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What is Results-Based Financing?
.jpg "Project Commissioning, Embu (Results-Based Financing)")
The Results-Based Financing (RBF) investment programme is a commercial financing facility that became operational in WSTF in December 2014 after the Government of Kenya signed a Grant Subsidiary Agreement with the German Development Bank (KfW) and the World Bank. The grants are provided by the Swedish International Development Agency (SIDA) through the KfW via the Aid on Delivery (AoD) programme for 1.36 million EUR and the World Bank Output-Based Aid (OBA) programme for 11.835 million USD.
In recognition of the need to reduce grant financing for commercially viable water utilities and in order to introduce a new business model to water financing, the RBF programme is supporting water utilities that are investing in water supply and sanitation improvement projects in the low-income and underserved rural and urban areas in Kenya. The WSPs are able to leverage loans from local financing institutions, which are then subsidised at a percentage of the project cost on attainment of agreed deliverables.
Target clients of the Results-Based Financing
The primary beneficiaries of the projects under the RBF programme that have been reached out of the targeted 150,000 (until 2018) as of June 2016 are a total of 3,645 households or 21,650 people. These are broken down as 16,940 people accessing individual water connections, 4,290 people accessing water kiosks, and 420 people accessing yard taps.
How the Results-Based Financing works
The projects to be implemented by the water utilities are pre-financed with commercial loans from domestic lenders in Kenya on market terms. The loans will support investments linked to the following:
- Construction/expansion of water and sewer networks to reach unserved consumers,
- Rehabilitation/improvement of existing networks e.g. the non-revenue water reduction programme,
- Water and/or sewer connections to households and public points,
- Water and sewer treatment facilities.
After completion of their projects, the water utilities are incentivised through applying one-off subsidies provided under the RBF sub-programmes for up to 60% under the OBA and up to 50% under the AoD programmes.
To facilitate the uptake of the RBF subsidies, the water utilities’ projects are prefinanced with commercial loans from local lenders. The RBF programme is currently working with three commercial banks, namely Sidian Bank, Kenya Commercial Bank (KCB) and Housing Finance, which have access to a 50% guarantee provided by USAID. Other banks, including Equity Bank, Family Bank, GT Bank and Coop Bank, have also been approached by the Water Fund and have shown interest in financing the water utilities under the programme.
Achievements of the Result-Based Financing
RBF commercial loans by local banks
As of June 2016, the RBF programme has facilitated the financing of five projects and reaching cumulative loan disbursements of KES 338.18 million since its creation in December 2014. The commercial facilities are loaned out to interested water utilities at the prevailing market rates. Of the total disbursements to date, the Sidian Bank has contributed 76.5%, followed by Housing Finance (23.5%), while KCB is yet to make a disbursement under the RBF programme.
RBF subsidies by WSTF
The RBF programme has so far disbursed subsidies valued at KES 69.48 million to four projects since inception (Table 12). The AoD programme contributed 62% of the total subsidies while 38% came from the OBA programme.
The 11.835 million UBA grant for the OBA facility consists of 9.5 million USD (KES 950 million) and 2.335 million USD (KES 233.5 million) for implementation support activities while the AoD grant facility for 1.36 million EUR (KES 150 million) is available for AoD subsidies.
Partners
As mentioned before, two categories of partners facilitate the work of the RBF programme:
- Local banks that pre-finance projects with commercial loans: Sidian Bank, KCB and Housing Finance (which have access to a 50% guarantee provided by USAID). Other banks including Equity Bank, Family Bank, GT Bank and Coop Bank have shown interest in financing the water utilities under the programme.
- Partnerships for financing subsidies after the projects are implemented: Government of Kenya, KfW, World Bank, SIDA.
Key elements of the Results-Based Financing success
- The programme is contributing to SDG 6 and Kenya‘s Vision 2030 by ensuring the availability and the sustainable management of water and sanitation for all. It is receiving favourable support from the Government of Kenya through the Ministry of Water and Irrigation, the county governments, water services boards and WASREB who are the stakeholders mandated to provide water supply and sanitation services in low-income and underserved areas of Kenya.
- The ownership of the water and sanitation infrastructure by both the water utilities and the county governments is increasing under the programme.
- The beneficiary water utilities are now fully registered companies under the Kenyan Companies Act and have the capacity to service commercial loans, which can be subsidised under the RBF programme.
Challenges and future perspectives
Challenges
- Lack of viable project proposals: To assist WSPs in developing viable project proposals, the WSTF is providing technical assistance (TA) funding under the RBF programme. The WSPs will procure consultancy services for developing project technical designs, project cash-flows, environmental and social management plans and social connection policies, which are prerequisites for eligibility under the RBF subsidy programme.
- Failure to raise connection fees by household beneficiaries: The failure to raise funds for connections by household beneficiaries is being addressed through the inclusion of at least 60% of the total cost of connections in the commercial loan to be borrowed by the WSPs. The households will then contribute at least 40% of the costs. The beneficiaries are expected to repay the 60% of connection costs borrowed by the WSP through monthly instalments included in their tariffs over an agreed period.
- Increased demand for commercial financing facilities: The RBF programme is noting an increasing demand for the introduction and improvement of water and sanitation services in all 47 counties. This is attributed to population growth, dilapidated infrastructure and physical and commercial non-revenue water. This is resulting in increased demand for commercial financing facilities by water utilities while banks are beginning to understand the water sector.
- Lack of coordination between water utilities and county governments: A number of water utilities are failing to meet the eligibility criteria under the RBF programme due to poor relationships with their county governments. It is a strict requirement that projects to be undertaken by the water utilities are approved by and will receive support from the county governments. Some water utilities are not applying for the RBF subsidies due to this irregularity.
- Slow uptake of commercial financing as an option for WSPs: The majority of water service providers in Kenya are not aware of the terms and conditions of the RBF subsidy programme. To increase awareness of the RBF programme, the WSTF have been undertaking workshops, seminars and open days to reach out to all WSPs in Kenya. The WSTF intends to launch a Call for Proposal under the AoD programme in July 2016 to invite WSP applications under the RBF programme.
Targets
The RBF programme pipeline as of June 2016 has a total of 17 projects with an estimated commercial loans requirement of KES 2.304 billion and a potential subsidy demand of KES 1.241 billion (Figure 8). The target beneficiaries for the OBA are 150,000 by June 2018.
Future perspectives
The RBF programme is a short-term programme that is aiming to achieve the following after its implementation phase.
The TA funding are short term facilities where external consultants are working with water utilities staff and building capacity in developing project proposals and in supervising the projects. It is expected in the near future that the water utilities will be able to undertake these tasks internally, thus becoming autonomous and consequently reducing their over-reliance on external assistance.
The RBF subsidies are meant to stimulate initial financing for the water sector by commercial lenders in Kenya. The subsidies are meant to assist the water utilities to repay their loans while at the same time improving revenue collection from the established projects. It is therefore envisaged that the established projects will result in increased revenue inflows enabling future loan borrowing by the water utilities, which will be repaid using company revenues.
The RBF facilitation in linking water utilities to commercial lenders sets in as an opportunity for commercial lenders to better understand the water sector while, at the same time, the water utilities are now considering borrowing from commercial banks as a future sustainability strategy and moving away from overdependence on traditional grants.
The RBF programme is therefore building confidence in the financial sector to consider the water sector as a viable business sector, where commercial financing can be applied and fully utilised for the advancement of the people of Kenya.