The Kigali Bulk Water Supply (KBWS) project is an exemplar of a successful water PPP. Being the first of its kind in East Africa, it is a pioneering model for the financing, construction and operation of a 40,000 cubic meters/day bulk water facility with a concession term of 27 years.
The project’s success is remarkable given that it was developed against the backdrop of a water-stressed market where water insecurity has been exacerbated by climate change.
Kenya can borrow a leaf from the KBWS project to unleash the potential of water PPPs to provide water for drinking, irrigation, sanitation and hydropower plants.
Kenya has already made significant strides to realise its dream of successful water PPPs. Notably, the Water (Amendment) Bill, 2023 proposes to empower Water Works Development Agencies and the National Water Harvesting and Storage Authority to take on the role of water service providers through PPPs.
Additionally, the government has announced ambitious plans to construct 100 dams over a five-year period. As these dam projects are capital-intensive and the public purse is strained, a good number of them are likely to be structured as PPPs.
Since PPPs rely on loans for financing, developers must design them to ensure that lenders can make a reasonable return on investment.
Two mechanisms that can be employed to give lenders comfort are a government support measure package, which has been anticipated under the new Water (Amendment) Bill, and political risk insurance.
Governments and development finance institutions can also support water projects by providing viability gap funding (VGF), to help bridge any gap between project costs and cash flows expected.
The KBWS project, for instance, attracted funding from the African Development Bank and VGF from the Private Infrastructure Development Group which is funded by six governments and the IFC.
Importantly, prudent risk allocation is a core ingredient for the success of a water PPP because effective risk-sharing enhances financial viability and investor appeal.
Developers should evaluate, among other things, the risk of revenue shortfalls due to water demand fluctuations, tariff adjustments or drought, and consider negotiating for the revenue risk to be underwritten by government or shared.
Another issue for developers to grapple with is water loss which compromises operational sustainability. According to the Water Services Regulatory Board’s performance report for 2021/22, non-revenue water (NRW) levels remained at 45 percent for the preceding three years, which is double the allowable threshold of 20 percent.
Financially, this inordinate water loss translates to an annual loss of approximately Sh11.2 billion. It behoves a water PPP developer to mitigate the NRW losses caused by technical factors such as leaks in transmission pipelines and non-technical factors including diversion and theft.
The recently published NRW Management Guidelines of 2022 can help to inform the developer’s assessment of these risks.
In terms of contracting, developers should familiarise themselves with the comprehensive model bulk water supply project agreement made available on the Ministry of Water, Sanitation & Irrigation’s website.
While such templates provide a good starting point for water PPP contracts, developers need to retain qualified advisors to customise the contractual terms as appropriate.
Diligent planning by developers of water PPPs will yield results in the form of bankable projects which successfully deliver much-needed water resources for the public’s benefit.
Beatrice Nyabira is the Partner and Head of the Projects, Energy & Restructuring Practice at DLA Piper Africa, Kenya (IKM Advocates). Judy Muigai (Director) and Angela Wanjiku (Associate) are in the same practice.