need to invest substantially in storage capacity to achieve water security. The country’s current storage levels are only 47 cubic meters per capita, compared with 750 cubic meters per capita in South Africa. The exact amount of storage needed to achieve water security is not yet known, but the costs are likely to be high. For example, doubling current storage capacity to 94 cubic meters per capita would require an estimated $2.4 billion in investment. The best way to develop water storage is through multipurpose schemes, usually financially anchored in hydropower generation. Since Ethiopia’s power sector investment plans call for a major development of new hydro capacity, there is an opportunity to develop multipurpose storage that serves the needs of the power sector, provides for other uses such as irrigation, and is managed in such a way as to attenuate extreme hydrological events, such as droughts and floods.

Doubling the country’s current irrigated area is economically viable. At present, Ethiopia only irrigates around 290,000 hectares of agricultural land, barely three percent of the country’s cultivated area (recall figure 3d). Simulations suggest that it is already economically viable to develop a further 347,000 hectares of land for irrigation, which would yield an internal rate of return in excess of 12 percent (see figure 8). Of this total area, 191,000 hectares lie downstream of existing and future dams that are not yet being exploited for irrigation. The irrigation scheme could be achieved with an investment of $373 million in the extension of the water distribution infrastructure to serve land lying downstream from these dams. A further 156,000 hectares appear viable for the development of small scale irrigation schemes, at a total cost of $560 million. These areas show agronomical potential and are sufficiently close to road networks and other basic infrastructure to ensure that the resulting production increases could reach the market. Figure 3d is a graphic representation of the areas viable for irrigation.

14
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ETHIOPIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE Prices of ICT services in Ethiopia are also very low—except for international calls—and much lower than in the rest of Africa. For example, a standardized monthly basket of mobile telephone services costs $3.37 in Ethiopia compared with the African benchmark of $11.12. Such low tariffs for domestic mobile (and fixed) services seem to be supported by cross subsidies from international call charges, which are substantially higher than the African benchmark. This is because ICT tariffs in Ethiopia have not yet been rebalanced to bring them closer into line with cost structures, a move that most African countries have undertaken to prepare the market for competition. Surprisingly, the low cost of services does not seem to have promoted wider access to these services in Ethiopia.

Ethiopia’s central challenge is to introduce competition to the ICT sector. The Ethiopian market could potentially experience the same explosive growth of GSM coverage as has taken place across Africa. To make the transition, the country needs to modernize the sector’s institutional and regulatory framework, which is among the least developed in Africa. Ethiopia scores only 28 percent on an AICD index of institutional reform that captures the extent to which countries have modernized in terms of sector reform, regulatory framework and governance of state-owned ICT incumbents, compared with around 50 percent for the median African country (figure 10). The key step would be to license a second mobile operator in the market, and eventually additional ones. In addition to accelerating the expansion of GSM coverage, such a move has the potential to raise significant fiscal resources for the government—based on the experience if the 2000s in Africa, the license could potentially raise at least $0.5 billion.

**Table 6. Benchmarking ICT infrastructure**

||Unit|**Ethiopia**|Low-income countries|
|---|---|---|---|
|GSM coverage|% population|**9.9**|48.2|
|International bandwidth|Mbps/capita|**0.3**|5.8|
|Internet|subscribers/100 people|**0.0**|0.1|
|Landline|subscribers/100 people|**1.0**|0.8|
|Mobile phone|subscribers/100 people|**1.6**|15.1|
|**Prices**($)|**Ethiopia**|Without submarine cable|Other developing regions|
|Price of monthly mobile basket|**3.37**|11.12|9.9|
|Price of monthly fixed line basket|**2.00**|13.58|—|
|Price of 20-hour Internet package|**14.85**|67.95|11.0|
|Price of a 3-minute call to United States|**3.33**|2.59|2.0|
|Price of inter-Africa telephone calls, mean|**1.27**|0.72|n.a.|

_Source_ : Minges and others 2008. — = Data not available. n.a. = Not applicable.

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ETHIOPIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE while developing its power export potential, which alone accounts for $1 billion of these annual needs. While small relative to power needs, transport and WSS needs are high in absolute terms: each amounts to almost $1 billion annually. In the power sector, the need for investment is particularly high, at $3.1 billion. In the WSS sector, the need for operations and maintenance spending is particularly high, at $355 million. ICT sector spending needs are comparatively modest (table 8).

**Table 8. Indicative infrastructure spending needs in Ethiopia**

|US$ millions per year<br>|<br>||
|---|---|---|
|Sector|Capital expenditure<br>Operation and maintenance|Total spending|
|ICT|72<br>139|211|
|Power|3,105<br>276|3,380|
|Transport|248<br>149|398|
|WSS|846<br>355|1,201|
|Irrigation|6<br>—|6|
|Total|4,277<br>919|5,196|

Source: Briceño-Garmendia and others 2008.

Note: Figures refer to investment except public sector, which also includes recurrent spending. Public sector covers general government and nonfinancial enterprises.

