AFRICAN DEVELOPMENT BANK

SWAZILAND

LOWER USUTHU SMALLHOLDERS IRRIGATION PROJECT II – (LUSIP II)

APPRAISAL REPORT

OSAN DEPARTMENT

April 2016

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TABLE OF CONTENTS

I – STRATEGIC THRUST & RATIONALE ........................................................................... 1

1.1 Project linkages with country strategy and objectives ......................................................... 1

1.2. Rationale for Bank’s involvement ...................................................................................... 2

1.3. Donor coordination ............................................................................................................. 2

II – PROJECT DESCRIPTION ................................................................................................. 3

2.1. Project components ............................................................................................................. 3

2.2. Technical solution retained and other alternatives explored…………………………… 3

2.3. Project Type ……………………………………………………………………………...4

2.4. Project cost and financing arrangements………………………………………………….4

2.5. Project’s target area and population ................................................................................... 5

2.6. Participatory process for project identification, design and implementation……………..6

2.7. Bank Group experience, lessons reflected in project design .............................................. 6

2.8. Key performance indicators ................................................................................................ 8

III – PROJECT FEASIBILITY ................................................................................................. 8

3.1. Economic and financial performance ................................................................................. 8

3.2. Environmental and Social impacts ..................................................................................... 9

IV – IMPLEMENTATION ..................................................................................................... 13

4.1. Implementation arrangements .......................................................................................... 13

4.2. Monitoring ........................................................................................................................ 14

4.3. Governance ....................................................................................................................... 15

4.4. Sustainability .................................................................................................................... 16

4.5. Risk management .............................................................................................................. 16

4.6. Knowledge building .......................................................................................................... 17

V - LEGAL INSTRUMENTS AND AUTHORITY…………………………………………17

5.1. Legal instrument ............................................................................................................... 17

5.2. Conditions associated with Bank’s intervention ............................................................... 17

5.3. Compliance with Bank Policies ........................................................................................ 18

VI – RECOMMENDATION ................................................................................................... 18

Appendix I: Map of the Project Area……………………………………………………….. I

Appendix II. Swaziland’s Socio-Economic Indicators………………………………………..II

Appendix III: AfDB Portfolio in Swaziland (March 2015).......................................................III

Appendix IV: SWADE Organogram………………………………………………………………….......IV

Currency Equivalents

As of November 2015

1 UA = 1.39687 USD

1 UA = 19.2806 ZAR (SZL)

1 USD = 13.80272 ZAR (SZL)

Fiscal Year

1 April – 31 March

Weights and Measures

1metric tonne = 2204 pounds (lbs)

1 kilogramme (kg) = 2.200 lbs

1 metre (m) = 3.28 feet (ft)

1 millimetre (mm) = 0.03937 inch (“)

1 kilometre (km) = 0.62 mile

1 hectare (ha) = 2.471 acres

i

Acronyms and Abbreviations

ACMS Aid Coordination and Management Section in Ministry of Econ. Planning

AfDB African Development Bank

ADEMU Agricultural Development and Environmental Management Unit (LUSIP 1)

EIB European Investment Bank

EIRR Economic Internal Rate of Return

ESIA Environmental and Social Impact Assessment

EU European Union

FAO Food and Agricultural Organization

FA Farmers' Association

GoS Government of Swaziland

IFAD International Fund for Agricultural Development

IRR Internal Rate of Return

ITF Individual Tenure Farms

KDDP Komati Downstream Development Project

LUSIP Lower Usuthu Smallholder Irrigation Project

MCM Million cubic meters

MDG Millennium Development Goal

MNRE Ministry of Natural Resources and Energy

MOA Ministry of Agriculture

NASWG National Agriculture Sector Working Group

NGO Non-Governmental Organization

NLP National Land Policy

NDS National Development Strategy

NEPAD New Partnership for Africa’s Development

PRSAP Poverty Reduction Strategy and Action Plan

SADC Southern African Development Community

SARC Southern Africa Resource Center

SEA Swaziland Environment Authority

SNC Swaziland National Council

SNL Swazi Nation Land

SSA Swazi Sugar Association

SWADE Swaziland Water & Agricultural Enterprise Ltd.

WUA Water Users Association

ii

Loan Information

Client’s information

BORROWER: Kingdom of Swaziland

EXECUTING AGENCY: Swaziland Water and Agriculture Development Enterprise

(SWADE)

Financing plan

Source Amount

(ZAR’000)

Amount

(UA’000)

Instrument

ADB 855,131

44,353

Loan

EIB 498,958 25,880 Loan

BADEA, KF 437,560 22,695 Loan

Government 216,330 11,220 Counterpart

TOTAL COST 2,007,979 104,148

ADB’s key financing information

Loan Currency South African Rand (ZAR)

Loan Type Fully Flexible Loan

Interest Rate Base Rate +Funding Cost Margin+ Lending

Margin + Maturity Premium Base Rate

Floating Base Rate based on 3-month JIBAR

Funding Cost Margin1 Refer to footnote

Lending Margin 60 basis points (0.6%)

Maturity Premium2

Fees None

Tenor Up to 24 years inclusive of Grace Period

Grace period 5 years

Average Loan Maturity 14.75 years

EIRR (base case) 10.6%

1 The six months adjusted average of the difference between: (i) the refinancing rate of the Bank as to the borrowings linked to the Floating

Base Rate and allocated to all its floating interest loans denominated in the Loan Currency and (ii) the Floating Base Rate for each semester

ending on 30 June and on 31 December. This spread shall apply to the Floating Base Rate which resets on 1 February and on 1

August. The Funding Cost Margin shall be determined twice per year on 1 January for the semester ending on 31 December and on 1 July

for the semester ending on 30 June.

2 The Maturity Premium is based on the Average Loan Maturity, which is defined as the weighted average time to repay a loan, calculated as

the average number of years until each principal repayment amount of the loan is due, weighted by the principal repayment amounts. Loans

with – an Average Loan Maturity less than or equal to 12.75 years will incur no (Nil) Maturity Premium; an Average Loan Maturity greater

than 12.75 years and up to 15 years will incur 10 bps (0.10%) Maturity Premium; an Average Loan Maturity greater than 15 years and up to

17 years will incur 20 bps (0.20%) Maturity Premium.

iii

Timeframe - Main Milestones (expected)

Concept Note approval 30 October, 2015

Project approval 4 May, 2016

Loan Signature 30 July 2016

Effectiveness 30 October , 2016

Closing Date 31 December, 2021

Completion 30 September, 2021

Last repayment 30 December, 2036

iv

Project Summary

1. Project Overview

1.1 The Swaziland- Lower Usuthu Smallholder Irrigation Project Phase II (LUSIP-II), is a follow-up

project to the LUSIP-I which was approved on 27 November 2003 (and completed in 2010) as a response

to the Government’s recognition that the natural resources potential of the Lower Usuthu River Basin

provided an excellent opportunity for effective integration of poor smallholder farmers on Swazi Nation

Land into the commercial agriculture sub-sector. The plan for the entire LUSIP is to divert part of the

peak flow of the Usuthu River into a 155 million m³ capacity off-river storage reservoir to be used to

irrigate 11,500 ha (in two phases) of downstream land to grow sugarcane. The overall objective of the

LUSIP project is to increase household income, enhance food security and improve access to social and

health infrastructure for the rural population by creating the conditions for the transformation of

subsistence level smallholder farmers into small-scale commercial farmers. The second phase of the

project (LUSIP-II) has four main components: (1) Main Conveyance System; (2) Secondary System; (3)

On Farm Infrastructure Development (New Area) – LUSIP II; and (4) Project Management and

Engineering Supervision.

1.2 The overall benefits of the project will include an increase in the agricultural production, improved

production infrastructure, environmental and natural resources conservation and capacity building of

beneficiaries in various aspects of agricultural production, environment and natural resources

management and entrepreneurship. The project will contribute to poverty reduction in the project target

region. Indeed, increased production will lead to higher incomes for producers and improve their social

and economic well-being. It will also contribute to raising agricultural productivity and growth in the

agriculture sector, and significantly increase the food and nutritional security and incomes of the 2,259 (at

least 50% women) additional rural households. The project will transform about 5217 hectares of land

from its present use of semi-subsistence level farming into diversified commercial cash and food

cropping.

2. Cost and Financing

The total cost of LUSIP II is estimated at ZAR 2.01 billion (UA104.15 million), to be financed by

the African Development Bank (AfDB) - ZAR 855.131 million (UA44.35 million); European Investment

Bank -ZAR 498.958 million (UA25.88 million); Kuwait Fund and BADEA – ZAR 437.56 million (UA

22.69 million); and the Government of Swaziland – ZAR 216.33 million (UA 11.22 million). AfDB will

finance the Main Conveyance System (Component 1) of the project.

