BA Thesis_WaterFundKenya_Kenya Water System

7/28/2019 BA Thesis_WaterFundKenya_Kenya Water System

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Bachelor Thesis 2008

Water Investments

Pilot Study for a Water Fund

in Kenya

Coaching Tutor: Dr. Jason Hauser, ZHAW

Winterthur, May 28, 2008

Author: Alex Paur


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I

Wahrheitserklrung (Statement of truth)

Ich erklre hiermit, dass ich die vorliegende Arbeit selbstndig, ohne Mithilfe Dritter und nur

unter Bentzung der angegebenen Quellen verfasst habe.

Alex Paur, Mai 2008

.

Contact:

Alex Paur

Harossenstrasse 3

8311 Brtten

[email protected]

Herausgabeerklrung des Dozenten

Die vorliegende Bachelor-Arbeit wird fr eine uneingeschrnkte Herausgabe1 freigegeben.

Winterthur, 28.05.2008 Jason Hauser

1 Unter Herausgabe wird sowohl die Einsichtnahme im Hause wie auch die Ausleihe bzw. die Abgabe zu Selbstkostenpreisenverstanden.


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II

Management Summary

Water is the most precious good on our planet, any form of life depends on it. From the 1.4

billion km3

of water on earth, only about 1% is available for human consumption. These 14million km3 of fresh-water could satisfy the need of todays population if they were evenly

distributed in time and space. Instead, water shortage is an ever present problem in many

areas on our planet. Apart from quantity, water quality is an equally important item. About 2

billion people do not have access to adequate sanitation. Due to population growth, every

day more people compete for the same amount of fresh-water and the per capita water

amount available declines continuously. Water is becoming the most critical natural resource.

This capacity constraint can only be faced by improving water management. However,

compared to crude oil, natural gas or gold, little attention is being paid to water as a rawmaterial and investment opportunity. This is even more surprising since water is the only raw

material which is absolutely essential for the survival of every human being.

In cooperation with Swisscontact East Africa this pilot study is exploring the feasibility of

developing a water fund as an innovative saving product for the microfinance sector in

Kenya. The objective is to get an overview of the water sector in Kenya, to tackle possible

bottlenecks and challenges in the water management and to find solutions and potential

investment opportunities along the value chain of water management.

Water funds are already a well established investing and saving product in Europe. Pictet

Funds S.A. and SAM Group were first to enter the market in 2001. Applying this model to a

developing country as Kenya seemed to be far from reality, but research revealed the

opposite.

Although Africa is well known as a predominantly dry continent, Kenya has developed only a

small fraction of its available fresh-water resources. Most water is abstracted from surface

water, but ground water is used too. In addition to population growth, climatic variability as

well as deforestation, water pollution and mismanagement are leading to water scarcity. A lot

has changed in the water management of Kenya since 2002 when the new Water Act gave

the impulse for the liberalisation of the market. The ongoing reforms clearly define the duties

for sector actors. Efficiency has been well enhanced by shifting responsibility from

governmental to private ownership of water services and by the decentralisation of decision

making authorities.


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III

The project Water Fund Kenya will provide the Wananchi2 with a microfinance product linked

to the life sustaining resource water. Investments in water management projects will

accelerate economic growth as well as sustainable development, improve health and reduce

poverty. The concerned parties are Swisscontact as project initiator, Equity Bank as fund

manager and various companies in the water sector.

The author travelled to Nairobi in April 2008 and met more than ten organisations from the

water industry. He got an interesting insight into the water management of Kenyas capital

Nairobi. It was surprising to see that a great number of private companies are involved in the

water sector of Nairobi. Most of them heavily support the idea of the Water Fund.

Nevertheless, investment opportunities were identified as major bottleneck for the project

since none of those companies is listed on the stock exchange market.

The finding of this study is that the project Water Fund Kenya is feasible. However,

subsequent research must be executed for the implementation of the product. Another

outcome of the various meetings in Nairobi is that Swisscontact organises a workshop with

the visited agents. The objective is to bring together the many valuable, but often

uncoordinated ideas of water projects in public schools around Kenya.

2 Wananchi is the Kiswahili word for the plain citizen in Kenya.


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IV

List of content

Wahrheitserklrung (Statement of truth)................................................................. IManagement Summary ............................................................................................ IIList of content.......................................................................................................... IVList of acronyms...................................................................................................... VI

1. Introduction ........................................................................................................ 11.1 Motivation.......................................................................................................... 11.2 Research methodology ..................................................................................... 21.3 Field study in Kenya.......................................................................................... 21.4 Scope and limits of this paper ........................................................................... 2

Part A - Water investments

2. A scarce resource.............................................................................................. 32.1 Water quantity................................................................................................... 32.2 Water quality ..................................................................................................... 42.3 Water cycle ....................................................................................................... 52.4 Access to water for everyone ............................................................................ 72.5 Water management........................................................................................... 82.6 Summary of chapter 2 ....................................................................................... 9

3. Investment ........................................................................................................ 103.1 Water sector.....................................................................................................103.2 Existing water funds.........................................................................................113.3 Summary of chapter 3......................................................................................15

Part B - Pilot Study for a Water Fund in Kenya

4. Water Management in Kenya .......................................................................... 164.1 Republic of Kenya ............................................................................................164.2 Kenyas water resources..................................................................................174.3 Driver of water scarcity.....................................................................................204.4 Legislation and reforms....................................................................................224.5 Challenges.......................................................................................................254.6 Summary of chapter 4......................................................................................27


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VI

List of acronyms

ASAL Arid and Semi-Arid Land

CAAC Catchment Areas Advisory Committee

EAWAG Eidgenssische Anstalt fr Wasserversorgung, Abwasserreinigung und

Gewsserschutz (Swiss Federal Institute of Aquatic Science and

Technology)

FDI Foreign Direct Investment

FP Finance Promotion

GDP Gross Domestic Product

GWI Global Water Market Index

IPO Initial Public Offering

KES Kenyan Schilling (1 CHF = ca. 60.80 KES)

MDG Millennium Development Goals

MSCI Morgan Stanley Capital International Index

MWRMD Ministry of Water Resources Management and Development

NCWSC Nairobi City Water & Sewerage Company

NGO Non-Governmental Organisation

NSE Nairobi Stock ExchangeOECD Organization for Economic Cooperation and Development

SAM Sustainable Asset Management

SME Small and Medium-sized Enterprises

UN United Nations

UNDP United Nations Development Programme

WHO World Health Organisation

WRMA Water Resources Management Authority

WRUA Water Resources User AssociationsWSB Water Services Board

WSP Water Services Provider

WSRB Water Services Regulatory Board

WSTF Water Service Trust Fund

ZHAW Zrcher Hochschule fr Angewandte Wissenschaften (Zurich University

for Applied Sciences)


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Water Investments Pilot Study for a Water Fund in Kenya 1 / 66

1. Introduction

The initial idea for a water fund project came from Swisscontact East Africa in Nairobi. This

study is a first step towards the implementation of a new financial product in the Kenyan

market. It was carried out to judge the feasibility of the project and to identify opportunities,

challenges and bottlenecks.

This thesis is structured as follow:

Part A Water Investments

A scarce resource

Investments

Part B Pilot Study for a Water Fund in Kenya

Water Management in Kenya

Project Water Fund Kenya

After the introduction, the paper starts in Part A with an overview of the resource water in

general. Both water quantity and quality play an important role. Investment issues are

outlined by looking at the water sector. A brief description of two existing water fund products

is also given in this part. In Part B the Kenyan water sector is being explored. Kenyas water

resources and their limits are discussed before looking at the water management and

legislation in chapter 4. Then the author focuses on the fundamental idea of the study, the

Water Fund Kenya. Chapter 5 consists mostly of the lessons learned during the authors field

research in Nairobi, Kenya. On the basis of this paper Swisscontact will decide whether and

how to continue with the development of the Water Fund project. To assist Swisscontact in

this decision, a feasibility analysis is presented in chapter 5. At the end, the author expresses

his personal opinion and impressions from his trip to Africa. Chapter 6 summarises the

findings and conclusions of the study.

