Document of The World Bank FOR OFFICIAL USE ONLY Report No: ICR00005300 IMPLEMENTATION COMPLETION AND RESULTS REPORT TF-16395 ON A GRANT IN THE AMOUNT OF SDR 7.73 MILLION (US$ 11.11 MILLION EQUIVALENT) TO THE Republic of Kenya FOR THE Kenya Urban Water and Sanitation OBA Fund for Low Income Areas May 25, 2021 Water Global Practice Eastern and Southern Africa Region CURRENCY EQUIVALENTS (Exchange Rate Effective {Apr 30, 2021}) Currency Unit = Kenyan Shillings 107.80 = US$1 US$ 1.44 = SDR 1 FISCAL YEAR July 1 - June 30 Regional Vice President: Hafez M. H. Ghanem Country Director: Keith E. Hansen Regional Director: Mark R. Lundell Practice Manager: Catherine Signe Tovey Task Team Leader(s): Rajesh K. Advani, Jessica Anne Lopez ICR Main Contributor: Aroha Bahuguna ABBREVIATIONS AND ACRONYMS CPS Country Partnership Strategy EA Environmental Assessment EMP Environmental Management Plan ERR Economic Rate of Return ESIRT Environment and Social Incident Response Toolkit ESMF Environmental and Social Management Framework GHG Greenhouse Gases GPOBA Global Partnership for Output-Based Aid GPRBA Global Partnership for Results-Based Approaches GoK Government of Kenya IRR Internal Rate of Return IVA Independent Verification Agent MDG Millennium Development Goals MoWSI Ministry of Water, Sanitation and Irrigation NLC National Land Commission NPV Net Present Value NRW Non-Revenue Water OAG Office of the Auditor General OBA Output Based Aid O&M Operations and Maintenance OVR Output Verification Report PAP Project Affected Person PAD Project Appraisal Document PDO Project Development Objective PIU Project Implementing Unit RAPs Resettlement Action Plans RF Results Framework RPF Resettlement Policy Framework SDG Sustainable Development Goals SIDA Swedish International Development Cooperation Agency ToR Terms of Reference USAID United States Agency for International Development WACC Weighted Average Cost of Capital WASH Water, Sanitation, and Hygiene WASREB Water Services Regulatory Board WSB Water Service Board WSP Water Service Provider WSS Water Supply and Sanitation WSTF Water Sector Trust Fund TABLE OF CONTENTS DATA SHEET .......................................................................................................................... 1 I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ....................................................... 5 A. CONTEXT AT APPRAISAL .........................................................................................................5 B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE) .......................................9 II. OUTCOME .................................................................................................................... 11 A. RELEVANCE OF PDOs ............................................................................................................ 11 B. ACHIEVEMENT OF PDOs (EFFICACY) ...................................................................................... 12 C. EFFICIENCY ........................................................................................................................... 17 D. JUSTIFICATION OF OVERALL OUTCOME RATING .................................................................... 18 E. OTHER OUTCOMES AND IMPACTS (IF ANY) ............................................................................ 19 III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ................................ 21 A. KEY FACTORS DURING PREPARATION ................................................................................... 21 B. KEY FACTORS DURING IMPLEMENTATION ............................................................................. 21 IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME .. 23 A. QUALITY OF MONITORING AND EVALUATION (M&E) ............................................................ 23 B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE ..................................................... 24 C. BANK PERFORMANCE ........................................................................................................... 26 D. RISK TO DEVELOPMENT OUTCOME ....................................................................................... 27 V. LESSONS AND RECOMMENDATIONS ............................................................................. 27 ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ........................................................... 30 ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION ......................... 36 ANNEX 3. PROJECT COST BY COMPONENT ........................................................................... 38 ANNEX 4. EFFICIENCY ANALYSIS ........................................................................................... 39 ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS ... 48 ANNEX 6. SUPPORTING DOCUMENTS (IF ANY) ..................................................................... 49 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) DATA SHEET BASIC INFORMATION Product Information Project ID Project Name Kenya Urban Water and Sanitation OBA Fund for Low P132979 Income Areas Country Financing Instrument Kenya Investment Project Financing Original EA Category Revised EA Category Partial Assessment (B) Partial Assessment (B) Organizations Borrower Implementing Agency Republic of Kenya Water Services Trust Fund Project Development Objective (PDO) Original PDO The project development objective is to increase the number of people in low income areas with access to improved water supply and sanitation services in Kenyan towns and cities. This objective will be realized by incentivizing urban Water Services Providers to invest in water supply and sanitation improvement subprojects to benefit households in low income areas by applying one-off Output-Based Aid subsidies to make water and sanitation access affordable. Page 1 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) FINANCING Original Amount (US$) Revised Amount (US$) Actual Disbursed (US$) World Bank Financing 11,835,000 11,107,400 9,944,728 TF-16395 Total 11,835,000 11,107,400 9,944,728 Non-World Bank Financing 0 0 0 Borrower/Recipient 6,300,000 14,670,000 14,670,000 Total 6,300,000 14,670,000 14,670,000 Total Project Cost 18,135,000 25,777,400 24,614,728 KEY DATES Approval Effectiveness MTR Review Original Closing Actual Closing 13-Nov-2014 03-Dec-2014 02-Mar-2017 30-Jun-2018 30-Nov-2020 RESTRUCTURING AND/OR ADDITIONAL FINANCING Date(s) Amount Disbursed (US$M) Key Revisions 16-Feb-2018 3.27 Change in Results Framework Change in Loan Closing Date(s) Change in Procurement Change in Implementation Schedule 29-Oct-2019 4.17 Change in Results Framework Change in Components and Cost Change in Loan Closing Date(s) Cancellation of Financing Reallocation between Disbursement Categories Change in Disbursements Arrangements 14-May-2020 6.69 Change in Results Framework Change in Loan Closing Date(s) KEY RATINGS Outcome Bank Performance M&E Quality Satisfactory Satisfactory Substantial Page 2 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) RATINGS OF PROJECT PERFORMANCE IN ISRs Actual No. Date ISR Archived DO Rating IP Rating Disbursements (US$M) 01 31-Mar-2015 Moderately Satisfactory Moderately Unsatisfactory 0 02 22-Oct-2015 Moderately Satisfactory Moderately Satisfactory 1.00 03 20-Jun-2016 Moderately Satisfactory Moderately Satisfactory 1.00 04 26-Dec-2016 Moderately Satisfactory Moderately Unsatisfactory 1.45 05 27-Jun-2017 Moderately Satisfactory Moderately Unsatisfactory 2.20 06 18-Dec-2017 Moderately Satisfactory Moderately Satisfactory 2.60 07 19-Jun-2018 Moderately Satisfactory Moderately Satisfactory 3.56 08 20-Dec-2018 Moderately Satisfactory Moderately Satisfactory 3.91 Moderately 09 19-Jun-2019 Moderately Unsatisfactory 4.04 Unsatisfactory 10 09-Dec-2019 Moderately Satisfactory Moderately Unsatisfactory 5.17 11 20-Apr-2020 Moderately Satisfactory Moderately Satisfactory 5.95 12 26-Nov-2020 Satisfactory Satisfactory 8.39 SECTORS AND THEMES Sectors Major Sector/Sector (%) Water, Sanitation and Waste Management 100 Sanitation 30 Water Supply 70 Themes Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Private Sector Development 10 Public Private Partnerships 10 Page 3 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) Urban and Rural Development 100 Urban Development 100 Urban Infrastructure and Service Delivery 100 ADM STAFF Role At Approval At ICR Regional Vice President: Makhtar Diop Hafez M. H. Ghanem Country Director: Diarietou Gaye Keith E. Hansen Director: Ede Jorge Ijjasz-Vasquez Mark R. Lundell Practice Manager: Jonathan S. Kamkwalala Catherine Signe Tovey Rajesh K. Advani, Jessica Anne Task Team Leader(s): Kevin Bender Lopez ICR Contributing Author: Aroha Bahuguna Page 4 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES A. CONTEXT AT APPRAISAL Context 1. At the time of project appraisal in 2014, 25 percent of Kenya’s population of 47 million resided in urban areas,1 of which an estimated 34 percent were living below the poverty line. 2 Although urban poverty was lower than the national poverty rate of 45 percent, it was estimated at the time that 30 million people, or 48 percent of the population, would reside in urban Kenya by 2030, leading to slums and congestion if urbanization was not managed well. 3 Access to basic urban services, such as water supply and sanitation (WSS), is key to improving the welfare of the poor and contributing to Kenya’s economic development. Kenya Vision 2030, the country’s national development plan launched in 2008, aimed to ensure that improved water and sanitation would be available and accessible to all by the year 2030. However, WSS access remained modest. Sixty-five urban water service providers (WSPs) with a total of 18.35 million people in their service area provided water to 54 percent of the population and 29 WSPs provided sewerage services to 17 percent of the population.4 To achieve the target of universal WSS coverage in urban areas against a background of increasing urbanization, urban areas would require more financing for development of water supply and sanitation infrastructure than what was available from traditional sources. 2. The operational and financial performance of WSPs was mixed at appraisal. For approximately 100 formal utility providers tracked by the regulator, the average non-revenue water was 42 percent, while the acceptable benchmark was deemed to be 20-25 percent by WASREB; continuity of service was reported to be 16 hours per day, with only 66 percent of WSPs within the acceptable sector benchmark;5 and only about half of the WSPs covered operations and maintenance (O&M) costs through user fees, with weaker utilities relying on grants to sustain their operations. The sector had typically relied on the Government of Kenya (GoK) and development partners for its funding. However, while the annual cost of investment and rehabilitation needed in water supply was estimated at $303 million in 2011, the budget allocation was only $193 million.6 This considerable gap in financing could be partially filled through private sector lending to utilities, typically for revenue-generating investments with a shorter payback period. But, commercial lending to water utilities in Kenya was in its nascent phase. Banks saw the sector as financially weak and unable to generate adequate returns. Moreover, WSPs had limited capacity to provide collateral to secure loans and did not generate sufficient self-financing. Many had only a limited relationship with commercial banks and were not familiar with lending practices and what they would need to do to become creditworthy. These factors increased lending risk considerably. Furthermore, commercial interest rates were high, making it difficult for this source of 1 World Bank. 2014. World Development Indicators. 2 Kenya National Bureau of Statistics. 2005-06. Kenya Integrated Household Budget Survey 2005-2006. Ministry of Planning and National Development 3 World Bank. 2011. Kenya Economic Update, June 2011, Edition No. 4: Turning the Tide in Turbulent Times. Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/27254 License: CC BY 3.0 IGO 4 Water Services Regulatory Board (WASREB). 2014: A Performance Report of Kenya’s Water Services Sector – 2012-13. Issue no. 7 5 Ibid 6 World Bank. 2011. African Ministers’ Council on Water, Water Supply and Sanitation in Kenya: Turning Finance into Services for 2015 and Beyond. Washington, DC: World Bank Page 5 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) financing to gain traction without strategic support from the international finance community to lower the weighted cost of borrowing. 3. The Kenya Water Act of 2002 introduced important reforms in the sector. Key amongst these were separating responsibilities for asset ownership and operation, creating autonomous utilities and an independent sector regulator, the Water Services Regulatory Board (WASREB), and ring-fencing revenues within the sector. The Act also established the Water Services Trust Fund (WSTF)7, as a state corporation to finance pro-poor investments in water and sanitation through WSPs and community run projects. Considerable public investment had been put into the eight regional asset holding parastatals Water Service Boards (WSBs)8 to build and rehabilitate water-resource assets managed by them, as well as treatment and distribution infrastructure operated by WSPs. 4. Building on these reforms, the World Bank had been supporting access to commercial finance for water providers since 2007. This was initiated through a series of technical assistance and a pilot launched with K-Rep Bank to incentivize rural and peri-urban communities to access loan finance to rehabilitate and expand small piped-water systems. Subsequently, an extraordinary tariff adjustment introduced in 2009 by WASREB to improve financial sustainability of WSPs, resulted in a tariff increase between 70 and 100 percent, followed by a formal tariff adjustment process where WSPs applied for regular tariffs for a progressive shift towards full cost recovery tariff in the medium term, allowing them to recover justified costs including financing costs. WASREB collaborated with the World Bank to develop a mechanism to assess utility creditworthiness to support commercial finance. In 2011, shadow credit ratings for 43 Kenyan utilities were published. Following the establishment of a devolved system of governance by the 2010 Constitution of Kenya, World Bank initiatives were undertaken to support WSP access to commercial finance, including grants to the Nairobi Sanitation Output Based Aid (OBA) Project (P131512)9 and Nairobi Sanitation OBA II Project (P162248)10 to extend low-cost sewered sanitation and water services in densely populated low-income communities and informal settlements of Nairobi using a blended financing model. 5. The Kenya OBA Fund project was prepared shortly after devolution took effect in 2013 and would enable the national government to cooperate with new local institutions such as the county governments and WSPs under the decentralization framework. Specifically, this project would help WSPs in smaller urban centers obtain commercial finance for delivering water supply and sewerage services to low-income areas and close the gap in WSS access between metropolitan areas such as Nairobi and Mombasa and small towns. The high cost of connection to water and/or sewer networks often prevented low-income consumers from accessing the service. Thus, they relied either on boreholes and/or private water operators. Water from these sources was not only of poor quality, time consuming to fetch, and unreliable but was also expensive when purchased from private vendors. By providing targeted results-based subsidy for capital costs through the Kenya OBA11 Fund, administered by the WSTF, the project would incentivize the participating WSPs to extend services to low-income households. This would contribute to the Kenya Vision 2030 to 7 Renamed as the Water Sector Trust Fund under the Water Act, 2016 8 WSBs own and develop infrastructure used in the production and delivery of water services, and contract WSPs to operate the systems in demarcated service areas. 