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i Kenya Microfinance for Water Services Project Project Completion Report TF057614 TF057615 TF057616 TF093392 June 2015

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Kenya Microfinance for Water Services Project Project Completion Report TF057614 TF057615 TF057616 TF093392 June 2015

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© 2016 The Global Partnership on Output-Based Aid The World Bank 1818 H Street NW Washington DC 20433 Website: www.gpoba.org E-mail: [email protected] All rights reserved.This report was produced the Global Partnership on Output-Based Aid (GPOBA). The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of GPOBA or the Board of Executive Directors of the World Bank or the governments they represent. Neither GPOBA nor the World Bank guarantees the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of GPOBA or the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Note: All currency amounts are in U.S. dollars unless otherwise noted.

CURRENCY EQUIVALENTS

(Exchange Rate Effective: February 28, 2013)

Currency Unit = Kenyan Shilling K Sh 1.00 = US$0.01 US$1.00 = K Sh85.95

US$1.00 = €0.76 US$1.31= €1.00

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ACRONYMS AND ABBREVIATIONS

CAS Country Assistance Strategy

ERR external rate of return

EU European Community

€ European currency

FGD focus group discussions

GPOBA Global Partnership Output-Based Aid Trust Fund Program

CR Completion Report

IFC International Finance Corporation, part of the World Bank

Group

IRR internal rate of return

ISR Implementation Supervision Report

K Sh Kenyan shilling

MDG Millennium Development Goal

MIGA Multilateral Investment Guarantee Agency, part of the World

Bank Group

MWI Ministry of Water and Irrigation

NEMA National Environmental Management Authority

NPV net present value

NWCPC National Water Conservation and Pipeline Corporation

O&M operations and maintenance

OBA Output-Based Aid

OVR Output Verification Report

PAC Project audit consultant

PAD Project Appraisal Document

PIC Project Implementation Consultant

PPIAF Public-Private Infrastructure Advisory Facility, a World

Bank-administered trust fund

SNTA PPIAF Sub-National Technical Assistance Program

SPA service provision agreement

US$ US dollar

USAID United States Agency for International Development

WSP

Water and Sanitation Program (Note: This report does not

use WSP to mean Water Service Provider, a common

acronym in Kenya)

WSP-AF Water and Sanitation Regional Program in Africa

WASREB Water Services Regulatory Board

WRMA Water Resources Management Authority

WSTF Water Services Trust Fund

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Kenya Microfinance for Water Services Project

CONTENTS

Data Sheets

A. Basic Information

B. Key Dates

C. Sector and Theme Codes

D. Bank Staff

E. Results Framework Analysis

F. Ratings of Project Performance in ISRs

G. Restructuring

H. Disbursement Graph

Table of Contents 1. Project Context, Development Objectives, and Design .................................................................. 1

1.1 Context at Appraisal .......................................................................................................................... 1 1.2 Original Project Development Objectives (PDO) and Key Indicators ................................................ 3 1.3 Revised PDO and Key Indicators, and Reasons/Justification ............................................................. 4 1.4 Main Beneficiaries ............................................................................................................................. 5 1.5 Original Components ......................................................................................................................... 5 1.6 Revised Components ......................................................................................................................... 6 1.7 Other Significant Changes .................................................................................................................. 6

2. Key Factors Affecting Implementation and Outcomes ................................................................... 7 2.1 Project Preparation, Design, and Quality at Entry ............................................................................. 7 2.2 Implementation ................................................................................................................................. 9 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization .................................. 11 2.4 Safeguards and Fiduciary Compliance ............................................................................................. 13 2.5 Post-completion Operation/Next Phase .......................................................................................... 13

3. Assessment of Outcomes .............................................................................................................14 3.1 Relevance of Objectives, Design, and Implementation ................................................................... 14 3.2. Achievement of Project Development Objectives .......................................................................... 14 3.3 Overarching Themes, Other Outcomes and Impacts ...................................................................... 16 3.4 Summary of Findings of Beneficiary Survey .................................................................................... 16

4. Assessment of Risk to Development Outcome .............................................................................16 5. Assessment of Bank and Borrower Performance ..........................................................................17

5.1 Bank Performance ........................................................................................................................... 17 5.2 Borrower Performance .................................................................................................................... 17

6. Lessons Learned ..........................................................................................................................17 7. Comments on Issues Raised by Grantee/Implementing Agencies/Donors .....................................20 Appendix A. Project Costs and Financing .........................................................................................21 Appendix B. Outputs by Component ................................................................................................22 Appendix C. Economic and Financial Analysis ...................................................................................28 Appendix D. Grant Preparation and Implementation Support/Supervision Processes . Error! Bookmark not defined.

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Appendix E. Beneficiary Survey Results............................................................................................37 Appendix F. Beneficiary Survey Results ...........................................................................................37 Appendix G. Summary of Grantee's CR and/or Comments on Draft CR ............................................37 Appendix H. Comments of Cofinanciers and Other Partners/Stakeholders ........................................37 Appendix I. List of Supporting Documents .......................................................................................37 Appendix J. Additional Notes on the Selection and Measurement of PDO and Intermediate Outcome Indicators .......................................................................................................................................40 Appendix K. Summary of Project Agreements and Amendments ......................................................44 Appendix L. Breakdown of Original and Revised Financing Figures Presented in Data Sheet A: Basic Information ....................................................................................................................................45

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Data Sheets

This is a small-grants project for which an operations portal roadmap is not available and

processing is done offline. The Data Sheets have been constructed from various source documents

and SAP-based activity management systems.

A. Basic Information

Country: Kenya Project Name: Kenya Microfinance for

Water Services

Project ID: P104075 L/C/TF Numbers:

TF057614

TF057615

TF057616

TF093392

Date: January 28, 2014 Type:

Completion report prepared

following Core guidelines,

by agreement with TF task

manager

Lending Instrument: Grant Borrower: K-Rep Bank, Ltd.