1.1 Motivation

Rather than writing a purely theoretical report, the authordesired to work on a subject with

strong relation to a practical issue. In November 2007 a contact with Veronique Su from

Swisscontact East Africa could be established through a personal relationship. Veronique Su

came up with the idea of a Water Fund in Africa. Her intention was to create a new state-of-

the-art saving and investing product in Kenya. No investigation whatsoever had been done

on this subject at that time. The main driver for the authors motivation to develop the Water

Fund Kenya project is his belief in water being the most important limited and irreplaceable


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Water Investments Pilot Study for a Water Fund in Kenya 2 / 66

natural resource on earth. He accepted the assignment for his Bachelor thesis. The topic

was finally approved on November 28th, 2007 by Dr. Stefan Koruna, Head Business

Administration Program of the Zurich University of Applied Sciences.

1.2 Research methodology

The author began with desk research in February 2008 right after the start of the thesis

semester. Background information about the natural resource water and related investment

possibilities were evaluated. An uncountable amount of books, reports and studies have

been published during the last 50 years. To guarantee quality and relevance of the literature,

the most current releases were considered. Furthermore, data disclosed by large worldwide

operating organisations such as the United Nations and the World Bank were preferred.

Between February and April 2008, the author contacted 22 organisations involved in thewater sector around the world and an interview with Peter Wild from Sustainable Asset

Management (SAM) was accomplished on March 17 th, 2008. The written version of the

interview is available in fully length in addendum 1.

1.3 Field study in Kenya

The author spent 6 workdays from April 11th to 21st, 2008 in Nairobi, Kenya. Swisscontact

East Africa arranged for the author 14 appointments with water related institutions andcompanies and supported him in his research. Detailed information and results from those

investigations are specified in Part B of this report. A list of all meetings held during this time

is available in addendum 2. The discussions have not been recorded because this might

have affected the confidence building process at the beginning of each meeting. Selected

photos from this trip are shown in addendum 5.

1.4 Scope and limits of this paper

It is not the purpose of this paper to look at the social, ethical and humanitarian issues

related to the human right to water access. That has been made in detailed reports by the

UN, the WHO and other NGOs. It is also not the scope of this thesis to analyse business

opportunities that arise from social and environmental problems in Europe, America and

Asia. Instead, the paper attempts to use the available information to understand and analyse

the water management in Kenya. The authors intention is to introduce the reader to the core

good of the final product, the Water Fund. Furthermore, the scope lies on Part B, the pilot

study for a water fund in Kenya. The result gives a first overview of the market and points outchances and challenges for the further development of the project.


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Part A - Water Investments 3 / 66

Part A - Water Investments

2. A scarce resource

Water is an essential life-sustaining element. It pervades our lives and is deeply

embedded in our cultural backgrounds. The basic human needs of a secure food

supply and freedom from disease depend on it3UN Secretary Kofi Annan

2.1 Water quantity

Water is a multifaceted good. People not only consume water while drinking it but they also

need it for cooking, washing, cleaning, irrigating and in many other ways. Much water is used

in the industry and agriculture too. The total amount of water on earth is about 1400 million

km3, but only a small fraction thereof is useable for humans.4 About 97.5% lies in oceans as

salt-water not suitable for consumption. Two thirds of the remaining fresh-water are frozen in

glaciers and icebergs and only about 1% of all the water on earth is basically available for

consumption.5 This figure is likely to decline further as a result of urbanisation, contamination

of water sources and climate change. The relation between total water amount on the globe

and fresh-water available for consumption is shown in table 1.

Table 1: Water deposits on the planet earth

Source: Own design (adapted from Helvetas; 2007)

2.1.1 Water shortage

While the amount of water on earth remains constant, demand is changing. The global

climate change and the growing world population will lead to a higher demand of water and a

3 UN World Water Development Report 2; 2006; p. V4 Nestl Waters: http://www.nestle-waters.com/en/Menu/Environment/PreciousResource/A+precious+resource.htm; 04.03.20085 UBS Investment Research; 2006; p. 3

total wateron earth

fresh-waterfor consumption

totalfresh-water


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shortage of water supply. According to the water report from Nestl Waters fresh-water

available per capita risks dropping from 7300 m3 to 5100 m3 by 2025.6 If the available fresh-

water was evenly distributed in space and time, todays resources would be greatly sufficient

to provide water for all. Instead, disparities in water resource distribution are getting worse.

Water stress is a world wide phenomenon with regional effects.7 Therefore an analysis of the

water shortage problem must take into account the regional differences. With the exception

of Antarctica, all continents show concerned regions. In Europe for instance, Cyprus, Italy,

Malta and Spain are among the most affected countries.8 Marq de Villiers suggests

accomplishing water preservation by price mechanisms or by a more efficient usage through

modern technologies.9 Water shortage is also closely related with the acute food shortage

the world is facing at the moment.10 The main limiting factor for increasing the global

agricultural output to meet rising demand is nothing else than water.

2.1.2 Virtual water

Virtual water is the amount of water that is embedded in food or other products needed for its

production. In summer 2008, Professor John Anthony Allan from the Kings College in

London and the School of Oriental and African Studies is being awarded for his in 1993

developed pioneer concept of virtual water.11 Human beings dont need water only for direct

consumption such as drinking, showering or washing. Prof. Allans concept measures the

amount of water required for the production of everyday consumer goods. For instance, a

simple cup of coffee requires 140 litres of water to grow, produce, pack and ship the beans.12

He also demonstrated that meat production requires an enormous amount of water. There is

a virtual flow of water from producing and exporting countries to countries that consume and

import food corps or any other commodity. This is an important fact when speaking about

population growth, consumer behaviour and water scarcity. A more resource conscious diet

in developed countries could in fact spare water desperately needed in regions short of

water. A water scarce country could save water by importing products that require a lot of

water for their production, rather than producing them domestically.

2.2 Water quality

Every year some 5 million people die of water-borne infectious diseases. This high fatality

rate is partly due to the fact that about 2 billion people have no access to adequate

6 Nestl Waters: http://www.nestle-waters.com/en/Menu/Environment/PreciousResource/A+precious+resource.htm; 04.03.20087 World Water Council (a): http://www.worldwatercouncil.org/index.php?id=5&L=0target%3D_blank; 06.03.20088 European Environment Agency; 2005; p. 1149 Wasser, die weltweite Krise um das blaue Gold; 2000; p. 42010 Media Analytics; 2008; p. 511 Presseportal: http://www.presseportal.ch/de/pm/100014749/100557318/stockholm_international_water_institute; 19.03.200812 World Water Council (a): http://www.worldwatercouncil.org/index.php?id=866&L=0; 03.04.2008


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sanitation, and the trend is rising.13 It is in the interest not only of developing countries but

also the industrialized countries to find a solution to this problem.

2.2.1 Water treatment

Water treatment can be divided into purification, disinfection, desalination of sea water and

monitoring. Disinfection of drinking water is mainly used for water treatment. Nevertheless,

80% of all contagious diseases are still disseminated by contaminated water. In some

countries desalination of salt-water has gained importance. Desalination plants are

expensive due to the high energy consumption. In addition, they release lots of greenhouse

gases. However, the production costs have been lowered by 10% annually in the last few

years and they continue to fall.14 Therefore, desalination will most probably gain more

importance in the coming years.

2.3 Water cycle

The earths water cycle acts like a giant water pump that continually transfers fresh-water

from the oceans to the land masses and back again. Through this system, water is being

recycled. In this solar-driven cycle, water evaporates from the earth's surface into the

atmosphere and is returned as rain or snow. Part of this water evaporates back into the

atmosphere, another part flows in streams to the sea. Still another part drains into the soilturning into groundwater. Plants incorporate soil moisture into their tissues and release it into

the atmosphere. Much of the groundwater eventually works its way back into the flow of

surface waters.15 This hydrological cycle is shown in table 2.