9 Kenya Nairobi Sanitation OBA Project (P131512). World Bank GPOBA Project approved on 17 December 2012. 10 Nairobi Sanitation OBA II Project (P162248). Approved on 17 Aug 2017 was a separate small grant to allow for an additional $2.6 million cost increase in the Nairobi Sanitation Project (P131512). 11 Output-based aid is a form of results-based financing used to improve the delivery of basic infrastructure and social services for the poor, where payments are contingent on the achievement of pre-agreed outputs. Page 6 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) make “improved water and sanitation available and accessible to all” by 2030. Utilities would be finalized12 only once they were able to obtain commercial loans from domestic lenders on market terms. The loans would support investments in water and sewer connections, public water points, and upstream WSS infrastructure. The grant, provided by the Global Partnership on Output-Based Aid13 with funds originating from Sweden (donor) through the Swedish International Development Cooperation Agency (Sida), would subsidize up to 60 percent of the sub-project cost financed by the loans, subject to a cap of US$115 per beneficiary. The proposed project was aligned with all three domains of engagement of the Bank under the Country Partnership Strategy (FY 2014-18) by playing a critical role in the development of WSS infrastructure “for poor households in cities to become more productive, while attracting financial resources from the private financial sector”, and encouraging improved governance by “ensuring that only legally compliant and creditworthy WSPs are financed under the project.” Theory of Change (Results Chain) 6. The project leveraged existing public investments and resources by introducing commercial finance as a supplementary resource to assist the GoK in achieving its Vision 2030 goals. The project established an OBA Fund at the WSTF targeting well performing WSPs with viable investment subprojects which could access commercial loans to finance investments that deliver household water and sewer connections, public water kiosks, and the upstream investments needed to deliver these services. To be eligible for partial grants, the beneficiary households needed to meet pro-poor criteria. Project results were to be achieved by supporting the following activities and outputs: The WSPs were to be given capacity building support to ensure that they were successful in undertaking the sub-projects and provided technical assistance to make them attractive to commercial lenders. This would enable them to sign loan agreements with commercial banks to pre-finance the cost of improved WSS infrastructure. Upon the achievement and verification of pre-agreed outputs, OBA subsidies to be provided to WSPs under the project would help the WSPs repay the loan together with tariffs and connection fees from the services. Since OBA subsidies were to be provided only if commercial loans were used, they were a key element of the project design to encourage WSPs to use commercial finance for the provision of improved WSS infrastructure in low-income areas. The Project Development Objective (PDO) was to increase the number of people with access to improved water supply and sanitation services, which was measured by the indicators on the number of people with access to piped household water connections, public water points, and sewer connections. These indicators were aligned with the definition of “improved” WSS under the Millennium Development Goal (MDGs) indicators for the sector.14 However, the project would go beyond connections to provide other upstream infrastructure as well, which would help to make these connections possible. This would help to move the WSPs towards the Sustainable Development Goal requirements adopted in 2015 through improvements in the quality and reliability of water supply.15 As the longer-term outcomes, the Theory of Change aimed to provide: (i) sustainable water supply and sanitation infrastructure to low-income households by incentivizing WSPs 12 Utilities were not finalized at the time of Appraisal. The final eight WSPs at project closing were Murang’a South, Murang’a Town, Nol Turesh, Naivasha, Embu, Kisumu, Nyeri, and Mathira implementing nine sub-projects. 13 Renamed the Global Partnership for Results-Based Approaches (GPRBA) in February 2019. 14 At the time of Appraisal, the MDGs 2000-2015 were still in effect. The indicators for monitoring progress in the WSS sector were (i) an increase in the proportion of population using an improved drinking water source, which included piped water supply sources and (ii) an increase in the proportion of population using improved sanitation, which included connection to a piped sewer system. 15 The Sustainable Development Goals (SDGs) adopted in 2015 were stricter, and the indicator for water supply “ Proportion of population using safely managed drinking water services” is defined as improved drinking water source that is located on premises, available when needed, and free of fecal and priority chemical contamination. The SDG indicator for sanitation is “Proportion of population using (a) safely managed sanitation services and (b) a hand-washing facility with soap and water” where a safely managed sanitation facility is defined as one where excreta is safely disposed of in situ or treated off-site. Page 7 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) to expand and improve services in those areas, which may not have been prioritized otherwise; (ii) improved enabling environment for private finance by supporting creditworthy WSPs access commercial debt; and (iii) improved human development outcomes for the beneficiaries in terms of improved health from reduced contamination of water, increased productive time due to reduced illnesses and associated caregiving duties, fetching of water from sources outside of the house etc. A Theory of Change was not explicitly stated at the time of Appraisal of the project. It was reconstructed for this ICR on the basis of the project activities, the Project Development Outcome (PDO) and the associated Results Framework (RF) in the Project Appraisal Document (PAD). Figure 1 illustrates the Theory of Change. Figure 1: Overview of the Project’s Theory of Change Project Development Objectives (PDOs) 7. The PDO was to increase the number of people in low income areas (“Target Areas”) with access to improved water supply and sanitation services. Key Expected Outcomes and Outcome Indicators 8. The PDO was to be measured through the following two indicators16: a. Number of people in low-income urban areas provided with access to improved water sources under the project; b. Low-income people provided with access to improved sanitation facilities under the project. 9. The project originally included five intermediate indicators at the time of Appraisal: a. New household sewer connections constructed in low income areas under the project; b. Number of water utilities that the project is supporting; c. New piped household water connections in low-income areas resulting from the project intervention; d. Improved low-income community water points constructed or rehabilitated under the Project; and e. Number of public toilets constructed in low-income areas under the project. 16The Project Appraisal Document inadvertently shows the outputs as the outcome indicators in Section II.C. The correct PDO outcomes are shown in the Results Framework. Page 8 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) Components 10. The project had two components: Component 1 for project implementation support, including technical support for WSP sub-project preparation and implementation; and, Component 2 for output-based grants to support capital investments in WSP sub-projects. a. Component 1: Implementation Support Activities (GPOBA US$2.34 million, amount disbursed at closing was $2.0 million). This was designed to ensure effective management of the project in line with World Bank fiduciary obligations. Towards this end, the component was to fund the following activities: a Project Manager for the project based at the WSTF; Capacity Building Support for WSP sub-projects; an Independent Verification Agent (IVA); Publicity and Workshops; and WSTF administrative overheads including project audits. b. Component 2: OBA Subsidies for Water and Sanitation Sub-projects (GPOBA US$9.5 million, amount disbursed at closing was $7.9 million). This was to partially finance WSPs sub-project investments to ensure that low-income areas benefitted from the expansion of improved water supply and sanitation services. These subsidies were to be provided to WSPs who borrowed commercial finance from local lenders on market terms to invest in sub-projects to offset some of the cost of debt servicing of commercial finance. Otherwise, the debt service of commercial finance could result in higher tariffs, and negatively impact the access of low-income households to such services. B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE) 11. The project underwent three Level 2 restructurings in February 2018, October 2019, and May 2020. These covered a cumulative project extension of 29 months (including six months to take into account COVID-19 related delays) to allow the PDO to be met and other changes described below. The main issues addressed through these restructurings were: revision of allocation and targets to reflect selected sub-project targets, as these had been estimated at appraisal; and revision of subsidy payment methodology to recognize achievement of interim targets. Revised PDOs and Outcome Targets 12. The PDO did not change during the project. However, the targeted number of beneficiaries from sewer sub- projects was increased, while the number of beneficiaries from water sub-projects was reduced from the estimates at design. Therefore, the number of total beneficiaries was reduced from 150,000 at design to 134,000 in 2018 and subsequently to 120,500 in 2019, to bring the pre-implementation estimates in line with more realistic estimates once the sub-projects were confirmed - see Table 1. Sub-projects, and hence WSPs implementing those sub-projects, were not finalized until they were able to demonstrate that they had obtained loans from the commercial bank. Thus, some WSPs that were included as part of the project at the time of appraisal were dropped later, which decreased the number of beneficiaries included in the Results Framework. Table 1: Original and Revised PDO Indicator Targets Original, Revised and New PDO Indicators Original Target Revised Target Revised Target as in the PAD in 2018 in 2019 Number of people in urban areas provided with access to Improved Water Sources 135,000 94,500 81,000 under the project - People provided with access to improved water sources – female N/A N/A 40,500 Number of people in urban areas provided with access to improved sanitation 15,000 39,500 39,500 under the project - People provided with access to improved sanitation services – female N/A N/A 19,750 Page 9 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) Revised Intermediate Indicators 13. The Intermediate Indicators were revised as shown in Table 2. A distinction needs to be made between the indicators on the “Number of water utilities that the project is supporting” and the “Number of utilities accessing commercial loans”. The former indicator included in the original RF, comprised those utilities that were provided with technical assistance under the project to make them more attractive to commercial banks while applying for loans. The latter was added only in 2019 to include utilities that had succeeded in obtaining loans from commercial banks on market terms. The complete list of WSPs supported under the project, the associated terms of lending, and type of investment (water or sanitation) is provided in Section II.B. Table 2: Original and Revised Intermediate Indicators and Targets Original, Revised and New Intermediate Indicators Original Target Revised Target Revised Target as in the PAD in 2018 in 2019 New household sewer connections constructed under the project 1,000 7,906 7,906 New piped household water connections resulting from the project intervention 19,000 17,104 14,500 Improved community water points constructed or rehabilitated under the project 140 42 40 Number of water utilities that the project is supporting 5 8 Dropped 30 N/A N/A Number of public toilets constructed New indicator N/A 12.5 Local private capital mobilized (USD million) New indicator N/A 9 Number of utilities accessing commercial loans Revised Components 14. Components remained valid and were not revised. However, during the second restructuring in 2019, US$217,396 was reallocated from Component 2 to Component 1; and US$727,600 of funds were cancelled (see Table 3 for the reallocated and cancelled amounts) because two sub-projects were dropped – one in Bomet and the other in Thika, which were not able to secure commercial financing in time to implement the sub-projects during the lifetime of the OBA project. See Section II.B for details. Table 3: Funding Reallocation in 2019 Amount of Grant Revised Component Change Allocated (USD) Amount 1. Consultant’s services 2,050,000 183,844 2,233,844 1a. Training and Operating Costs under Part 1 of the project 285,000 33,552 318,552 Sub-total 2,335,000 217,396 2,552,396 2. Subsidy for water and sanitation connections under Part 2 of the project 9,500,000 -944,996 8,555,004 Total Amount 11,835,000 -727,600 11,107,400 Other Changes 15. Introduction of additional Procurement method: The use of Force Account as an eligible method of procurement was introduced in 2018, to accommodate the purchase of goods by the WSPs and the use of the WSPs’ Page 10 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) own personnel and equipment for undertaking and completing work up to a threshold of US$200,000 to minimize exposure to risks associated with the method of procurement. 