State Intends to Issue a Water Bond Following a Failed Initial Attempt.

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Nearly half of the water supplied in Kenya is unmetered, resulting in a significant loss of revenue for water companies and exacerbating the funding challenges in the sector. The Ministry of Water reports that around 45 percent of water distributed is not billed due to unmetered consumption. To address the funding gap estimated at Sh652 billion ($6.5 billion) in the water sector, the government is considering granting water service providers (WSPs) permission to borrow from the capital markets, potentially through the issuance of bonds.

If approved, this move is likely to lead to an increase in water tariffs to cover the debt repayments. Currently, WSPs generate Sh21.8 billion ($218 million) in tariff revenue, of which Sh11.6 billion ($116 million) is allocated to staff expenses. The government’s previous initiative, the Kenya Pooled Water Fund, which aimed to mobilize Sh10 billion from local bond markets for water infrastructure development, was unsuccessful. However, it demonstrated that capital market investors are willing to invest in well-structured water sector projects.

The Ministry of Water, Sanitation, and Irrigation has begun engaging stakeholders, including the Capital Markets Authority, to explore the possibility of bond issuance by WSPs. One of the challenges is to keep the water debt off the government’s balance sheet to avoid adding to Kenya’s public debt burden. The adoption of cost-reflective water tariffs is seen as a means to ensure that the debt does not require taxpayer-funded guarantees for the bonds issued by WSPs. Additionally, stakeholders are proposing the ring-fencing of revenue generated from water tariffs to prevent leakages that could undermine the viability of WSPs’ bond issuance.

To proceed with debt financing in the capital market, water firms will need to secure credit ratings from reputable ratings agencies. It is recognized that a variety of funding sources will be required to address the funding and financing gap in the water sector and achieve universal access to water services as outlined in the National Water Sector Investment Plan.

Opinion: Addressing the issue of unmetered water consumption is crucial for revenue generation and sustainable funding of the water sector in Kenya. By implementing metering systems and ensuring that consumers are billed accurately, water companies can improve their financial performance and reduce losses. The proposed move to borrow from the capital markets through bond issuance can provide much-needed financing for water infrastructure development. However, it is essential to carefully structure the bonds and tariffs to balance the need for revenue generation with affordability for consumers. Proper oversight and accountability mechanisms should also be in place to ensure that the funds are used effectively and efficiently for the development and maintenance of water infrastructure.

BDA.

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