2.3.1 Sustainability

It is a fact that the total amount of water on earth cannot be augmented, which means that

today there is still the same mass of water than thousands of years ago. However, nowadays

much more water is being tapped. Manhood depends on water and the worlds population is

growing continually, increasing the demand for water rapidly. The way water is managed

today is not sustainable as the groundwater table is sinking in most places and water quality

is often insufficient.16 In the future, the industry will have to widen its focus and start thinking

in terms of sustainable provision of water services.

13 SAM Study; Precious Blue; 2008; p. 414 Procontra; 2007; p. 6515 USAID; 1998; p. 616 SAM Study; Precious Blue; 2008; p. 13


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2.3.2 Limited resource

Fresh-water should not be treated as a free resource but must be valued to reflect its status

as a scarce resource. As the OECD mentions, clever pricing policies can encourage

environmentally responsible water-use behaviour as well as ensure an adequate supply of

water.17 To accomplish this, water should be valued appropriately in each of its various uses.

The introduction of water markets and pricing mechanisms can have immediate and lasting

impacts on water use. The questions whether water should be priced or not is a controversial

issue. Bankers often reckon water as a commodity similar to gold or wheat. However, it must

be taken into account that water can not be transported economically around the world.

Thats why water is not freely tradable and must therefore not be seen as a normal

commodity. There is not, and there will never be, one single price for water throughout the

world.

18

The hydrological cycle of water discussed in point 2.3 is shown next.

Table 2: The Hydrological Cycle

Source: USAID, Population Information Program; p. 36

17 OECD; 1998; p. 1 - 218 Wild, D.; Interview; 2008; Addendum 1


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2.4 Access to water for everyone

The human right to water entitles everyone to sufficient, safe, acceptable, physically

accessible and affordable water for personal and domestic needs.19 People can not live

without water and are dependent on access to fresh-water. For some, any attempt to ask a

price for water is contrary to the ethical sense of free access to water as a human right.

However, even many NGOs came to the conclusion that water has to be priced as an

incentive for conservative use, especially in agriculture20. Daniel Wild agrees: Wasser ist ein

Menschenrecht, aber es ist nicht gratis21 (water is a human right but it should not be for

free). He also mentions the so called smart tariff systems which are getting popular in

emerging markets. They control that a certain amount of water, for instance the first 50 litre a

day, is for free or at a very low charge. Beyond this daily allowance the unit price increases

sharply for those who want to wash their car or sprinkle their garden. Privatisation could bean option to improve efficiency and service at the local level, but in order for water to be

retained as a human right across societies, this must be controlled by good governance, firm

regulatory frameworks and strong institutions.

2.4.1 Millennium Development Goal

The 7th UN Millennium Development Goal intends to ensure environmental sustainability.

One target is to reduce by half the number of people without access to safe drinking water.22

Hygiene and adequate sanitation are equally important for a sustainable development.

Unfortunately, progress towards this target has been very modest. In fact, the situation is

getting even worse because of population growth, urbanisation and economic development.

More than 300 million people in Africa have no satisfactory access to safe water supply and

sanitation.23 This results in the spread of water born disease from which about half of the

African population suffer. To meet the water related MDG an investment of 20 billion USD 24

each year is required:

2.4.2 Value of water

Water is not a normal commodity where demand and supply determine the price of the good.

As long as there is sufficient water, it has virtually no value in consumers minds. Gasson

says: From a position of relative abundance, a quorum of the worlds population becomes

aware of the need to compete for diminishing water resources. The value users attach to

19 UN; Economic and Social Council; 2003; p. 220 UBS Investment Research; 2006; p. 1921 Wild, D.; Interview; 2008; Addendum 122 UNDP: http://www.undp.org/mdg/goallist.shtml; 05.04.200823 UN-Habitat; 2006; p. 824 UN-Habitat; 2006; p. 10


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water starts to climb steeply 25. A higher valuation of water does not automatically result in a

higher price for water services if there is no market to balance competing demands.

However, it leads to conflicts, headlines, and higher priority on the political agenda. Those

bad outcomes have at least the good side effect that investors interest in the sector will

continue to grow, and public attitude towards water will continue to change.

2.4.3 Price of water

Den Preis von Wasser gibt es nicht26 (there is no single price for water) says Daniel Wild

from SAM but he immediately adds that there might be a common price for water within a

certain region. The reason is that possibilities for transportation of water are limited. For

instance, even if Switzerland has enough water and Australia is suffering from water

shortage, Switzerland can not profit from the high demand in Australia because the watercan not be brought to Australia. Therefore water is not an easily tradable commodity such as

gold or wheat. It can only be traded economically in limited quantities in the form of bottled

drinking water. According to Daniel Wild the sourcing price of water is normally under CHF

0.5 (= USD 0.47)27 per m3 in western countries.28 For tap water, the price is about six times

higher because the whole water management, including the waste water purification, has to

be covered too.

2.5 Water management

To improve the water situation in a certain region more than one approach should be taken

into consideration. Managing water can mean to enhance supply, reduce demand, improve

the handling or protect water resources in a sustainable way.

Ismail Serageldin, Vice President for Environmentally Sustainable Development at the World

Bank, identifies the following main problems in water management:29

Responsibility is fragmented among sectors and institutions

There is too much dependency on centralised administration

Undervaluation of fresh-water as a resource and water is not priced according to its

economic value

Policies do not connect the quality of water to health and environmental issues

25

Media Analytics; 2008; p. 526 Wild, D.; Interview; 2008; Addendum 127 Exchange rate CHF/USD per 09.05.200828 Wild, D.; Interview; 2008; Addendum 129 USAID; p. 26


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There are many agencies with interests in the water management but virtually no

coordination of policies between sectors of the economy is established. Issues like water

quality and health are often omitted because they do not fit within the mandate of any single

government agency. Institutions charged with managing water supplies often lack technical

competence. At the same time, there is little stakeholder involvement and community

participation in setting water policies and regulating the use of water, so projects often do not

meet people's needs. Many heavy users of water, such as farmers, receive subsidies from

the government and in effect are encouraged to waste water that they otherwise probably

would not waste. Most governments have found it politically more successful to develop new

water supplies than to charge heavy users the full costs of water. In most cases water is

viewed as an unlimited resource to be pumped around and used as often and as much as

needed for any purpose. Without adequate consideration of water's key role in human and

environmental health, it is no surprise that water resources are degraded nearly everywhere.

2.6 Summary of chapter 2

The natural resource water is also called the blue gold. Other than the precious metal, water

is not freely tradable because it cannot be moved. A shortage of water in one area cannot be

satisfied by an excess in another area. Not water in general, but access to clean fresh-water

is a scarce resource. Less than 1% of the total water deposits on the earth are available for

consumption to men. Moreover, water is not evenly distributed over the world. Many

countries suffer badly from water stress and the situation is getting worse. The access to

clean water is thought of being a human right. However, people must realise that fresh-water

has a value and that its reservoirs are not infinite. Even many NGOs came to the conclusion

that water has to be priced. Although water is being cleaned by the natural water cycle which

transfers fresh-water from the oceans to the land and back again, water pollution is an issue.

Many people die every year from water-borne diseases. Water purification, disinfection and

desalination are therefore crucial for the well being of a nations population. Water is the

most important natural resource. Its management must be improved in order to handle it in a

responsible and sustainable way for further generations.


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3. Investment

Water is a scarce and therefore precious good. One important goal of this paper is to find out

how investments into water can be made. Worldwide 400 to 500 billion USD are spent every

year on the granting, conditioning and purification of water.30

In order to exploit all possibilityof investment one should think about putting money into companies offering products and

services along the entire value chain of water. Speaking about the value chains the following

areas should be looked at in particular:

Urban water management (e.g. cooling water)

Agriculture (e.g. process water)

Industry (e.g. energy production)

Promising investments are often found not only at the level of the core product water but also

up- and downstream the value chain. So-called enabling technologies and products are often

particularly attractive, for instance household fittings, sanitary equipment and pipes.31

Companies may emerge as potential investment opportunities which at first sight do not

seem to have any connection to water, but subsequently turn out to be indirectly related to

the water sector. Examples are producers of more efficient irrigation systems, water

treatment technologies, desalination technologies, pumps and pipes, water meter

technologies to control usage and to track water quality.32 The WHO calculated that every

dollar spent on water supply, sanitation and water resource management is an investment

with a solid return.33 Investments in water can be an engine for accelerated economic growth,

sustainable development, improved health and reduced poverty. Poor countries with access

to improved water and sanitation services enjoyed annual average growth of 3.7% GDP,

those without grew at just 0.1%.