16. Revised Disbursement Mechanism: The subsidy disbursement mechanism was revised as follows in 2019 (see Table 4 for comparison with original subsidy mechanism): (i) 10 percent upon securing the commercial loan; (ii) 45 percent upon verification of completion of major works, as evidenced by banking records and engineer approved interim payment certificates; and (ii) 45 percent against verified water and sanitation connections. The revised disbursement mechanism front-loaded some of the subsidy (45 percent against completion of physical works or upstream infrastructure compared to the earlier 65 percent against connections) to recognize interim targets and hence help the WSPs access liquidity in a timely manner. This helped accelerate implementation and was one of the rationales for restructuring. Table 4: Disbursement Mechanism Schedule Revision in 2019 Original Revised Original Subsidy Payment Trigger Revised Subsidy Payment Trigger Payments Payments Upon establishing pre-agreed outputs with the WSTF, and signed 10% Upon commercial loan signing 10% loan agreement between WSP and commercial lender Upon independent verification that the pre-agreed output targets 65% Upon verification by the IVA of completion 45% have been reached in the low-income areas i.e. household water of major physical works and loan and/or sewer connections, public water points and public toilets drawdown have been achieved Upon demonstrated service delivery, as evidenced by 3 months 25% Upon independent verification by the IVA 45% continuous billing and receipt of payments for service under the that water and sanitation connections are project completed Rationale for Changes and Their Implication on the Original Theory of Change 17. The restructuring of the projects in both February 2018 and October 2019 aimed to extend the project to offset the delays at the start of implementation. These extensions were necessary to ensure that the participating WSPs, which had already signed loan agreements were able to complete construction of the sub-projects and had the necessary time to complete household connections to enable utilization of the infrastructure that had been built. The restrictions on movement in the first quarter of 2020 due to COVID-19 further led to a no-cost extension of the closing date. Details on reasons for the various delays are addressed in Section III.B. The theory of change did not change with the restructurings because the expected outcomes were the same throughout the project, i.e. increased number of people provided with access to improved water sources and sanitation services, albeit with reduced targets, with the same activities, outputs, and intermediate outcomes. II. OUTCOME A. RELEVANCE OF PDOs Assessment of Relevance of PDOs and Rating 18. The relevance of the PDO is rated as HIGH. The Project remains highly relevant to the strategic objectives of both the Government of Kenya and the World Bank Country Partnership Strategy (CPS) 2014-18 (Report No. 87024- Page 11 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) KE), extended under the performance and learning review (P161914) and the World Bank Group (WBG) COVID-19 Crisis Response Approach Paper.17 a. Relevance to CPS: The PDO was clearly aligned with the three domains/objectives outlined in the Kenya CPS 2014-18. The Project supported direct investments in basic infrastructure ensuring equity by targeting poor households in urban areas and improving the enabling environment for private investment by leveraging private sector finance. Thus, the Project contributed specifically to objectives of: Growth to Eradicate Poverty (Outcomes 1, 2, and 3) through the provision of enhanced urban infrastructure water supply and sanitation services by improving the enabling environment for private investment; Human Resource Development for Shared Prosperity (Outcome 5) by reducing inequality in access to WSS by targeting the provision of the WSS services in low-income urban areas; and Delivering a Devolution Dividend (Outcome 8) by supporting the county-owned WSPs in their capacity development to provide sustainable WSS services under the newly devolved governance system. The project continued the progress made by other OBA projects in the water sector, which provided a testing ground for the introduction of commercial financing in the sector. The scope, size, and level of ambition of the project were thus in line with the enabling environment for private investment. b. Relevance to the Kenya Vision 2030: The PDO was strongly aligned with Kenya Vision 2030 that aimed to ensure that improved water and sanitation is available and accessible to all by the year 2030. By subsidizing the WSS investments to poor households in urban areas, the project was able to directly contribute to the overall development of the water sector as envisioned in Kenya Vision 2030. B. ACHIEVEMENT OF PDOs (EFFICACY) Assessment of Achievement of Each Objective/Outcome 19. The project PDO outcomes were to increase the number of people in low income areas with access to (1) improved water supply and (2) improved sanitation services. While PDO Outcome 2 target was increased during the first restructuring of the project, PDO Outcome 1 target was revised downwards in both the first and second restructurings, resulting in three targets.18 Thus, a split rating will be applied to the Efficacy assessment. PDO Outcome 1: Increase in the number of people in urban areas with access to improved water sources under the project 20. The achievement of Outcome 1 is rated as MODEST for the original target, SUBSTANTIAL for the revised target, and HIGH for the final target. At project closing 84,408 people were provided with access to improved water sources in the form of new household water connections and new community water points (see Table 5). The achievement of the final target against the original target of 135,000 was 63 percent, against the revised target of 94,500 was 89 percent, and against the final target of 81,000 was 104 percent achieved. Rehabilitation and construction of upstream infrastructure under the project were needed to accommodate new connections, contributing to the improved and 17 Kenya - Country partnership strategy FY2014-18 (Vol. 2): Main report (English). Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/173431468284364640/Main-report The Kenya CPF FY21-26 is under preparation following the completion of the Systematic Country Diagnostic in FY20.. 18 Target 1 was effective from Project Effectiveness to February 2018. At the end of the period, the PDO outcome 1 target was reduced. Target 2 was effective for the period from March 2018 to October 2019. At the end of this period, the target value for outcome 1 was further reduced and funds cancelled accordingly. Target 3 or the final target was effective from November 2019 to project closing date. Page 12 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) expanded services by the WSPs to low-income areas. But these were not measured in the Results Framework of the project. Table 5: Increased access to improved water sources under the project Period 1: Project Period 2: March Period 3: Effectiveness to 1st 2018 to 2nd PDO Outcome Indicators November 2019 - restructuring in restructuring in project closing February 2018 October 2019 Number of people in urban areas provided with access to Improved Water Sources under the project 63% 89% 104% Intermediate Indicators Number of water connections made under the project 42% 44% 105% Number of water points constructed under the project 71% 71% 100% 21. Before the project, many WSPs were facing constrained production capacity that limited their ability to provide access to clean and safe water, especially in low-income areas that were hard hit in times of water shortages. Thus, the residents had to resort to alternative sources of supply that took as much as 1.5 hours per trip in some areas, were of poor quality (some areas reportedly had high fluoride levels), unreliable, and expensive as indicated in the baseline surveys carried out by the IVA. These sources were not necessarily “improved” under the MDG definition, and certainly did not conform to the SDG definition either. The project supported the WSPs in overhauling their aging water pipeline network and augmenting their distribution system, which helped to provide new household water connections and community water points in low-income areas. Access to piped water supply is recognized as one of the improved sources of drinking water19 and hence led to the achievement of the PDO of the project and the long-term outcomes implicit in the theory of change, especially through the use of commercial financing. 22. At project closing, the project provided 15,167 new piped household water connections and 40 improved community water points, including yard taps, reaching 74,550 and 9,858 beneficiaries with improved water supply respectively. As a result, beneficiaries were able to access cheaper and cleaner source of water, that cost on average US$0.85 per cubic meter20 compared to US$ 1.12 per cubic meter from private vendors21 (not including the cost of transportation required to fetch the water). IVA reports for a few sub-projects indicated that the average cost of water from private vendors could be as high as $10 per cubic meter (Nol Turesh), and beneficiaries were reported to be spending less per month on water from the WSPs. 23. In addition to water connections, the project was instrumental in constructing and rehabilitating upstream infrastructure such as water storage tanks, sedimentation tanks, and transmission mains to improve and expand their service delivery to low-income areas. These new construction and rehabilitation works benefited WSPs by increasing 19 “Improved drinking water sources are those that have the potential to deliver safe water by nature of their design and construction”. This includes piped water among other sources. Accessed from https://washdata.org/monitoring/drinking-water on 03/08/2021 20 Water Services Regulatory Board (2020). IMPACT: A Performance Report of Kenya’s Water Services Sector - 2018/19. 21 United Nations Development Programme (2011). Small-Scale Water Providers in Kenya: Pioneers or Predators? Last accessed on April 6, 2021 from https://www.undp.org/content/dam/undp/library/Poverty%20Reduction/Inclusive%20development/Kenya%20paper(web).pdf Page 13 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) revenue from the new connections and increased cost coverage, lower non-revenue water (NRW) due to reduced leaks in the rehabilitated distribution system, increased water production capacity which enabled them to make the new connection possible, etc. For details on new and rehabilitated infrastructure in sub-projects, refer to Table 6 below. Table 6: Water infrastructure built and rehabilitated under the project WSP sub-projects New Infrastructure and Rehabilitations Efficiency gains “We have achieved cost coverage through participation in the OBA program. Before, the company could not meet its 2,310 household water connections, 14 O&M obligations and relied on subsidies even to pay for Murang’a South I public water points, 7 yard taps, 5.14 km power bills. Our board of directors now fully support pipeline commercial finance as an option to supplement capex investments necessary to meet coverage targets and revenue growth” – Murang’a South management 3,031 household water connections; 3.7km transmission pipeline; 2 sedimentation tanks (5,185m3/day This resulted in improvement of the water production each); Rehabilitation works of existing capacity of the plant by an additional 9,700 m3/day. As a Murang'a South II treatment plant through installation of result, the utility was able to expand its service area by 81 alum and chlorine dosing platforms; Sq. Kms across 9-administrative locations. general renovation of utility building within treatment works The OBA project unlocked additional finance from the 1,285 household water connections;1 National Government Constituency Development Fund Murang’a Town public water point; 14km pipeline; 1 (NG-CDF) of $36K to support further pipeline extension and water storage tank, connections to 171 additional HHs, with 769 people. By working with partners in the OBA project such as Sidian Bank, WASREB and the County Government of Kajiado, they improved their corporate governance and financial management practices. In particular, Nol Turesh was assisted by Sidian Bank to set up a revenue collection 4,009 household water connections; 8 system, which not only minimized revenue leaks, but also Nol Turesh public water points, 39km p/line; 2 water increased collection to a level sufficient to cover O&M and storage tanks (total capacity of 475 m3) debt service costs. “We are able to plan better to meet our obligations and set aside some resources to finance some improvements/expansion of service in under-served communities” – Nol Turesh Management The WSP doubled the number of people connected to their 1,596 household water connections; 10 services in low-income areas with OBA. Its enhanced in- public water points; 54km mains and house technical capacities in project preparation from the distribution pipeline; 1 water storage OBA program, particularly its expertise in identifying and Naivasha tank w/108 m3 capacity; drilling of preparing bankable projects - design, package proposals borehole; rehabilitation of pump house and model viability for financiers, coupled with and installation of 4 pumps relationships with financiers, helped them to raise additional finance of about USD 200K in 2020. 1,417 household water connections; construction of laboratory room with one The rehabilitation works on the urban scheme led to a meter testing bench; construction of reduction in NRW from 45 percent to 34 percent. This had Mathira laboratory room; installation of GIS an overall effect of company-wide NRW reduction from 58 software and billing system; Rehabilitate percent to 48 percent. 44 km of asbestos cement pipes and dilapidated galvanized iron pipes Page 14 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) distribution network; Rehabilitation of water storage tank 1,519 household water connections; 30 km main and distribution pipeline; The additional connections led to increased revenues for Kisumu construction of pumping station and the WSP. installation of 3 pumps, 2 water storage tanks (total capacity of 311 m3) PDO Outcome 2: Increase in the number of people in urban areas with access to improved sanitation 24. The achievement of outcome 2 is rated as HIGH. The project exceeded its targets for PDO Outcome 2, providing 40,355 people with access to improved sanitation services against a target of 39,500. 25. The project helped to increase the sewerage coverage of the WSPs by investing in household sewer connections as well as augment their treatment capacity to accommodate the new connections. Sewerage connection is an internationally standardized measure of improved sanitation services, which led to the achievement of the project’s outcome of improved sanitation services and long-term outcome of reduced disease burden.22 26. The project invested in 5,108 new household sewer connections in Embu and 2,963 in Nyeri, exceeding the respective targets of 5,000 and 2,906 connections. Other investments under the project included upstream infrastructure in the form of 32 km of trunk sewer lines, 950 manholes, and 6 sewer treatment ponds in Embu, which helped it to improve the sanitary conditions in the central business district, and some parts of the residential and commercial areas. The new waste stabilization ponds provided an additional capacity to treat wastewater of 2,000 cubic meters per day, which was a significant upgrade over the previous 800 cubic meters per day. Similarly, in Nyeri 23 km of trunk sewer lines and a sewer pumping station in Nyeri were constructed, in addition to the household connections. These investments led to increased intake of wastewater of about 1,500 cubic meters to the sewerage treatment plant that has a designed capacity of 6,000 cubic meters but was treating only 3,000 cubic meters before the project. Thus, the project enabled the Nyeri Water and Sanitation Company to optimize the operational capacity of its wastewater treatment plant from 50 percent to 75 percent. The IVA not only reported increased revenue generation from the increased number of connections for the WSP (see Table 6) but also improved sanitation and hygiene conditions in the target areas due to reduced pollution of surface water as measured by self-reported responses by the beneficiary on health outcomes. For example, based on baseline and end line surveys by the IVA, Nyeri had a 15 percent diarrhea incidence after the project compared to 27 percent before the project. Similarly, Embu reported a 3 percent diarrheal incidence compared to 36 percent after and before the project respectively. 27. Investing in improved water and sanitation infrastructure in previously unserved areas required financing, and the project helped to leverage public funds by introducing commercial finance. Obtaining commercial loans on market terms for investments in low-income areas was a key requirement for the WSPs to receive OBA grants that would buy 22The UNICEF / WHO Joint Monitoring Programme for Water Supply and Sanitation has defined “improved sanitation” as “t hose designed to hygienically separate excreta from human contact”, which includes toilets connected to piped sewer system. Accessed from https://washdata.org/monitoring/methods/facility-types on 03/08/2021. Page 15 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) down up to 60 percent of the sub-project cost. Subsidies were a primary reason why WSPs extended services to low- income areas, because these subsidies kept the cost of paying back the loan low enough for services to be affordable to residents of low-income areas. The subsidies also allowed the WSPs to offer household loans to consumers to recover the connection fees over a period of time, given that the high cost of connection to WSS services is often a deterrent for low-income consumers. The design of the project ensured that on the one hand, these output-based subsidies held WSPs accountable for installing reliable water and sewer connections and upstream infrastructure thereby ensuring a revenue stream to the WSPs. On the other hand, they made the investments more attractive to commercial banks not only because they helped WSPs secure additional cash, but also held them accountable for completing the sub-projects. 