3. Implementation

The Project will be implemented by the Swaziland Water and Agricultural Development

Enterprise (SWADE), a parastatal established by the Government of Swaziland in 1999 to facilitate the

planning and implementation of the Komati Downstream development Project (KDDP) and Lower

Usuthu Smallholder Irrigation Project (LUSIP), and any other large water and agricultural development

project that the Government may assign. It has successfully implemented the KDDP and the LUSIP-I. It

will be responsible for the design and technical supervision of the project activities in addition to the

procurement, financial management and Monitoring and Evaluation (M&E) of the project. The Project

will be implemented in five years (2016 – 2021).

v

4. Bank’s Added Value

The Bank’s intervention in this project will add significant value to the investments made by the

Government of Swaziland and other development partners under LUSIP 1. LUSIP 2 is thus critical to the

country in order to efficiently utilize these investments for the purpose of intensifying agriculture under

irrigation. The project will substantially address the agricultural production constraints and development

challenges faced by the rural communities identified in the 2014 AfDB’s Swaziland Country Strategy

Paper which include: (1) limited irrigation-related infrastructure that is holding back agricultural sector’s

growth and crop diversification; (2) sources of water from some major rivers located outside the country

which necessitate the country to negotiate its water rights with other countries especially South Africa;

and (3) limited diversification of exports which substantially relies on sugar export and to a lesser extent

on the textiles and clothing industry. In line with the Bank’s Ten Year Strategy, 2013-2022, the Bank’s

intervention will have the multiplier effect of economic development through infrastructure development.

By introducing bananas, maize, and beans into crops mix, in addition to the sugar production, the project

will contribute directly to meeting four major components of the “High 5” (feed Africa, industrialize

Africa, integrate Africa (through regional sugar exports) and improve the quality of life of the African

people through increased cash incomes from sugar sales.

5. Knowledge Management

The knowledge gained through the implementation of several projects and studies in the sector in

Swaziland has been duly applied in designing this project. In the same pattern, the knowledge that will be

generated by this Project will be instrumental in designing and managing subsequent phases of the LUSIP

and other new projects. The results from the various and other surveys, including the socio-economic

impact study and EIAs will inform the stakeholders on how to put the acquired knowledge attributes into

practical use for better results-oriented achievements and sustained benefit flows.

vi

RESULTS-BASED LOGICAL FRAMEWORK

Country and project name: Swaziland Lower Usuthu Smallholder Irrigation Project II (LUSIP - II)

Purpose of the project: To alleviate poverty in the project area

RESULTS CHAIN

PERFORMANCE INDICATORS MEANS OF

VERIFICATION RISKS/MITIGATION MEASURES

Indicator

(including CSI) Baseline Target

IMP

AC

T

Impact

Improved standard of living of

the population in the LUSIP-II

project area

Increase in average income of

farmers under the scheme)

No of beneficiary households

1.1 Household

income = SZL 5,000

1.2 No of beneficiary

households = 0

1.1 House hold income of SZL

32,940. (2020)

1.2 No of Beneficiary

households = 2,259

1.Case studies

2.SWADE reports

OU

TC

OM

ES

Outcome 1: Increased crop

production.

1. 1 Crop output

Total Production

a. Sugar cane= 0 mt

b. Banana = 0 mt

c. Maize = 0 mt

d. Sugar Bean = 0 mt

Total Production (2020)

Sugar cane = 440,000 mt

Banana = 14,790 mt

Maize = 5,792 mt

Sugar Bean = 1,622 mt

1.Ministry of Agric

Survey.

2.SWADE Progress

Reports

Risk: Reduction in water availability for

irrigation

Mitigation: Project area covered by Tripartite

Water Usage Agreement.

Risk: Fluctuations in Price of Sugar:

Mitigation: Crop Diversification

OU

TP

UT

S

Component 1

Main Conveyance System;

1 Siphon 1,

1.2 Lined main canal,

Five Bulk storage reservoirs

1.3 SCADA system

- 5,988m long

- 33,262m long

- Five reservoirs built

- 1 System installed

SWADE Progress

Reports

Risk: Project cost overruns due to the rise in the

cost of materials due to rising costs of raw

materials may lead to cost increases.

Mitigation: Efficient procurement timing to

address the increases, as well as adequate price

contingencies for the unavoidable increases will

mitigate the risk.

OU

TP

UT

S

Component 2

Secondary System;

Outputs

2.1 Distribution system

LUSIP2 incl. roads and

drainage systems;

2.2 Pump stations (irrigation)

including power lines and

transformers;

Distribution network

Bulk pump station and rising

mainline DN 1,200 mm

- Distribution system for the

Matata Block including

roads and drainage

systems

- Bulk pump station and DN

1,200mm pipeline

(1,081m)

SWADE Progress

Reports

vii

OU

TP

UT

S

Component 3

On Farm Development

Infrastructure

Size of Area developed for

cropping

Road network

Pipe systems and center

pivot or semi-solid

sprinkler systems,

Land preparation and

levelling for a total

5,217ha.

SWADE Progress

Reports

OU

TP

UT

S

Component 4 Project

Management and Engineering

Supervision

- No of design review report

- No of construction supervision

reports

- No of people resettled

- No of community mobilized = -

- No of Farmer companies

formed

– No of Quarterly Progress

Reports produced

- No of Annual Audited

Accounts produced

- 1 Design review report

- 4 quarterly reports

- 22 households

- 3 chiefdoms

- 10 farmer companies

- 4 per year

- 1 per year

SWADE Progress

Reports

Risk: Delay in providing counterpart funding by

Government

Mitigation: The Bank and the DP are for

infrastructure development. SWADE is well

staffed to manage the project, and GKOS has

given commitment make sufficient provision in

the Annual Budget.

Risk: Ineffective and uncoordinated project

supervision among financiers

Mitigation: Parallel financing; and project

activities are not required to start and end at the

same time.

KE

Y

AC

TIV

ITIE

S COMPONENTS INPUTS

Component 1

Component 2

Component 3

Component 4

Component 1 – ZAR 855.131 million (UA 44.36 million)

Component 2 – ZAR 498.958 million (UA 25.88 million)

Component 3 – ZAR 458.902 million (UA 23.80 million)

Component 4 - ZAR 194.986 million (11.22 million)

TOTAL ZAR 2,007.977 million (UA 104.15 million)

LUSIP II IMPLEMENTATION SCHEDULE Year 2015 2016 2017 2018 2019 2020 2021

Quarter 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Initial Activities

Appraisal

Loan and Grant negotiations and approval

Signature of loan agreement and fulfilment of first disbursement conditions

Publication of the General Procurement Notice

Project Launching

Procurement of property goods works and services for the PIUs / PCUs/First Disbursement

Construction of Irrigation Infraatructure

Award of contracts for the construction of infrastructure

Construction infrastructure/management committee

Project Management and Monitoring

Mnagement and monitoring

Mid Term Review

Project Completion

Disbursement Deadline

1

REPORT AND RECOMMENDATION OF THE MANAGEMENT OF THE AFDB

GROUP TO THE BOARD DIRECTORS ON A PROPOSED LOAN TO THE

KINGDOM OF SWAZILAND FOR LOWER USUTHU SMALLHOLDERS

IRRIGATION PROJECT II (LUSIP II)

Management submits the following Report and Recommendation on a proposed ADB loan of

ZAR855.13 million to finance the Lower Usuthu Smallholders Irrigation Project II (LUSIP

II) in Swaziland.

I STRATEGIC THRUST & RATIONALE

1.1 Project linkages with country strategy and objectives

1.1.1 The Swaziland Country Strategy Paper (CSP) 2014-2018 was approved by the Bank’s

Boards of Directors on April 22, 2014. The pillars of this strategy revolve around (i)

Supporting Infrastructure Development for Sustainable and Inclusive Growth and (ii)

Strengthening Governance and Institutional Capacity. Within the context of these two

themes, the CSP activities have been grouped into four “results clusters” – (1) Smallholder

Irrigation Infrastructure, (2) Water and Sanitation, (3) Transport infrastructure, and (4)

Governance - that take into account cross-sectoral synergies for maximum impact. The

activities in the proposed project are consistent with two of the Bank’s core operational

priorities (infrastructure and governance) and are aimed at supporting Swaziland achieve

high, inclusive, and sustainable growth. Despite the lack of an overall agricultural strategy in

the country, there are a number of policies in place, which have been developed over the

years. At national level, there is the National Development Strategy (NDS) (1997-2022),

Poverty Reduction Strategy and Action Plan (PRSAP), Programme of Action (2013-18) and

the Economic Recovery Strategy (ERS). In addition, there are a number of polices in place

addressing specific agricultural policy issues, which include: (i) a Comprehensive

Agricultural Sector Policy (CASP); (ii) National Food Security Policy; (iii) Livestock

Development Policy; (iv) Draft Land Policy; (v) National Forestry Policy; (vi) Resettlement

Policy; (vii) Swaziland National Irrigation Policy, (viii) Agricultural Diversification Strategy,

(ix) National Agricultural Research Policy, and (x) National Agriculture Investment Plan.

There are also supportive legislations and regulations, which enforce these polices especially

for animal health, plant health and water use and quality. Overall, the project is linked with

these policies and at completion it is expected to achieve the commercialization of

smallholder farming, enhanced productivity, agricultural diversification and food security,

and broader economic participation of rural communities and reducing poverty.

1.1.2 The first phase of the Lower Usuthu Smallholder Irrigation Project (LUSIP), which

was initiated in 1999 was supported by a group of donors that included AfDB, European

Union, IFAD, DBSA and BADEA. LUSIP is a significant part of the government water

management programmme to optimize the usage of the Usuthu River. Besides the AfDB,

LUSIP II has attracted other financiers such as the European Investment Bank, BADEA and

the Kuwait Fund. The proposed project which is a continuation of the LUSIP I will, among

other outcomes, deepen efficient water resources management through optimal use of the

facilities constructed under the first phase. The project will stimulate growth in the economy

through higher production, provision of job opportunities and increased income.