3.1 Water sectorTraditionally, three sectors of water use are distinguished: The domestic sector including

household and municipal uses, the industrial sector and the agricultural sector including

water for irrigation and livestock.34 The water industry consists of an extensive variety of

enterprises across industries and sectors. It can be distinguished between four global trends

that shape the future development of the water sector:

30 SAM Studie; Zukunftsmarkt Wasser; 2007; S. 431 SAM Study; Precious Blue; 2008; p. 1432 UBS Investment Research; 2006; p. 1433WHO; 2007; p. 134 World Water Council (a): http://www.worldwatercouncil.org/index.php?id=5&L=0target%3D_blank; 06.03.2008


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Demographic changes,

Ageing infrastructure

Increasing health awareness

Controversy over the liberalisation of the water market

These impacts will have consequences for the supply of a sufficient quantity of water to

provide the service required, to assure adequate water quality for the service in question and

to set up an appropriate infrastructure to transport water.35

3.1.1 Liberalisation of the water market

In most countries the supply of water is under public management. Nevertheless, the World

Bank as well as the International Monetary Fund are in favour of the liberalisation andprivatisation of the water sector. Opponents of the liberalisation fear uncontrollable price

increases and a deterioration of water quality.36 Supporters of the liberalisation argue that

water should be regarded as an economic commodity in the hope of putting a stop to the

wasteful handling of water. The World Bank also issued development credits which were

conditional on the privatisation of various government-run activities, such as water and

wastewater services. To date, only a small minority of about 10% of the worlds population is

supplied by private water companies. There also is a strong resistance from non-

governmental organisation against privatisation. Opponents main arguments are based on

fears that companies will try to maximise their profits at the expense of the poor. That can

happen through price rises for instance. The experiences with private water groups so far are

rather mixed.37 To counterbalance the risks of privatisation, a strong regulatory authority

issuing strict guidelines, within which the private companies may operate, is essential. On the

one hand this means keeping the price below a socially acceptable upper limit; on the other

hand it means guaranteeing safety and maintaining the pipe network. Privatisation will result

in higher water prices because public sector cross-subsidies will cease.38 Modest price rises

are justifiable for sustainability, as encouragement of economic use of water and as incentive

for the industry for necessary investments into the infrastructure.

3.2 Existing water funds

While a wide range of sustainable and ecological funds have been available for some time,

pure water funds are still rare. This might change soon. 2008 is said to be the year of the

35 SAM Study, Precious Blue; 2008; p. 636 Procontra; 2007; p. 6337 SAM Study, Precious Blue; 2008; p. 1138 SAM Study, Precious Blue; 2008; p. 12


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water initial public offerings (IPOs).39 Daniel Wild says that investment into water is a low risk

investment compared to energy or information technology. As water funds follow a topic

approach they do not fit into the traditional classification of funds such as industry,

commodity, technology or nourishment investment.40 Water funds typically invest along the

value chain of water and across many different sectors. Investment into water is lasting

because there is no substitute which could replace water. Infrastructures, for instance water

pipes, have a lifetime of up to one hundred years. The water sector is a stable, relatively

slowly changing sector. Nevertheless, water funds can not resist the ups and downs of the

stock markets in the short-term.

3.2.1 Performance of water funds

In 2007 investing into the water sector was worthwhile compared to other investment areas.Not different to other sectors, the highest gains were achieved by water stocks from China.

The Asian market outperformed the others many times. To measure the performance of the

water sector the GWI (Global Water Market Index) and the MSCI (Morgan Stanley Capital

International Index) are used. The GWI rose by 20.1% in 2007 whereas the MSCI lost 1.9%

in the same period.41 The two largest water funds today are the Pictet and the SAM

Sustainable Water Fund. Recently other banks like UBS, Credit Suisse and Swisscanto

launched water funds. All of them entered the market in the second half of 2007. Significant

data are therefore not yet available.

3.2.2 SAM Water Fund

SAM (Sustainable Asset Management AG) launched their first water fund in September

2001. The focus of the fund lies on four investment clusters: 42

Distribution and management

Advanced water treatmentDemand-side efficiency

Water and food

69 companies are currently listed in the portfolio of the fund. 48% of all companies in the

portfolio are located in North America, 43% in Europe and 9% in Asia and Pacific. Africa and

South America are not represented. The funds performance has been very attractive since

39 Media Analytics; 2008; p. 840 Wild, D.; Interview; 2008; Addendum 141 Media Analytics; 2008; p. 842 Wild, D.; Interview; 2008; Addendum 1


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the launch and has always exceeded the benchmark (MSCI World Index). Since inception in

autumn 2001, the fund has gained 53.23%43 in value. Table 3 shows the ten largest positions

in the portfolio.

Table 3: The 10 biggest companies in the SAM Water Fund Portfolio

1. Veolia Environment (France)

2. ITT (USA)

3. Danaher (USA)

4. Suez (France)

5. Geberit (Switzerland)

6. Chaoda Modern Agriculture (Hong Kong)

7. Pall (USA)

8. Roper Industries (USA)

9. Wavin (Netherlands)

10. Thermo Fisher Scientific (USA)

Source: SAM Sustainable Water Fund, 2008

3.2.3 Pictet Water Funds

Pictet Funds S.A., founded 1805 in Geneva, is a leading fund management bank. The water

fund was introduced in January 2000 as the first water fund offered in the public market and

today has the largest volume of all water funds. In 2001, the fund was awarded as one of the

best investment ideas. Pictet advises a minimum investment period of 7 years. Since the

launch of the fund the average performance indicates 13.61%. The accumulated

performance from 2000 to 2007 amounts to 89.26%. Both geographic segmentation and also

the companies in the portfolio are similar to SAMs water fund. However, Pictet has two

major food producing companies, Nestl and Group Danone44 in its portfolio.

3.2.4 Comparison of performance

Pictet and SAM started their first water fund seven respectively six years ago. Daniel Wild is

convinced that this is a crucial advantage because confidence and trust is very important for

investors and can only be built over time. Practically nobody withdrew money from the SAM

fund despite the recent crisis on the financial markets. This shows that investors understand

43 SAM, Sustainable Water Fund; 200844 Pictet; http://www.pictetfunds.com/public/folfundperformancechart.html?ci=122; 06.05.2008


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the perspective of the fund.45 The long term performance of both funds has been good and

the fluctuations relatively low. In comparison, the water funds of Swisscanto and UBS were

launched only a few months ago. Because of the mortgage crisis in the USA no sustainable

performance has been achieved yet.

Water funds are not yet prevalent as investment opportunity, but the given examples prove

that the concept is successful. Further water-related finance product will enter the market in

the years to come. In table 4 the annual performance of the two above described water

funds and the MSCI World is depicted. In 2001 the SAM Water fund had not yet been

launched. It can be seen that both funds always outperformed the benchmark MSCI World

with the exception of the peak year 2005. Over all, the SAM Water Fund performed slightly

better than the Pictet Water Fund.

Table 4: Performance of Pictet and SAM water funds versus MSCI World

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

2001 2002 2003 2004 2005 2006 2007

Performance

in

%

Pictet

SAM

MSCI World

Source: Own designData source Pictet and MSCI Wold: http://www.pictetfunds.com/public/folfundperformancechart.html?ci=122; 06.05.2008Data source SAM: http://www.sam-group.com/htmld/products/water/performance.cfm; 06.05.2008

45 Wild, D.; Interview; 2008; Addendum 1


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The demand of water will follow the growth of the world population. Long-term measures are

needed to assure an efficient water management. Private companies will become more and

more important for managing and financing those investments. However, the market for

water is still strictly regulated and the prospect of a high rate of return is limited. Furthermore,

isolated investments do not yet guarantee sustainability. Desalination, for instance, affects

the environment and the facilities account for a very high energy consumption.