28. The project supported ten utilities in total. The support built the capacity of WSPs to access commercial finance for the provision of WSS services, including for two utilities not eventually financed. The end result exceeded the intermediate indicator target of eight - see Table 7 for the list of WSPs. Capacity building for WSPs was crucial for improving their chances to obtain commercial loans, given their limited relationships with commercial banks. Specifically, these WSPs were provided with technical assistance to create technical plans and prepare financially viable and bankable proposals to commercial banks. It should be noted that two of the utilities – Bomet and Thika, that were supported under the project – eventually dropped out on account of extraneous factors outside of the control of the project. The Thika Water and Sanitation Company, which had signed a loan agreement with Equity Bank, had its board of directors dissolved following a dispute with Kiambu County over the merger of the eight WSPs in the county. The lender subsequently withdrew its loan agreement with the WSP. Bomet Water Company too was provided technical assistance funding to prepare a bankable proposal. At the time it applied for a loan from the bank, however, a grant from the County Government failed to materialize, and it dropped out from the project. Table 7: WSPs supported under the Project with capacity building Type of Total WSP Sub-project Main Financier Investment Investments Murang’a South I Water Sidian bank $251,543 Murang’a South Water and Sanitation Company Limited Murang'a South II Water Sidian bank $949,195 Murang’a Water and Sanitation Company Limited Murang’a Town Water Sidian bank $433,406 NolTuresh Loitokitok Water and Sanitation Company Nol Turesh Water Sidian bank Limited $1,154,550 Naivasha Water and Sanitation Company Limited Naivasha Water Cooperative bank $1,201,261 Mathira Water & Sanitation Company Limited Mathira Water Family bank $1,311,893 Kisumu Water and Sanitation Company Limited Kisumu Water Cooperative bank $1,458,249 Nyeri Water & Sanitation Company Limited Nyeri Sanitation Cooperative bank $2,834,770 Embu Water and Sanitation Company Limited Embu Sanitation Cooperative bank $5,075,570 Thika Water & Sewerage Company Limited Thika n/a n/a Dropped Bomet Water Company Limited Bomet n/a n/a Dropped Total Investment $14,670,437 Page 16 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) 29. As a result of the support provided under the project, eight out of the targeted nine utilities were able to access commercial loans and mobilized US$14.67 million equivalent in local currency in private capital to finance the investments. WSPs were pre-financed with commercial loans from domestic lenders on market terms ($12.16 million) to cover investment costs. The interest during construction ($1.49 million) was capitalized and formed part of the asset base (per accounting norms), and the WSPs raised additional own funds ($1.02 million) to contribute towards the overall project cost ($14.67 million). As WSPs are autonomous entities governed by independent boards of directors, their contribution towards capital costs, including capitalized interest, counts towards private capital mobilized. The financing and implementation risk rested with the WSPs and commercial banks, and on successful implementation of the projects and achievement of service-related indicators or “output targets”, the WSPs received a subsidy of up to 60 percent of project cost (Details in Section I.B). If the WSP failed to achieve the agreed output target or did not use commercial loans to finance the investment, the subsidy was pro-rated to the proportion of outputs achieved with the commercial loan. For example, subsidies to Kisumu were canceled after they used their own resources for the household connections following their inability to secure a top-up loan in time to complete the sub-project (Details in section IV.B). Justification of Overall Efficacy Rating 30. The overall efficacy rating is HIGH during November 2019-project closing (period 3); and SUBSTANTIAL in periods 1 and 2. See Table 8 for details. Table 8: Efficacy Rating Period 1: Project Period 2: March Period 3: Effectiveness to 1st 2018 to 2nd November 2019 - restructuring in restructuring in project closing February 2018 October 2019 Efficacy Substantial Substantial High Outcome 1: People provided with access to improved water sources Modest Substantial High Outcome 2: People provided with access to improved sanitation services High C. EFFICIENCY Assessment of Efficiency and Rating 31. Efficiency is rated SUBSTANTIAL based on the economic and financial returns as well as the operational efficiency of the project. 32. Economic Returns. The economic return of the project is 20 percent. Although it is lower than anticipated at appraisal (34 percent), it is in the ballpark range of 15 to 20 percent observed in the sector.23 The returns are comparable to those of urban water supply and sanitation projects completed in the last two years as well, including the Nairobi Sanitation OBA Project (P131512) and Nairobi Sanitation OBA II Project (P162248), demonstrating strong economic gains resulting from the intervention. Beneficiaries of the project improved their quality of life in terms of productive days 23The IEG report found the estimated median ERR trend in the Water and Urban Development Sectors to be between 15 and 20 percent for the years 2000 to 2008, with a rising trend for subsequent years. IEG World Bank. 2010. “Cost-Benefit Analysis in World Bank Projects”. https://ieg.worldbankgroup.org/evaluations/cost-benefit-analysis-world- bank-projects Page 17 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) gained and costs saved from avoided illnesses, productive time saved from collecting water, and cost savings from avoided purchase of alternative and more expensive sources of water. 33. The economic returns to the project were calculated by updating the original analytical model (which used data for only four utilities at the pre-feasibility stage, including two that were not part of the project) at appraisal with observed costs and benefits across the nine sub-projects financed (details in Annex 4). The post-implementation economic analysis calculated an economic rate of return (ERR) of 19.8 percent and net present value (NPV) of US$ 13.93 million at a discount rate of 5 percent in line with World Bank guidance24 (see Table 9 for comparison with estimates at appraisal). 34. Financial Returns. The financial analysis examined the investment costs and actual cash flow generated by the sub-projects, including operating costs, debt service, and surpluses. The financial internal rate of return (IRR) was estimated at 12.3 percent with a net present value of US$ 1.25 million at a 9.6 percent discount rate (see Table 9), which was calculated as the weighted average cost of capital (WACC) for the project. It is commendable that the project generated a positive IRR exceeding the WACC, which is rare in most developing countries where water projects barely cover operating costs. Table 9: NPV and IRR as Estimated at Project Appraisal and at Closure Type of Analysis Description Efficiency Parameter Financial Analysis Economic Analysis IRR 22% 34% NPV (US$ million) - 7.4 Estimate at Appraisal Social discount rate n/a 10% Asset Life (years) 20 years IRR 12.3% 19.8% NPV (US$ million) 1.25 13.93 At closure Discount rate 9.6% 5% Asset Life (years) 25 years 35. Operational efficiency: The project encountered several implementation delays in the initial stages of the project which entailed restructuring of the project twice, and together with the COVID-19 related restrictions on movement, necessitated a total of 29-month extension. However, these delays were not a result of inefficiency of the project itself but a product of the design of the project which required the WSPs to obtain commercial finance and be able to complete the sub-projects within the project timeframe and delays outside of the control of the project team (details in Section III.B). In fact, the delays did not result in cost overruns on investments. The project closed with a 90 percent disbursement rate. D. JUSTIFICATION OF OVERALL OUTCOME RATING 36. The overall outcome rating for the project is SATISFACTORY. The project’s relevance was HIGH, and efficiency was SUBSTANTIAL. It was successful in achieving its objectives in period 3 resulting in a HIGH efficacy and SUBSTANTIAL in periods 1 and 2. To apply the split rating methodology, numerical outcome ratings for each target were weighted by 24 World Bank. 2015. Technical Note on Discounting Costs and Benefits in Economic Analysis of World Bank Projects, November 12, 2015. Page 18 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) the share of project disbursements in the period in which the target was effective. Since the majority of the funds were disbursed in period 3, a weighted average of the ratings in the three phases results in a SATISFACTORY rating for the overall outcome (See Table 10). Table 10: Rating for Overall Outcome Period 1 Period 2 Period 3 Relevance High Efficacy Substantial Substantial High Efficiency Substantial Moderately Moderately Highly Overall outcome rating Satisfactory Satisfactory Satisfactory Numerical value of the outcome ratings 4 4 6 Disbursement value in each period (US$ million) 3.27 0.9 6.94 Disbursement in each period 29.43% 8.10% 62.47% Weighted Value of Outcome Rating 29.43 x 4 = 1.18 8.10 x 4 = 0.32 62.47 x 6 = 3.75 Satisfactory Weighted overall outcome rating (1.18+0.32+3.75=5.25) Highly Unsatisfactory=1; Unsatisfactory=2; Moderately Unsatisfactory=3; Moderately Satisfactory=4; Satisfactory=5; Highly Satisfactory=6 E. OTHER OUTCOMES AND IMPACTS (IF ANY) Gender 37. Although the project was not gender tagged and gender-specific data was not gathered, it can be argued that the access to improved water supply and sanitation was a significant progress for women. Women are usually in charge of caregiving responsibilities at home, and hence tasked with the duty of taking care of sick household members due to water-borne diseases. While not verifiable through actual medical records, the customers reported a drop in incidence of disease such as diarrhea and typhoid in the Output Verification Reports (OVR). Thus, reduced disease burden from improved WSS services is expected to improve the lives of women in the project areas. Anecdotal evidence from a few WSPs also suggests a reduction in the time spent fetching water by women, which freed up time for other activities. Note that the RF indicators “People provided with access to improved water sources – Female” and “People provided with access to improved sanitation services – Female” were estimated as 50 percent of the total beneficiaries based on assumptions regarding the gender composition of the targeted areas. The actual number of females served through the project could be at variance with the reported total female beneficiaries of 62,382. Institutional Strengthening 38. The project brought governance benefits to WSPs by preparing them to meet the market test to access credit and through additional oversight brought by lenders during implementation. The project helped develop WSP creditworthiness through a toolkit and hands-on support for the loan application process which helped strengthen financial management, project modeling, and business plan preparation. Together with separate technical assistance, the toolkit helped local lenders improve their knowledge of operations and risks in the water sector, and develop appraisal guidelines and loan structures, among other things. In the long term, the skills developed in planning, management, and investment will enable strengthened capacity by the county government and WSPs to deliver sustainable development programs for water and sanitation. Page 19 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) Mobilizing Private Sector Financing 39. The project served as a catalyst for increased private sector participation in delivering water supply and sanitation services to low-income urban areas through a blended finance model. The project provided hands-on experience to WSPs on reaching out to and working with commercial banks, while helping the latter gain know-how in appraising water projects. By giving them exposure to the water sector, it increased the interest and appetite among banks to lend to the water sector. The commercial loans to a few of these WSPs were also supported by partial credit guarantees25 from Unites States Agency for International Development’s (USAID) Development Credit Authority for investments in Water, Sanitation, and Hygiene (WASH) to help mitigate lender credit risk. This resulted in participation of three banks by the end of the project - Sidian Bank, Co-Operative Bank, and Family Bank. Two other banks, the Kenya Commercial Bank and Ecobank, were involved in appraising WSP applications. Equity Bank that had approved the loan for Thika Water Company withdrew its loan agreement as explained in Section II.B. Thus, of the ten water utilities supported under the project, eight accessed commercial loans, mobilizing a total of US$ 14.67 million in local private capital. Poverty Reduction and Shared Prosperity 40. This project was instrumental in improving the quality of life of low-income residents in urban areas by incentivizing WSPs to provide WSS services to these populations through output-based subsidies. Low-income areas were to be initially identified through WSTF’s poverty database (Majidata), which uses multi-dimensional criteria of poverty including settlement and housing patterns and status, socio-economic indicators, and water and sanitation access indicators. However, this methodology did not work efficiently as planned, and the IVA had to work with WSPs to screen the households when establishing the baseline, using socio-economic criteria based on Majidata. As detailed in Section II.B, the project made possible the extension of WSS services to low-income areas. This was supported by a testimonial from the Managing Director for Embu WSP who emphasized that the extension of sewerage services to low-income areas, an unfulfilled demand since 1983, had been made possible only due to the project because of the access to the market loan combined with the OBA subsidy. The project also made water supply services more affordable compared to some alternatives. Based on self-reported data by beneficiaries to the IVA, household expenditure reduced after the project introduced improved water supply services in their area because they were able to switch from alternative sources of water, the cost of which is sometimes considerably higher than what is charged by utilities on a per volume basis. Since this evidence on reduced household expenditure is based on self-reported data, caution is urged as beneficiaries may have overstated the benefits to provide an answer, they think was expected of them, rather than what was truthful. Other Unintended Outcomes and Impacts 41. WSPs reported improved income generation from the sale of water from water points. The IVA also reported increased income among households based on self-reported data, which could be attributed to the improved income generation or the increase in time available for other economic activities having been freed from the need to fetch water. However, this data is not verifiable and cannot be used as a causal evidence. 