USAID WASH-FIN Assessment of the Kenya Pooled Water Fund - Executive Summary

The Government of Kenya estimates that the country needs to invest KES 100 billion (USD 930 million) annually to meet the goal of universal access to water by 2030. However, as of 2018, only about KES 40 billion (USD 370 million) was available annually, leaving a total shortfall of KES 600 billion (USD 5.6 billion) to achieve universal access to water by 2030. KPWF planned to arrange USD 100 million from the local capital market to finance several water and sanitation projects for the period 2018-2022. The KPWF bond product was designed as a series of loans targeting between USD 30 and 50 million annually, with an average tenor of 15 years and a fixed interest rate of about 15% per annum. To protect from bond default, the KPWF required guarantees at two levels, a liquidity guarantee, and a default guarantee. The Government of Kenya provided USD 2.5 million in the 2016/2017 national budget and set up a reserve account with the Water Sector Trust Fund (WSTF), the government's WASH financing entity. USAID, through the Investment and Economic Opportunity (IEO) provided a partial credit guarantee facility through the Development Credit Authority (DCA). The Swedish International Development Cooperation Agency (SIDA), through GuarantCo, provided an additional guarantee to de-risk the loans. The IEO also provided early support in evaluating the KPWF proposal and making recommendations. At later stages, USAID provided technical support to KPWF through the Kenya Integrated Water Sanitation and Hygiene (KIWASH) and the Water, Sanitation and Hygiene Finance (WASH-FIN) programs. The KPWF process faced several challenges, including delays in bond issuance and revisions to the amount and timing of the bond. On May 13, 2019, KPWF formally requested USAID to terminate the DCA guarantee, a signal that the execution of the bond would take even longer. USAID formally terminated the guarantee on June 11, 2019. The other guarantee with GuarantCo and SIDA was never executed as there was no bond issuance. At the time of this assessment, KPWF had still not been able to fulfill its original mandate. USAID's assessment sought to answer five key questions: (i) Was the rationale behind KPWF solid? (ii) Was the structure of KPWF the most optimal for the targeted environment? (iii) Was the assessment of market readiness correct? (iv) Was the product being offered comparable to what was already in the market? (v) Was government and other stakeholder engagement sufficient to enable the process? The assessment was carried out by USAID's WASH-FIN activity between January 2020 and November 2020 and interviewed at least 20 people representing national and county government officials, water service providers (WSPs), development partners, and technical support staff from different entities. The findings of the assessment indicate that the rationale behind KPWF was solid. Well before KPWF, it was recognized by all stakeholders that the financing gap in the water and sanitation sector was too large for the public sector to close alone and that there was a need to bring in private financing. Kenya is classified as a lower middle-income country, which strengthens the need for private financing. Efforts to bring commercial finance to the water sector were already underway prior to KPWF, including the World Bank's SUWASA project, which supported WSPs to access commercial financing from local banks through the Output Based Aid (OBA) program. By the close of SUWASA in 2015, six WSPs had borrowed approximately USD 3.2 million, and by 2019, nine WSPs had borrowed a total of Ksh 767 million (USD 7.7 million) from three commercial banks. The conceptualization of KPWF was spurred by the fact that the domestic capital market in Kenya was one of the most developed markets among Eastern and Central African countries. National government stakeholders and development partners welcomed the KPWF approach, which would increase the ticket size and volume of transactions by pooling available resources from the capital markets and further provide longer tenors, ultimately lowering the financing costs.