The first water funds entered the European market seven years ago. They almost always

outperformed the Morgan Stanley Capital International Index. The portfolio of those funds

consists mostly of large players from Europe and America. The good performance of the

water funds prompted many other financial institutions to launch a water-related savingproduct in 2007. It can be assumed that investments in water management will further

increase in the next years.


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Part B Pilot Study for a Water Fund in Kenya 16 / 66

Part B Pilot Study for a Water Fund in Kenya

In November 2007 Veronique Su from Swisscontact East Africa Financial Services had the

idea of launching a water fund in Kenya. However, both the way to achieve this goal and the

market conditions were totally unknown at that time. Therefore, the author was asked to write

the present report. The task given by Swisscontact East Africa was:

The author will first give an overview of Kenya and its water resources. He than looks closerat the water fund idea and presents the result of the field study in Nairobi. At the end, a

feasibility analysis including suggestions for further proceeding is carried out.

4. Water Management in Kenya

This chapter focuses on the water market in Kenya. The local conditions and water

resources as well as the sectors structure are examined. The findings are applied in chapter

5 for the Water Fund Kenya. The most important economical figures of Kenya are shown in

table 5.

Table 5: Figures about Kenya

Area: 582650 km2

Population: 36'913721 (est.)

Population growth: 2.8 % (est.)

Life expectancy at birth: 55.31 years

Capital: Nairobi

GDP real growth rate: 6.3%

GDP per capita (PPP): 1'600 USD (est.)

Inflation rate: 9.3% (est.)

Unemployment rate: 40%

Population below poverty line: 50%

Source: CIA Fact Book: https://www.cia.gov/library/publications/the-world-factbook/geos/ke.html; 08.05.2008 and Kenya Official:

http://www.kenya.go.ke/index.php?option=com_content&task=view&id=11&Itemid=1; 13.05.2008

4.1 Republic of Kenya

Kenya gained independence in 1963. The country is located on the East coast of Africa and

lies on the equator. It is about 14 times larger than Switzerland and is bordered by five

to get an overview of the structure of the water sector in Kenya

to tackle possible bottlenecks and challenges in the water management

to find solutions and potential investment opportunities along the value


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countries, namely Sudan, Somalia, Ethiopia, Uganda and Tanzania. 42 ethnic groups live

together in the country which consists of diverse physical features: the low laying arid and

semi-arid lands, the coastal belt, the plateau, the highlands and the lake basin around Lake

Victoria.46

4.1.1 Conflicts after elections

On December 27th, 2007, Kenya held presidential, parliamentary, and local government

elections. Until political unrest struck in early 2008, Kenya had, since gaining independence,

maintained remarkable stability despite changes in its political system and crises in

neighbouring countries. It was considered as a good example of development and

democratisation. However, the elections at the end of 2007 gave rise to violence and

tensions between ethnic groups. The instable situation lasted for several weeks and iscontinuing to present security issues for many Kenyans. Presumably, the outcome of the

election was very tight between President Mwai Kibaki (Party of National Unity PNU) and

the leader of the opposition, Raila Odinga (Orange Democratic Movement ODM). Both

parties blamed each other for electoral fraud. The effects of this explosion of violence in the

country are dramatic. Over 1000 people died in the aftermath and more than 300000 had to

flee and abandon their homes.47 The sudden and unforeseen clashes came by surprise.

However, they can not only be explained by the elections but brought also to light the further

reaching frictions between social, politic and ethnic communities. Problems over land

ownership have been neglected for too long. Under the mediation of former UN Secretary

Kofi Annan, the two leaders have formed a new government on April 13 th, 2008.48 The post-

election crisis will have repercussions on the economic growth. The GDP forecast for 2008

had to be reduced by about 50% from 8% to 4%. Most hit by this plunge of growth will be the

tourism industry.

4.2 Kenyas water resourcesKenyas natural water replenishment rate of only 647 m3 of renewable fresh-water per capita

is rated as one of the lowest by the UN.49 Kenya is therefore classified as a chronically water-

scarce country (see table 6). Compared to other African countries, Kenya belongs to the

most affected regions. This can be seen in the table of addendum 4, where Kenya is listed at

the third last place concerning water availability. Nonetheless, it has developed only a small

fraction of its available safe water resources. The World Bank explains this discrepancy as

46 Kenya Official: http://www.kenya.go.ke/index.php?option=com_content&task=view&id=11&Itemid=1; 13.05.200847 GIGA; 200848 U.S. Department of State: http://www.state.gov/r/pa/ei/bgn/2962.htm; 17.05.200849 UN-Water; 2006; p. 138


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follow: There is no contradiction in the country being simultaneously water-scarce and able

to safely exploit many times the current water usage. It simply means that not only does

Kenya receive one of the worlds lowest per capita water replenishment rates each year, but

that it has also not developed the limited amount of water available50. Many reasons can be

found why the groundwater is not exploited more. Among them are the low levels of funding

for assessment, uncoordinated efforts on development and lack of skilled people for

monitoring and evaluation.

Table 6: Annual renewable fresh-water supplies

water stressed area = 1'000 - 1'700 m3/capita

water scarce area = less than 1'000 m3/capita

Kenya = 647 m3/capita

Source: UN-Water; 2006; p. 3 + 138

The renewable water availability can be divided into two sources: Surface and groundwater

resources. In Kenya, there is about ten times more surface water available than

groundwater. Obviously, more groundwater is used in the arid and semi-arid lands (ASALs),

where only little surface water is available. In contrast, in the cities the huge demand of water

is covered by surface water, because the recharge rates of groundwater are limited.

Nevertheless, groundwater is an important source of urban drinking water.51 The advantage

of ground water is its cleanness. On the other hand, surface water is easier to collect but it

has to be treated before it can be used. In Kenya, the morbidity disease pattern shows that

over 60% of the diseases are waterborne or related to water. Most often is Malaria, followed

by the respiratory system skin diseases, diarrhoea and intestinal worms.52

4.2.1 Surface waterAbout 2% of Kenyas area is occupied by water, or 11230 km 2.53 There are five drainage

basins in Kenya: the Tana, Athi, Ewaso Nyiro, Rift Valley and the Lake Victoria Basin. Most

lakes are located around the Rift Valley Basin. Many of these lakes are saline. The largest is

Lake Victoria with water availability of 11672 million m3. However, due to the great demand

from Nairobi, the highest percentage of water is abstracted from the Tana River Basin, which

50 World Bank Working Paper No. 69; 2005; p. 851 World Bank Working Paper No. 69; 2005; p. 5652 UN-Water; 2006; p. 3053 UN-Water; 2006; p. 27


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Surface and ground water abstraction in Kenya

0

5

10

15

20

Surface water Ground water

Millioncubi

cmetersperday

Actual abstraction

Safe yield

has a volume of 3744 million m3 thereof 15.9% is being abstracted.54 The water map in

addendum 3 shows the water basins of Kenya.

4.2.2 Ground water

Held in layers of porous rock or aquifers, ground water resources in Kenya are divided into

five areas: the volcanic rocks area in the Rift Valley, the volcanic rocks area outside of the

Rift Valley, the metamorphic basement rocks area, the eastern quaternary sedimentary rocks

area and western quaternary sedimentary rocks area.55 Table 7 shows the above mentioned

discrepancy between water deposits and extraction, divided into surface water and ground

water.

Table 7: Development of Kenyan water resources

Source: Own design (adapted from World Bank Working Paper No. 69; 2005; p. 10)Data Source: World Bank Working Paper No. 69; 2005; p. 8 9)

4.2.3 Water catchments

Water catchments are the areas where the water for the surface and groundwater is coming

from. Five areas are distinguished in Kenya, the so-called Kenyas Water Towers: Mt.