Original Total

Amount*: US$1,151,300 Disbursed Amount: US$2,597,119

Revised Amount*:

US$1,151,300

€1,400,539

Total equivalent:

US$2,988,528

Environmental Category: B – Partial assessment

Implementing Agency: K-Rep Bank, Ltd.

Co-Financiers and other External Partners:* K-Rep Bank, Ltd.

International Development Association (IDA)

* See Appendix L for additional details.

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B. Key Dates

Process Date Process Original Date Revised/Actual

Date

Concept

Review:* none Effectiveness: March 5, 2007

Appraisal:** April 4, 2006 Restructuring: June 29, 2011

Approval: *** December 6,

2006

Mid-Term

Review: none

Closing: December 31, 2008

June 30, 2010

June 30, 2011

February 28, 2013

* Scoping study done 2002, published as Mehta and Virjee (2003). Pre-feasibility work conducted

2004-2006. See World Bank 2009 (Appendix A) for a complete timeline.

** Eligibility Note and Proposal for Micro-Financing Project submitted to GPOBA (GPOBA

2006). Panel of Experts review of application completed April 11, 2006.

*** Grant agreement signed.

C. Sector and Theme Codes

C.1 Sector Codes (as percentage of total Bank financing)

Sector Original Percentage Revised/Actual

Percentage

Water supply 100% 100%

C.2 Theme Codes (as percentage of total Bank financing)

Theme Original Percentage Revised/Actual

Percentage

Financial and private sector

development 100% 100%

D. Results Framework Analysis

These indicators and targets were compiled from different project source documents, including the

project proposal, grant agreement and restructuring paper. Normally, indicators and original target

values in the following data sheets are taken from the Results Framework in the Project Appraisal

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Document (PAD), but this project did not have a PAD.1 Appendix J explains how the indicators

were selected and measured in the absence of a PAD.

D.1 Project Development Indicators

Indicator Baseline

Value

Original

Target Value

Formally

Revised

Target

Value

Actual Value

Achieved at

Completion

Indicator 1: Number of people with access to water under the Project

Unit = persons Not

established* 60,000 100,000 190,119

Dates Achieved -- December 2006 June 2011 February 2013

Comments

(incl. % target achieved)

190% target achievement. The actual value at completion

represents the estimated number of persons served through new and

existing connections (household, kiosk and standpipe, agricultural)

on the 35 schemes.

* The original baseline value is not available because baseline surveys were completed only for 10

out of the originally envisioned 21 projects during the pilot phase from 2006-2010 (GPOBA 2009,

pg. 2, GPOBA 2011, pg. 3).

D.2 Intermediate Outcome Indicators

Indicator Baseline

Value

Original Target

Value

Formally

Revised

Target

Value

Actual Value

Achieved at

Completion

Indicator 1: Number of community subprojects accessing finance under the

Project

Unit = subprojects 0 21 40 35

Dates Achieved December

2006 December 2006 June 2011 February 2013

Comments

(incl. % target achieved) 87.5% target achieved

1 At the time this project was approved, recipient-executed trust fund projects under US$5 million were not required to

have PAs.

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Indicator Baseline

Value

Original Target

Value

Formally

Revised

Target

Value

Actual Value

Achieved at

Completion

Indicator 2: Number of new water connections

Unit = connections 0 Not established 8,000 11,505

Dates Achieved December

2006 December 2006 June 2011 February 2013

Comments

(incl. % target achieved)

134% target achieved: Household, institutional, agricultural,

standpipe, and kiosk connections were counted. Institutional

connections are not counted in any of the other indicators.

Indicator 3: No. of new household connections at agreed working conditions

and service standards

Unit = household

connections (incl.

agricultural connections

used for domestic purposes)

0 Not established Not

established 11,398

Dates Achieved December

2006 December 2006 June 2011 February 2013

Comments

The total includes 231 agricultural connections (built expressly for

irrigation), but also used for domestic purposes. Note that the

OVRs referred to a number of connections as “inactive,” and data

on the condition and service standards was not available for most

schemes at the time of project close.

Indicator 4: No. of new kiosk facilities at agreed working conditions and

service standards

Unit = kiosk and standpipe

connections 0 Not established

Not

established 62

Dates Achieved December

2006 December 2006 June 2011 February 2013

Comments

Note that the OVRs referred to a number of connections as

“inactive,” and data on the condition and service standards was not

available for most schemes as of project close.

Indicator 5: No. of existing projects with an increase in revenue, measured as

the average monthly revenue collected from water sales over two

months after project commissioning

Unit = Sub-projects 0 Not established Not

established 12

Dates Achieved December

2006 December 2006 June 2011 February 2013

Comments

(incl. % target achieved)

100% achieved: Of the 33 schemes (35 subjects with two schemes

having 2 subprojects each), 12 schemes were extant prior to the

loan.

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E. Ratings of Project Performance in ISRs

Not available. This is a data sheet (disbursed amounts by Implementation Supervision Report

[ISR] dates and ratings) internally generated by the Operations Portal. The Operations Portal has

not been set up to generate CR templates for this project; no ISRs were required.

F. Restructuring

The project was restructured on June 29, 2011 to extend the closing date for the third time (World

Bank 2011, pg. 1). Target values for some indicators were increased. See Appendix J for a

discussion of the indicators and target values. See Appendix K for a timeline of the various

amendments to the grant agreement, including restructuring.

G. Disbursement Profile

Normally, the Operations Portal generates a disbursement profile (original disbursement forecast

against formally revised forecast against actual disbursement). The Operations Portal is not set up

to generate any CR templates for this size project; an CR is not required.

The project team produced the following graph depicting the movement of the project grant over

the project period. A total of US$2,597,118 was disbursed.

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

Tota

l exp

en

dit

ure

(U

SD)

Utilization Schedule

Grant Movement

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1. Project Context, Development Objectives, and Design2

1.1 Context at Appraisal

Millennium Development Goals

By 2006, Kenya required considerable investment to reach the Millennium Development Goal

(MDG) to provide 72.5 percent of the population with safe water supply access. At the time, safe

water coverage in rural areas was just 52 percent. To meet the MDG required adding infrastructure

providing access to an additional 5.6 million rural residents as well as rehabilitation of existing

infrastructure. Infrastructure in suburban areas also required expansion or upgrading. Kenya’s

government budget was unlikely to meet this level of investment (GPOBA 2006).

