Utility Credit Ratings Help Leverage Domestic Loans for Infrastructure Development

Water utilities in Kenya could prove creditworthy borrowers for domestic lenders looking to expand their loan portfolios, according to a new report released by the Kenyan Water Services Regulatory Board (WASREB) with support from the World Bank’s Water and Sanitation Program and Public Private Infrastructure Advisory Facility.  

Following an assessment of 43 Kenyan urban water service providers, 13 were rated “creditworthy” another 16 were rated “potentially creditworthy,” while the remaining 14 utilities will “require substantial reforms” before accessing credit financing. The results of the credit assessment were released in a new WSP technical report, Financing Urban Water Services in Kenya: Utility Shadow Credit Ratings.

Water utilities serve only 40 percent of the population in Kenya’s urban towns and cities. Access to finance is often a key constraint to extending coverage to un-served consumers, especially as utilities have traditionally relied on public funds from government and development partners to finance capital investments. These resources are limited and the additional investment needs are too large to be funded from utility revenues alone.  

However, investments made in the extension and rehabilitation of distribution networks can often generate financial returns to cover the investment costs where cost recovery tariffs are employed to cover operating and maintenance (O&M), capital investment, and debt service costs.

“In the face of Kenya's projected urban population growth rate of about 7 percent annually, utilities are hard-pressed to keep up with demand,” notes Wambui Gichuri, regional team leader for WSP in Africa. “More investment by the private sector would contribute towards expanding access in urban areas and achievement of national targets.”

The credit assessment aims to provide potential private sector lenders with information about the borrowing capacity of urban water service providers and provide utilities a diagnostic to identify areas for improvement.

"The gap between funds available to water utilities and the demand for water infrastructure continues to grow,” says Adriana de Aguinaga de Vellutini, program manager for the Public-Private Infrastructure Advisory Facility (PPIAF), which provided support for the credit assessment study. “It is therefore important to facilitate the process of mobilizing additional funding for developing the water sector to ensure sustainable service delivery. The credit rating exercise gives the utilities a clear sense of the actions to be performed to enable them to improve creditworthiness and fund their considerable infrastructure backlogs.”

The assessment rated the 43 water service providers in areas particular to a utility, such as financial and credit management, management quality and capacity, operational performance, as well as external factors such as economic base, susceptibility to external shocks, and changes in sector policy.

The shadow ratings were based on a domestic rating scale that benchmarks water service providers against an AAA domestic rating for the Government of Kenya.  

“The results of the credit assessment not only allow water utilities to identify areas for improvement and exchange of good practices, but also provide an opportunity for them to take positive steps, and possibly even make policy changes, to address performance challenges that hinder access to credit,” says Gichuri.

For more information, contact Rajesh Advani, wspaf@worldbank.org.
Download Full Report:
Financing Urban Water Services in Kenya: Utility Shadow Credit Ratings

Download Summary (Learning Note):
Using Credit Ratings to Improve Water Utility Access to Market Finance in Sub-Saharan Africa