Kenya, Aberdares, Mau Complex, Mt. Eglon and Cherangani.56 Deforestation and poor

farming methods are to blame for the degradation of catchments. The different areas of

water catchments in Kenya can be seen on the Kenyan water map in addendum 3.

54 UN-Water; 2006; p. 1055 World Bank Working Paper No. 69; 2005; p. 856 UN-Water; 2006; p. 36


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4.3 Driver of water scarcity

Water is a scarce resource in Kenya. There are different reasons why the situation is further

deteriorating in the near future. Population growth, climate variability, deforestation, water

pollution and mismanagement are the most important driver for water scarcity in Kenya. The

legislator must provide appropriate measurement for improving the water management in the

country. With the Water Act 2002 one step in the right direction has been taken.

4.3.1 Population growth

Water in Kenya is becoming scarcer simply because the demand is increasing as the

population growth every year. Not only the population but also the water usage per capita

rises. Individuals are using more water for domestic purposes and food security to the point

where the needs are exceeding supply. Kenyas population will account 56481427 people in

2020, whereas per capita water availability will fall to 359 m3 per year and person.57 This

trend is shown in table 8. The trend can be slowed down by improving the demand efficiency

but it can not be stopped. The brown line indicates the population growth until 2020 and the

blue one shows the per capita water availability for Kenya.

Table 8: Water availability compared to population growth

20'000'000

30'000'000

40'000'000

50'000'000

60'000'000

1999 2010 2020

year

population

300

400

500

600

700

800

m3

/year

population per capita water availability

Source: own design

Data source: UN-Water; 2006; p 32

57 UN-Water; 2006; p. 32


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4.3.2 Climatic variability

Damage of infrastructure, power rationing and food shortages are the result of climatic

variability and water resource degradation. In the years of drought the immediate effect on

agriculture is massive. The agricultural GDP indicates a disastrous deficit with the overall

GDP following it.58 Such climatic variability is happening more often in the course of the

worldwide climate change. This is a dangerous and threatening phenomenon for Kenya.

4.3.3 Deforestation

Forests are very important for the supply of water. Despite their economic and environmental

importance, forests in Kenya continue to be destroyed. Groundwater loss increases because

forests are the main absorption for rainwater. Replacing forest with annual crops will lead to

a long-term increase in flows and more water will evaporate. There is evidence that after

clearance of large parts of water catchments, dry season flows have decreased significantly.

Forest clearance generally results in greater investment in infrastructure to achieve the same

level of water storage. Furthermore, deforestation leads to increased erosion of the land.59

Big industrial users of water in Kenya, such as Coca Cola and Breweries, are involved in

tree-planting projects. For the future development of the water resources in Kenya such

commitments are important.

4.3.4 Water pollution

Water pollution appears in untreated urban sewage-water, industrial wastes, sea water

intrusion into water aquifers, agricultural chemicals and so on. Regulations controlling

polluting activities in place, but no enforced, are useless and simply transfer costs caused by

private enterprises to the public sector or future generations.60 The only solution would be to

make polluters paying the full cost of the damage. Therefore, monitoring in Kenya needs to

be improved and the public awareness should be sensitised. The decentralised treatment

plants are run by the local authorities and often operate at an efficiency of less than 50%

because of poor management and handling. If contaminated water goes directly into the soil,

health damaging crops can be the result of it. Water pollution arising from the industry

descends from tanneries, textile mills, breweries, creameries, paper production and recycling

plants, chemical processing industries, and slaughter houses.61 Farmers often use fertilizers

and pesticides. Both are very dangerous for the environment and jeopardize the surface

58 UN-Water; 2006; p. 1259 World Bank Working Paper No. 69; 2005; p. 9160 World Bank Working Paper No. 69; 2005; p. 5861 World Bank Working Paper No. 69; 2005; p. 60


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waters as well as the ground water. As a result, lakes suffer from invasive weeds and end up

in a lack of oxygen.

4.3.5 Mismanagement and conflicts over water resources

More than 50% of water abstractions are estimated to be illegal.62 Existing records of

resource assessments are incomplete in time and coverage. Inadequate water resource

management imposes high cost on the nations economy. Likewise, there was no developed

data network for the river gauging stations. This led to decisions which were based on

inaccurate data and opened the doors for mismanagement. The result of such

mismanagement are conflicts between groups of water users that sometimes end up in

damage to property, violence and even loss of human life.63. Companies operating in regions

where water is scarce, have to be aware that they are competing for an essential resource. Itis important for them to avoid any bad headline that would damage their reputation.64

Especially critical are water sources that are shared by two or more countries. Such

situations can easily become a point of conflict if there is no regional collaboration in place.65

On the world, there are lots of conflicts where the access to water resources plays a crucial

role. The Indian Pakistan conflict or the Israel Palestine crisis are only two of them. Kenya

shares water bodies with Uganda, Tanzania, Ethiopia and Somalia. It is essential for Kenya

to strengthen its capacity to negotiate and manage those waters in sharing issues.

4.4 Legislation and reforms

The author met agents from the Ministry of Water, the Water Resources Management

Authority and the Athi River Water Board. He was pleased by the straightforward

communication and the commitment to further improvements in the water sector by the

government. The Water Act 2002, described in point 4.4.1, was an important step towards

more efficient water management, but everybody agreed that further developments and

reforms are needed. The lack of legislative uniformity and the uncertainty of the reformprocess make it difficult for private investors to gain confidence in the system.66

Historically, the government has assumed the leading role as a water resource developer

and manager, whereas the private sector has only been involved in groundwater

development.67 For many years, the water management in Kenya was being neglected and

the Ministry failed in putting up a coordinated water management. The lack of water has

62 UN-Water; 2006; p. 763 World Bank Working Paper No. 69; 2005; p. 5864 UBS Investment Research; 2006; p. 765 World Water Council (b): http://www.worldwatercouncil.org/index.php?id=25; 27.04.200866 SBA Consulting; 2008; p. 567 World Bank Working Paper No. 69; 2005; p. 44


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become a limiting factor in some regions of Kenya for development activities. In the

meanwhile, the management and protection of water resources to ensure that water is

available for equitable allocation for all demands, including water for domestic and public

use, industry, agriculture, energy, livestock, wildlife, tourism and ecosystems, has become a

high priority.68 In 1997, the Ministry of Water and Irrigation started with major water sector

reforms by putting in place provisions for service delivery as well as better management of

water resources and services.69 In 1999, after two years of negotiating, Kenya adopted a new

water policy introducing several important innovations: The policy takes an integrative

approach, involving all relevant ministries in dialogues on water issues. The Ministry of Water

is no longer a direct service agency but carries a coordinating and supporting function.

Decision-making has been decentralised, and the concerns of local communities, as well as

those of women, are consistently taken account of. The objective is to achieve a

development in water resources that is ecologically sustainable and contributes to reducing

poverty.

Understanding the process the country has gone through in the past ten years implies to

remember the times when Kenya was a British colony. Mahboub M., engineer and

Permanent Secretary of the Kenyan Ministry of Water and Irrigation says: During colonial

times all resources were at free disposal to the colonial authorities. When Kenya became

independent, we had the impression that now all the resources should also be free available

to the Kenyan people70. The attitude towards water of this people had to be changed before

a new water policy process could have been started. It took two year to work out a new water

policy. The main point was the changed role of the government from direct service provision

to regulatory and enabling functions. There was also a consensus that appropriate tariffs

were needed in order to raise the money needed for investments in further development of

the waster sector. In so far, the user-and-polluter-pays principle was one of the most

important steps. The involvement of other ministries was significant for the success.71 The

Water Act was accepted in the year 2002 and stands for a marked shift in water delivery in

Kenya.

4.4.1 Water Act 2002

The Water Act 2002 finally came into force in 2005. The political changes after the elections

in 2002 helped a lot since the willingness for reforms was great afterwards. The political

change was crucial for the realisation and implementation of the Water Act. Before the new

elections at the end of 2007, Mahboub M. stated that the reform would not be reversed even

68 UN-Water; 2006; p. 769 Ministry of Water and Irrigation; 2007; p. 770 InfoResources; 2007; p. 171 InfoResources; 2007; p. 2


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if the government should change.72 The water Act defines the roles for sector actors clearly.