2

1.2 Rationale for Bank’s involvement

1.2.1 The Bank’s Ten Year Strategy (TYS) 2013-2022, identifies agriculture related infrastructure

development as a key factor in improving agricultural production, and agriculture and food security as

areas of special emphasis. The Bank’s 2014-2018 Gender Strategy calls for economic empowerment,

knowledge and capacity building for women. This project addresses all of these key Bank strategies and

policies in the areas of moving agriculture from development to commercialization and business

ownership, crop diversification, income enhancement, as well as more participation of rural dwellers in

economic activities. In addition, through the activities mentioned above, the proposed project is in

consonance with the three out of the Bank’s ‘High 5’ i.e. “Feed Africa”, “Integrate Africa”, and

“Improved the quality of lives of people of Africa”. The project, by diversifying into other crops, will also

achieve sustainable incomes for the beneficiaries in particular and the country at large.

1.2.2 The Bank has been active in Swaziland agriculture sector for many years. It has financed various

operations in Swaziland among which are: Ngwavuma Irrigation Study, Swaziland Sugar Project (1982),

On-Lending Agricultural Line of Credit to Swaziland Development And Savings Banks (1992), Lower

Usuthu Irrigation Project I (LUSIP I) which was completed in 2010, and the Komati Downstream

Development Project, which closed in 2011.

1.3 Donor coordination

Donor Support to Agriculture (2014/15)

Sector or subsector* Size

GDP Exports Labour Force

Agriculture (including

fisheries and forestry) 8.6% 27% 70%

Players - Public Annual Expenditure (average) : Budget

Government Donors EU 57%

USDm USD 37.8 m USD 12.2 m Taiwan 19%

% 76% 24% FAO 27%

Level of Donor Coordination

Existence of Thematic Working Groups (this sector/sub-sector) [Yes]

Existence of SWAps or Integrated Sector Approaches [No]

ADB's Involvement in Donors Coordination [Co-Leader]

Source ACMS (MoDP); Preliminary Estimates- External Assistance to Swaziland

1.3.1 Donor coordination is evolving in Swaziland, similar to the other middle-income countries in the

region. The AfDB played a key role in galvanizing donor support reforms in Swaziland. The Bank

supported the strengthening of the Aid Coordination and Monitoring Section (ACMS) in the Ministry of

Economic Planning and Development in 2009, which improved coordination of development assistance

and ensured country ownership.

1.3.2 At the agriculture sector level, the key Development Partners with on-going operations in the

sector are the AfDB, the European Union (EU), OPEC/OFID, Taiwan, World Food Program (WFP) and

the Food and Agriculture Organization (FAO). The Bank assisted in the establishments of the National

Agriculture Sector Working Group (NASWG), which the Bank is co-leading with the Government. The

Government is in the process of formalizing the National Taskforce, which is currently working on the

preparation of the Comprehensive Africa Agriculture Development Program (CAADP) documents into

the NASWG. The Bank has also been appointed the Lead Partner for the coordination of the donors for

the LUSIP-II Project.

1.3.3 The EU is currently supporting the Swaziland Agricultural Development Programme, which

ended in 2015. The EU has also earmarked 40 million Euros for the agriculture sector under EDF 11

Programme, which will target improvement of the horticulture value chains development and capacity

building among other key agricultural development initiatives in Swaziland. WFP has continued to pursue

3

its mandate of ensuring that people have access to adequate and decent food. There has been a gradual

shift of resources from relief to recovery-related activities which aimed at enhancing development rather

than creating dependency. The FAO has most of its interventions in the country falling under its

Technical Cooperation Programme (TCP). TCP projects are short-term in nature. The FAO also assists

the government in implementing emergency programmes aimed at addressing the drought problem.

II PROJECT DESCRIPTION

The objective of the project is to alleviate poverty in the project area by transforming the existing

subsistence farmers into commercial farmers on irrigated lands producing both food and cash crops

(principally sugarcane). It is to support the development and utilization of the water resources of the

Lower Usuthu River through provision of irrigation infrastructure to enable smallholder farmers to

intensify and diversify their agricultural production building on existing market linkages with the private

sector. It is also aimed at establishing an effective management of infrastructure and equipment for the

sustainable improvement of production and cost recovery.

2.1 Project Components

2.1.1 The LUSIP Phase II has four main components, namely: (i) Development of the Main

Conveyance System (MCS); (ii) Development of Secondary Irrigation Pipe Network supplying the

different irrigation blocks, each covering 100-700 ha; (iii) On Farm Infrastructure Development; and (iv)

Project Management and Engineering Supervision.

2.1.2 A summary of the project components are as follows:

Table 2.1: Project Components

Component name Est. cost

(ZAR million)

Component Outputs

1. Main

Conveyance

System;

855 Siphon 1,

Lined main canal,

Five bulk storage reservoirs

SCADA management system

2. Secondary

System

499

Distribution system LUSIP2 incl. roads and drainage systems;

Pump stations (irrigation) including power lines and transformers;

3. On Farm

Development

Infrastructure

459 Road network

Pipe systems and centre pivot or semi-solid sprinkler systems,

Land preparation and levelling

3. Project

Coordination and

Management

216 Design review and construction supervision

Resettlement and impact mitigation

Community mobilization, setting up of farming companies

Capacity building

Administrative and Financial Reporting M&E

Budget preparation and work programme and Audit

Total 2,008

2.2. Technical solution retained and other alternatives explore

2.2.1 The Main Canal South was constructed as part of LUSIP I project. The canal discharge was

calculated to convey water for only 5,217 ha of new development in addition to 455 ha of existing

plantation in the LUSIP 2 area. The GoS intends to include the Nsoko-Msele Block (4090 ha), Poortzicht

Scheme (750 ha) and Riverside Scheme (1000 ha) to the project which entails increasing the Main Canal

South capacity to accommodate such an extension.

4

The only viable solution is to raise the sides of the canal to increase the discharge, which would render

the project not economically viable, as the Nsoko-Msele Block is not ready for development now.

Therefore, it was agreed to maintain the Irrigation Canal South without remodelling.

Table 2.2: project alternative considered and reason for rejection

Alternative name Brief Description Reasons for Rejection

Raising of existing Main

Canal South

Canal sides raised to

accommodate water for

the Nsoko-Msele Block.

Increased cost makes the project

economically non-viable. The

increase will be included under

future phases if viable.

Conveyance system

downstream Main Canal

South

Open channel system to

supply water to LUSIP II

Matata Block and others

High cost of cut and fill in a

mountainous terrain.

2.3 Project type

LUSIP II is a stand-alone investment Project aimed at increasing agricultural production and incomes of

households in the Lower Usuthu River Basin. Like its predecessor (LUSIP I), the Lower Usuthu

Smallholders Irrigation Project is being jointly financed as an evidence of collaboration and leveraging

of expertise among the development partners (AfDB, EIB, KW and BADEA) involved in the project

financing.

2.4 Project Cost and financing arrangements

2.4.1 The total project cost, including physical and price contingencies, is estimated at ZAR 2.01 billion

(UA 104.15 million) net of taxes and duties. The price contingencies were based on projected local and

foreign inflation rates of 5% and 2% per annum, respectively. The physical contingencies ranged from

0% (consultants’ salaries) to 10% (works) based on common technical practices. This will be financed by

(i) AfDB Loan of ZAR 855.13 million (UA 44.35 million -42%) covering the cost of the Main Canal

System (Component 1); (ii) European Investment Bank loan of ZAR 498.958 million (UA 25.88 million -

25%) (Component 2); (iii) BADEA and Kuwait Fund Loans of ZAR437.56 million (UA 22.69 million-

22%) (Component 3); and Government counterpart contribution of ZAR 216.33 million (UA 11.22

million – 11%). The Government’s contribution will finance the cost of the Project Management

Component to the tune of ZAR 194.99 million (UA 10.11 million -10%), and a fund shortfall of ZAR

21.34 million (UA 1.11 million -1%) under Component 3. Summaries of the project costs by

components, sources of financing and schedule by component are presented in Tables 2.3 to 2.7. All the

donors have committed to parallel financing of the project.

