State plans to issue water bond after first attempt failed

Nearly half of all water supplied in the country is unmetered, representing a significant loss of revenue and compounding the funding headache for water companies.

The Ministry of Water says about 45 percent of the water put into the distribution system is not billed due to unmetered consumption.

This is one of the key issues that has emerged as the government considers granting water service providers (WSPs) the green light to borrow from the capital markets to bridge an estimated Sh652 billion funding gap in the sector.

According to documents seen by Business Daily, the government mulls allowing WSPs to float a bond in the local market in a second attempt after the Kenya Pooled Water Fund Initiative (2018 to 2022) proved unsuccessful.

If granted, Kenyans should brace for an upward review of water tariffs to cover the repayments of the debt. Currently, WSPs generate Sh21.8 billion in tariff revenue of which Sh11.6 billion is gobbled up by staff expenses.

“The Kenya Pooled Water Fund was aligned to the Ministry of Water and Sanitation Strategic Plan 2018 – 2022, which sought to mobilise Sh10 billion from local bond markets over the strategy period. While the programme did not achieve its objective of issuing a bond to fund the development of local water and sanitation infrastructure, it demonstrated that capital market investors are willing and able to invest in well-structured water sector investments,” the Ministry of Water, Sanitation and Irrigation states in its pitch.

Water tariffs review

The ministry has kicked off engagements with stakeholders, including the Capital Markets Authority, to chart the way forward. A sticking point, however, is how to keep the water debt off the government’s balance sheet so as not to add to Kenya’s pile of public debt.

The adoption of cost-reflective water tariffs has been identified as the best bet at staving off the risk of necessitating taxpayer-funded guarantees for bonds floated by water service providers.

Stakeholders are also proposing the ring-fencing of revenue generated from water tariffs to avert any leakages, which may undermine the viability of issuance by the WSPs.

“Capital market financing for the water and sanitation sector does not have to affect public debt levels. Through a non-recourse structure, failure to pay only leads to restructuring/write-off as lenders are looking to future cash flows by the water service providers,” says Rebel Group, a consultancy firm which provides advisory on the prospects of bond issuance by WSPs.

“Despite the ambitions and efforts of the Government of Kenya, the sector funding and financing gap to reach universal access remains a challenge for water service providers in Kenya. To meet the total cost of implementing the National Water Sector Investment Plan, a variety of funding and financing sources will be required, including commercial financing,” the Water ministry says.

The water firms will be required to secure credit ratings from credible ratings agencies before they can proceed to the capital market to raise debt financing.

There are 48 WSPs in Kenya regulated by the Water Services Regulatory Board.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.