Kenya Plans Water Bonds to Plug Funds Gap Leaving Nation Dry

HARARE (Capital Markets in Africa) – Kenya is turning to the bond market to finance water and sewage projects as it seeks to plug a funding gap that’s left nearly half the population without access to a tap.

Utilities are pooling together loans and packaging them as debt for investors as they seek to fix poorly maintained and aging networks that lose about 43 percent of the water pumped in East Africa’s largest economy, according to the Water Services Regulatory Board. Sixty percent of Kenyan water utilities have failed quality tests, while a third of the operators supply water for less than 12 hours a day.

The first 15-year bond of about 2 billion shillings ($20 million) may be issued later this year, Robert Bunyi, chief executive officer of the Kenya Pooled Water Fund, said in an interview Tuesday in the capital, Nairobi. The six utilities participating in the offer are from counties including Nairobi, Embu, Thika, Kisumu, Nyeri and Meru.

“We want to channel local savings into investment of water infrastructure,” said Bunyi. The target is to raise as much as 10 billion shillings of water bonds annually, he said. The notes will be offered as an infrastructure bond to qualify for tax exemption and will also seek green-bond accreditation from the Kenyan stock exchange in order to attract social-impact investors, he said.

Dutch Backing
Kenya’s 586.2 billion-shilling bond market is dominated by government debt, with debt sales by companies including East African Breweries Ltd. and Centum Investment Co. making up only about 15 percent of total issuance, according to the Capital Markets Authority of Kenya.

The water-financing facility is backed by the Dutch government and supported by agencies including the World Bank, and the U.S. Agency for International Development. If it’s a success, the Kenyan model will be used in other African countries, as well as Indonesia and Vietnam, said Jean-Pierre Sweerts, managing director at the Water Finance Facility, an Amsterdam-based agency that’s spearheading the program.

Kenya’s water network covers about 55 percent of household and businesses’ needs, with sewerage access at 15 percent, according to the regulator. Grant funding that previously covered shortfalls has dwindled since the country became a so-called middle-income country in 2014, forcing Kenya to seek increased private-sector funding, according to Robert Gakubia, the regulator’s chief executive officer.

Funding Gap
The water industry in Kenya has an annual funding gap of 60 billion shillings, Gakubia said. The country can only fund about a third of the 1.76 trillion shillings needed to achieve universal access to water and sanitation by 2030, leaving a 1.2 trillion-shilling hole, he said.

Kenya’s 88 regulated water utilities posted total revenue of 18 billion shilling in the year through June 2017, said Gakubia.

The bonds will target pension funds, collective investment schemes and insurance funds seeking long-term investment classes. The water services’ regulator and the World Bank have jointly developed a rating tool to act as a guide into the creditworthiness of the utilities.

Kenya was chosen as the launchpad for the water-bond program because of the need for water and sanitation funding, its large and developed capital markets, a growing number of bankable water-service providers, its robust regulatory environment and sound legal framework, said Sweerts.

Commercial Bank of Africa Ltd., owned by the family of President Uhuru Kenyatta, and Nairobi-based investment bank Kestrel Capital, have been appointed as the placing agents for the upcoming offer, Sweerts said. The WFF has budgeted 5 million euros ($6.2 million) for the debut water bond, he said.

If only half the water losses were plugged by fixing leaking pipes and accurate metering, water companies would generate enough revenue to finance expansion works, said Philip Gichuki, former CEO of the Nairobi City Water and Sewerage Co., who now works as a consultant.

“There isn’t enough money from the exchequer,” he said. “If financing is available, water companies will increase efficiency and easily recover the investment.”