Table 2.3: Project Cost Estimates by Component

Components ZAR '000 UA '000 Foreign

Exchange

Local Foreign Total Local Foreign Total (%)

1. Main Canal System 134,610 538,440 673,050 6,982 27,927 34,909 80%

2. Secondary supply system 77,400 309,600 387,000 4,015 16,058 20,073 80%

3. On farm development 72,267 289,069 361,337 3,748 14,993 18,742 80%

4. Project management 17,200 154,800 172,000 892 8,029 8,921 90%

Sub-Total 301,477 1,291,909 1,593,387 15,637 67,008 82,645

Physical Contingency 22,623 96,947 119,570 1,173 5,028 6,202 81%

Price Contingency 55,819 239,201 295,021 2,895 12,407 15,302 81%

Total 379,920 1,628,057 2,007,977 19,705 84,443 104,148

5

Table 2.4:Sources of Finance

Source of Financing UA '000

Local Foreign Total %

AfDB 8,871 35,482 44,353 43%

EIB 5,176 20,704 25,880 25%

BADEA/Kwuati Fund 4,536 18,159 22,695 22%

Govt of Swaziland 1,122 10,098 11,220 11%

Total 19,705 84,443 104,148 100%

Table 2.5 : Total Project Cost By Year (ZAR'000)

Components Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Total

1. Main Canal System - 128,270 205,231 307,847 213,783 - 855,131

2. Secondary supply system - 49,896 124,740 199,583 124,740 - 498,958

3. On farm development - - - 114,726 206,506 37,671 458,902

4. Project management 37,047 40,947 29,248 29,248 29,248 29,248 194,986

Total 37,047 219,112 359,219 651,404 574,276 166,919 2,007,977

Table 2.6: Project Cost Estimates by AfDB Financed Component

Component ZAR '000 UA '000

Local Foreign Total Local Foreign Total

Main Canal System

- Civil Works 132,610 530,440 663,050 6,878 27,512 34,391

- SCADA System 2,000 8,000 10,000 104 415 519

Sub-total 134,610 538,440 673,050 6,982 27,927 34,909

- Physical Contingency 13,461 53,844 67,305 698 2,793 3,491

- Price Contingency 22,955 91,821 114,776 1,191 4,762 5,953

Total 171,026 684,105 855,131 8,871 35,483 44,353

Table 2.7: Project Cost Estimates by AfDB Financed Component/Expenditue Category (Incl Contingencies)

Component ZAR '000 UA '000

Local Foreign Total Local Foreign Total

Main Canal System

- Civil Works 168,485 673,940 842,426 8,739 34,955 43,694

- SCADA System 2,541 10,164 12,705 132 527 659

Total 171,026 684,105 855,131 8,871 35,483 44,353

2.5 Project’s target area and population

2.5.1 Location: The project is located in the lower Usuthu area about 120 km from Mbabane. It is

naturally divided into Bovane Block consisting of 9,280 hectares and the Matata Block 7,120 hectares.

The LUSIP II area will have a gross area of 6,033 ha and a net area of 5,672 ha, with 5217ha to be

developed under the project. Therefore, the proposed on-farm development works will include 5,217 ha

of irrigation blocks. The communities under the project area are Matsenjwa, Mngometulu and

Ngcamphalala. There are adequate social and health services in the project area. The project

infrastructure allows for future expansion to the Nsoko-Msele Block of (4000 ha), Poortzicht Scheme

(750 ha) and Riverside Scheme (1000 ha) by raising the sides of the Main Canal South and installation of

a parallel syphon.

6

2.5.2 The mean annual rainfall ranges from 440 mm to 570 mm and the mean annual evapo-

transpiration is 2,057 m. About 70% of the annual rain fall within the hot summer rainy season from

October to March. The mean annual temperature in winter ranges from a minimum of 5° C to a maximum

of 20° C. Vegetation in the project area consists mainly of mixed tree and bush Savanah with mainly

Acacia species. Forests and woodlands are also found in the area.

2.5.3 The Soils: Different scenarios for development of land for irrigated sugarcane were analysed for

the LUSIP 2 area, with the most promising resulting in the availability of a total net area of approximately

5,672ha (455ha existing and 5,217ha new land), with 3,399 ha below the main conveyor and 2,273 ha

above the conveyor. In terms of suitability, half of this is suitable land, a quarter marginally suitable land,

with the remainder either being semi suitable or conditionally suitable.

2.6 Participatory process for project identification, design and implementation

2.6.1 The GOS has undertaken an extensive and unique participatory approach in the LUSIP area from

the very initial stages. It started extensive consultations with the communities in the area since 1998 and

this led to the establishment of various committees at the community level (e.g. women’s committees,

resource users group, water users, Zonal planning committee, and neighborhood committees). These

committees had the mandate to discuss and propose development solutions including issues relating to

resettlement, suitable and preferred crops, livestock grazing area etc. LUSIP participation process has

therefore had a strong bottom-up approach. These structures have been maintained and constant

collaboration exists. Consequently, the established participatory process will continue throughout the

implementation of the project through the involvement of the various committees.

2.6.2 A project steering committee and a project technical committee are in place and the relevant

stakeholders including representatives of the 3 affected chiefdoms are members. Women participation

was encouraged and representation was as high as 30%. The successful implementation of LUSIP I has

provided the Government of Swaziland and SWADE with a positive experience in a demand-driven

project and has increased the desire of beneficiaries to fully participate and engage in commercial

farming. SWADE technical team coordinated the stakeholder consultations, community mobilisation and

sensitisation during development of the LUSIP I, through LUSIP 2 identification, preparations and

appraisal processes. Consultative meetings were held with key stakeholders including Cooperating

Partners, Farmers Union, Local Commercial Banks and Credit Union, Sugar Association, National Maize

Corporation and other Private Sector units in the area to refine the project concept and design.

Preparation of the ESIA also went through the same process. As in LUSIP 1, mechanism for continuous

engagement with the stakeholders during the project implementation is already in place.

2.7 Bank Group experience, lessons reflected in project design

2.7.1 The Bank Group has 5 ongoing operations in Swaziland valued at UA 51.7 million. There are no

ongoing operations in the Agricultural Sector. The current portfolio is dominated by the transport sector

representing over 65 % of the entire portfolio followed by water and sanitation (31.5%), multi-sector (1.8

%) and power (1.4%). The portfolio is rather young with the oldest ongoing project approved in 2011.

The average age of the current portfolio is 2.2 years way below the Bank’s average. The overall

disbursement rate stands at only 1.13 % mainly due to the approval of the 3 new operations in 2014.While

there is no projects at risk, 2 projects experiencing issues related to slow disbursement and effectiveness

were highlighted in the portfolio flashlight (Statistical Capacity Building Programme - Phase II (SCB II)

and Energy Sector Technical Assistance Program).

2.7.2 In November 2003, the AfDB approved LUSIP 1 with a total cost of UA 85.39 Million out of which

the AfDB Group Loan was UA 9.31 Million (Rand 98.49 million) of ADB Resources. Other Sources of

Finance were, (1) BADEA - UA 8.05 million, (2) The EU - UA 8.27 million, (3) DBSA - UA 10.61

million, (4) IFAD - UA 13.15 million, (5) EIB - UA 18.67 million, (6) GOS - UA 13.79 million, and (7)

Beneficiaries - UA 3.54 million.

7

2.7.3 Apart from minor delays due to the consultation with communities, the project went on smoothly

and did not experience undue delays. The construction of infrastructure (concrete diversion weir, feeder

canal, Reservoir, and dams) was completed as per the desired quality. The PMU was able and

coordinated the implementation of project activities efficiently. The Bank and the Borrower ensured good

compliance with safeguards by implementing a Resettlement Plan and monitoring the Health care

delivery, water and sanitation facilities and impact of civil works. Box 1 below presents achievements of

LUSIP I.

2.7.4 In addition, the Bank’s knowledge work, such as the Fiscal Adjustment Roadmap (FAR) and the

Economic Diversification Study (EDS), have provided a better understanding of bottlenecks in policy and

program implementation. Institutional support activities, where the Bank and other development partners

are involved, are informed by the knowledge work. It is noted that a strong outreach and information

dissemination program to encourage debate and share information on available Bank instruments will

enhance dialogue and broaden the funding modalities in Bank interventions.

2.7.5 Swaziland has most of the institutions needed to implement economic and structural reforms but

their capacity had not been assessed. Development partners’ insistence on reform implementation without

significant institutional support and capacity building has therefore proven to be ineffective. Similar

observations have also been made at the project level, especially in critical areas such as procurement and

project management. Ensuring that prior conditions are met or that sufficient progress is made in that

regard is important in avoiding delays in project implementation after loan approval and signature.

2.7.6 Lessons drawn from the ongoing projects (six in number) and previous project completion reports

highlighted the following: (i) Participatory approach: It is imperative for a supply led irrigation to

integrate the distribution of water and associated land use within the expressed needs and preferences of

the local community and to recognise and ensure that the project addresses population needs for those

households not benefiting from access to irrigated land; (ii) an exit strategy for the project and its

management team that is based on empowering community and giving them more responsibilities in

operations and maintenance; and (iii) acknowledge the important roles played by the traditional chiefs in

land allocation as chiefs are custodians of lands under the Swazi Nation Land (SNL). These lessons

learnt have guided both the Bank and the Government in project design and will continue to guide the

implementation process of the project.

8

Box 1: Achievements of LUSIP I

1 As of December 2015 a total of 4,455ha had been developed with 4,275ha

planted with sugar cane and 180 ha developed for alternative crops.

2 A total of 91 farmer companies (which include livestock companies) with 3000

members had been established against a target of 75 with 10 water users

institutions registered against a target of 12.

3 1850 farmers out of 3000 received average of annual dividends of E35million per

annum translating to E2.7million (US$1450) per farmer in 2015.

4 The average tax revenue of government in targeted area increased from E11,

611,142.04 in 2012/13 (to E15, 002,039.48 by 2015/16.

5 The relocation of the Mahlabatsini Primary School in particular led to 16%

increase in school enrolment from 179 pupils in 2009 to an average of 207 pupils

by 2016.

6 Environmental compliance against comprehensive mitigation plan (CMP) was

achieved and a monitoring lab had been built and equipped at Siphofaneni.

7 A total of 2,186 households (84%) now have access to clean water with 2,771

households (106%) having VIP latrines against a target of 2,600.

8 Reduction in communicable and water borne deceases - Diarrhoea declined from

a prevalence of 14.3% in 2005 to zero cases reported in 2015.

