An innovative project is increasing access to clean and reliable water supply for rural communities in Kenya, using a blend of commercial finance and an output-based subsidy. The project is helping small community-based water providers access the finance they need to improve water systems and connect poor households to piped water supply.
Access to rural water supply remains low in Kenya. In particular, access to piped water has only increased from 9 to 10 percent of rural households over the past eight years.
Small community-based water providers are seen as part of the solution and are supported by the Water Sector Act of 2002, which introduced regulatory and tariff reforms.
However these small water projects lack funding, especially to improve existing systems.
Involving a microfinance bank
The project aims to increase access to and efficiency in water supply services for the poor in rural and peri-urban areas of Kenya. Its Swahili name is ‘Maji Ni Maisha’ which means 'Water is Life.'
In 2004, the Water and Sanitation Program (WSP) Africa began to work with a local microfinance bank, K-Rep Bank, to explore structures under which a commercial financier would be interested in providing loan finance to small community-based water providers.
WSP carried out two case studies that identified a number of constraints, including affordability of capital investment, limited collateral available, and small water providers’ limited capacity to develop projects. The studies, which were funded by the Public-Private Infrastructure Advisory Facility (PPIAF), led to a proposal for a pilot project targeting five districts around Nairobi.
In 2006, the Global Partnership on Output-Based Aid (GPOBA) approved US$1.15 million in grant funding for the scheme to be implemented by K-Rep Bank and supported by WSP.
The project aims to increase access to and efficiency in water supply services for the poor in rural and peri-urban areas of Kenya. Its Swahili name is ‘Maji Ni Maisha’ which means ‘Water is Life.’
Innovative financial structure
"It is the first GPOBA-funded project to use this combination of instruments, so we are eager to share the results"|Patricia Veevers-Carter, GPOBA Program Manager
“This project is facilitating access to finance for community-based water providers by blending output-based subsidies and commercial finance. It is the first GPOBA-funded project to use this combination of instruments, so we are eager to share the results,” said Patricia Veevers-Carter, GPOBA Program Manager.
Under the scheme, the financing is provided on a project finance basis. The community provides equity (20 percent of project cost) and K-Rep finances the remaining 80 percent through a loan with a maximum tenor of five years.
The longer tenor of the loan is made possible through the output-based subsidy which repays up to half the loan, typically after 18 months. It also makes the monthly repayments more affordable for the community.
The subsidy is released once a subproject achieves the agreed “outputs” which include number of new connections and average monthly revenue.
Financing for the subprojects varies from US$60,000 to US$200,000. Connection targets also vary, from 50 new connections for a well-established system to almost 600 for a new system.
For Kimanthi Mutua, Managing Director of K-Rep Bank, “The output-based subsidy served a very important role in helping K-Rep to enter the sector and also to understand how to structure financial products for financing community-based water projects.”
To reduce the collateral required from the borrowers, K-Rep Bank purchased a partial credit guarantee from USAID’s Development Credit Authority which covers 50 percent of the loan principal.
Working in partnership
“The Maji Ni Maisha approach is an example of the type of success for poor people that stems from collaboration and inclusion,” said Jaehyang So, Manager of WSP. “By leveraging the strengths of various programs and involving the local communities, we were able to improve sustainable access to piped water in one area while laying the foundation for scale-up of the approach more widely.”
The roles of the various project partners are as follows:
K-Rep Bank is the lead agency for the project. It approves loan applications, oversees disbursements, and recovers the loans it provides to the communities.
The community-based water service providers develop, own, and manage the water assets.
The Water Services Boards (created under the 2002 Water Act) provide service provision agreements to the communities.
An independent project audit consultant verifies the pre-agreed outputs.
GPOBA funds the output-based subsidies.
WSP provides capacity support throughout the project cycle.
PPIAF finances grants to enable the communities to contract consultants for project development and implementation.
Results so far
SLIDESHOWThe original pilot project targeted 21 subprojects, representing a total investment of about US$2 million, in five districts around Nairobi.
Maji Ni Maisha is now expanding to a national scale and will target over 165,000 beneficiaries in 55 communities, using additional funds from the European Union’s Water Facility.
“This project is an important innovation because it’s leveraging private sector finance to extend water infrastructure in Kenya,” said John Zutt, World Bank Country Director for Kenya. “The project is successful and has the potential to be replicated across Africa.”
So far, nearly 1,800 connections have been verified, benefiting 10,776 people.
Wanjiru Muigu, an inhabitant of Kinoo, previously had to fetch water several times a day in jerrycans. “We are really grateful for this project because it has really helped us as women,” she says.
“Now I can just turn on the tap and drink some water,” says Lucy Njeri of Karweti. “I can see that my people will have a better future because of the water supply.”
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