Community-managed Piped Schemes

In 2002, community-managed piped schemes provided water to about 30 percent of the eight

million rural Kenyans with access to safe water. Communities, self-help groups, the government,

non-governmental organizations (NGOs), and external support agencies provided the investment

capital for these schemes (Njonjo and Lane 2002, pgs. 5-6). Community organizations with

autonomous legal status typically managed these systems (GPOBA 2006).

Water Sector Reform

The government had been implementing reforms in the water sector when this project began. The

2002 Water Act, which established new institutions to take over much of the responsibility for

service provision from the Ministry of Water and Irrigation. The National Water Conservation and

Pipeline Corporation would play the key role in these reforms.

Key organizations mandated under the 2002 Act include:

Water service providers: The principal types of providers are public utility companies,

private operators of small piped networks, and community water users’ associations.

Water Service Boards (WSB): WSBs have the legal mandate to ensure that water and

sanitation services are delivered within their jurisdictions. WSBs sign service provision

agreements (SPAs) with water service providers, and monitor SPA compliance.

Water Services Regulatory Board (WASREB): WASREB is the national regulator

responsible for tariff setting, quality standards, and licensing for WSBs.

Water Services Trust Fund (WSTF): This institution provides grant finance for capital

investment in rural water supplies.

National Environmental Management Authority (NEMA): This institution provides

environmental clearances to water service providers.

2 This section of a Completion and Results Report (CR) is usually completed using information drawn from the Project

Appraisal Document (PAD). However, a PAD was not prepared for this project, in line with then World Bank

procedures for small trust fund grants. Therefore, this section has been completed instead using information from the

GPOBA Eligibility Note and its review (GPOBA 2006, 2006b), the original grant agreements and their amendments

(IDA 2006, EU 2007, Bruce 2007), and the Operations Manual (K-Rep 2006).

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Water Resources Management Authority (WRMA): This government authority protects and

conserves water resources. Water service providers must receive a permit from WRMA to

abstract a designated volume of water.

The above organizations had begun to transfer assets and responsibility for service delivery to

autonomous local service providers at the start of this project (GPOBA 2006, pg. 6).

Country Assistance Strategy

In 2004, the World Bank issued a new Kenya country assistance strategy (CAS), jointly prepared

with the International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency

(MIGA). The CAS aimed to mobilize private sector participation in the provision and management

of infrastructure, including water supply. It also aimed to build capacity and to expand the services

of financial institutions. The CAS cited several examples of programs involving Bank and IFC

cooperation in promoting private investment in infrastructure building (World Bank 2004, pgs. ii,

2-3, 7, 15, 22-23).

Project Antecedent

K-Rep Bank Ltd, the grant recipient, isa microfinance institution registered as a commercial bank in

Kenya.

Prior to this project, the Water and Sanitation Program Regional Program in Africa (WSP-AF) and

the Public-Private Infrastructure Advisory Facility (PPIAF) had collaborated with the Ministry of

Water and Irrigation, the Nairobi Water Services Board and K-Rep Bank to mobilize market-based

funding for small community-managed schemes in Kenya. The work to-date focused on:

support in developing credit assessment and appraisal tools for community-managed

schemes;

assessment of market lending to community-managed schemes in Kenya;

assessment of the potential for business development services to assist community-

managed schemes to develop into small water enterprises; and the

development and assessment of three subprojects for K-Rep appraisal and preliminary loan

approval (GPOBA 2006, pg. 9).

Project Rationale3

The project aimed to increase access to water supply services by leveraging community equity

with commercial financing, and by managing the viability of projects in lower income rural

communities with the support of output-based subsidies. To this end, the project sought to

introduce a new way of financing community-based water supply by using both commercial

financing and output-based aid, instead of relying on government grants to self-help groups.

The rationale for taking this approach to providing access was as follows:

3 The following paragraphs are based on the Eligibility Note (GPOBA 2004) and Mehta and Virjee (2007).

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Traditional financing was limited and not sufficiently focused on sustainability: Donors,

NGOs, government allocations, and funds raised by community groups traditionally fund

community water supplies. These financing sources have several drawbacks. For example,

external funding sources often prefer new investments instead of improving the operations

and maintenance of existing schemes. Traditional funders also did not conduct rigorous

business planning and appraisal of financial viability, nor did they provide communities

access to professional levels of design, implementation, and management services.

Microfinance institutions could expand available financing, reduce lag times, and

introduce commercial rigor to all phases of the project cycle: Microfinance institutions

provide an alternative and immediately available financing option for community water

supply projects. This would reduce the time communities spend – often over five years –

searching for financing to improve water supply. Commercial financing would also

introduce rigor and professional support to the water supply projects by requiring schemes

are sufficiently viable to repay the loans.

Output-based Aid (OBA) subsidies could develop the link between microfinance institutions

and relatively poor rural and suburban communities: Financial viability studies indicated

that consumers could afford tariffs sufficient to cover operations and maintenance (O&M)

costs, and some debt service on capital. However, Kenya’s relatively poor communities

could not afford the high interest rates associated with commercial capital.

Such an approach was clearly in line with the CAS and its goals of getting the private sector more

involved in infrastructure and service delivery, and building and expanding the capacity of

financial institutions to serve the non-government sector.

1.2 Original Project Development Objectives (PDO) and Key Indicators

Normally the Project Development Objective (PDO) and key indicators are definitively stated in

the Project Appraisal Document (PAD). However, this project did not have a PAD: at the time of

project approval, PADs were not required for small recipient-executed trust funds such as this one.