2.8. Key performance indicators

2.8.1 The key performance indicators for monitoring the project achievements are identified and

captured in the results based logical framework. The key outcomes include increased crop production,

increased farmers’ income and better water management, which will result in improved standard of living

of the population in the Lower Usuthu Region. The key indicators are increased crop productivity and

increased land under irrigation. These indicators will be collected and analysed regularly by the M&E

unit of SWADE through crop trials and monitoring progress on drainage construction. The M&E unit

will collect and report data disaggregated by gender during project implementation.

2.8.2 SWADE will prepare quarterly project progress reports, presenting the progress made on

implementation and achievements on output indicators, which will be monitored through SWADE’s

management system and national statistics. Indicators will be updated in the Implementation Progress

Report (IPR) and necessary adjustments will be made as appropriate. A medium term report (MTR) and

Project Completion Report (PCR) will be prepared to provide an assessment of the project. All of these

reports will be circulated widely within the Government, the Bank and to other development partners.

III PROJECT FEASIBILITY

3.1 Economic and financial performance

Table 3.1: key economic and financial figures

FIRR, NPV (base case) 4.7% : ZAR 729.3 million

EIRR, (base case) 10.6%

Note: detailed calculations are available in Annex B6

9

3.1.1 The project is considered financially and economically viable. At full operation, each farmer

household will be making a net income of ZAR 32,940 (USD 3,100) per year. The analysis at the project

level has been carried out by comparing the project cost, on farm crop establishment and operational cost

with the benefits. It is estimated that the project will generate total net gross profit of ZAR 115 million

(USD 9.24 million) per annum at its full operational level. The discounted cash flow (DCF) analysis

carried out on the net cash-flow gave a Financial Net Present Value (NPV) of ZAR 729.3million (USD

52.82 million) at a discount rate of 4% (the average cost of borrowing).

3.1.2 In carrying out the economic analysis of the project, the financial costs and benefits streams have

been converted into their respective economic values and the discounted cash flow methodology applied

to the net cash flows. The DCF analysis carried out on the net cash-flow gave an Economic Internal Rate

of Return (EIRR) of 10.6%, with the Economic Net Present Value (ENPV) estimated at SZL 270.9

million, at a discount rate of 9%. In addition, the Government estimated that other benefits such as

employment generation, environmental benefits, and spin off effects of the investment to boosts local

economy further justify the implementation of the project. Assumptions made in the Economic Analysis

are detailed in Annex B of the Technical Annexes.

3.1.3 Sensitivity Analysis (Economic): The sensitivity analyses have been carried out under three (3)

assumptions and the results are as follows:

Table 4: Results of Discounted Cash-flow Analysis / Sensitivity Analysis

Assumptions IRR

(%)

NPV at 9% cost of

capital (SZL'000)

Base Figures 10.6% 270,863

Assumption 1: 10% increase in project costs 9.7% 135,010

Assumption 2: 10% fall in revenues 9.5% 87,880

Assumption 3: 1 Year Delay in Project Implementation 9.7% 131,365

3.2 Environmental and Social impacts

Environment

3.2.1 The project was validated as Category 2 on February 25, 2016 in line with the Bank’s

Environmental and Social Assessment Procedures (ESAP); mainly because most impacts are site specific

and have no significant and irreversible detrimental effect. The project will have both positive and

negative impacts and they differ according to the phase of the project. During construction, impacts will

include loss of grazing areas, loss of biological diversity, disruption of current household dynamics and

cultural structures, accidents and health impacts, waste generation, spillages and soil pollution,

eutrophication and water pollution, dust emissions and noise. In addition, during operation, further

impacts will emanate from construction activities that include difficulties with in-field soil & water

management, health impacts, especially with malaria and an increase in schistosomiasis, market

constraints of vegetables and other crops, sugar price instability, cane burning and its contribution to

climate change, alteration of soil quality, possible drowning of people and livestock, increased risk of

HIV/AIDS.

3.2.2 The project also brings about certain benefits that include training and capacity building of

communities, increased cropping intensity on more than 5,000 ha due to the provision of dry season

irrigation water, access to water supply, improved livestock husbandry and productivity, increased and

stabilised household incomes from agriculture for more than 2000 households, increased secondary

economic activities agriculturally-related goods and services and associated local employment, improved

institutional capacity of organisations responsible for water management and agricultural development,

improved access from constructed roads, improved gender mainstreaming initiatives, increased crop

yields and diversity due to improved drainage, inputs and crop husbandry.

10

3.2.3 Public participation is the cornerstone of the environment and social aspects of this project and it

is expected to result in the enhancement of all the identified benefits. The negative impacts will be

mitigated as outlined in the environment and social management plan (ESMP) which summary has been

posted on the Bank’s website on 26 February, 2016. Such mitigation measures include provision of waste

receptacles, identification of suitable and authorized disposal site, proper rehabilitation, contractor's

workers & public awareness campaigns on health and safety, biodiversity etc. Spill containment

structures will be put in place together with general spill clean-up guidelines. There will be regular

toolbox talks on safety, health and environmental topics. There will be regular servicing (at designated

areas) of vehicles and machinery to avoid oil leaks. A storm water management plan will be compiled and

implemented. Working methods that will be used shall minimize erosion, noise and dust emissions and

nuisance in general. Where necessary, there will be onsite treatment where turbidity and organic matter

(like settling ponds) are physically and biologically removed before discharge of the effluent to the

environment. Populations of threatened and protected species will be removed under the supervision of a

qualified and experienced botanist and relocated to adjacent representative habitat that has been selected

by the botanist. In the event of an outbreak of disease, public health authorities will be notified hence they

are an important stakeholder in the project. The cost of implementation of mitigation measures which will

be funded by the government is estimated at ZAR 16,000,000. In addition, the government will also

spend ZAR130,000/year for monitoring and ZAR24,000,000 for resettlement.

Climate Change

3.2.4 The issues of climate change impacts were addressed by SWADE under the MNRE & UNDP/

GEF’s January 2015 report titled “Integration of climate change and risks to the downstream development

project and Lower Usuthu smallholder irrigation projects”. It was agreed with the Swaziland Environment

Authority (SEA) that, the recommendations of the report will be integrated into the LUSIP II Climate

Mitigation Plan (CMP) to make the study part of the ESIA documentation. From the study it was found

that climate change will have a significant negative impact on the project if no adaptation measures are

implemented. The vulnerability studies indicate a reduced precipitation, increased temperature, change in

length of rainy season, increased incidences of drought and floods, increased vulnerability of

infrastructure, lack of policies and finally a negative impact on the economy.

3.2.5 The identified climate change impacts will be mitigated at three different levels. In the short

term, there will be (i) training of farmers and communities in the KDDP and LUSIP on the vulnerabilities

of their various livelihood activities to climate change; (ii) assisting the communities to select various

adaptation measures to assist them to adapt to climate change; (iii) training the communities to develop

climate proof community development plans by following the guidelines for climate proofing community

development plans; and (iv) assist communities identify quick wins in adapting to climate change e.g.

rainwater harvesting, rotational grazing, using drought tolerant varieties etc. In the medium term: (i)

climate proofed basin development plans will be introduced; (ii) guidelines for assisting communities

construct climate proofed structures that can deal with projected impacts of climate change i.e. severe

storms (floods, wind and hail) will be developed; and (iii) communities will be assisted to conduct

infrastructure vulnerability assessment to identify infrastructure vulnerable to climate change. In the long

term, overarching climate change policies and strategy for the government of Swaziland will be

developed and reliance on sugarcane as an export crop will be looked into with aims of diversifying to

other less water reliant crops e.g. cassava, sorghum etc.

Gender

3.2.6 Despite equality in rights guaranteed by the Constitution, women are still marginalized in

Swaziland. Swaziland has a gender inequality indicator of 0.529, and ranks number 115 among the

world’s countries, demonstrating that there are large disparities between men and women. The July 2005

Swaziland Constitution recognizes gender equality and provides for equality of all persons before and

under the law and prohibits discrimination on several grounds including gender. In 2010 the country also

adopted the National Gender Policy whose main objective is to achieve a gender balance in the socio-

economic, legal, cultural, religious, political processes by developing and implementing strategies and

11

interventions that recognize and acknowledge the needs and interests of both women and men in the

eradication of gender inequality, gender based violence, HIV/AIDS and poverty in the country.

3.2.7 In line with the Constitution and the National Policy, SWADE has developed a Gender Policy

and Strategy that is being used to mainstream gender related activities in the implementation of the

LUSIP. Against this backdrop, Swaziland remains a patriarchal society dominated by men in almost all

areas of social, cultural, economic and political activities. Implementation of the LUSIP II project has a

number of positive impacts on gender, which include economic empowerment of both women and men

through commercial farming leading to poverty reduction; capacity building particularly for women

through skills training; and changing social dynamics through promotion of equal participation. Evidence

from the implementation of LUSIP I indicates that women participation is increasing in decision-making

positions of farming companies (30%). The main challenge on gender that would require mitigation is the

use of head of household for registration in farming companies under the LUSIP project, which may limit

equal participation of women and men. This if not addressed would exacerbate the women vulnerability

to poverty. As such, there is need for capacity building and public education to help address this challenge

to build on the successes of LUSIP I to continuously main streaming gender in the project activities. In

addition, there is need for capacity building of women through artisanal skills development. In particular,

promote women participation through training and community sensitization. Traditional leaders will be

particularly targeted to ensure acceptance of equal participation for both men and women, and also

inclusion of the youth in the whole programme.