The establishment of these institutions would allow for decentralisation, participation and

sustainability in the management of water resources.73 Through the swift from governmental

to private ownership of water services and the decentralisation of decisions-making authority,

the efficiency has been enhanced. Even if in many areas less water is available than

required, water availability has generally augmented due to water loss reduction. In

conclusion, through the reform the water services and management have been improved

significantly and the water sector is much more interesting for investors nowadays.

4.4.2 Structure after the Water Act

There are different levels in the structure of the Kenyan water sector. Delivery of water and

water resources management are divided into seven Water Service Boards (WSBs) and sixCatchment Area Advisory Commitees (CAACs). The Water Services Regulatory Board

(WSRB) and the Water Resource Management Authority (WRMA) have regulatory functions.

A non-governmental provider of services, such as Runda Water Company for instance, must

sign an agreement with the Water Service Board. The structure including the level and task

for each institution is shown in table 9.

Table 9: Structure of Water Act 2002

Source: Own design (adapted from NCWSC; 2007; p. 5)

72 InfoResources; 2007; p.273 UN-Water; 2006; p. 7

Name Level Task / Responsibility

Ministry of Water Resources Managementand Development (MWRMD)

National level Policy formulation

Water Resources Management Authority(WRMA)

National level Regulation

Water Services Regulatory Board (WSRB) National level Regulation

Catchment Areas Advisory Committees(CAACs)

Regional level Regulation

Water Services Boards (WSBs) Regional level Service Provision

Water Resources User Associations(WRUAs)

Local levelService Provision: WaterResources Management

Water Services Providers (WSPs) Local levelService Provision: Waterand Sewerage Service


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4.4.3 Trust Fund

It is not possible to find a provider organisation for all communities in Kenya. The Water

Services Trust Fund (WSTF) has been set up to finance micro-projects and to provide direct

funding for small communities which would otherwise suffer from the privatisation of water

service delivery. Some companies first believed that Swisscontact wants to run a similar

fund. It was the task of the author to make clear that this is not the case. The intention is to

come up with a fully commercial fund. Development aid through donating money to

individuals is not the philosophy of Swisscontact.

4.4.4 Result of the reform

The beginning of the process with the implementation of the new, decentralised structure

posed a great challenge to all involved. However, the new political setting in 2002 favoured

the reform process. Without the new government that came into power in that time, the

reform could have hardly been implemented in this manner.74 Six years after the

establishment of the decentralised structures, first positive effects can be seen. The water

sector is functioning more efficiently and is able to react more promptly to the concerns of the

population. Communities are involved in water management and water users contribute

financially to the water sector according to a tariff structure. In autumn 2007, Mahoub M. was

confident that the new structures are stable enough to persist in a changed political

environment.75 Earlier than expected, the time has come for this to be proven.

4.5 Challenges

Currently, accessibility to water remains a major problem in rural Kenya and among

the countrys poor urban dwellers76 - Wanja Njuguna-Githinji, winner of the CNN African

Journalist of the Year Award 2008

Even if the water supply has been improved, there is still a lot to do. Statistics show that over

50% of the rural population and more than 25% of the urban population have no access to

clean water. In many areas of Africa the collection of water is still a task only carried out by

women. As the demand for water and therefore its price increases, the poorest part of the

population is the first one to suffer. The irony is that families living in poor informal

settlements are paying much more for water compared to residents who are connected to the

city council water meters. They also have to walk long distances and spend many hours

74 InfoResources; 2007; p. 475 InfoResources; 2007; p. 576 ITT Industries: http://www.itt.com/WATERBOOK/Kenya.asp; 09.05.2008


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hauling water. Another problem is the poor quality of tap water. Many people in Kenya boil or

treat the water before consuming it because of fear of water borne diseases.

4.5.1 Privatisations

A new privatisation law was enacted in 2005 in Kenya. In the sequel the electricity generating

company KenGen, Kenya Railways, Telkom Kenya and Kenya Re-Insurance have been

privatized and in 2008, the government sold 25% of Safaricom.77 The shares were divided

into very small pieces in order to give the poor population the opportunity to invest into the

mobile company. Further privatisations in all sectors are anticipated. In a report written by

Strategic Business Advisors it is said that finding the right structures to encourage private

sector investments in the water sector became an imperative.78 Even organisations as the

Kenya Association of Manufacturing became active in lobbying policy changes that envisiona private sector solution in order to deal with the shortcoming of the public operator. Owners

of real property, property developer and community based organisations have a huge

incentive to invest in water services and sanitations. Property values are retained and

enhanced by the availability of basic services. A number of private individuals are filling the

gap in service provision by investing in boreholes, water tanks, standpipes and other

systems.

4.5.2 Investments and risks

In the past years the average annual investment in water and sanitation systems in Kenya

was approximately 35 million US Dollar per year. Only 38.5% thereof came from the

government, the rest came from other countries as FDI. This shows that Kenya is depending

on international investments.79 The African Development Bank assessed in 2007 a 67%

investment gap for water supply and sanitation in Africa. Governments are required to raise

their budget for the water sector and to encourage the private sector. According to Daniel

Wild, getting a credit it is often easier for a private company than for a state.80

Waterinfrastructure requires intensive fixed capital investment, with the risk of eventual political and

regulatory troubles when prices have to be raised. Furthermore, it should also be thought of

the risk of reputation damage.81 The lack of governmental ability, will and means to expand

infrastructure, gave rise to the model of public-private partnership framework. In Kenya, for

instance, private companies operate water services while the government is holding a

77 U.S. Department of State: http://www.state.gov/r/pa/ei/bgn/2962.htm; 17.05.200878 SBA Consulting; 2008; p. 179 Global Water Finance; 2007; p. 3580 Wild, D.; Interview; 2008; Addendum 181 UBS Investment Research; 2006; p. 19


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majority stake in those companies.82 Local conditions in Kenya are different from community

to community. Thats way technologies and water systems should be varied among

communities. Local research and the domestic peoples knowledge should be used to find

the most efficient ways to invest. Foreign companies must discuss and assess the activities

with the local population because they know which solution fits best.


Although Kenya was hit by political unrests at the beginning of the year, the country has a

prosperous economy. With only 647 m3 of renewable fresh-water supply per capita and year,

Kenya is known as a water scarce country. Nevertheless, there is a great potential for

developing more water sources because only a tiny part of the deposits is used nowadays.

Population growth, climate variability, deforestation, water pollution, mismanagement andconflicts over water resources are the main reasons for Kenyas water scarcity. A

consequence of the strong population growth will be that the per capita water availability falls

further. This trend can only be retarded by better water management. The water legislation is

therefore very important for the country. The water sector reform including the Water Act

2002 empowered individuals in the sector and was essential for the development in the past

years. The act allocates clearly the duties and responsibilities to the different actors in the

sector. This also raised the incentives for private companies to enter the market. Major

investment in infrastructure is needed in the near future in Kenya. This opens new

opportunities for both, domestic and foreign investors.

82 UBS Investment Research; 2006; p. 19


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5. Project Water Fund Kenya

After the examination of water in general and the water market in Kenya in particular, the

following part focuses on the idea of a new financial saving and investment product. The

project Water Fund Kenya has been initiated by Ms. Veronique Su from Swisscontact EastAfrica and represents the root of the study.

5.1 Vision

Water can make a difference to Africas development if it is managed well and used

wisely.83 UNEP and UN-Habitat, Africities Conference in Nairobi

The authors vision is a water fund consisting of shares of different Kenyan companies alongthe value chain of water. There should be no restrictions to participating in the fund. The

plain citizen in Kenya, the so called Wananchi in Kiswahili, will be able to invest his little

savings in water and indirectly in his own future. Through the investments made by the fund,

much more liquidity will be poured into the water sector of Kenya and companies will have

the means to invest into water management and service. The result will be a win-win

situation, both the investors and the companies will be better off. The overall goal of the

Water Fund Kenya is to achieve economic development in the water sector and to improve

the peoples standard of living in Kenya. Furthermore, it provides a saving product for thelocal, directly from water scarcity affected people.