25The DCA is a formal agreement signed between the USAID and a private lender for loans provided to targeted borrowers that aims to mobilize commercial debt solutions to underserved borrowers facing challenging financial market conditions. The USAID credit guarantees are backed by the US Treasury providing risk sharing up to 50 percent of realized loss following receipt of claim from the lender. Page 20 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME A. KEY FACTORS DURING PREPARATION 42. Background Analysis. The project followed a series of interventions undertaken by the GoK with support from the World Bank and other development to support WSPs’ access to commercial finance. These interventions demonstrated that strategic grant funding or concessional loans can help unlock additional capital through innovative financing mechanisms, such as partial credit guarantees and output-based grants, leading to a growing role for private finance in the sector. The project team built on these prior initiatives and Bank engagements to design a well-informed intervention to make pro-poor investment viable and last mile access possible by leveraging commercial finance. At the same time, it held various roadshows and discussion with commercial banks to sensitize them on the viability of lending to the water sector. 43. Adequacy of stakeholder engagement. The unequivocal support from GoK at all levels – the National Treasury, Line Ministry, and the county governments – on the need for commercial financing of investments in the sector was important to the preparation of the project, if only to demonstrate their commitment to the success of the project and extend its cooperation during project implementation. 44. Readiness for implementation would have accelerated progress of the project. While the risks associated with commercial finance were correctly identified and the project provided for capacity building to help with accessing finance, it could have been more proactive in identifying consultants for capacity building itself. For example, these WSPs were not equipped to write the Terms of Reference (ToRs) for hiring the consultants who could help them with capacity building. Delays in the consultant procurement process contributed to overall implementation delays, as projects could not secure financing until the technical assistance for developing financial proposals was in place. The delay in securing commercial loans led to the delays in construction of sub-projects, which resulted in disbursement delays owing to the structure of output-based financing where the disbursement of project funds occurred largely at the end of the project lifecycle. Similarly, the unfamiliarity of the commercial bank staff with the water sector in the initial phase of the project could have been addressed early on by having a pre-qualified list of consultants that could be tapped into for providing their expertise to WSPs in reaching out to the commercial banks. This would have brought forward the process of familiarizing the banks with the operations and risks in the water sector, developing appraisal guidelines and loan structures etc. B. KEY FACTORS DURING IMPLEMENTATION Factors subject to the control of government and/or implementing entities 45. On numerous occasions, there were delays in transferring Bank funds to the project account, which slowed implementation and escalated costs for the providers. As the WSTF is under the Ministry of Water, applications for drawing down World Bank funds were made to the Ministry, which vetted each application before submitting it to the National Treasury. On approval, World Bank funds were disbursed to the designated account with the National Treasury in dollars, then to the Line Ministry in Kenya Shillings before being transferred to the account of WSTF. There were numerous delays in the process, which took two to three months in some cases, negatively impacting and slowing down the implementation of project activities and adding to interest costs that the WSPs were incurring on the commercial bank loans. Page 21 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) 46. Resettlement delays caused by the National Land Commission. The National Land Commission (NLC), the institution legally mandated to acquire private land for public use, was not fully constituted and therefore unable to materially discharge this function. The NLC Chairman and commissioners had not been appointed until November 2019, which led to delays in payment of compensation to project affected persons (PAPs) in Embu, Nyeri, and Mathira. This delayed the completion of works as the Bank requires beneficiaries to be compensated before works commence. These factors considerably slowed down implementation and were behind the downgrading of the project’s safeguards and implementation progress ratings in 2019. 47. Delays due to changes introduced by the Water Act of 2016. As a result of devolution, a new water law was passed in 2016 to govern the sector within the framework of devolution brought about by the constitutional change of 2010. This created a period of uncertainty, as there was clarity sought on whether WSPs could borrow under the new structure. The task team and client commissioned a legal opinion, which helped provide a framework for continued WSP borrowing. However, this required each county, as the new owner of the WSP, to issue a letter of support for each sub- project. This required sensitization and discussion to reach agreement, which contributed to implementation delays, and the eventual dropping of the Thika sub-project. The implementation delays contributed to the downgrading of the project implementation progress and development objective ratings in 2019, and the resolution of these issues helped speed up implementation which resulted in better ratings in 2020. Factors subject to World Bank Control 48. The project included emphasis on TA activities, which supported results achievement. WSPs received technical assistance to support sub-project preparation, implementation, and supervision, including development of bankable proposals to secure commercial loans. Project support to these WSPs was one of the key reasons for the success of the whole project in achieving the outcome in that without capacity building, they would not be able to obtain commercial loans for the necessary infrastructure, and thus unable to expand their services to low-income areas. Technical Assistance activities such as assessment of financial viability and technical feasibility of investment projects, improvement in the bankability of WSPs, and supervision of project implementation were also essential in providing additional reassurance to lenders. Factors outside the control of the government and/or implementing agencies 49. Natural disasters and COVID-19 affected implementation. Heavy rains in 2018 delayed construction due to the wet soil which did not allow the use of excavators when creating trenches for the laying of pipes. For example, in the Embu sub-project, excavation for the six sewer treatment ponds had to temporarily stop due to the heavy rains. This was one of the reasons for the extension of the closing date during the second restructuring in October 2019. Risks associated with COVID-19 hindered implementation of works and verification of outputs. All sub-projects slowed down in the first quarter of 2020, as customers were not comfortable with workers entering their premises due to risks associated with the disease. Moreover, the increased restrictions on movements in Kenya during the initial months of the pandemic hindered supplies and did not allow the independent verification agent to conduct verification of outputs (see IV.A on M&E utilization for details). This led to a no-cost extension of the closing date from May 31, 2020 to November 30, 2020. Page 22 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) 50. Implementation of sub-projects hinged on obtaining commercial loans, which was not guaranteed. Given the design of the project where subsidies were conditional on obtaining commercial finance, and construction commenced only after the loan agreements were signed, some of the delays were outside the control of the implementation agencies. As explained in Section II.B, two sub-projects in Thika and Bomet had to be dropped because they could not secure financing in time to complete the sub-project within the lifetime of the OBA project. The progress of the sub-project pipeline was directly linked to the implementation progress and development objective ratings throughout the project lifecycle. While initial progress on securing loans and commissioning contracts was understandable, with time the expectation was that projects will move into timely implementation and completion. IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME A. QUALITY OF MONITORING AND EVALUATION (M&E) M&E Design 51. Indicators were clear, well-defined, and well-linked to the PDO. While there was no theory of change in the PAD, the implicit theory of change as ascertained from the PDO, activities and the RF, was fairly clear and the associated M&E design was simple for implementing agencies to monitor relevant project outputs and impacts. There were a few shortcomings at appraisal that were mostly corrected in subsequent restructurings. Given the complex design of the project itself, and the requirement for WSPs to obtain commercial loans before they could be finalized, the project overestimated the number of people that it could provide access to improved water. Thus, it had to revise the target down twice over the course of implementation. In addition, the project originally had an indicator on the construction of public toilets on the recommendation of WSTF. However, the demand for public toilets construction by the WSPs under the project was reduced following a dedicated investment grant funded by the Bill and Melinda Gates Foundation and KfW Development Bank earmarked for public toilet construction. Although one or two WSPs initially agreed to public toilet construction, the indicator had to be dropped later because of lack of progress. It should be noted that public toilets are technically the responsibility of local councils and not WSPs, but the former have performed poorly in fulfilling this mandate. Finally, although this project aimed to achieve its outcome of reaching the last mile by leveraging commercial finance, there was no indicator to track the latter. This was rectified later, and two indicators were added to monitor the amount of “local private capital mobilized” and “number of utilities accessing commercial loans.” M&E Implementation 52. The WSTF, through the IVA, monitored the project progress. The IVA supported the data collection and verification process for the project. The questionnaires for data collection were designed by the IVA, reviewed by WSTF, and approved by the Bank. Data was collected thrice per the disbursement schedule over the course of project implementation from a random sample of beneficiaries in each sub-project. At the start of the project, the IVA collected data, including household survey data, to establish the sub-projects’ baseline against which the outputs linked to subsidy disbursement would be measured and verified. Because the household survey data was self-reported, it suffered from all the biases and limitations of this methodology, such as answers that are considered socially acceptable by the Page 23 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) respondents rather than actual experiences. These baseline figures were documented in the Baseline Survey Report, in 2017 halfway through implementation because of the delays in the procurement of the IVA. The second round of data collection at the time of the completion of construction was designed to gauge the extent to which the physical works as built were aligned with the design. The verification of outputs was carried out using secondary data in addition to field verification. The final disbursement was made against the targeted number of beneficiary connections for each WSP. These findings were formally documented in the final OVRs upon completion of the sub-project. M&E Utilization 53. The OBA model utilized M&E data effectively to facilitate disbursements. The engagement of the IVA to monitor results ensured data was collected in a timely manner, verified independently, and available to use during the project period. During the initial months of the pandemic, the physical verification of outputs was hindered. However, the IVA received the license from the government to check the physical works in Embu and Kisumu (the last two sub- projects to be completed), and remote verification procedures were quickly adopted to allow the IVA to continue verification of connections and obtain household feedback through phone interviews. While the response rate and time taken was similar to in-person interviews, the chief limitation of the telephonic interviews was that the behavior and body language of the respondents could not be observed for any visual cues. Justification of Overall Rating of Quality of M&E 54. The overall rating of the quality of the M&E is SUBSTANTIAL. The M&E system was designed well to support accurate and timely monitoring of project progress to support project management, implementation quality, and decision making. The M&E protocols were rapidly adjusted for consultations with beneficiaries to align with both the World Bank and Kenyan government guidelines in the light of COVID-19. It had moderate target shortcomings during preparation, which were corrected subsequently during restructurings. B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE Environment and Social Safeguards 55. Overall, project implementation complied with the Bank’s safeguard policies. The project was classified as Environmental Category B, as there were limited environmental and social impacts. The applicable Safeguards Policies triggered were OP 4.01 (Environmental Assessment) and OP 4.12 (Involuntary Resettlement), and the relevant safeguards instruments were disclosed through Infoshop on November 13, 2013. To mitigate potential impacts, the project updated the Environmental and Social Management Framework (ESMF) and the Resettlement Policy Framework (RPF) developed for the World Bank supported Water and Sanitation Services Improvement Project (P117635), which was primarily focused on infrastructure development in WSBs. The ESMF included an Environmental Assessment (EA)/Environmental Management Plan (EMP) template, tailored for the sub-projects under OBA grants. 56. The client, WSTF, took proactive measures to ensure compliance with environmental safeguards and closely followed the guidelines on resettlement. It prepared resettlement action plans (RAPs) for six sub-projects and communicated that the WSPs in project areas with project affected people (PAP) would not start physical works until RAPs were approved by the Bank and satisfactorily implemented. However, there were delays in making payments to some PAPs in Embu and Nyeri, as it took time to trace all the PAPs and to have the valuation, and in some cases payments, done by the National Land Commission (NLC). This contributed to the slowdown in overall implementation (see Section III.B). At the time of project closing, 92 percent (399 of 433) of the PAPs had been compensated. For the rest, in Page 24 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) accordance with Bank procedures, money was either deposited with the NLC (for those who could not be traced) or into an escrow account at a commercial bank. 57. In the case of the Embu WSP, two fatalities during implementation and having to resettle families delayed progress but contributed to more rigorous implementation protocols and satisfied beneficiaries. Works were temporarily suspended twice in Embu in September 2019 and in January 2020 following one fatality in each event and an injury to an employee of the contractor in the former case. World Bank environment and social incident response toolkit (ESIRT) procedures were followed in both cases. All the remedial actions resulting from both the September 2019 and the January 2020 fatal incident investigation reports were completed, including full compensation to the dependents of the deceased victims. Works resumed in March 2020, upon taking corrective measures to improve and ensure operational health and safety of project sites. In one case, families living in mud huts on one plot were resettled with the WSP paying their rent while the construction of new houses, paid for by Embu, was completed to the satisfaction of the families and possession taken. 