The original PDO is clear, despite the absence of a PAD, because the various original project

documents state the project objective in nearly identical language. The original 2006 grant

agreement states:

The objective of the Project is to increase access to and efficiency in water supply services for the

poor in rural and suburban areas of Kenya through investments in selected community subprojects

(IDA 2006, pg. 6). 4

4 The Eligibility Note (GPOBA 2004, pg. 9), which is the closest equivalent to a PAD available from among original

project documents, uses nearly identical language in stating the objective. “The objective of the pilot is to increase

access to water supply service by the poor in the rural and peri-urban areas of Kenya and to increase the efficiency of

water supply services.” The Note adds that the “purpose of the pilot is to demonstrate that microfinance has an

innovative role to play in financing small water infrastructure in Kenya.”..

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By contrast, defining the project’s key indicators and their original target values in the absence of a

PAD is not clear-cut. Various original project documents do not use the same set of indicators, and

often do not set any target values.

The following indicators were selected from various project documents. Appendix J provides the

detailed rationale for their selection. For the purposes of the CR, the first indicator (number of

beneficiaries) has been defined as the PDO indicator, and the remaining indicators as intermediate

outcome indicators.

Table 1.1 Indicators and Original Target Values

Indicator Original Target Value

Number of people with access to water under the Project 60,000

Number of community subprojects accessing finance under the

Project 21

Number of new working connections

To be defined during

subproject design and

appraisal. Target values to

equal the sum of values for

all approved subprojects

Number of new individual household connections at agreed

working conditions and service standards

Number of [new] kiosk facilities at agreed working conditions and

service standards

Number of existing projects with an increase in gross revenue;

measured as the average monthly revenue collected from water

sales over two months after project commissioning

Source: See Appendix J

1.3 Revised PDO and Key Indicators, and Reasons/Justification

The project was restructured on June 29, 2011. The restructuring paper listed three performance

indicators with revised target values, as shown in table 1.2. The target values for these indicators

were expanded due to the increased scale of the project as of 2008 (see Section 1.6 for further

explanation).

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Table 1.2 Indicators and Their Target Values, As Given in the 2011 Restructuring Paper

Indicator Revised Target Value

Number of people with access to water under the project 100,000

Number of community subprojects accessing finance under the

project 40

Number of new water connections 8,000

Note: No original target value had been established for the third indicator, number of new water

connections. See table 1.1 for further explanation.

Source: World Bank 2011.

1.4 Main Beneficiaries

Consumers served by the water schemes that received project financing comprised the main

beneficiaries. The project originally targeted poor rural areas of the country with an estimated

average annual household expenditure of US$150 per month or less (GPOBA 2007, pg. 2).

Beneficiaries would receive two types of benefits:

Existing consumers would receive better standards of service in terms of quantity and hours

of supply, due to improvements in the capacity and management of existing schemes.

New consumers would receive access to water services either from new schemes or from

the expansion of existing schemes.

The original project targeted 60,000 beneficiaries served through existing or new connections from

the 21 schemes in the districts and city area under the Athi Water Services Board (formally called

the Nairobi Water Services Board (WSB)).

The revised project expanded the number of targeted beneficiaries to 100,000 persons served

through existing or new connections from 40 schemes located in seven of the eight WSB service

areas. Schemes under the Northern WSB were excluded due to logistical difficulties of working in

this area of Kenya.

1.5 Original Components

The grant agreement specifies two parts: investment financing and project management.

Investment Financing

The project was intended to provide output-based aid subsidies to community scheme management

groups that successfully used commercial loans to rehabilitate and augment existing piped water

schemes or to construct new piped schemes.

The community group would provide 20 percent of the financing upfront, and receive a loan for K-

Rep Bank for the remainder. K-Rep Bank followed its normal due diligence process for the loan

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appraisal. The community group would also receive a subsidy of up to 40 percent of total capital

expenditure after meeting the output targets, which were an agreed number of connections and a

certain level of monthly revenues from consumer payments for two months following project

completion. This subsidy would allow the group to repay a large portion of the loan immediately.

Project Management

Community groups were eligible for an additional subsidy to pay Project Implementation

Consultants (PICs) for technical services during construction, such as procurement, contractor

supervision, reporting, and building the technical, financial, and organizational capacity of the

users’ associations to manage the schemes.

This component also financed the Project Auditing Consultant (PAC), which prepared the baseline

and Output Verification Reports (OVRs), certifying that outputs had been achieved and a given

amount in subsidies could be disbursed.

1.6 Revised Components

Project components were not redesigned. However, the scale of the project was expanded from 21

subprojects limited to the area covered by the Athi WSB to a nationwide project involving 40

schemes in areas covered by all but one of Kenya’s WSBs.5 A European Union Water Facility

grant that more than doubled the financial size of the original project facilitated this change.6

1.7 Other Significant Changes

Additional Assistance to Prepare Loan Applications: PPIAF awarded a grant of US $523,719 to

finance a Project Development Facility at WSTF after project start-up. The final amount disbursed

under this facility was US$325,951, with the remaining US$197,768 refunded (World Bank

2009b, pg. 3,6; Advani 2011, pgs. 12-13; personal communication with the author).

The facility partly financed the costs of support organizations (NGOs and consultants) to assist

communities with feasibility studies and bankable K-Rep loan applications. WSTF signed a

contract with Price Waterhouse Coopers (PwC) on May 14, 2009, to act as the Project

Development Facility Manager (World Bank 2009b, pg. 3,6; Advani 2011, pgs. 12-13; personal

communication with author).

Ultimately, 35 project development grants of US$9,000 each were awarded to 33 communities (2

communities had 2 grants each) after the management committees submitted viable expressions of

demand and contributed US$2,000 toward the cost of the support organizations to assist in

preparing the loan applications (WSP, GPOBA, et al 2011).

5 Schemes under the Northern WSB were excluded due to logistical difficulties in working in that area of Kenya. 6 See Appendix A on changes in the financial size of the project, and Appendix K for a timeline of amendments to the

project grant agreement.

