The bootstrapping race: development by commercialisation

Kenya’s ongoing commercialisation of its water sector creates two positive feedback loops that need careful regulation to live up to the commitment of water as a human right. Recent events distressingly demonstrate and urgently demand that this must include prioritising underserved areas.

This blog is Part 5 of our new series on ‘Studying an uncertain future‘ written by members of SPERI’s doctoral researchers network.

What if providing water and sanitation to everyone in Kenya by 2030 was, if not easy, at least simple? What if all that was needed was to help water service providers (WSPs) overcome that one last obstacle to self-sustainable operations? What if this would spiral utilities upwards, end their long-standing aid dependency, rapidly extend services to all, and let donors use their scarce resources to leave no one behind? Does such bootstrapping sound magical?

Not to EWASCO, the public utility in Embu near Mount Kenya: within roughly a decade the water and sanitation company pulled itself out of the murky waters of derelict infrastructure and poor service delivery. It is now one of the country’s top-performers and often featured as a success story of utilising commercial finance to achieve universal coverage over a short time frame. Out of dire necessity, the company innovated vendor credits, which has been merely the first step in an incremental upwards process of rehabilitating, upgrading, and extending their infrastructure, connecting more users, and growing revenue streams and financing options. Embu’s way to the top has certainly been less straight and more complicated than commonly portrayed in retrospect. Equally, however, it’s far from unique: similar success stories can be heard from other utilities, too.

From privatisation to commercialisation and commercial financing

About 20 years ago, Kenya and its development partners prepared the grounds for privatising the country’s water sector. Full privatisation, however, has never been implemented and instead has given way to commercialisation. The newly created water and sewerage companies that replaced municipal departments remained in public ownership but have undergone restructuring to become independent, efficiently and commercially run organisations. Progressing to fully cost-recovering tariffs, ramping up billing and collection, and working on increasing technical and operational efficiencies have become the priorities.

Recently, this has been used as a launchpad for mobilising commercial finance to address the vast investment needs of Kenya’s water sector. Recognising a substantial infrastructure and finance gap, donors and governments have begun to acknowledge the necessity of attracting commercial investment and have started to promote reforms and the Maximizing Finance for Development approach. This has meant that more and more donors have moved towards blended finance approaches that use public monies to mobilise additional commercial finance by de-risking or otherwise improving the attractiveness of investments for commercial financiers.

This requires some heavy lifting in two ways. Next to the financial aspect of subsidising interventions and providing (partial) guarantees, extensive technical assistance is employed to prepare and capacitate both supply and demand side organisations. In Kenya, this includes training of WSPs in aspects such as business planning and financial management, the support of governments in understanding commercial finance and creating enabling environments, as well as working with financiers to help them better understand the water sector and tailor products for it.

Ultimately, these efforts attempt to achieve what would otherwise not occur: commercial investment into the provision of a social and often politicised good, especially in areas that struggle to pay for the connection or service. Aided by considerable public support, some utilities are lifted up enough and transactions are sufficiently de-risked to open up a market for commercially financing water supply and sanitation. Two recent and largely successful programmes have been the World Bank’s Output Based Aid (OBA) and KfW’s Aid on Delivery (AOD). These feature comprehensive project preparation support, 40-60% subsidies, and up to a 50% guarantee from donors, furnishing financiers with minimal risk and exposure.

Islands of top performance

The underlying idea that justifies the massive “sweetening” of private investments is simple: public resources are regarded as the ignition to a then perpetually running motor that can be understood as the first of two positive feedback loops. Remember the story of Embu? Small borrowings enabled the company to incrementally improve and become a top-performing WSP. Yet commercial financing not only enables investments but also acts in a disciplinary fashion. Good (corporate) governance is not merely a condition for but also function of commercial finance: it introduces extra oversight by financiers and increases pressure to improve performance to be able to afford and repay loans. Financing commercially builds the material, technical, managerial, and commercial capacities to absorb more commercial finance, which further builds … Development became seemingly simple: all that was needed was to trigger tipping points, “turn around” utilities, and prevent tinkering with this process. Commercial finance would do the rest.

Unchecked, this sets off a second positive feedback loop that is possibly less wanted: top performing utilities crowd out struggling ones in accessing funds and finance, which will further propel performers but hamper others. Embu, again, illustrates the point. While large parts of their success was financed commercially, some key infrastructure was also developed with much cheaper concessional loans or grants. In a situation of diminishing donor monies, it is the stronger utilities that can present themselves more easily as effective partners to donors, who are driven by their need to disburse huge volumes of aid and report success stories. The ones losing out in this competition for the least risky partners are the very utilities and areas in most need, potentially reinforcing or growing spatial inequalities. What seemed simple suddenly becomes more complex, “easy” only for the donors, who strive to leave behind a legacy of success as they withdraw from now lower-middle income countries.

Reaching those furthest behind first

The less often quoted second phrase following “leave no one behind” stresses to first help the furthest behind, not the easiest to reach. The current pandemic situation has distressingly demonstrated and strikingly reminded us of the importance of such needs-based prioritisation. Yet the dual engine of improvement and inequality fuelled by commercial finance threatens this principle and we must make sure that while we reap its beneficial effects, we also check the detrimental ones. This includes:

  1. Balancing our understanding of water as social and economic good. Commercially financing may tilt this towards the latter. Access to and affordability of sufficient and safe water in secure ways for all must remain our focus.
  2. Reducing spatial inequalities. Commercially financing may prioritise more affluent and denser urban areas. Better directing different sources of finance according to development levels is critical to leave no one behind and reach those furthest behind first.
  3. Considering speed and resilience of the transition. The pandemic revealed the sector’s essentiality but also vulnerability to external shocks. Massive injections of free or extremely cheap money will be needed post-pandemic, and any form of commercial financing seems unlikely for years to come.

The withdrawal of donors from Kenya’s still hugely aid dependent water sector without overall coordination risks creating path-dependencies that foster regional and urban disparities. Crucially then, reducing spatial inequalities must be a fundamental design goal of any exit strategy of donors.

Read all the blogs in our series on ‘Studying an uncertain future‘.