58. The project closed on November 30, 2020 with a Moderately Satisfactory safeguards rating. The safeguards compliance by the client steadily improved over the life of the project, and it implemented recommendations by the Bank to incorporate more stringent social, environmental and occupational health and safety protocols throughout the project. Procurement 59. Procurement was rated Moderately Satisfactory for most of the project period. The project faced some procurement delays initially. This was attributed to the (i) selection process of consultants for carrying out feasibility studies of sub-projects identified by WSPs; (ii) completion of the feasibility studies by the consultants; or (iii) contracting process of consultants due to inadequate familiarity of the WSPs with the Bank procurement procedures. The WSPs lacked the capacity to prepare the ToRs to contract consultants for technical assistance, which slowed down the selection process for consultants. This led to the decision to come up with a pre-qualified list of consultants for the WSPs to choose from. However, procurement for both works contracts and IVAs was conducted mostly through a national competitive bidding and other provisions allowed per the legal agreement and was thus transparent and fair. The delay in the feasibility studies was due to the absence of appropriate arrangements for scheduling, coordination, and supervision of inputs and deliverables of individual consultants carrying out different aspects of the same feasibility studies of sub- projects. Financial Management 60. Financial Management was rated Satisfactory for most of the project duration but downgraded to Moderately Satisfactory in December 2019. This was because of a few unforeseen challenges: (i) temporary vacancy in WSTF of the Chief Manager Finance and Administration; (ii) delays in financial reporting; and (iii) low disbursement and budget absorption. However, the more significant issue as noted in the external audit report was around inadequate supporting documents for casual workers payments, noncompliance with procurement procedures, unsupported expenditures among others relating to inception activities carried out in FY 2015-16. The PIU steadily increased its capacity to manage these issues over the life of the project through constant engagement with the task team, and with support from external consultants to ensure compliance and to build internal capacity where needed. Project audits were carried out at the Bank's request, as these are not required for OBA projects, and the project has consistently submitted IFRs satisfactory to the Bank. After approval of the initial procurement plan, payment of Bank funds has been based on outputs by the Page 25 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) independent verification agent in accordance with the relevant OPCS guidance note for OBA projects. The 2019 project audit report from the Office of the Auditor General (OAG) has been completed and received by the team. Based on verbal discussions with the PIU, the team expects the client to be able to respond to queries raised by the OAG. 61. By the end of the project, disbursements were at 76 percent and expected to reach 90 percent prior to the end of the disbursement grace period.26 An undisbursed amount estimated at $1.2 million was attributed to savings due to the following reasons: (i) a reduction in the amount projected for accrued interest on loans to Embu, Kisumu, and Nyeri, and hence reduction in subsidy payments. The subsidy to the WSPs was originally estimated on the loan and accruing interest through March 2021. However, the Bank provided its no-objection on works completed by November 30, 2020, which meant that the subsidy would no longer cover any interest after this date, thus freeing up resources; (ii) delays in disbursements by the commercial bank to Kisumu resulted in Kisumu using its own capital resources to establish individual household water connections. This led to the cancellation of subsidy to the WSP since own capital resources are not subsidized under the OBA project; (iii) the exchange rate gain of the dollar against Kenyan shillings resulted in fewer dollars being used for payment of subsidies, which were in shillings; and (iv) a few activities such as field visits, projected trainings etc. were not carried out. C. BANK PERFORMANCE Quality at Entry 62. Quality at entry was SATISFACTORY. The project was of high relevance (see Section II.A) to both the Bank and GoK objectives. It is part of an ambitious Bank initiative to use OBA grants to leverage commercial finance in Kenya to improve service delivery to the poor, which included the Nairobi Sanitation Project (P131512) providing sustainable access to sanitation and water services in low-income communities of Nairobi. The project preparation included clear and concise PAD document that adequately addressed the sector and institutional challenges and risks. The preparation stage technical, fiduciary, and environmental and social assessments were well done, and raised relevant issues and anticipated challenges that were incorporated into the project design. Quality of Supervision 63. Quality of supervision was also SATISFACTORY. The Bank conducted eight implementation support missions, including the MTR, between December 2014 and November 2020. It clearly communicated the progress, observed issues, and recommendations in timely and detailed aide-memoires and Implementation Status Reports. The Bank provided effective oversight to help ensure that emerging technical issues were resolved, and that capacity was built in the implementing agencies. Many discrete challenges – such the operational health and safety of project sites following two fatalities and an injury in Embu – were addressed competently. To respond to the COVID-19 crisis, the project adopted remote verification procedures to continue to ensure quality of works and sustained services for targeted customers. The task team communicated virtually with sub-project teams, including weekly calls with the client, which helped to inform the end of project ISR, disbursement of remaining project funds, payment of remaining PAPs from the escrow accounts, and completion of the project audit. At the time of writing of this ICR, the audits had been completed and received by the team, and final disbursements for Embu and Nyeri were expected to be disbursed by the end of March 2021. 26 March 31, 2021 Page 26 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) Justification of Overall Rating of Bank Performance 64. The performance of the Bank is rated as SATISFACTORY. As one of the first projects using innovative ways to leverage commercial finance to improve service delivery in low income areas, the Bank team played a critical role in preparing and implementing the project. It provided high quality support to design a comprehensive and relevant project that contributed to the sector goals of the GoK. During the implementation, the Bank team provided high quality supervision and proactively responded to the challenges and issues that arose. D. RISK TO DEVELOPMENT OUTCOME 65. The risk to development outcome is low. All infrastructure construction under the project is complete and all WSPs received the subsidies, which were key to their continued financial sustainability. Even in the post-COVID environment, WSPs have managed to continue collecting revenues, with collection rates estimated at 98%. So long as there is no change to the tariff policies in place, the project has enhanced the long-term financial sustainability of the WSPs. 66. Loan repayment rates have been good, even during the COVID-19 pandemic. Following the grace period, 7 of the 8 WSPs have been making consistent loan repayments in accordance with the terms of the loan agreements. Two WSPs decided to prepay the loans, and one loan was restructured as the WSP was unable to meet the 5-year timeframe for repayment (most loans were 10-years, demonstrating the need for a minimum 10-year tenor). Despite cashflow challenges for many utilities resulting from Government of Kenya decree to provide free service during the pandemic, the use of escrow accounts, where borrower utilities set aside a portion of their daily cashflow with their banks for debt service has been useful in ensuring uninterrupted loan payments. See Table 11 for a summary of the loan performance. Table 11. OBA Loan Performance INDICATOR ACHIEVED COMMENTS NO. OF LOANS 9 Water utilities servicing loans with zero days in arrears; Of these 2 WSPs have repaid their loans ahead of schedule NO. OF LOANS 1 1 WSP restructured its loan in 2019. Debt service payments RESTRUCTURED now on track. REPAYMENT RATE* 100% Most utilities have cash cover in escrow accounts, up to 2x of monthly installments for loan repayments. *data obtained from commercial banks as of March 21, 2021. V. LESSONS AND RECOMMENDATIONS 67. The project served as a catalyst for private finance. In delivering water supply and sanitation services to low- income urban areas through a blended finance model, the project supported the World Bank's Maximizing Finance for Development (MFD) and Private Capital Mobilization (PCM) goals. It enabled 8 small- to medium-sized water utilities to access commercial finance at market interest rates to fund the upfront cost of 9 sub-projects. The US$10 million World Bank OBA grant leveraged US$14 million in domestic commercial finance and, more importantly, demonstrated the viability of the blended finance approach and that the institutional reforms undertaken to create viable service providers Page 27 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) did in fact generate private investment. The OBA grant reinforced accountability for performance of the WSPs and helped cover a portion of the project capital cost, enabling the expansion of access to improved water and sanitation services to low-income communities. The subsequent pipeline and interest from banks to continue lending is the subject of scale- up discussions, with an indicative project pipeline of $15 million identified through supervision missions. Donor co- financing and risk mitigation instruments, such as results-based financing and partial credit guarantees, will help reduce lender risk and lower the effective cost of borrowing for utilities to affordable levels. 68. A legal and regulatory framework that supports financially sound autonomous utilities is essential for attracting private capital to the sector. The sector reforms in 2002 that separated the functions between different aspects of service delivery and the utility tariff reform paved the way for utilities to develop ways to finance new infrastructure with their own revenues on a sustainable basis. In particular, this involved: (i) providers being autonomous entities incorporated under the Companies Act (WSPs) or the Cooperative or Trust Acts (communities); (ii) ring-fenced revenues, with income from water sales going towards O&M and capital expenses; (iii) a functional and independent regulator that licensed WSPs, regulated tariffs, and monitored utility performance. A legal and regulatory framework that supports financially sound autonomous utilities is therefore essential. Continued review by the regulator to improve cost- recovery and encourage WSPs to become commercially viable coupled with performance-based incentives will enable the sector to leverage more private finance, reducing the reliance on fiscal resources while expanding service delivery and improving quality. 69. Well managed and efficient utilities are also essential to unlock commercial finance and to deliver services through critical periods such as the COVID-19 crisis. The task of unlocking commercial finance eventually rests with the WSP that must make its case to the lender based on its financial and operational performance, and sound management structure. These are key ingredients of a strong foundation that also enable utilities to continue delivering services during periods such as the COVID-19 crisis, when their cash flows come under stress and services have to continue to be delivered in the national interest. This program has shown that well managed WSPs can and have been able, since the onset of devolution, to take and implement all the critical decisions required to access commercial loans and to run and sustain water and sanitation services in their areas. Many of them are amenable to taking proactive steps to scaleup alternative financing initiatives although there will be a critical need for support from both levels of government, most notably political support and some viability gap funding. More importantly, a high-level review of what available public finance should target and to what extent private sector financing can contribute is necessary for commercial finance to be integrated into the sector financing mix. 70. Adopting a realistic timeframe is essential to achieve project objectives, especially when the financing decision is out of the borrower’s control. In this project, the decision to finance the project rested with a commercial lender and the Bank had no influence over the decision. Projects needed to be prepared with TA support, and submitted to market lenders for appraisal which included a review of financial, technical and legal due diligence. Given the multiplicity of stakeholders and steps involved especially in an environment where the use of commercial financing for public infrastructure and operations is fairly new, considerable groundwork needs to be accomplished even before the project implementation starts. Hence, there needs to be adequate buffer built into the project. In this case, procurement delays, project appraisal and selection, and implementation challenges (including resettlement) necessitated extensions to the life of the project, but the restructurings enabled the project to achieve the PDO, and more importantly, sustainable outcomes. Page 28 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) 71. Results-based financing instruments should be flexible to adapt to project needs. The project was initially designed around rigid OBA criteria that made disbursement of the grant subject to achievement of last mile connection targets in low-income areas. Yet utilities had to invest in significant upstream infrastructure (such as wastewater treatment plants, ponds, transmission mains, water treatment plants and source augmentation), which not only increased the finance and implementation risks but cannot necessarily be attributed solely to low-income areas given the integrated nature of water and sanitation networks. The strict poverty criteria associated with the grant curtailed the project pipeline, as paradoxically, commercial finance goes to financially viable projects which may not necessarily meet the pro-poor provisions. That said, the grant did help make services affordable to end users and project restructuring allowed for partial OBA payments to be made upon completion of major works, which helped advance liquidity to the WSPs in a timely manner and reduce some of the finance costs. Results-based financing instruments, particularly when seeking to leverage commercial financing, should allow for flexibility in end-user targeting and permit implementing agencies to access capital when required, balancing