P U B LI C -P RI VAT E INFR ASTR UCTUR E AD VISORY FACILITY 71718 June 2010 IMPACT STORIES PPIAF Facilitates Micro-Financing for Peri-Urban Water Providers in Kenya In 2005 PPIAF �nanced a study to better understand the challenges faced by Kenyan community-based organizations (CBOs) as they tried to secure market- based �nancing for small water operations in peri-urban areas. The study investigated ways of combining capacity building, output-based donor subsidies, and private sector �nancing to help CBOs expand and improve their water delivery operations. In collaboration with the Water and Sanitation Program (WSP) and the Global Partnership on Output-Based Aid (GPOBA), the study helped facilitate market- based infrastructure �nance for 21 CBO water providers in rural and peri-urban areas of Kenya. In order to build on the success of this �rst grant, PPIAF approved a second one in 2008 to help the Kenyan government establish a Project Development Facility to help a much larger group of CBOs prepare capital development plans and apply for investment loans from local micro-�nance institutions led by K-Rep Bank. Access to water supply remains at low levels in rural Kenya, and efforts to increase access to piped water have been slow, increasing only from 9% to 10% of rural households over the past eight years. Small-scale providers, previously seen as temporary sources of unsafe and expensive water, are now increasingly seen as a practical way of supplying infrastructure services to low- income households and dispersed populations in rural and peri-urban areas throughout Africa. In Kenya, helped by the 2002 Water Sector Act that introduced regulatory and tariff reforms, it is estimated that CBOs run about 30% of all rural water supply schemes in the country and serve at least 60% of Nairobi’s households. However, small service providers have traditionally been constrained by low levels of business expertise and poor access to �nance. PPIAF SUPPORT In 2005 the Public-Private Infrastructure Advisory Facility (PPIAF) provided a $72,000 technical assistance grant to facilitate market-based lending to small water service providers on a project �nance basis, backed only by project revenues. PPIAF’s grant was task managed by a team from WSP’s Nairobi regional of�ce, and the scope of work was an extension of two case studies undertaken by WSP in 2004. WSP’s analyses suggested that CBO operators of small-piped water systems in rural and peri-urban areas des- perately needed �nancing to extend and improve their systems, and that micro-�nancers could, theoreti- cally, make this funding available. But the study also highlighted that this kind of lending faced several constraints, both on the part of CBOs and that of micro-lenders. In particular, the study found that CBOs in Kenya lacked the technical and managerial capacity to plan investment projects and make compelling loan applications to prospective lenders. Micro-lenders, on the other hand, had little understanding of the water sector, little interest in project �nance loans (with loans secured only by the anticipated revenues from the facilities to be built or improved), and were unfamiliar with project credit analysis. PPIAF-funded technical assistance, managed by WSP’s water experts, produced a series of assessment tools for lenders to use in providing market-based �nancing for small water projects as well as business and �nancial planning tools to help small water operators present bankable projects to prospective www.ppiaf.org lenders. GPOBA made additional technical assistance fund- thority). Once the project achieved the pre-agreed outputs ing available to help the CBO operators understand how to (e.g., number of new customer connections), the GPOBA use output-based donor subsidies to reduce their borrowing subsidy, accounting for a maximum of 40% of project cost, costs and make their projects affordable and sustainable. was released to the CBO, allowing it to pay off two-thirds GPOBA also made subsidy funding available for qualifying of its debt. operators. After the success of the pilot program, PPIAF approved a sec- DONOR COORDINATION ond, larger Sub-National Technical Assistance (SNTA) grant PPIAF’s support extended WSP’s initial work and assisted in in 2008 totaling $523,719 to help the government estab- mobilizing �nancial support from the private sector as well lish a Project Development Facility (PDF). The PDF scales up as other bilateral and multilateral sources. K-Rep Bank’s use the pilot work by offering grants to a much larger group of of PPIAF’s assessment tools led to its understanding of and eligible CBOs so that they can contract consultants to con- support for the pilot. GPOBA (and later, the European Union) duct feasibility studies, determine their subsidy needs and provided subsidy funding and related advice. the affordability levels of their community, examine design and engineering issues, and, with other assistance from the PDF, qualify for private �nancing. Additional output-based IMPACTS aid for the scaled-up project was provided by the European To date, K-Rep Bank has approved 13 sub-projects for �- Union’s Water Facility. nancing with a total value of $1.08 million. These projects are bene�tting nearly 40,000 people. OUTCOMES In addition to the domestic bene�ts of safe water supply, In 2006, GPOBA approved a pilot project to be implemented the pilot project has demonstrated bene�ts for water-related using the tools designed by the PPIAF grant. This initial pilot income-generating activities such as dairy cattle farming, targeted 21 community-based water sub-projects, repre- poultry keeping, and horticulture. New household or yard senting a total investment of $1.15 million in �ve districts connections have also bene�ted women residents who oth- around Nairobi. Commercial �nance for the sub-projects erwise would be spending time and energy fetching water. was provided by one of Kenya’s leading micro-lenders, K- Under the management of the PPIAF-supported PDF, the Rep Bank. The overall project was administered by the gov- pilot project has now been expanded nationally, targeting ernment’s Athi Water Services Board. over 165,000 bene�ciaries in 55 communities, using addi- For each of the sub-projects, the relevant CBO provided tional subsidy funds from the European Union. equity totaling 20% of project cost and borrowed the re- maining 80% from K-Rep Bank (these �ve-year loans were partially guaranteed by USAID’s Development Credit Au RELATED PPIAF AND SNTA ACTIVITIES IN KENYA • 2000: Options for Privatizing Water Supply and Sewerage Operation in Nairobi, $490,180 Since 1999 PPIAF, a • 2001: Strategy for Privatizing the Water Supply and multidonor technical Sewerage in Mombasa and the Coastal Region, assistance facility, has helped $441,000 developing countries use public- • 2002: Private Sector Participation Options for the private partnerships to improve their Water Supply and Sewerage Operation in Kisumu, infrastructure. A key focus has been $230,750 upstream technical assistance to support • 2003: Training Workshop for Members of the the development of an enabling Water Services Regulatory Board, $74,000 environment for such partnerships. • 2009: Assessment and Development of Market This series highlights how PPIAF’s support Transactions in the Kenyan Water Utility Sector has made an impact on the ground. (SNTA), $486,000