Achieving Sustainable Development Goal 6 by 2030 will be a major milestone for any developing country. Its realization will arguably be highly impactful to at least four (4) other SDG goals ranging from ending poverty, improving health and wellbeing, gender equality, and economic growth. Specifically, targets 6.1 and 6.2: are paramount and at the forefront of all developing governments’ agendas.
However, the infrastructure necessary to provide potable water to domestic users, such as dams, filtration plants, and pipelines, is costly to build and maintain (Viziers and MacCallum, 2019).
Although governments are primarily responsible for providing this public good, private-sector investors are increasingly active in this sector (Rodriguez et al., 2012). The gap in available and required financing to fund water and sanitation projects by the central government and the devolved government continues to widen in most developing countries.
In Kenya, for example, there exists a financing gap of at least 100 billion Kenya shillings per year (WB, 2018). Kenya is faced with a huge deficit in financing for water, sanitation, and hygiene every year. The World Bank and Ministry of Water and Irrigation estimate that over Kenya Shillings 100 billion is needed every year if the country is to achieve the sustainable development goal 6. (WB, 2018). Cumulatively, the estimated total cost for water supply is Kenya Shillings 1.7 trillion (USD17 billion), while the available government budget is Kenya Shillings 592.4 billion (USD5.6 billion), leaving a shortfall of Kenya Shillings 1.2 trillion (USD11.4 billion). (WASREB, 2016)Moreover, in South Africa, an estimated R33 billion per annum is required to close the water infrastructure funding gap in South Africa over the next 10 years (DWS, 2018).
While the financing gap is huge, it is not unbridgeable. (Annamraju et al, 2001). It is, therefore, important that, at this point on, developing countries focus on developing and implementing a sustainable financing strategy. Such a strategy should not only realize an increase in allocation through alternative financing mechanisms to the sector but also follow through to ensure that the investment results in increased water and sanitation coverage (Annamraju et al., 2001). Given the legal framework, this can be explored through the water service providers(WSPs)/water utilities.

One of the significant determinants of debt capacity for any company is its financial position. The debt service coverage ratio determines the capacity for debt absorption among water utilities within a commercial environment. An analysis based on a base case scenario that provided a common interest rate, grace period, and tariff indexation rate was used to evaluate four water utilities to explore the possibility of leveraging impact investors through fixed-rate bonds for sustainable water and sanitation investment in Kenya.
From an analysis of the four case studies, it was noted that with this base case scenario held constant, not all water utilities are able to achieve the desired DSCR.
Moreover, the study found that there is a need to customize the base case scenarios to achieve the desired results for different water utilities. This may include reducing costs or increasing water tariffs within legally allowable rates, or, more suitably, reducing the debt obligation. On average, the four case studies indicated that there is a capacity for the absorption of long-term debt financing among water utilities. While the scenarios are important to be considered at an individual company level, the borrowing power for each company is also very different.
On average, the debt service coverage ratio (DSCR) calculated for the case study utilities was above 1. This means that the companies have the ability to pay the principal and the interest for a debt. However, this is also highly dependent on favorable capital market conditions and legal frameworks that encourage impact investment into the sector. The case study established that the four water utilities had a debt absorption capacity of KES 3,963,655,024.
Assuming that the water sector can absorb KES 4 billion annually, that would put the total financing for the next 10 years at 40 billion. While it does not seem much towards bridging the financing gaps, it provides the county and the sector a starting point and an opportunity for growth. Over time this would mean that with available alternative and long-term financing options, at least 50% of water companies can achieve the DSCR suitable to absorb some small financing to implement basic water and sanitation project.
Certainly, unless more water companies increase their efficiency and become more creditworthy, increasing their capacity to absorb more debt, it can be concluded that it is not possible to half the existing financing gap. In this light, leveraging impact investors in financing the water sector in Kenya through fixed-rate bonds is a worthy endeavor that, if pursued, can provide positive impacts toward achieving SDG 6 and bridging the financing gap.
Great read