the need to implement projects within as short a timeframe as possible with holding them accountable for verifiable results. . Page 29 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS A. RESULTS INDICATORS A.1 PDO Indicators Objective/Outcome: Number of people in urban areas provided with access to Improved Water Sources under the project Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion People provided with access Number 0.00 135000.00 81,000.00 84,408.00 to improved water sources 05-Sep-2014 30-Jun-2018 30-Nov-2020 13-Nov-2020 People provided with access Number 0.00 67500.00 40,500.00 42,204.00 to improved water sources - Female (RMS requirement) People provided with access Number 0.00 0.00 0.00 0.00 to improved water sources - rural People provided with access Number 0.00 135000.00 81,000.00 84,480.00 to improved water sources - urban Comments (achievements against targets): Page 30 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) Objective/Outcome: Number of people in urban areas provided with access to Improved Sanitation under the project Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion People provided with access Number 0.00 15000.00 39,500.00 40,355.00 to improved sanitation services 05-Sep-2014 30-Jun-2018 30-Nov-2020 13-Nov-2020 People provided with access Number 0.00 0.00 19,750.00 20,178.00 to improved sanitation services - Female (RMS requirement) People provided with access Number 0.00 0.00 0.00 0.00 to improved sanitation services - rural People provided with access Number 0.00 15000.00 39,500.00 40,355.00 to improved sanitation services - urban Comments (achievements against targets): Page 31 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) A.2 Intermediate Results Indicators Component: Output-Based Aid subsidies for water and sanitation subprojects Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion New household sewer Number 0.00 1000.00 7,906.00 8,071.00 connections constructed under the project 15-Jul-2013 30-Jun-2018 30-Nov-2020 07-Dec-2018 Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion New piped household water Number 0.00 19000.00 14,500.00 15,167.00 connections that are resulting from the project 15-May-2014 30-Jun-2018 30-Nov-2020 13-Nov-2020 intervention Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Improved community water Number 0.00 140.00 40.00 40.00 Page 32 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) points constructed or 15-May-2014 30-Jun-2018 30-Nov-2020 07-Dec-2018 rehabilitated under the project Comments (achievements against targets): Component: Implementation Support for project management, subproject preparation and supervision, and to contract an independent verification agent Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of water utilities Number 0.00 5.00 8.00 10.00 that the project is supporting 15-Jul-2013 30-Jun-2018 31-May-2020 07-Dec-2018 Comments (achievements against targets): Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Local private capital Amount(USD) 0.00 12.50 12.50 14.67 mobilized 15-Jul-2013 31-May-2020 31-May-2020 02-May-2019 Comments (achievements against targets): Page 33 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of utilities accessing Number 0.00 9.00 9.00 8.00 commercial loans 15-Jul-2013 31-May-2020 31-May-2020 02-Apr-2020 Comments (achievements against targets): Page 34 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) B. KEY OUTPUTS BY COMPONENT Objective/Outcome 1 1. People provided with access to improved water sources Outcome Indicators 2. People provided with access to improved water sources – Female 3. People provided with access to improved water sources - urban 1. New piped household water connections that are resulting from the project intervention Intermediate Results Indicators 2. Improved community water points constructed or rehabilitated under the project 1. 84,408 people provided with access to improved water sources Key Outputs by Component 2. 42,204 females provided with access improved water sources (linked to the achievement of the Objective/Outcome 1) 3. 84,408 people in urban areas provided with access improved water sources Objective/Outcome 2 1. People provided with access to improved sanitation services 2. People provided with access to improved sanitation services – Outcome Indicators Female 3. People provided with access to improved sanitation services - urban Intermediate Results Indicators 1. New household sewer connections constructed under the project 1. 40,355 people provided with access to improved sanitation services 2. 20,178 females provided with access to improved sanitation Key Outputs by Component services (linked to the achievement of the Objective/Outcome 2) 3. 40,355 people in urban areas provided with access to improved sanitation services Page 35 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION A. TASK TEAM MEMBERS Name Role Preparation Kevin Bender Task Team Leader(s) Efrem Fitwi Procurement Specialist(s) Nyambura Githagui Social Specialist Svetlana Khvostova Social Specialist Supervision/ICR Rajesh K. Advani, Jessica Anne Lopez Task Team Leader(s) Joel Buku Munyori, Lucie Muchekehu, Mulugeta Dinka Procurement Specialist(s) Josphine Kabura Kamau Financial Management Specialist Mohammad Ilyas Butt Procurement Team Svetlana Khvostova Environmental Specialist Kimberly Vilar Social Specialist Samuel Baiya Team Member Clifford James Mwaura Waithaka Team Member Joshua Kibet Team Member Raymond Simon Maina Kirwa Social Specialist James Chacha Maroa Environmental Specialist B. STAFF TIME AND COST Page 36 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) Staff Time and Cost Stage of Project Cycle No. of staff weeks US$ (including travel and consultant costs) Preparation FY13 4.623 37,298.43 FY14 11.077 48,281.20 FY15 2.860 11,704.88 Total 18.56 97,284.51 Supervision/ICR FY16 5.116 37,051.05 FY17 4.725 30,510.60 FY18 6.861 37,668.38 FY19 16.892 127,980.38 FY20 3.175 59,645.52 Total 36.77 292,855.93 Page 37 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) ANNEX 3. PROJECT COST BY COMPONENT Amount at Approval Actual at Project Percentage of Approval Components (US$M) Closing (US$M) (%) Implementation Support for project management, subproject preparation and 2.335 2.00 86% supervision, and to contract an independent verification agent Output-Based Aid subsidies for water and sanitation 9.5 7.90 83% subprojects Total 11.835 9.90 84% Page 38 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) ANNEX 4. EFFICIENCY ANALYSIS 1. Efficiency is rated SUBSTANTIAL based on the economic and financial returns as well as the operational efficiency of the project. The economic return of the project at 20 percent. Although lower than anticipated at appraisal (34 percent) (See Table 1), the economic rate of return is in the range of 15 to 20 percent normally observed in the sector. 27 The returns are comparable to those of urban water supply and sanitation projects completed in the last two years, including the Nairobi Sanitation OBA Project (P131512) and Nairobi Sanitation OBA II Project (P162248), demonstrating strong economic gains resulting from the intervention. Beneficiaries of the project gained improved quality of life in terms of productive days gained and costs saved from avoided illnesses, productive time saved from collecting water, and cost savings from avoided purchase of alternative sources of water that are more expensive. 2. The financial internal rate of return (IRR) was estimated at 12.3 percent with a net present value of US$ 1.25 million at a 9.6 percent discount rate (see Table 9), which was calculated as the weighted average cost of capital (WACC) for the project. It is commendable that the project generated a positive IRR exceeding the WACC, which is rare in most developing countries where water projects barely cover operating costs. 3. Operational efficiency: The project encountered several implementation delays in the initial stages of the project which entailed restructuring of the project twice, and together with the COVID-19 related restrictions on movement, necessitated a total of 29-month extension. However, these delays were not a result of inefficiency of the project itself but a product of the design of the project which required the WSPs to obtain commercial finance and be able to complete the sub-projects within the project timeframe and delays outside of the control of the project team (details in Section III.B). In fact, the delays did not result in cost overruns on investments. The project closed with 76 percent disbursed and expected to reach 90 percent prior to the end of the disbursement grace period on March 31, 2021. 4. The Ex-post financial and economic analyses of the Kenya Urban Water and Sanitation program was carried out in accordance with World Bank’s Guidance Note on economic analysis of projects set out in the Operational Policy and Bank Procedure (OP/BP) 10.00, Investment Project Financing. Cost-Benefit analysis method was used to assess the efficiency of the project in achieving the expected development impact. All streams of benefits and costs as a result of sub-project investments were used to determine the financial internal rate of return (FIRR) and the economic rate of return (ERR). Revenues and cost assumptions were based on actual cost at operational phase and approved tariffs with the regulator, WASREB. 27The IEG report found the estimated median ERR trend in the Water and Urban Development Sectors to be between 15 and 20 percent for the years 2000 to 2008, with a rising trend for subsequent years. IEG World Bank. 2010. “Cost-Benefit Analysis in World Bank Projects”. https://ieg.worldbankgroup.org/evaluations/cost-benefit-analysis- world-bank-projects Page 39 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) Table 1: Economic and Financial Analysis Summary Financial Analysis Result WACC 9.6% Financial NPV ($) 1,255,872 Financial IRR 12.3% Economic Analysis Discount Rate 5% Discounted Benefits ($) Benefits - Health - Avoided Treatment - Assumed continuing savings 124,190 Benefits - Health - Productive Days - Assumed continuing savings 159,590 Benefits - Income - Productive Time - Assumed one time savings 2,228,679 Benefits - Income - Avoided Costs for Water - Assumed one time savings 2,443,221 Benefits - Avoided Cost of Unimproved Sanitation-Assumed continuing savings 1,738,278 Economic NPV ($) 13,934,203 Economic IRR 19.8% 5. Methodology and Assumptions. This ex-post financial and economic analysis covers nine sub-projects financed under the project, with the project development objective (PDO) of increasing the number of people in low-income areas with access to improved water supply and sanitation services – with a revised target of 120,500 people. Investments made in sub-projects include rehabilitations of dilapidated water supply, network extensions to connect new customers to water and sewerage services, including water points, water source augmentation wastewater and sewerage treatment plants. All benefits and costs are in constant 2015 prices, with a discount rate of 5 percent in line with World Bank guidance.28 A. Economic Analysis 6. The economic analysis demonstrates the economic viability of the Kenya OBA project while considering all quantifiable and incremental costs and benefits in the with and without project scenarios and using economic values and prices. Economic benefits and costs were calculated as those accruing to beneficiary communities and local economies where sub-projects were implemented. 1. The net benefits of the project were estimated as the incremental benefit for “with” and “without” the project, and for each of the sub-projects. The without project scenario considered the scenario where OBA investments were not made. The with-project scenario considered the situation where investments had been made with commercial finance to construct water supply systems, wastewater plants and connections made to households willing to pay for service. 7. Benefits. Key benefits assessed and quantified were mainly the direct health and economic benefits evident at close of program. For water supply sub-projects, the benefits assessed included (i) avoided medical expenditure on 28 Technical Note on Discounting Costs and Benefits in Economic Analysis of World Bank Projects, World Bank, November 12, 2015. Page 40 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) water and sanitation related diseases – mainly diarrhea (ii) indirect income gained due to avoided days lost from work due to sickness; (iii) cost savings from purchase of water from more expensive direct sources – mainly water vendors; and (iv) value difference between improved and alternative ‘unimproved “sanitation facilities. Where project data was available and reliable, the economic model used project specific values. Otherwise, data from Kenya Demographic Health Surveys (KDHS) 2014/2015 report was used for the end of project estimates. 8. Other indirect benefits from waste-water sub-projects, though not considered for this analysis due to absence of data, included benefits resulting from reduced pollution due to waste-water treatment, climate benefits including reduction in carbon emissions as a result of waste-water treatment, among others. 9. The key assumptions made in calculating benefits are highlighted in Table 2 below. Table 2: Assumptions Used to Calculate Project Benefits Aspect Benefits Considered Basic Assumptions Source of data Health – avoided This was to measure avoided Assumes the diarrhea incidence rate Baseline and end line cost of treatment. treatment cost from declined as reported at pre-project and post Independent verification incidences of diarrhea in children project x the exposure rate of reports. under five. 0.8229. WHO guidance and reports. Unit cost per treatment, which uses the combined rates of outpatient Kenya Market reports on costs30 and Oral Rehydration Salt costs of ORS (ORS) This measured productive days Estimates days off work per case as Kenya Integrated Household gained by time spend off ill 8 hours per day Budgetary Survey (KIHBS) health. The opportunity costs of 2015/2016 time spend by patients of Assumes adult working population productive age (15-64) is equal to (those between 15-64 years). World Bank statistical the wage they would earn in the reports on Kenya’s GDP per market if they had been in good Opportunity cost (30% of hourly capita health. monetary income, using GDP per capita as the proxy for time value) Income – This measured the time saved Time for fetching water. Kenya Demographic Health productive use of from fetching and waiting to get Survey (KDHS) 2014/15 time saved from water Opportunity costs (30% of hourly fetching water monetary income, using GDP per World Bank statistical (for water supply capita as the proxy for time value) reports on Kenya’s GDP per sub-projects) capita Income – lower This measured the avoided or Compares cost of water with Project specific data used in cost of water (for reduced costs of buying water, project, to the cost of an alternative performance appraisal water supply sub- specifically from water vendors. source (water vendors) per cubic document (PAD), Kenya projects) The cost when compared to meter in the absence of project original consumption level is theoretically equivalent to an increase in real income. Income – benefits This measures the reduced Compares the household Income – benefits from 29 WHO exposure scenario for improved water supply and no basic sanitation in a country which is not extensively covered by those services, and where water supply is not routinely controlled is given a corresponding risk of exposure of this value. This allows for estimating health benefits from improving water and sanitation for populations that start on different points on their WSS levels of service. https://doi.org/10.2166/wh.2007.008 30 WHO presents the unit cost per outpatient hospital visit at $3.98: https://www.who.int/choice/country/ken/cost/en/ and estimated cost of ORS per diarrhea episode. Page 41 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) from lower household expenditures expenditure in those pre- and post- lower household household attributed to use of connected project phase. expenditure on sanitation expenditure on sewer. The savings (when post sanitation project expenditure is compared Assumes benefits across target to pre-project expenditure) is households who previously used theoretically equivalent to an unimproved sanitation. increase in income 10. Costs. The Kenya OBA project costs comprised the following: a. Sub-project eligible capital costs for works and capitalized interest during construction. b. Post construction annual O&M costs for the economic life of sub projects – 25years. c. After subsidy cost of debt – interest - for the term of financing. d. Program administrative and technical assistance costs. 