Ethiopia’s total spending requirement is among the highest in Sub-Saharan Africa and is huge relative to the size of Ethiopia’s economy: an untenable 42 percent of the country’s GDP. This is one of the largest infrastructure spending burdens found for any African country in the study (figure 11).

Ethiopia currently allocates $1.3 billion per year to meeting its infrastructure needs. Capital expenditure absorbs 60 percent of total spending (table 9). Operating expenditure is entirely covered from budgetary resources and charges contributed by infrastructure users. Overseas Development Assistance accounts for 40 percent of total capital expenditure and is the largest source of external finance for infrastructure investment in Ethiopia. From the non-OECD financiers, China is an increasingly important source of external finance and currently contributes 20 percent of total capital expenditure. Private participation is conspicuously absent, particularly in ICT, where the absence of a liberalized regulatory framework and competitive market structure hampers provider diversification. Households play a significant role in funding on-site sanitation.

19
<!-- Start of picture text --> Sub-Saharan Africa<br>fragile low-income countries<br>COMESA<br>nonfragile low-income countries<br>resourch-rich countries<br>middle-income countries<br>Congo, Dem. Rep. of<br>Ethiopia<br>Kenya<br>Tanzania<br>Sudan<br>Uganda<br>South Africa<br>Cape Verde<br>0 10 20 30 40 50 60 70 80<br>% of GDP<br>capital expenditure Ooperations and maintenance<br><!-- End of picture text -->
<!-- Start of picture text --> Sub-Saharan Africa po<br>nonfragile low-income countries po<br>COMESA po<br>middle-income countries jp<br>fragile low-income countries po<br>resource-rich countries Po<br>Ethiopia PY<br>Kenya Po<br>Tanzania Po<br>Uganda PO<br>Cape Verde PE<br>South Africa pd<br>Congo, Dem. Rep. of po<br>0 2 4 6 8 10 12<br>% of GDP<br>capital expenditure Ooperations and maintenance<br><!-- End of picture text -->
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<!-- Start of picture text --> power<br>0.7<br>0.6<br>ou 05<br>S 04<br>S 93<br>*x<br>92<br>0.1<br>0.0<br>Ethiopia large utility<br>Munaccounted losses Ounderpricing collection inefficiencies<br><!-- End of picture text --> <!-- Start of picture text --> water<br>0.6<br>a 04<br>S<br>S<br>x<br>S 0.2<br>0.0<br>Ethiopia large utility<br>Munaccounted losses Ounderpricing collection inefficiencies<br><!-- End of picture text -->
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ETHIOPIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

**Table 11. Potential gains from greater efficiency**

<u>US$ million per year</u>

||ICT|Power|Transport|Water|Irrigation|Total|
|---|---|---|---|---|---|---|
|Underrecovery of costs|--|42|37|23|--|102|
|Overstaffing|9|--|--|--|--|9|
|Distribution losses|--|24|--|9|--|33|
|Under collection|--|15|28|1|--|44|
|Under maintenance|0|0|263|0|0|263|
|Total|9|40|290|9|0|451|

_Source_ : Briceño-Garmendia and others 2008.

# Annual funding gap

Ethiopia’s infrastructure funding gap amounts to $3.5 billion per year (or about 26 percent of GDP) across various sectors (table 12). Over 77 percent ($2.9 billion) of the infrastructure funding gap is in the power sector, much of which is associated with the development of the generation capacity that Ethiopia would need to become a power exporter (figure 19). The rest of the gap is related to water and sanitation, where an additional $809 million per year is needed to meet the Millennium Development Goals. No financing gap was found for transport.

**Table 12. Funding gaps by sector**

<u>US$ millions per year</u>

||ICT|Power|Transport|WSS|Irrigation|Total|
|---|---|---|---|---|---|---|
|Needs|(211)|(3,380)|(398)|(1,201)|(6)|(5,196)|
|Spending|126|476|301|383|—|1,286|
|Potential efficiency gains|9|40|290|9|0|451|
|(GAP) or surplus|(76)|(2,864)|193|(809)|(6)|(3,459)|
|Reallocation potential|149|142|196|0|—|486|

— = Data not available.

Despite the overall shortfall, about $486 million a year is spent above the estimated requirements to meet the identified infrastructure needs in some sectors. First, Ethiopia’s large road investment program, which is an effort to catch up with the investment backlog in roads, goes beyond what the country might need to do in the steady state, once it has caught-up with its historic road rehabilitation and construction backlog. Second, Ethiopia is allocating a much higher level of public spending for ICT than would be strictly necessary to meet the associated development goals if private sector initiative were used. Finally, operations and maintenance spending looks quite high relative to the country’s long-term needs once its hydropower portfolio is further developed.

For purposes of calculating the funding gap, only the potential efficiency gains are netted out from the investment needs. The reason is that, although there is evidence of overspending in some areas of infrastructure, it cannot be assumed that if these resources were reallocated they would necessarily be allocated to the other infrastructure sectors, as in principle they could contribute to any part of the budget.

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