Sector Finance and Resource Flows for Water Supply in Kenya John Ondari Consultant Water and Sanitation Program 2 nd February 2004

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Outline n Background Study ObjectivesStudy Objectives Approach- Insitutional and financial mappingApproach- Insitutional and financial mapping WSS Resource Flows - EstimatesWSS Resource Flows - Estimates n Key findings Role of User ChargesRole of User Charges Donor financingDonor financing

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Objectives of Resource flow assessment in Kenya –To assess sector finance and resource flows in the water sector Institutional/ Financial mappingInstitutional/ Financial mapping Analysis of public financeAnalysis of public finance –To assess decision making processes- mobilization, allocation and disbursements –To explore next steps for improved finance

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Approach- Institutional mapping

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Approach- Financial Mapping

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Estimates of Total Sector Finance

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Key finding 1- Importance of User financing n Finding: User financing is an important source of WSS expenditure(about 39%) mainly through budget NWCPC, Local public utilities and PSSPs depend on this source entirely for recurrent expenditure: BUT Its potential is not fully realized; It is not efficiently used in urban and is not understood in rural Evidence

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Key finding 1- Importance of User financing n Urban n Means user charges- approved tariffs n For MENR-WSSD and NWCPC (=appropriations in Aid): protected but not efficiently allocated- cash flow problems Expenditure approval and flow processes create disincentives n For LAs Unprotected- no operational surplus for development n For Utilities- LUs and NWCPC Tariff low and government slow in revision- low charges even with higher potential- no autonomy n For PSSPs- Unclear legal status- unpredictable revenue

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Key finding 1- Importance of User financing n Rural n 1. Means user charges for public providers n For MENR-WSSD and NWCPC (AIA): protected but inefficiently allocated- cash flow problems Expenditure approval and flow processes create disincentives n For LAs- too little and unprotected and illegal n 2. Means user charges + comm. Contributions by CBOs/SHGs/HHs n Estimates based on weak information base- no proper records for communities in WSS, BUT n Sample cases indicate substantive user contributions n Recent RWSS field visit to 6 communities revealed significant user contributions (up to 100%)

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Key finding 1- Importance of User financing n Free and some material contributions both to O&M and capital not captured n HH information unavailable- not well captured, n Difficulties to arrive at National estimates

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Key finding 1- Importance of User financing n Implications n Users willing to pay- particularly urban n Likelihood of operational surplus- particularly LAs n Budget allocation- not linked to performance- disincentive for public providers to increase user charges n PSSPs require enabling regulation/ transparent contracts to increase internal generation n NWCPC and Lus require enabling rules to revise tariffs n Financing mechanism required which crowds in more community and market resources

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Key finding 1- User financing: Aspects for reforms/ Investment planning n WSPs to be separated as independent business entities-better revenue expenditure match n Resource allocations to WSPs in proportion to user contribution to create incentives for more finances from this source n Higher investments- higher user charges- better O&M and sustainability n Long term operational surpluses for sector investment likely n Tariffs for both rural and urban are same- this does not reflect provisions in the water policy

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Key finding 1- User financing: Aspects for reforms/ Investment planning n Suggested considerations for design of proposed WSTF Ensure a demand responsive approach Co-ordinate off-budget resources Explore possible WSTF support to PSSPs Capture community contribution as internal generation Explore potential role of LAs

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Key finding 2- Role of Donor financing n Donor WSS financing is used for capital expenditure

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Key finding 2- Role of Donor financing n mainly through Off-budget routes (70%) n On-budget donor support divided into two- AIA and revenue n AIA= donor spends on behalf of beneficiary n Revenue= spent directly by beneficiary- budget support n Donor support is mainly through AIA (about 90%) n Lack of confidence in government management

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Key finding 2- Role of Donor financing n AIA comes in two forms- Credit purchase and direct payment n Credit purchase=goods/services acquired on behalf of beneficiary n Direct Payment- donors make direct payment to suppliers n AIA mainly through Credit purchase n Lack of accountability on part of government Share of Credit purchase in AIA

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Key finding 2- Role of Donor financing n Actual on budget realization has been low but now increasing

Sector Finance & Resource Flows for WSS in Kenya Kampala, 2 nd February Key finding 2- Role of Donor financing: Implications n Low donor funding low capital allocations Low MTEF Ceiling Low sector investment n Low FDI as donors leadership lacking n Now easier to leverage even market resources with growing donor committments n Off- budget resources:- un-coordinated May not be implemented within a DRA Reflects lack of confidence in accountability and good management of the public sector Problem- planning investment and projections