5.2 Field study

The author travelled to Nairobi in order to collect data and information. Between 14th and 21st

April he attended 14 meetings which lasted up to 3 hours. A list of all meetings is available in

addendum 2. The discussions were very fruitful and also crucial for exploring the local

situation. The authors main goal, among many others, was to tackle the following tasks:

83 UN-Habitat; 2006; p. 10

Who are the players in the water sector of Nairobi and how do they

conduct business?

What are the challenges in the water management of Nairobi and

how are they faced?

Spotting opportunities for investments and building relations for

the development of the project.


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As the research was made in a totally unknown and foreign environment to the author, local

business culture and rules had to be considered. Confidence building was very important at

the beginning of each meeting. The communication style was a mix of interview and

discussion and notes were taken by the author. In most cases the met people were open

minded, willing to provide information and very much interested in the idea of a water fund.

5.3 Swisscontact

Swisscontact is a non-profit organisation engaged in development cooperation. It was

established in 1959 as a non-political foundation by a group of Swiss private businesses and

universities. Its Head Office is located in Zurich, Switzerland. Swisscontact is currently

implementing projects in 30 countries throughout Africa, Asia, Eastern Europe and Latin

America. The organisation supports economic development by directly or indirectlyinfluencing the living standards of target communities. Its goal is to promote sustainable

private sector development in selected developing and transitional countries. The field of

activities includes:

Small and Medium enterprise (SME) promotions

Financial services for SME and rural f inance promotion (FP)

Vocational education and training

Reduction of urban environmental pollution

Swisscontact promotes sustainable development according to their leading principle Helping

others to help themselves84.

5.3.1 Swisscontact Financial Services East Africa

Swisscontact Financial Services East Africa is based in Nairobi and covers Kenya, Tanzania

and Uganda.85 The team consists of six Kenyan employees plus the team leader, Ms. V. Su.They provide capacity building and technical assistance in the field of organisational

development, human resources development, research, microfinance curriculum

development and consultancy to local financial institutions active in microfinance.

5.4 Water sector in greater Nairobi

The field research was conducted in and around Nairobi because of Swisscontacts location

in the capital of Kenya. Some findings are applicable for all Kenya, others must be further

84 Swisscontact: http://www.swisscontact.ch/english/pages/UB/UB_Wn.php?navanchor=2110041; 11.05.200885 Swisscontact East Africa: http://www.swisscontact.co.ke/home.html; 18.05.2008


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developed for other areas in the country. In the following chapter the findings and results of

the field research are evaluated and discussed by the author of the paper.

5.4.1 Nairobi

Nairobi is the capital of Kenya. Officially, the population of Nairobi is almost 3 million people86

whereas estimations are much higher because of the informal settlements. Despite the post-

election crisis, Nairobi continues to be the primary communication and financial hub of East

Africa. It enjoys the region's best transportation linkages, communications infrastructure, and

trained personnel, although these advantages are less prominent than in past years.87

5.4.2 Stakeholders in the water sector

One could think that the task of water management including extraction, purification and

distribution is centralised and only carried out by the state, especially in a developing country

such as Kenya. However, research has shown that many private companies are active in

that field. The Water Act 2002, outlined in point 4.4.1, was a major enabler for privately

owned companies to enter the market. There are many organisations with an interest in the

water sector. Table 10 on the next page shows the stakeholders in the Kenyan water market.

Agents from all areas but the striped ones have been contacted by the author during his

research in Nairobi.

5.5 Water supply in Nairobi

Investments in water and sanitation are high in Nairobi compared with other parts of the

country.88 Nevertheless, insufficient levels of public investment in water and sanitation

service infrastructures have led to inadequate supply to meet the increasing population. Most

of the surface water used in Nairobi derives form the Athi River. Groundwater is being

pumped from beneath the city mostly by private users such as hotels or swimming pool

owners. One challenge is to improve the poor state of the distribution system. A huge

percentage of the water gets lost through leakage, illegal abstractions and other

shortcomings. Also inefficiency in the handling of water is a problem. Wasteful usage by

some people can even be observed during periods of drought. There are signs that the

groundwater level in Greater Nairobi is lowering. However, no cogently studies have been

pursued so far and no accurate figures are available. The abstraction of groundwater started

in the early 50s. Nowadays, groundwater represents about 21% of the water supply in

86Cities of the World: http://www.city-data.com/world-cities/Nairobi.html; 15.05.2008

87 U.S. Department of State: http://www.state.gov/r/pa/ei/bgn/2962.htm; 17.05.200888 Global Water Finance; 2007; page 37


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Greater Nairobi. Due to over extraction, the average well depth has increased from 60 to 84

meters89.

Table 10: Stakeholders in the Water Sector of Nairobi

Source: Own design

5.5.1 From the source to the consumer

In Nairobi water is either abstracted from rivers (surface water) or through boreholes (ground

water). Collecting tanks for rainwater are seldom seen in the town but are used in remote

areas of the country. After extraction, the water is purified with chlorine. Before distributing itto the consumer, the quality of water is analysed. In order to being able to charge the

consumer for the water used, the consumption should be measured. Much water is lost

through illegal abstractions and leakages. Another problem is the re-pollution of the water

after purification as a result of the old and badly maintained infrastructure. Finding a solution

to this problem means to take into account expensive investments in infrastructure. Table 11

on the next page shows the most common way of the water from the source to the end

consumer and its losses during the distribution.

89 World Bank Working Paper No. 69; 2005; p. 56 - 57

NeighbouringCountries

WaterManagement

Institutions

Industry and

AgricultureSectors

Communitybased

Organisations

Legislators

Government

GeneralPublic

InternationalOrganisations

InvestmentsAgencies

Water

Sector


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Source: Surfaceor ground water

Purification

Loss by illegal abstraction

Loss by leakages

Re-pollution

Table 11: From the source to the consumer

Source: own design

5.5.2 Quality of tap water

Most people in Nairobi would never drink tap water without having cooked it before because

they dont trust in the quality of the water. The Nairobi Water Company as well as Runda

Water90 purifies the water according to international standards. Both filtration and chlorination

are used for that purpose. Samples of the water are being tested regularly. Nevertheless, the

worries of the consumer are not completely out of reason. During distribution the purified

water gets polluted again as a result of the badly maintained pipes. Better infrastructure

would be needed to ensure sufficient water quality. Another method of purification is the

application of UV light at the place of consumption. The installation of the technology is

relatively expensive but also a promising investment for the future. Mr. Maina from Trojan UV

mentioned that the widespread use of chlorination in Kenya is problematic. The application of

chlorine is forbidden in North America by fear of health concerns since it might cause cancer.

Furthermore, chlorine damages the infrastructure. UV light is a good alternative but difficult to

apply for large quantities of water.

5.5.3 Nairobi City Water & Sewerage Company

Nairobi Water Company is the most important water provider in the city. It employs about

2000 people. The company is wholly owned by the Nairobi City Council and serves about

200000 customers. Water is sourced from different dams around Nairobi. Thika Dam is the

biggest dam and has been visited by the author. It was built between 1989 and 1994 by a

British company and provides 85% of the water extracted by the company. The dam is

located at about 100 kilometres outside Nairobi and 2041 meter above sea level. Therefore,

90 These companies are presented in chapter 6.5.3 and 6.7.


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force of gravity can be used to transport the water in the pipes, so no pumps are needed.

The water extracted from Thika dam is not sufficient anymore. Thats the reason way studies

are carried out in cooperation with the World Bank in order to find new way to extract more

water. The construction of a new dam would be critical since it implicates the resettlement of

people living in the concerned area as well as damaging the natural environment.

5.5.4 Athi Water Services Board

The Athi River Basin drains an area of 67000 km2 that is used for agriculture and industrial

production, but the area is also urbanised. The length of Athi River is about 591 km and its

water quality after passing Nairobi is rated as poor due to untreated or semi-treated sewage

from the capital.91 T

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