RESOURCES/FEATURED STORIES

PPIAF Assesses Kenya’s Water Sector Debt

30 July 2020
PPIAF Assesses Kenya’s Water Sector Debt
The Government of Kenya’s Vision 2030 aims to transform Kenya into a newly industrializing middle-income country by 2030. Under its third medium-term plan for Vision 2030, the government wants to increase the number of Kenyans with access to potable water from 60% to 80% by 2022. This will require significant investment in new and existing water infrastructure. To support these efforts, the government adopted a policy of encouraging public-private partnerships (PPPs) and commercial lending to help utilities access the financing and expertise they need to develop the water infrastructure that

The Government of Kenya’s Vision 2030 aims to transform Kenya into a newly industrializing middle-income country by 2030. Under its third medium-term plan for Vision 2030, the government wants to increase the number of Kenyans with access to potable water from 60% to 80% by 2022. This will require significant investment in new and existing water infrastructure.

To support these efforts, the government adopted a policy of encouraging public-private partnerships (PPPs) and commercial lending to help utilities access the financing and expertise they need to develop the water infrastructure that will help Kenya meet its Vision 2030 development goals.

But the financial viability of Kenya’s water utilities has become a challenge to attracting investment financing. This has been made more acute by the transition of water utilities into decentralized corporations.

After a review of the Water Act in 2016, regional water service boards were dissolved, and ownership of water companies was transferred to county governments. This change led to a number of constraints that impacted the operations of many utilities, including an expectation of transfers of obligations of the national government to the company balance sheet.

For example, Nairobi Water and Sewerage Company (NWSC)’s board was dissolved making it difficult for NWSC to pass key investment decisions until new management was in place. At the same time, a review of the utility’s financials revealed it was heavily indebted and had no additional fiscal space to take on additional debt or make strategic investments in the network. These policy changes were designed to address overall sector financial viability but have resulted in the utilities’ ambitious investment plans being put on hold.

Given these circumstances, PPIAF and the project team agreed to review the debt burdens of water service providers across the country to assess the potential for commercial financing. As part of a sector-wide assessment, PPIAF reviewed the  concessionary and domestic debt taken by the government on behalf of the sector with the expectation it would be repaid through collections from water customers. PPIAF’s assessment established that water company collections will not make a significant dent in covering the existing debts and the creditworthiness of many water utilities is insufficient to secure any new financing.

In May 2020, PPIAF presented the government with a report providing options for dealing with the existing debt held by the National Treasury and the Ministry of Water, Sanitation and Irrigation, along with recommendations for a turnaround program for water utilities to increase their free cash flows and improve their performance. These actions will improve the creditworthiness of water utilities, enabling them to secure commercial financing and reducing the financial burden on the public sector.

PPIAF’s report and recommendations have been considered by the regulator and shared with the Ministry of Water. Importantly, the report is now being used as a basis for a broader dialogue with the Government of Kenya on the water sector’s financial viability and how to make improvements that can help the government unlock the financing it needs to deliver on its Vision 2030 for the water sector.