Social

3.2.8 Population: As of 2010 the total population of Swaziland was estimated at 1.2million with 38%

below the age of 15 and 58% between 15 and 65 years of age, while about 3.4% was 65 years and older.

80% of the population lives in rural areas and depend mostly on agriculture. According to 2010 World

Bank reports, the population density of the country was estimated at 61.37 per km² with the population

growth rate at 1.195%. However, while population is growing the production is on decline with maize

production declining between year 2000 and 2012 at a rate of 30%, dropping from an average 100,000

tons of maize per year in 2000 to an average harvest of 70,000 tons in 2012. According to the World

Food Programme, the outcome of the annual assessment by the Swaziland Vulnerability Assessment

Committee (Swazi VAC) indicated that 116,000 people (10 percent of the population) faced a food deficit

during the 2012/2013 lean season. This is a 30% increase on the 2011/12 figure of 89,000. As a result, the

pressure on food prices remains high.

3.2.9 On a good note, the forecasts for 2015/2016 predict slightly higher than average rainfall and may

indicate improved production. However, the many underlying factors that contribute to the trend of low

production - erratic weather, high fuel and input costs, the devastating impact of HIV and AIDS, and low

implementation of improved agricultural practices - are still much prevalent.

3.2.10 Land Tenure: In Swaziland there two systems of land ownership and use; (1) the Individual

Tenure Farms (ITF) and (2) the Swazi Nation Land (SNL). Swazi Nation Land is vested in the

Ingwenyama (the King) represent 57% of the total available land in the Kingdom. The king governs the

land through local chiefs, who act as the main administrators of the land tenure system. Chiefs allocate

land to individual households through the ‘kukhonta’ system. Under this system, an individual, seeking to

own or use land, approaches the chief who, in conjunction with the community in the chiefdom, may

decide to allocate land to the individual. Once the land is allocated, the individual allottee enjoys some

degree of security of tenure which include but not limited to the right to pass land on to offspring.

However, the chief can always reallocate the land or evict the household, although this occurs quite

infrequently.

3.2.11 Production on the SNL is primarily for subsistence and less than 10 per cent of total production is

offered for sale. Maize, the staple food of Swaziland, is the principal crop grown on the SNL and

occupies about 80 per cent of the total crop areas. Maize is quite frequently mix-cropped with cucurbits,

legumes, sweet potatoes, and sorghum. In recent years, SNL farmers have appreciably increased

12

production of some cash crops, such as cotton, tobacco, and vegetables, but this still represents a small

proportion of the total SNL agricultural production. SNL has increased at a rate of approximately 2.8 per

cent per annum over the past decade but this has not met the requirements of the population growing at a

higher rate.

3.2.12 Individual Tenure Farms: Individual Tenure Farms (ITFs) cover about 750,000 hectares and

average about 800 hectares each. About three-quarters of the freehold title holdings are held in equal

proportions between Swazis, and expatriates, and the balance belongs to large companies such as the

Commonwealth Development Corporation. The ITFs are predominantly cropland, livestock ranches,

timber and fruit plantations, and mining concessions. However, a large proportion of this subsector

consists of unused land, owned by absentees. Production techniques on most of the ITFs are modern and

capital intensive, including use of full inputs and mechanization. The bulk of output produced in this

subsector is intended for both domestic and foreign markets. Sugar and timber are the principal

commodities and account for a sizeable proportion of total merchandise exports. About 60 per cent of the

national agricultural production originates from the ITFs, and includes other important commercial crops

such as cotton, citrus, pineapples, tobacco, and livestock. The annual growth of this subsector is estimated

at 5 per cent.

3.2.13 The project is located under the SNL. Land allocated by the chief is rarely taken away, and if so the

person is compensated fairly. Presently, there are several irrigation schemes on SNL and experience has

shown that there have been no dispute in terms of ownership and usage by individuals. Moreover, while the

traditional land system on the SNL could be viewed as a major bottleneck to agricultural development,

beneficiary farmers are grouped into associations through which they obtain credit for irrigation development

finance and crop inputs, apply for water permits from the Water Apportionment Board, negotiate for sucrose quota

from the Swaziland Sugar Association (SSA), and access development finance and seasonal loans by

guaranteeing the loan repayment through ‘stoporder’ deductions from the sugar crop proceeds at the mill.

3.2.14 HIV/AIDS: Swaziland has one of the highest HIV/AIDS prevalence in the world with 26% of the

15 – 49 year old population living with HIV. Prevalence in adults aged 18 – 49 years is even higher at

31%. The country has been negatively affected by HIV/AIDS which has increased the incidence of other

opportunistic diseases such as tuberculosis thus affecting the quality and quantity of human capital and

has also increased the burden on health service delivery system. The Government is committed to

combating HIV/AIDS and an HIV prevention policy is in place. The National Response Framework was

revised in 2013. Drivers fuelling HIV/AIDS include high unemployment amongst women and youth,

having multiple sexual partners and this is exacerbated by the high rates of polygamy; sex work; HIV

stigma and discrimination; gender inequality and gender based violence. Implementation of the project

would help in creating jobs for both women and the youth, who are the principal victims, and as such will

reduce the incidences of poverty related HIV infections. The project will support the SWADE HIV/AIDS

mainstreaming programme. There would be need for strengthening collaboration with public health units

of the government and HIV/AIDS based NGOs to provide sensitization and public awareness activities in

the project impact areas. In addition, under the project management component financed by the

Government of Swaziland, ZAR 3,206,984.61 (approx. UA 165,000) has been earmarked for capacity

building of the communities including gender and HIV/Aids training.

Involuntary resettlement

3.2.15 A Resettlement Action Plan (RAP) for LUSIP Phase II was prepared in 2012. A total of 22

households will be affected by the construction of the canal out of which all will be relocated since they

fall within 100 metres of the preliminary canal alignment. Affected communities have been sensitized on

resettlement and affected households are positive about the implementation of relocation plan. The

affected families are to be provided with dwelling houses, water tanks and will become project

beneficiaries. The resettlement will also entail livelihood restoration including livestock and other

livelihood activities.

13

SWADE will be responsible for the implementation and coordination of the resettlement programme. All

affected assets have been assessed and asset inventory established for the affected households. The total

cost of compensation is estimated at ZAR 23,709,597.68 (approx. UA 1.22 million).

IV IMPLEMENTATION

4.1 Implementation arrangements

4.1.1 The Project will be implemented by the Swaziland Water and Agricultural Development

Enterprise Limited (SWADE), a government company established by the Government of Swaziland in

1999. The project will be managed through the existing structure of SWADE which comprise of a Chief

Executive Officer, a Chief Financial Officer, an Internal Auditor, Procurement Officers, Civil/Irrigation

Engineers, and M&E Officers. Given the focus and size of the project, SWADE will additionally recruit,

on competitive basis, an Agribusiness Specialist and an Assistant Procurement Specialist to complement

the existing team. To fill the technical capacity gaps, SWADE has engaged the services of Aurecon

Consulting Firm to provide support to the PCU during the entire project implementation period.

4.1.2 Procurement Arrangements Public procurement in Swaziland is regulated by the Public

Procurement Act, 2011. The Act has been effective since 2013 and describes the institutional framework,

methods of procurement, procedures, rules and ethical behavior. The Act established an independent

regulatory body; the Swaziland Public Procurement Regulatory Agency (SPPRA) with responsibility for

policy formulation, regulation, oversight, professional development and information management and

dissemination in the field of public procurement. The Act applies to all public procurement conducted by

procuring entities which are defined as any entity designated to conduct public procurement activities,

including Ministries, Departments, Agencies, category A public enterprise or Local Government

Authority, except where procurement is related to defense or national security or where an international

agreement is concluded between the Government of Swaziland and any donor organization and may

require use of procurement rules and procedures provided in the said agreement. The Government is still

facing some challenges as it relates to the operationalizing of the Act. The regulations are yet to be

finalized and approved by Parliament. National standard bidding documents are yet to be developed and

capacity building of procuring entities, and procurement institutions is yet to be done.

In view of the foregoing, procurement activities under the project will be done in accordance with Bank

Procurement Rules and Procedures, as amended from time to time, using the relevant standard bidding

documents, and the provisions stipulated in the Financing Agreement. The Bank financed components

will have two contracts that will both be procured using ICB. The Government of Swaziland has

requested for Bank no objection for advance contracting of the works contract for the Main Conveyance

System. In light of the PD No. 02/2015, the Bank has approved the request to allow disbursement to take

place without much delay after approval. Table 4.1 below presents a summary of the procurement

arrangements, while procurement details are presented in Annex B.5 of the Technical Annexes.

Table 4.1: Procurement Table:

International Competitive Bidding

(ZAR’000)

Total

(ZAR’000)

Works 842,426 842,426

Goods 12,705 12,705

Total 855,131 855,131

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4.1.3 Financial Management: The financial management aspects of the Project Implementation will be

under the responsibility of SWADE using its existing structure to carry out the Financial Management

functions. The financial management capacity of SWADE was assessed and found to be adequate. In

addition, it has adequate experience in implementing donor funded projects including the previous Bank

financed LUSIP I project. SWADE has a functional Finance unit, which is headed by a Chief Financial

Officer. Its accounting system is fully computerised and therefore considered to be sufficient to meet the

Bank’s requirements of the financial management elements – budgeting, treasury management,

accounting and financial reporting, and internal controls. Overall, the Financial Management operations

assessment of SWADE reflected an adequate environment to provide, with reasonable assurance, accurate

and timely information on the status of the project and as such the existing systems shall be adopted for

budgeting, accounting, data/transactions processing and day to day work which shall be governed by the

existing Accounting Manuals.