11. Investments in sub-projects amounted to US$ 14.67 million31(See Table 3), substantially with financing from commercial bank loans. Activities financed included rehabilitations of dilapidated water supply, network extensions to connect new customers to water and sewerage services, including water points, water source augmentation and wastewater and sewerage treatment plants. Investments in wastewater and sewerage sub-projects accounted for most of the investment cost made by water utilities. Sub-project investments were made both for water supply improvement and wastewater treatment and sewerage connections. Table 3. Distribution of Investment Costs by Sub-project Analyzed Investment Cost by Subproject US$ Wastewater treatment and sewer connections 7,910,340 Nyeri 2,834,770 Embu 5,075,570 Water Supply improvement and extension 6,760,097 Naivasha 1,201,261 Muranga South I 251,544 Muranga South II 949,195 Muranga Town 433,406 Kisumu 1,458,250 Nol Turesh 1,154,550 Mathira 1,311,893 12. Wastewater treatment and sewerage Sub-projects. US$ 7.9 million was invested to improve the sanitation levels in pro-poor areas service areas for two water utilities – Nyeri and Embu. This constituted about 53 percent of the total investments in sub-projects, with 42,909 people having access to sewer services. • The Nyeri sub-project involved optimization of the operational and treatment capacity for the Kangemi sewer plant from 50 percent to 75 percent. The plant had a design capacity of 6000 cubic meters but operated below this capacity before the OBA project, receiving about 3000 cubic meters of wastewater 31 The exchange rate used is KES 100= 1 US$. Page 42 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) daily. With investments in trunk lines and over 2,900 connections, an additional 1,500 cubic meters of wastewater shall be treated daily from 14,530 residents in the Low-Income Areas (LIAs) of Kamakwa – Kandara, Ruring’u – Skuta, Ngangarithi – Classic and King’ong’o. These investments not only result in an increase in the revenue base of Nyeri Water Utility, but also bring substantial health, economic and environmental benefits to beneficiaries of Nyeri Subcounty. • Embu sub-project involved construction of 2,000m3 /day capacity wastewater treatment plant, 32km of sewer pipelines and sewer connections to 5,108 low-income households – directly reaching 28,094 people with improved sanitation in pro-poor areas of Dallas, Majimbo and Blue Valley. • The main economic benefits of these sub-projects are the avoided cost of healthcare due to unimproved sanitation facilities and reduced monthly household expenditure compared to alternative sanitation options – septic or pit latrines. Although not quantified in this analysis, the two sub-projects will bring additional indirect benefits such as reduction in pollutants and preservation of environment due to safe disposal of wastewater and net reduction in greenhouse gas emissions (GHG) due to avoiding methane emissions from untreated wastewater in anaerobic conditions. 13. Water Supply Improvement Sub-projects- Seven out nine sub-projects financed under the project invested in water supply infrastructure. Investments worth US$ 6.76 million were made in these sub-projects, directly reaching 119,646 people with clean drinking water. • Murang’a South Water Utility implemented two sub-projects at a total cost of US$ 1.2 million: - Muranga South phase 1 -Kenol Kabati pipeline extension, comprising of 6.2km water pipelines, 7-yard taps, 14 public water points and 1,500 household water connections. - Muranga South phase 2 – This comprised of a further 3.7km pipeline extension in Sabasaba town, construction of two sedimentation tanks and additional 2,500 household water connections. These investments more than doubled utility revenue, creating cashflows enough for debt service, O&M costs, and small infrastructure improvements. • Mathira sub-project involved rehabilitation of an old water supply and augmentation of the distribution system to reach the low-income areas, within Karatina town, Karindundu, Matahaithi and Blue Valley. With an investment of US$ 1.31million, the sub-project injected an additional 510m3 of water per day into the distribution system and benefitting 8076 in additional people after completion. • Naivasha sub-project involved 54km pipeline extension and water storage expansion, construction of 10 public water points and 1,596 household water connections in two informal settlements of Mirera and Kayole areas in the outskirts of Naivasha town. The settlement has a population of about 32,000 people who often relied on unreliable supply from water vendors. With an investment of US$ 1.20 million, the sub- project extended service directly to 25,128 people. • Kisumu sub-project involved water supply extension to three low-income zones of RIAT, Kajulu and Mkendwa. Works mainly comprised of pipeline extension and household connections at a cost of US$ 1.45million. The project connected 1,519 households on completion, directly providing 7,615 people with clean water supply. • Nol Turesh sub-project was a water supply extension project, connecting households in Sultan Hamud, in Kasikeu and IWCs in Emali town totaling to 4,009 connections, with construction of a further 8-public water points. With an investment of about US$ 1.15 million, Nol Turesh directly reached 22,460 people with clean water on completion. Page 43 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) • Muranga Town is a 0.43-million subproject, which involved optimization of the new Kiawambeu water treatment plant, with construction of a public water point and masonry storage tank, and 14km of water distribution lines to connect 1,266 households in Muchungucha, Gacharu, Ndikwe, Gitaru, Kiguru, Mbombowater with clean drinking water. Financing for a further extension work was terminated due to political interference of water utility management. 14. Results from the economic analysis show that the Kenya OBA project was economically justified with an EIRR of 19.8 percent and an ENPV of US$ 13.9million. Analysis was also done by individual sub-projects, showing that 8 out of the 9 sub-projects provide an economic return higher than discount rate. Water supply sub-projects- Murang’a South- phase 1, Murang’a Town, Naivasha and Nol Turesh achieved a return higher than the overall EIRR for the program – demonstrating higher efficiency based on dollar investment. 15. Benefits from investments through commercial finance in water supply and wastewater sub-projects were substantial. The Kenya OBA for urban areas invested US$ 8.25 million in capital subsidies to unlock US$ 14.67 million in private finance for capex. These investments directly benefited more than 162,555 people through access to improved water and sanitation services in low-income areas of Kenya. Benefits presented in tables 1 and 2 are discussed below. a. Avoided health expenditure and gains due to avoided days lost from work due to sickness was significant. Table 4 shows that there was a remarkable reduction in waterborne disease incidence – mainly diarrhea across sub-projects32. Based on WHO exposure risk of 82 percent and treatment cost per case of US$ 4.43, avoided costs for both direct medical costs and gains in indirect productivity costs were estimated at US$ 0.124 million and US$ 0.159 million respectively due to project investments. Table 4: Diarrhea Incidences “With” and “Without” Sub-project Diarrhea Incidences per Sub-project Without Project With Project Sewerage Investments Nyeri 26.5% 15.2% Embu 36.0% 3.0% Water Supply Investments Naivasha 41.5% 35.2% Murang’a South I 0.0% Murang’a South II 36.5% 11.7% Murang’a Town 17.0% 15.0% Kisumu 22.5% 6.0% Nol Turesh 2.0% 0.02% Mathira 36.0% 15.2% b. Reduced time for households in fetching water, valued at US$ 2.2million. KDHS 2014/15 reported that households in Kenya, without a water connection, spend an average of 150 hours annually fetching water. With 32 Source: Baseline and End line surveys by the IVA for each of the sub-projects. Page 44 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) an estimated wage rate of US$ 0.2 per hour based on Kenya’s per capita GDP, benefits resulting from timed saved were valued at US$ 2.2million. c. There was significant cost savings for households resulting from a utility water connection compared to purchasing water from private vendors, estimated at US$ 2.4million. Average cost of water from vendors in urban areas in Kenya costs about US$ 1.12 per cubic meter compared to about US$ 1 when purchased from water utilities. A water connection provided significant cost reduction to households and was valued at US$ 2.4 million for the seven-water supply sub-projects financed under the project. d. Value difference between improved and alternative ‘unimproved “sanitation, valued at US$ 1.7 million. The benefits of improved sewer connections extend beyond reduction in risk of diarrhea and other sanitation-related diseases. They also resulted in reduced expenditure resulting from maintenance of unimproved sanitation facility. Data from the project baseline and end line survey for Nyeri sub-project showed a reduction in sanitation expense of US$ 8.7 per month per household. Given the similar context and geographic location of the two wastewater and sewerage projects, household savings because of sewer connection were estimated at US$ 1.7million. 16. The economic analysis by sub-project showed eight of the sub-projects had an EIRR higher than the discount rate, except Mathira (See Table 5). Table 5: Economic Returns by Sub-Projects Economic Analysis Results by Sub-project EIRR ENPV Discount rate 5% Wastewater and Sewerage Connection US$ Nyeri 18% 2,318,915 Embu 9% 825,778 Water Supply Improvement Naivasha 21% 2,109,643 Murang’a South I 28% 1,407,658 Murang’a South II 8% 143,271 Murang’a Town 27% 901,666 Kisumu 8% 114,965 Nol Turesh 21% 275,785 Mathira 4% (119,873) B. Financial Analysis 17. Methodology. The financial analysis examined the cash needs of sub-projects, and whether actual revenues were sufficient to cover operating costs and debt service, and surplus for any periodic replacements. Water utilities provided ‘with and without’ actual project operating cashflows for the period 2015-2020 and projections. Page 45 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) 18. Assumptions. For all sub-projects, utilities estimated revenue growth of about 10% annually based on current approved tariff adjusted for inflation and the natural growth in population. Revenue collection efficiency based on IVA reports was about 98 percent, which was used for base case analysis. 19. The subprojects were not expected to generate financial returns without a subsidy provided. This assumption has been used for the financial internal rate of return (FIRR) calculations at both project appraisal and at closure. 20. It is assumed that the long-term inflation rate will stabilize at about 5.3%, which is slightly above the Kenya Central Bank target of 5%. At appraisal stage the inflation rate was projected at 7%. The government has consistently achieved its inflation target even during the pandemic. In addition, interest rates are assumed to remain unchanged during the tenor of the loans. An equilibrium interest rate of 14% is assumed for the long-term. 21. The water and wastewater facilities constructed with OBA project are expected to have an economic life of 25- years. Much of the infrastructure, like sewer systems, were designed to have a useful life of up to 40-years. At appraisal stage, asset economic life was estimated at 20-years. 22. Results of the base case financial analysis shows a financial return (FIRR) of 12.3 percent (See Table 6) . This was higher than the Weighted Average Cost of Capital (WACC), of 9.6%, indicating a positive return overall to water utilities, but lower than FIRR at project appraisal, of 21 percent. This could be explained by the fact that the four utilities considered at the appraisal stage did not proceed with the program or scale down on their investments for various reasons. Meru Water Company and Ruiru-Juja sub-projects, which demonstrated the highest potential dropped from the project, while Murang’a Town Water Company cancelled some of the financing agreements due to political interference. Table 6: Financial Analysis Summary Financial Analysis Result WACC 9.6% Financial NPV 1,255,872 Financial IRR 12.3% 23. Sub-projects that show high FIRR – Naivasha, Murang’a and Murang’a South-Phase 1 (See Table 7) were mainly small water supply systems, with low CAPEX, but serving large concentration of population in low-income areas. These could be considered highly efficient projects due to their low per capita investment - hence higher return. Kisumu and Mathira, despite having low CAPEX, had some of the highest per capita investments, and consequently had returns lower than the cost of capital. Table 7: Financial Returns by Sub-Projects Financial Analysis Results - Subprojects FIRR FNPV Sewerage Investments Nyeri 14% 45,135,768 Page 46 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) Embu 10% 2,688,963 Water Supply Investments Naivasha 22% 54,400,239 Muranga South I 16% 30,745,171 Muranga South II 8% (8,329,984) Muranga Town 20% 21,167,242 Kisumu 4% (16,217,685) Nol Turesh 11% 7,545,531 Mathira -2% (76,803,000) Page 47 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS 1. The Implementation Completion Report was shared with the Water Sector Trust Fund (WSTF), the Water Services Regulatory Board (WASREB), the Ministry of Water, Sanitation and Irrigation (MoWSI), and Ministry of Finance on April 15, 2021. 2. WSTF, the implementing agency, reviewed the document, provided a factual correction and confirmed that it is fine with the contents of the report. 3. WASREB, the industry regulator, reviewed and provided a useful lesson that was added to the report on the role of efficient utilities in accessing commercial financing and delivering basic services during crisis periods, such as COVID- 19. It also noted that high-level review of what available public finance should target and to what extent private sector financing can contribute is necessary for commercial finance to be integrated into the sector financing mix. WASREB noted having been involved throughout the process and in earlier blended financing schemes, including that for communities. It appreciated the pragmatic approach taken by the project during the dynamic nature of the changing political landscape. Page 48 The World Bank Kenya Urban Water and Sanitation OBA Fund for Low Income Areas (P132979) ANNEX 6. SUPPORTING DOCUMENTS (IF ANY) Project Documents • Project Appraisal Document (November 12, 2014), Report No: PAD560 • Restructuring Papers: February 16, 2018, Report No. RES30088; October 30, 2019, Report No. RES36223; May 14, 2020, Report No. RES41417 • Project Implementation Status Reports • Aide Memoires Additional Documents • Output verification reports prepared by the Independent Verification Agent • Advani, R. (2016). Scaling Up Blended Financing of Water and Sanitation Investments in Kenya. Knowledge Note: Kenya • World Bank Group (2018). Using Private Financing to Improve Water Services. MFD Briefs Page 49