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Partial Credit Guarantee: K-Rep secured a revolving US$5 million guarantee facility from the

U.S. Development Credit Authority in 2009. The terms allowed for sharing losses on a 50 percent

pari passu basis at a portfolio level (GPOBA 2009; Advani 2011, pg. 12).

Project Closing Extension: The project closing was extended three times, as detailed in Appendix

K.

Allow Municipal Water Service Providers to Participate in the Project: The second supervisory

mission agreed that the project could be extended to subprojects that would be owned and

managed by WSBs and municipal water utilities, rather than limited to schemes in which

community management committees were the designated water service providers.

Seven subprojects had this new type of management structure: Mukangu (KIRIWASCO),

Nyamasaria (KIWASCO), Kenol-Kabati (MUSWASCO), Kiambi Network (EWASCO), Kamweli

(KIRIWASCO), Rabai Power (KIMAWASCO) and Kayole Soweto (NCWSC). In the case of

Nyamasaria, KIWASCO delegated the authority to identify and connect new consumers, and carry

out meter reading, billing and revenue collection to community contractors, or Master Operators.

These operators were identified and trained by KIWASCO (Tertiary Engineering Consultants

2007).

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design, and Quality at Entry

The project exceeded most target values for its (imputed) PDO and outcome indicators.

First, the project design team correctly identified a niche for providing investment subsidies to

water schemes owned and managed by community organizations through a microfinancing

institution. As a result of this innovative project design, the borrower (K-Rep Bank) and other

banks have become keenly interested in this business line, provided that substantial subsidies are

available for the costs of constructing, rehabilitating, or expanding the scheme networks and main

civil works. The Dutch WASH Alliance and the United States have developed projects with

similar designs, based on the experience with this project.7

Second, the output-based aid approach created incentives for K-Rep Bank to take on a substantial

role in oversight, which in turn led to cost savings and higher construction quality (K-Rep Bank

2013, pgs. 12-13).

Significant preparation work was undertaken before the project was approved, notably:

7 K-Rep Bank has signed a memorandum of understanding with the Practical Action to provide loan products to small

and medium enterprises for waste management, water, sanitation, and hygiene. The USAID SUWASA Kenya project

will partner with several commercial banks to provide loan products for water services to the urban poor. K-Rep has

partnered with SUWASA to adapt these loans to financing urban utilities in poor areas. Communication with former

K-Rep Special Projects Depart Head, and former project manager, October 17, 2013, Nairobi, and Samual Baiya,

WSP-Kenya, email, November 25, 2013.

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the development of credit assessment and appraisal tools for community managed piped

schemes;

an industry assessment of the market for financing such schemes in Kenya;

an assessment of the potential of consultancy firms to provide business support services to

relevant schemes; and

the development and assessment of three subprojects for appraisal and preliminary loan

approval (GPOBA 2006, pg. 9).

Despite this preparation, the project immediately fell behind schedule and faced other challenges,

described below.

Certain relatively small changes in project preparation and design could have mitigated

implementation delays and their consequences, including:

An evaluation of the capacity and time needed for WSTF and K-Rep to complete all the

steps leading up to loan appraisal.

More time allotted to secure ownership of the project processes by the relevant institutions

and organizations. Stakeholders could have prepared using project documents such as the

ESMF and Project Operations Manual. Stakeholder participation should have been made

conditional upon workshops and training sessions attendance.

A loan disbursement window that ended well before the project closing date.

The above procedures are typical for World Bank projects, particularly when lending to financial

intermediaries. It was not clear at the time of project appraisal that these procedures would be

necessary given the relatively small recipient-executed trust funds. Readers will recall that for this

same reason, no PAD was prepared for this project.

Other factors behind the implementation delays indicate some fundamental weaknesses in the

original project design, including:

Limited private sector capacity: The lack of capable support organizations and project

implementation consultants was a major factor in delays.

Limited demand for financing from community management committees: Identifying

community-managed schemes with management organizations that were able to present

adequate loan applications proved difficult. In addition, some communities did not take up

the loan offers. The World Bank approved a significant change in project design whereby

loans could be extended to schemes owned and managed by WSBs and municipal water

utilities, rather than those in which community management committees were the

designated water service providers. K-Rep Bank, in its final report on the project, stressed

the potential for lending to water utilities (K-Rep Bank 2013, pgs. 13-16).

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2.2 Implementation

The time lag from subproject identification to loan took longer than anticipated during the pilot

phase (2006-2010) due to the time required to:

obtain community management committees registered as legal entities;8

sign a Service Provision Agreement with the WSB;9

fulfill the water abstraction permit requirements from WRMA(World Bank 2009a);

obtain approval of project reports by NEMA (World Bank 2009a);

carry out the considerable, unfunded work in developing the proposals initially required

from the Athi WSB. These responsibilities were later transferred to K-Rep Bank (World

Bank 2009a); and

resolve title disputes for the land where the scheme infrastructure would be (WSP,

GPOBA, et al 2011).

PICs initially performed poorly, partly because they lacked experience. Meanwhile, communities

lacked the expertise to manage PICs, and the contracts were not sufficiently rigorous in terms of

stating outputs and penalties for failing to deliver on time.

As a result, there were considerable delays in planned versus actual achievements for the project as

originally designed. For example:

One subproject was completed by December 31, 2008, the original project closing, versus

the planned 21 subprojects (World Bank 2009).

One year after the original closing date (December 2009), six of the originally planned 21

subprojects had been completed.

Ten of the originally planned 21 subprojects were completed by November 2010, about

two years after the original closing date (Advani 2011, pg. 1). 10

8 Most community water scheme management committees were registered simply as self-help groups, which was not

sufficient for loan purposes. Legal registration was delayed due to the need to get ministerial signatures (GPOBA

2009a, pg. 5). 9Getting SPAs signed was delayed because the WSBs had not resolved how to allow for community management

committees as providers in areas that had been granted to municipal water companies. The WSBs worked out various

arrangements, all of which required approval by the WSRB. The project also encountered situations whether

overlapping SPAs had been issued, and where the exclusivity clauses under SPAs had not been enforced (World Bank

2009a). Simplified procedures and contracts needed to be established (World Bank 2009b, pg. 6). 10 By January 2009, one subproject had been completed, and seven were in various stages of construction. A total of

13 subprojects (including the preceding 8) had been identified as eligible for loans (World Bank 2009). By December

2009, six subprojects had been completed, with another six loans approved, of which 3 subprojects were under

construction. Meanwhile, the scaling up had begun, with 24 sub-projects under study (World Bank 2009, pg. 4).