4.1.4 Financial Reporting and Auditing Arrangement: To meet fiduciary requirements, SWADE

will submit to the Bank Interim Quarterly Financial Progress Reports no later than 45 days after the end

of each calendar quarter. The quarterly financial reports will include a statement of sources and uses of

funds, with the uses of funds analysed by activities/components and categories, comparing actual

expenditure with budget and notes explaining significant variations in expenditures.

4.1.5 Audit Arrangements: In line with the country requirements, the Office of the Auditor General of

the Kingdom of Swaziland will have direct access to the annual audited financial statements of SWADE

including the project accounts. The audit is currently being carried out by an Independent Audit Firm

recruited through a competitive process in line with the Public Enterprise Unit (PEU) Act. The process

leading to the recruitment of the existing external auditors of SWADE will be submitted to the Bank with

a view to ascertaining its competiveness and for them to carry out the project audit. In addition, the audit

Terms of Reference (TOR) would be submitted to the Bank for clearance in order to ensure adequate

coverage of the project. In the event that the current audit reports preparation timelines for SWADE meet

the six months requirements of the Bank for the submission of the audited accounts, it would not be

necessary to prepare a separate audited accounts for the project but appropriate disclosures would be

required to be made in the notes to the accounts. However, in the event that this requirement is not met,

annual audited accounts of the project will have to be done separately from the SWADE entity audited

account whereby the project shall submit a single audited financial statements (including a management

letter), showing the separate component funded by each donor (as applicable) to the Bank, within six

months following the closure of each financial year. The cost of the audit shall be borne by SWADE.

4.1.6 SWADE has an Internal Audit function (managed by one staff) which reports directly to the Audit

and Risk Sub-Committee of the Board. However, SWADE proposes a staffing complement of three,

including the existing Internal Audit Manager who will be complemented by an Internal Audit Officer

with immediate effect and an additional Internal Auditor to be recruited as required depending on the

work load. The project will be included in the Internal Audit work programme.

4.1.7 Disbursement Arrangements: This will be effected using only Direct Payment Methods in

accordance with the Bank’s rules and procedures as laid out in the Disbursement handbook as applicable,

given that the Bank will finance only one major construction work and related goods. A disbursement

letter spelling out the disbursement arrangements will be discussed during the negotiations of the

financing.

4.2 Monitoring

4.2.1 SWADE Monitoring and Evaluation unit has a very detailed and current database on the key

indicators of: (i) projects at various stages; (ii) water table; and (iii) crop yields in selected sites of the five

agricultural regions. The report of Socio-Economic Baseline Survey was submitted in 2015. The report

provided the physical and socio-economic baseline status of the project area as well as selected project

indicators. The baseline information, which included sex-disaggregated data and was based on gender

15

analysis covered areas such as education, health, income levels etc. The project will incorporate gender

sensitive results-based indicators and target values. The project will also conduct at its onset, a start-up

workshop, with the aim of sensitizing and training of SWADE staff, implementing partners and project

beneficiaries on the project objectives and scope and review the Results Based Logical Framework as

well as Bank’s Procedures.

4.2.2 Through SWADE’s Monitoring and Evaluation (M&E) department, the Project will provide: (i)

timely and accurate information on project implementation progress and constant feedback for decision

making and addressing potential work plan deviations and problems during implementation; and (ii) the

basis for assessing the achievements of the project as per the Results Based Logical Framework. The

project will submit quarterly progress reports to the Bank and the Bank will undertake two supervision

mission per year and prepare an Implementation Progress Report (IPR) for each supervision mission. An

MOU will be signed among the financiers to facilitate effective M &E for all the project component with

particular emphasis on the infrastructure of the main, secondary and tertiary canals.

Table 4.2: The key milestones are summarized in the table below:

Timeframe Milestone Monitoring process / feedback loop

Year 0

Year 0

Year 1 – 5

Prequalification of

contractors, preparation of

procurement packages etc.

Project approval, signature

and launching

Implementation

GoS, AfDB

AfDB Board, GoS

Beneficiaries, SWADE, MA & PCU

Year 1 – 5 Oversight Steering Committee (MOF, MA, , SWADE)

Year 1 – 5 Audit Reports Annually by PCU

Year 3 Mid-Term Review Bank and PCU to monitor

Year 5 Impact Study PCU

Year 5 Project Completion Report SWADE, MA and PCU to monitor; Bank to

participate

4.3 Governance

4.3.1 The 2015 Ibrahim Index of African Governance showed Swaziland positive performance at the

overall governance level, showing its largest improvement in Human Development. Although Swaziland

registers a marginal improvement in Participation & Human Rights, it remains the lowest scoring

Southern African country in this governance dimension. In Sustainable Economic Opportunity. Swaziland

shows one of the largest improvements in Rural Sector on the continent, contrary to the continental trend

of deterioration in this sub-category. In Human Development Swaziland’s positive trend is the result of

strong gains in Education, in which it has shown year-on-year improvement. Swaziland continues to

register low scores in Participation & Human Rights, notably in Participation where it is ranked third

weakest on the continent, above Somalia and Eritrea. Swaziland also shows deterioration in this sub-

category, the largest within its region. During the period under review, Swaziland was ranked 28 out of

54 countries, with a score of 49.6 (well below the regional average score of 59). Swaziland scores 50.3 in

Sustainable Economic Opportunity, ranking 16th on the continent. Within the Sustainable Economic

Opportunity category, Swaziland’s best sub-category performance is in Rural Sector, scoring 57.0.

Swaziland’s weakest sub-category performance in the Sustainable Economic Opportunity category is in

Infrastructure, scoring 46.6. Swaziland has shown an improvement (+0.8) in Sustainable Economic

Opportunity since 2011. This has been driven by improvement in three of the four sub-categories: Public

Management (+1.5), Infrastructure (+0.9) and Rural Sector (+3.9). In addition, the Bank’s Country Policy

and Institutional Assessment (CPIA) shows a weakening governance environment, with the country’s

score declining from 3.5 in 2010 to 3 in 2011. In 2012, the governance score improved to 3.3 but the

country’s ranking slipped to 47 from 44 in 2011. There are major weaknesses on the expenditure side due

to inefficient resource allocations. Strengthening the budgetary process to enhance resource allocation and

16

capacitating oversight bodies to ensure effective delivery of their core mandate and to foster transparency

in procurement and accountability will be important.

4.3.2 The Anti-Corruption Commission (ACC) was reestablished in 2008 after the repeal of the

Prevention of Corruption Order of 1993. In the past two years, the ACC has brought some high-profile

cases before the courts. Its effectiveness, however, is constrained by inadequate human and financial

resources. Nevertheless, Swaziland was ranked 69 out of 175 countries in the 2014 Corruption Perception

Index, a great improvement over 2012 rating which ranked the country 88 out of 176 countries.

4.3.3 As part of the Fiscal Adjustment Roadmap (FAR) the Government has put in place a

comprehensive Public Finance Management (PFM) action plan. Of the seven PFM-related actions

required under the Fiscal Adjustment Roadmap (FAR), only the enactment of the PFM Bill is

outstanding. The PFM Bill, which was recently approved by Cabinet, provides a good opportunity for

implementing the remaining reforms. The Bill sets out the key principles of good governance, including

broad participation, inclusiveness, transparency and accountability. The Bank has provided resources for

a long-term PFM Advisor to the Ministry of Finance. The IMF and the World Bank are jointly providing

technical assistance to strengthen the macro-fiscal framework. The Government has also established a

strong framework that will help monitor progress in implementing reforms aimed at improving the

business environment.

4.4 Sustainability

4.4.1 The project is financially sustainable. The analysis indicates that the farmers will be able to

service their loans, as well as obtain handsome net profits for re-investments in running the farms. The

Government is also in the process of appointing a service provider to manage the bulk infrastructure

facilities on its behalf. It is envisaged that under this new arrangement, farmers will be charged with the

full cost of the irrigation water management, which Government estimates at ZAR1,350 (US$ 84.00) per

ha, but are currently charging only ZAR 450 (US$ 28.00) per ha, with a Government subsidy of ZAR 900

(US$ 56.00) per ha. The Government, by putting in place a mechanism for full recovery of the operation

and maintenance cost will contribute significantly to the sustainability of the project. The Government

has committed to making yearly adequate budget provision for counterpart funding. The irrigation

development, marketing of value added products, provision of institutional support and development of

strong farmer groups will work in synergy to ensure sustainability. In particular it is expected that, as

under LUSIP I, the farmers who will be organized in Farmer Associations will operate as farming

businesses, recruiting farm managers and/or service providers to manage their farms, including operation

and maintenance.

4.5 Risk Management

4.5.1 Volatility of the world sugar market.

Mitigation: Government has concluded (in 2014) the European Partnership Agreement with the EU,

which entitles the country to some preferential treatment. The Country also enjoys preferential treatment

in the SADC market.

4.5.2 Project Cost Overruns: Project cost overruns due to exchange rate fluctuations, uncertainties in

economic situation of SADC and the rise in the cost of materials.

