Lack of investment in water sector leaves Kenyan towns parched

At Nairobi’s Donholm Estate, water vendors stake out for customers by the roadside—their hand-carts bulging with plastic containers.

A former middle-income residential area, new unplanned housing developments have sprung up in the area, straining water supply.

The story of Donholm is repeated in other towns where population growth has not matched the expansion of water infrastructure.

But why are investors shying away from putting capital into this sector?

Investment analysts have attributed the lack of investment in water to poor regulations.

“The regulatory framework currently in the country puts off potential investors in the water industry,” said Mr Robert Bunyi.

“Every investor is interested in the security of their capital and would only invest where there is a predictable return on investment. As it is, water is priced way below the cost of production. How can this attract investment?” poses Mr Bunyi.

He says the country will continue keeping away investors in the water industry unless it provides some payment guarantees from consumers and puts in place sufficient legislation to protect the interests of investors.

“The City Council cannot guarantee investors payment for water used. An investor would be asking too much to demand accountability for the water that has gone through their system,” said Mr Bunyi.

Water companies have publicly acknowledged their inability to meet demand and frequently ration the commodity.

But what seems to be an obvious investment opportunity has challenges—in particular, the belief that water is a public resource, not to be sold for profit.

A new study shows that Africa has $1.7 trillion potential wealth and production in agriculture, tourism and water, pointing to new investment areas that stretch beyond commodities that are yet to be exploited.

The study by investment research firms Africa Investor and The Africa Group says the potential represented an additional market size of $762.4 billion.GDP in Africa—one of the fastest growing regions in the world—has been boosted by its vast natural resource wealth in recent years and new partnerships in other sectors could also lift growth.

Strong growth

A McKinsey Global Institute study says Africa’s strong growth will continue at a rapid pace and investors and businesses cannot afford to ignore the continent’s potential, which goes far beyond commodities.

“At the highest level, Africa is similar to any other private investment ... investors must take on risk to pursue an addressable market opportunity,” the Africa Group said.

Currently. it is estimated that available water per capita is about 650 cubic meters per year with future projections showing that by the year 2025, per capita water availability will drop to 235 cubic meters a year in Kenya as a result of population growth—far below the internationally required benchmark of 1,000 cubic meters per capita a year.

Some of the economic benefits that arise from improved water supply and sanitation include less expenditure on treatment of employees from water related diseases, increased productivity since fewer workers will stay away due to sicknesses, and helps save a lot of time for industry.

According to water experts’ calculations, meeting the Millennium Development Goal on water supply and sanitation will gain 322 million working days, and the annual global value of adult working days as a result of less illness has been approximated to be almost $ 750 million.

East African governments have recently, albeit late, woken up to this reality by renewing their investment efforts in water.

The latest is Southern Sudan which is constructing and rehabilitating bore holes, and improving water supply through the construction of water harvesting structures, among other projects.

Kenya appears to have learned a lesson on the importance of harvesting and conservation from a recent two- year drought.

But the market is yet to significantly embrace a call by a panel of water market experts last year—led by David Lloyd Owen, managing director of water advisory company Envisager—to consider increasing investments in the water sector as an attractive alternative to traditional equity market.

The Athi Water Services Board (AWSB), which is charged with expanding the water infrastructure in the country says daily demand by Nairobi residents alone stands at 750,000 cubic meters a day against the supply capacity of 530,000 cubic meters, leaving a daily deficit of up to 220,000 cubic meters.

With Nairobi’s population climbing beyond the five million mark, the projected demand for water in the city in 2020 and 2030 stands at 1.6 million and 2.2 million cubic meters respectively.

The big question then is why the market has not attracted substantial investment in the water sector to meet this demand?

According to Mr Julius Seloke, of Westwood Management Ltd—a brokerage firm in East Africa, the view that water is a human right has contributed largely to investors shying away.

“Water is fast becoming a much sought-after commodity and there is great potential in the business as the world’s sources for this commodity are depleted ,” said Mr Seloke.

Prof Mumma Albert, a senior lecturer, Faculty of Law, University of Nairobi, says because the Water Act 2002 depends on State- based legal frameworks, its effectiveness in meeting the needs of the rural poor are limited, particularly given the limitations of technical and financial resources facing Kenya.

“It is unlikely that the Water Act 2002 will be able to facilitate Kenya’s achievement of the Millennium Development Goals with respect to the provision of water and sanitation by 2015 particularly for poor rural communities,” says Prof Mumma.

Most African nations had became complacent about water availability due to its abundance as a free resource.

The abundance has underpinned industrialisation, fuelled increases in per capita consumption, and has allowed people to live in previously uninhabitable areas.

But as the population grows and water demand increases, this complacency will likely be shaken since more than half of the global population now lives in countries with falling water tables.

Kenya is significantly scaling up investments in agriculture, energy and water projects to hasten the nation’s recovery from the global recession and a regional drought.

Finance Minister Uhuru Kenyatta’s Sh997 billion budget for the 2010/2011 fiscal year, includes Sh51 billion—-35 per cent more from the previous fiscal year— for environment, water and sanitation projects.

The money is expected to modernise meteorological services, clean rivers, build dams and other water-storage infrastructure, restore Kenya’s highland forest (water towers) and scale up irrigation systems to reduce dependence on rain-fed agriculture, and install infrastructure to transport water and waste in urban and rural areas.

The Ministry of Water and Irrigation—which is responsible for formulating the National Water Policy and for carrying out reforms by bringing together all the stakeholders in the water sector, seeks to transfer the responsibility of water management to basin organisations and the provision of water and sanitation services to private companies as a part of the decentralisation process.

The reforms that came into effect in 2002 shifted the responsibility of managing water and sewerage services from local authorities, which have been accused of mismanagement over the years, to new water companies.

But eight years since the commercialisation of water services in the country, many consumers have yet to benefit from improved water supply and sewerage services-—evidenced by the permanent water-rationing programmes across the country.

According to investment analysts, while there is interest from the private sector to manage water sector operations, the ability to fulfil obligations on investment and service provision is not certain, unless there is commitment from by policy makers through formulation of investor safeguards.

The starting point is to recognise that water is not a typical commodity.

As a renewable natural resource there is some element of supply uncertainty; including weather patterns and flood or drought cycles likely to be exacerbated by anticipated climate change patterns.

Water is also an essential good so there is some certainty in demand.

Access to drinking water is considered a fundamental right, which is underscored by the Millennium Development Goals (MDGs), often making water-related projects politically sensitive areas of investment.

Analysts also suggest that water investment can be made in primary industries, like utilities that produce, treat and transport water.

But investments should also include related industries, such as a smart grid and pollution management that could increase efficiency of water use, and products tied to water--like food.

Water use is often energy-intensive, and thus carbon-intensive, while much industry endangers water. So increased focus on carbon and water go hand in hand.

One way to increase the efficiency of water use is to put it under private—for-profit-—control, so that markets determine where it goes, in what amounts, and what it will cost.

The effectiveness of this will largely depend on the willingness of the consumers to pay for the services.