Note: A February 2010 GPOBA Semi-Annual Report gave conflicting account of outputs, reporting five completed

subprojects, and nine subprojects under construction (GPOBA 2010, pg. 2-3).

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Implementation improved during the second national phase (2011-2013) of the project. The project

team deserves credit for taking steps to incorporate these lessons, notably:

K-Rep Bank assumed from the communities more contractual responsibilities for the

management and supervision of PICs, and set more rigorous standards for PIC pre-

qualification (World Bank 2009a, 2009b, pg. 6). K-Rep Bank branch staff and the Special

Operations Department devoted considerable staff resources to supervising the project.

The project began extending loans to communities whose schemes were owned by WSBs

and managed by municipal water utilities.

WSP-AF provided technical assistance to K-Rep Bank.

Disbursements indicate that most construction occurred toward the end of the project (see Figure 1

below). Nearly three-quarters of the 25 OVRs for the second phase of the project were conducted

less than one month before project closing. Three OVRs were conducted on the last day of the

project. (Appendix B, table B.1 presents the dates of the 35 OVRs for project phases 1 and 2.)

Figure 1: Cumulative K-Rep Loan Disbursements for Subprojects in US Dollars

Source: Prepared by project team, WSP-AF, from data in project monitoring system.

Implementation delays led to a several negative consequences, namely:

A number of communities failed to receive the planned subsidies because they had not

finished the planned number of connections by project closing.

Some schemes had little to no period of post-implementation management support and

monitoring, as construction was completed very near to the project closing.11 Revenue

projections had to be used in place of actual revenue in order to calculate the subsidies.

Key data with which to evaluate the project outcomes were not available on all or most of

the schemes. For example, Phase 2 projects had not established whether they could meet

their target monthly average revenues. Meanwhile, the PAC reported that most subprojects

11 As will be described in the section on post-implementation support, WSP will try to address this problem through

technical assistance starting in late 2013.

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held their revenues as debt (Tertiary Consulting Engineers 2013, pg. 8). Only eight

subprojects were able to report on nonrevenue water, and only 24 subprojects could report

on collection efficiency (See Appendix C).

Some civil works were apparently not completed by project closing (see Appendix B).

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

(a) M&E Design

The borrower’s M&E system comprised three components:

Pre-loan monitoring: K-Rep Bank tracked the progress of the subprojects toward a loan

offer and acceptance. As mentioned above, several of these steps proved time-consuming,

such as obtaining legal registration for the scheme management committees; receiving

SPAs from the WSBs; obtaining environmental clearances from NEMA and water

abstraction permits from WRMA; and securing land (title or access) for the infrastructure.

Construction monitoring: The PICs were required to provide monthly diagnostic reports.

This monitoring continued for the 24 months during which the contract with the PICS was

in effect.

OBA output monitoring: The process was designed as follows:

The OBA target outputs, derived from the scheme business plans for each subproject

were clearly stated in the K-Rep loan.

Prior to construction, the Project Auditing Consultant (PAC) visited the subproject to

assess the baseline situation relative to specific outputs, for example the number and

type of existing connections, and to confirm the eligible project cost, cost per capita,

and expected OBA subsidy (i.e. 40 percent of the eligible cost).

Upon completion of construction, the water user association submitted an Outputs

Report to K-Rep Bank.

The PAC then revisited the subproject to verify the outputs that had been achieved

relative to the targets, and to recommend payment of the subsidy based on what

percentage of the outputs had been achieved.12

If the outputs were less than 100 percent, the PAC conducted an additional field visit,

not more than six months after subproject commissioning. The remaining subsidy could

be authorized if all output targets had been achieved (K-Rep 2006, pg. 17).

In addition to the above M&E system, the schemes were to be supervised by the sector institutions

and NEMA:

12 Each subproject is assigned a score that weights coverage and service levels achieved against established targets.

The total score is calculated as = (coverage weights x coverage score + service weights x service score).

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Water Service Boards: The WSBs were responsible for requiring WUAs to submit annual

reports with specific indicators to track performance in sustaining outputs. Recommended

indicators included:

number of connections

revenue

total number of households benefiting from increased access

average daily consumption per connected household

percentage of population in target area with access to water supply

collection efficiency (K Sh collected/K Sh billed)

average hours of access to water supply per day

number of interruptions per given period (K-Rep 2006, pg. 25)

Environmental Safeguards: NEMA and WRMA were responsible for monitoring

compliance with the environmental clearance and water abstraction permit. The scheme

management committees were required to submit an annual audit report to NEMA as part

of this process.

WSP-AF monitored the major milestones in the loan development and implementation for each

subproject.

(b) M&E Implementation

The M&E system allowed K-Rep Bank and WSP-AF to identify and track problems in the

subproject cycle. For example, it spotted weak operations in the Mataraa scheme and management

problems in the Gitaru scheme (WSP, GPOBA et al., 2011, pg. 3).

However, the M&E system was less effective at collecting data to track the PDO and outcome

indicators. Appendix B details the inaccuracies in estimating the number of connections, and

Appendix J described other challenges in measuring the PDO and Outcome indicators.

A principal problem with the M&E was that it did not track the performance of the schemes

beyond the first two months of operations. For a slight majority of schemes, data on the first two

months of operations are not even available since construction was completed so close to project

closing. There is also no detailed analysis of operations and efficiency for the ten schemes that

have been in operation for over two years. The economic and financial analysis had to rely largely

on data from the OVRs and focus group discussions in six subprojects.