Mitigation: Though the project is costed in South African Rand (which is accepted in Swaziland as a local

currency), the procurement activities are already front-loaded by Advance Procurement Method which

will enhance timely procurement to address the price increases. In addition, adequate price contingencies

for the unavoidable increment in cost are provided in the project costing.

17

4.5.3 Reduction in Water availability for irrigation.

Mitigation: The project area is covered by the tripartite water usage agreement between South Africa,

Mozambique and Swaziland. Therefore, it is not envisaged that the project will experience inadequate

water for irrigation. Nevertheless, farmers will be trained in proper water management to reduce wastage

and to optimize returns for each drop of water.

4.5.4 Delay in providing counterpart funding could result in implementation delays. The

Mitigation: The resources of the Bank and other DP are earmarked to fund infrastructure while the

Government will fund Project Management and Coordination activities. SWADE which will manage the

project already exists and is well staffed. In addition, the Government has given commitment to make

adequate provision for the project implementation in the country’s annual budget.

4.5.5 Ineffective and uncoordinated project supervision: Given that financiers could have different

system and work plans, this could lead to uncoordinated and ineffective supervisions which could result

into development ineffectiveness.

Mitigation: The project is being parallel co-financed which means that each Development Partner has its

ear marked activities. Moreover the design of the project does not require all activities to start and

complete at the same time. Thus joint supervisions are not necessary.

4.5.6 Poor farmer organization:

Mitigation: Farmer mobilization underway.

4.6 Knowledge building

4.6.1 The knowledge gained and lessons learnt through the implementation of LUSIP I and other

Bank’s projects in Swaziland as well as studies carried out in the sector have been duly applied in

designing this project. Similarly, the knowledge that will be generated through implementation of this

Project will be instrumental in the designs and implementation of the anticipated LUSIP III. The results

from the various studies and other surveys, including the socio-economic impact study will inform the

stakeholders on how to put the acquired knowledge into practical use for better results-oriented

achievements and sustained benefit flows.

4.6.2 At the project level, the project implementation review, quarterly progress reports, audit, sector

M&E, ESMP monitoring, etc. as well as other reports will also provide information on various aspects of

the project for further diagnosis and improvement. The knowledge obtained will be shared within the

AfDB and with other development partners as well as with RMCs.

V LEGAL INSTRUMENTS AND AUTHORITY

5.1 Legal instrument

The Project will be financed with an ADB Loan.

5.2. Conditions associated with Bank’s intervention

5.2.1 Conditions Precedent to Entry into Force of the Loan Agreement: The entry into force of the

Loan Agreement shall be subject to the fulfilment by the Borrower of the provisions of Section 12.01 of

the General Conditions Applicable to Loans and Guarantee Agreements of the ADB.

5.2.2 Conditions Precedent to First Disbursement of the Loan: The obligation of the Bank to make

the first disbursement of the loan shall be conditional upon entry into force of Loan Agreement in

accordance with 5.2.1 above and the submission by the Borrower of evidence in form and substance

satisfactory to the Bank, of a duly concluded co-financing arrangements with BADEA, EIB and KF, or if

such arrangements have not been duly concluded, evidence by the Borrower that it has made appropriate

arrangements to cover any financing gap resulting from the failure to conclude the co-financing

agreements.

18

5.2.3 Undertaking: The Borrower shall cause the Executing Agency to implement the project in

compliance with national legislations and in accordance with the Environmental and Social Management

Framework (ESMF) and submit to the Bank on an annual basis an acceptable Environmental and Social

Monitoring Report.

5.3 Compliance with Bank Policies

This Project complies with all applicable Bank policies.

VI RECOMMENDATION

Management recommends that the Boards of Directors of the Bank approve the proposed ADB loan of

ZAR 855.131 million to the Kingdom of Swaziland for the purposes of financing the Lower Usuthu

Smallholder Irrigation Project - Phase II (LUSIP II), and subject to the conditions stipulated in this report.

I

APPENDIX 1: MAP OF PROJECT AREA

II

APPENDIX 2: SWAZILAND SOCIO-ECONOMIC INDICATORS

Indicators Unit 2000 2007 2008 2009 2010 2011 2012

National Accounts

GNI at Current Prices (Million US$) 1.702 3,433 3,566 3,365 3475 3971

GNI per Capital (US$) 1600 3030 3100 2880 2930 3300

GDP Current Prices(Million US$) 1517 3039 3020 3168 3894 4179 3705

GDP at 2000 Constant Prices (Million US $) 1517 1829 1873 1895 1931 1945 1939

Real GDP Growth Rate % 10.2 3.5 2.4 1.2 1.9 0.7 -0.3

Real per Capital GDP Growth Rate % 8.6 2.1 0.9 -0.4 0.4 -0.7 -1.7

Gross Domestic Investment % GDP 18.2 12.3 11 10.3 10.7 10.7 12.6

Public Investment % GDP 5.6 6.5 5.8 5.5 5.6 5.6 6.5

Private Investment % GDP 12.6 5.8 5.2 4.9 5 5 6.1

Gross National Saving % GDP 4.6 10.3 5.7 -0.1 1.7 0.1 10.6

Price and Money

Inflation (CPI)% 12.2 8.1 12.6 7.6 4.5 6.1 8.9

Exchange Rate (Annual Average)/Local currency/USD

6.9 7 8.3 8.5 7.3 7.3 8.2

Monetary Growth (M2)%

Money and Quasi Money as % of GDP 19.7 24.6 24.4 28.7 29.2 28.9

Government Finance

Total Revenue and Grants % of GDP 27 39.5 37.6 34.1 23.7 24.2 38.9

Total Expenditure and Net Lending % of GDP 28.3 30.6 39.6 40.1 37.9 33.8 35.9

Overall Deficit(-)/Surplus(+) % GDP -1.3 8.8 -2 -6 -14.3 -9.6 3

External Sector

Export Volume Growth (Goods)% 1.3 -4.4 -20.1 16 -8.9 7.9 11.4

Import Volume Growth (Goods) % -11.2 -6.9 -29.5 49.5 -18.1 -7.7 0.6

Terms of Trade Growth % -14.3 6.1 -7.2 20.8 -10.9 -11.7 -16.7

Current Account Balance (Million US$) -46 -141 -224 -410 -609 -433 -98

Current Account Balance % GDP -3 -4.7 -7.4 -12.9 -15.6 -10.3 -2.6

External Reserve Months of Import 2.3 2.3 2.6 3.1 2.2 1.6 ….

Debt and Financial Flows

Debt Service % Exports 1 2.3 1.7 1.7 2.3 3.1 3.4

External Debt % GDP 2.3.3 17.5 15.9 12.6 12.3 11.3 11.2

Net Total Financial Flows (Million US$) 35 55 54 38 70 102 …

Net Official Development Assistance (Million US$)

13 51 70 56 91 130 …

Net Foreign Direct Investment (Million US$) 106 37 106 66 136 95 …

Source: AfDB Statistics Department: Development Data Portal Database, United Nations: OECD, Reporting System Division, IMF: World

Economic Outlook, October 2012 and International Financial Statistics, October 2012; Notes:…Data Not Available (e) Estimations Last

update: March 2013

III

APPENDIX 3: TABLE OF ADB PORTFOLIO IN SWAZILAND

Swaziland ongoing portfolio as at January 2016

Division Long name Approval

date

Planned

project

completion

date

Amount App. Amount Dis. Age

ESTA2 STATISTICAL CAPACITY BUILDING

PROGRAMME - PHASE II (SCB II)

2/1/2012 12/31/2016 490,600.0 204,811.5 4.1

OSGE2 TA FOR PUBLIC FINC MGMT REFORMS 11/3/2011 11/30/2016 478,452.0 381,185.9 4.3

969,052.0 585,997.4 4.2

ONEC2 ENERGY SECTOR TECHNICAL

ASSISTANCE PROGRAM

12/8/2014 12/31/2016 717,652.0 0.0 1.2

717,652.0 0.0 1.2

OITC2 MANZINI-MBADLANE HIGHWAY PROJECT 5/28/2014 12/31/2019 33,314,220.6 0.0 1.8

OITC2 MANZINI-MBADLANE HIGHWAY PROJECT 5/28/2014 12/31/2019 1,200,000.0 0.0 1.8

34,514,220.6 0.0 1.8

OWAS2 EZULWINI SUSTAINABLE WATER AND

SANITATION SERVICE DELIVERY

6/18/2014 12/31/2018 16,702,835.7 503,128.8 1.7

16,702,835.7 503,128.8 1.7

TOTAL 52,903,760.3 1,089,126.2 2.6

IV

APPENDIX 4: ORGANOGRAM

LUSIP II Organogram

SWADE Organogram

Project Steering Committee

SWADE Board

CEO

LUSIP II Project Manager

Project Implementation Team

Economic Empowerment Unit

Business Development Support

Planning & Institutions Development Unit

Environmental Management Unit

Support Services

(IT; Procurement; Finance; Admin; M&E; HR; Communications)

Water Infrastructure & Management Unit

Engineering Consultants

Engineering Advisor

Environment Review Panel

MINISTER FOR AGRICULTURE

Board of Directors

Chief Executive

Officer

LUSIP I Project Manager

Internal Auditor

Executive Secretary

Human Resources & Administration

Manager

Chief Financial Officer

Information Management

Systems Manager

LUSIP II Extension Project

Manager

Strategic Planning Advisor

LUSLM National Project Manager

KDDP ACTING Project Manager

Executive Director