The M&E system was also weak in monitoring the performance of sector institutions. As noted

above, the WSBs, WRMA, and NEMA play critical and ongoing roles in the regulation and

oversight of community-managed schemes. While the M&E system performed well in tracking

whether scheme management applied for SPAs, water abstraction permits, and environmental

clearances, it did not track how well WSBs, WRMA, and NEMA evaluated and monitored

compliances.

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2.4 Safeguards and Fiduciary Compliance

Safeguards

An Environmental and Social Management Framework and a Resettlement Policy Framework

were prepared. The initial prescribed steps in these documents were followed, such as obtaining

water abstraction permits and environmental clearances for each subproject. It is unclear whether

the scheme management organizations submitted the required annual environmental audits,

although for most schemes, the first audits were not due until after project closing.

Fiduciary Compliance

K-Rep Bank submitted quarterly Financial Monitoring Reports on time and with the approval of

the World Bank.

K-Rep Bank submitted a financial audit report covering the period from inception to June 30,

2010. The audit was conducted in accordance with international accounting standards and the

auditor issued an unqualified opinion on the financial statements and special account statements as

of June 30, 2010. No major accounting and internal control weaknesses were noted during the

audit that would affect the project implementation, and the World Bank accepted the report (WSP

et al., 2011).

K-Rep Bank submitted a subsequent financial audit report, covering the period between July 1,

2010, and June 30, 2012 (Kimani and Associates 2012).

The 2011 Supervision Mission attempted a procurement review, although it did not provide all

necessary information. The mission noted the need for K-Rep Bank to (i) improve procurement

filing and record keeping; (ii) adhere to the provisions of Bank’s Guidelines in carrying out

procurement activities; (iii) use Bank’s standard bidding and request-for-proposal documents

wherever possible; and (iv) prepare and submit to the Bank a procurement plan for the proposed

project extension for review and clearance. K-Rep Bank subsequently worked with a World Bank

Procurement Specialist to update the project operations manual according to Bank procurement

procedures.

2.5 Post-completion Operation/Next Phase

WSP-AF recognized that most scheme management organizations lacked the skills and systems to

manage the schemes efficiently, and were unlikely to have sufficient revenue to hire private

operators. WSP-AF therefore plans to recruit a consulting firm to provide technical assistance to

the 33 schemes, and to develop training materials and management systems.

WSP-AF has identified four options for a future project building on this one:

A repeat project with K-Rep Bank

Work with WSTF to use donor funding to provide loans to rural community-managed

schemes

Work with WSTF to use donor funding to provide loans to rural community-managed

schemes using an OBA approach

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Work with WSTF to borrow funds to provide loans to rural community-managed schemes

using an OBA approach

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design, and Implementation

Relevance of Objectives: The need to improve access and efficiency in schemes owned and

managed by communities remains highly relevant, as this infrastructure will continue to provide

water to a significant portion of the rural and suburban populations.

Improving access in suburban areas to schemes owned by WSBs and managed by water utility

companies also emerged as a relevant project objective.

Relevance of Design and Implementation: Project design has a number of elements.

A key element in the project design was to provide subsidies through commercial banks for

constructing, rehabilitating, or upgrading the network and major infrastructure of the schemes

owned and managed by communities. The subsidies indirectly serve to make the water tariffs and

interest rates affordable to the consumers and management committees respectively, and to reduce

the risk to the bank (K-Rep).13

Donor institutions in the Netherlands and the United States are developing programs with very

similar designs (see Footnote 7).

Implementation through a commercial bank worked well. The OBA approach created incentives

for the borrower to take on more oversight than would otherwise have been the case, which in turn

led to cost savings and higher construction quality (K-Rep Bank 2013, pgs. 12-13). At the same

time, there are limits to a bank’s role, notably the short duration of bank supervision (24 months in

the case of this project), and monitoring environmental and water abstraction compliance.

3.2. Achievement of Project Development Objectives

The project reached 190 percent of the PDO’s target indicator. As explained in Appendices A and

J, this achievement probably underestimates the actual achievement, because new connections

(and therefore additional beneficiaries) were likely added after connections had been tabulated for

the purpose of paying the subsidies.

The project similarly achieved 135 percent of the target value for the number of new connections.

Again, this figure underestimates the number of new connections because it does not include

institutional connections.

13 The subsidies cover part of the investment costs, thereby reducing the loan amount and limiting the tariff impact of

the investment.

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No target values were established for two additional indicators: the numbers of new household

connections and kiosks at agreed working conditions and service standards. The numbers of these new

connections represented a successful outcome, given that the overall target for new connections was

exceeded. On the other hand, the monitoring system did not clearly establish that all these connections

were at agreed working conditions and service standards.

One indicator fell short of the target value: the number of subprojects financed totaled 87.5 percent

of target.

In addition to the PDO and outcome indicators that were selected ex post facto (see Appendix J),

the project documents refer to a number of other efficiency indicators: low rates of nonrevenue

water; monthly revenue targets for all schemes; revenue collection efficiency; population coverage

in the supply areas; etc. Data are not available on these indicators due to an M&E system that

largely ended with the OVR, and the short time between construction completion and project

closing for most subprojects.

3.3 EfficiencyThe present financial projection indicates the total portfolio’s financial internal rate

of return is 18 percent (with the subsidy payments taken into account). This is just at the hurdle

rate equivalent to K-Rep Bank’s lending rate. The portfolio, however, yields a negative net present

value of minus US$50,000. The financial performance of the subprojects is summarized in table

3.1, below:

Table 3.1 Sub-Project Summary Financial Performance

IRR with

subsidy

IRR

without

subsidy

Net Present

Value

(US$)

Operating

Cost

Coverage

Loan Life

Debt

Service

Coverage

Mean 24% 10% -1,400 2.17 1.97

Minimum -9% -19% -166,000 1.19 0.26

Maximum 159 76% 130,000 8.53 4.72

No. meeting 18% hurdle rate 15 13

No. with NPV or OCC > 1 14 35

No. with DSCR > 1.5 18

% of 35 meeting relevant

criteria

43% 37% 40% 100% 51%

Source: Appendix C, table C.4

Despite the portfolio’s weak financial performance, the project’s outcome confirms that

investments in water produce significant positive economic returns. The economic analysis was

conducted based on information collected in focus group discussions conducted in six subproject

areas. The economic internal rate of return of the six subprojects ranged from 64 percent in Hindi

to as high as 392 percent in Nyamasaria. This yielded benefits of between US$2 and US$10 for

every U.S. dollar invested in water. The economic rate of return results are summarized in table

3.2 below for the six subprojects:

Table 3.2 Summary Results of Economic Analysis

Hindi Koibatek Kiptere Nyamasaria Olepolos Gitangu

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Economic Internal

Rate of Return 64% 261% 161% 392% 72% 182%

Economic Net

Present Value (US$) 715,000 1,115,000 1,285,000 5,124,000 1,945,000 608,000

Cost of Investment

from Project (US$) 112,000 200,000 166,000 341,000 119,000 39,000

Cost of Household

Investment (US$) 241,000 47,000 136,000 157,000 684,000 29,000

Total Cost of

Investment (US$) 353,000 247,000 302,000 499,000 803,000 68,000

Benefit-Cost Ratio 2.0 4.5 4.3 10.3 2.4 9.0

Source: Appendix C, table C.7

3.3 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development Many of the schemes served low-income households. The water provided a basic service and a

productive input to increase livelihoods.

Introducing on-premise connections reduced the burden of water collection, which positively

affected women and children, who traditionally collect water.

Most of the schemes strengthened community-based organizations.

(b) Institutional Change/Strengthening

K-Rep Bank was strengthened in its capacity to provide loans to water schemes (see Section

5.2.b).

(c) Other Unintended Outcomes and Impacts

None

3.4 Summary of Findings of Beneficiary Survey

None

4. Assessment of Risk to Development Outcome

The ERR and IRR establish the financial viability of the subprojects.

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5. Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry Relatively small changes in project preparation and design, which are usual in World Bank

preparation of financial instruments and investment loans, could have mitigated implementation

delays and their consequences (see Sections 2.1 and 2.2).

(b) Quality of Supervision

A total of three supervision missions were held: two missions in 2009, and one in April 2011. The

aide memoires from these missions provide good documentation on the first phase (2006-2010) of

the project.

Since 2012, WSP-AF has maintained an Excel-based monitoring system to track milestones in the

subproject cycle (see Section 2.3), and employed several local consultants to gather the data for

this system. These consultants also provided technical assistance to K-Rep Bank in the loan

approval process and implementation.

5.2 Borrower Performance

(a) Government Performance

The various government institutions serving the water sector – WSTF, NEMA, WRMA, WSBs,

WASREB – performed their roles in supporting the community management committees in their

role as water service providers. Several utility companies actively worked on implementing

subprojects.

(b) Implementing Agency or Agencies Performance

K-Rep Bank built a competent appraisal team under an experienced engineer, and worked closely

with the communities, SOs, and PICS throughout the loan development process and

implementation. K-Rep Bank eventually had to commit over US$3 million to a water credit

revolving fund in order to generate sufficient funds to cover the costs of managing this portfolio

(Advani 2011, pg.18).

6. Lessons Learned

(1) Subsidies can leverage commercial financing from banks to make pro-poor investments

viable and attract equity from communities to invest in their own future

The project represents additional investments of US$4.2 million in piped water supply, where

public funds shouldered only a third of investments, hence freeing up public resources and

leveraging additional funds from the private sector. Communities that participated in the project

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reported benefits related to the increase in productivity due to the availability of water supply.

Households reported increased animal husbandry and vegetable farming, which helped them to

generate supplementary income from agricultural products sales. A post implementation review

estimates that every US$1 invested in the subprojects yielded economic benefits of between US$2

and US$10.

(2) Willingness to pay for piped water supply is critical

The willingness and ability to pay for piped water supply was a key factor in identifying viable

subprojects. The lender sought to confirm that target consumers were willing and able to pay the

connection fees and monthly bills, and that demand for piped water would not be eroded by

competing sources. All the subprojects financed installed meters and bill according to volume

consumption, mostly using rising block tariffs. A typical subproject has between 250 and 600

individual connections, and tariffs vary from US$0.45 to US$1 per cubic meter. The average

monthly bill for an individual household connection varies from US$7 to US$18. Poorer

consumers were served through point water sources such as kiosks.

(3) Investment choice and timing of subsidy payments significantly affects the repayment

profile

The lender expressed a preference for subprojects that could be implemented within one year and

quickly scaled up to ensure rapid generation of operating revenues. Linking new connections to

payment of the OBA subsidy allowed the subsidy to be used promptly to pay down part of the

loan, hence easing the expense burden.

Construction delays penalized subprojects due to capitalization on the increase in interest owed. In

cases where turnkey contractors were used, the implementation time was shortened, resulting in

cost saving from lower interest payments.

Rapid buildup of a customer base proved critical for the borrower: significant differences in

financial performance are evident between communities that were able to connect larger numbers

of households at once and those that had problems offering a reliable service to customers at the

outset. Delays also resulted in uncollected grants. Eighteen of the 35 subprojects attained less than

97 percent of the planned subsidy, mostly because they failed to meet the revenue target in time.

This resulted in US$250,000 subsidies that were not drawn. A softer target – or more time to

achieve the target – would have enabled communities to access these funds and reduced their

financial loss without compromising the sustainability of the project. In addition, a higher

proportion of subsidy could have generated more bankable subprojects, resulting in broader

economic impact with positive economic and financial returns.

(4) Labor should not be accepted as a community contribution

Voluntary labor contributions introduced significant uncertainty into the construction timeline;

delays significantly impacted interest owed and therefore the affordability of the schemes and

tariffs. Therefore, K-Rep Bank subsequently required community organizations to make

contributions in cash or tangible in-kind items, such as with construction materials.

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(5) Significant technical assistance is required; the lending institution should prequalify

support organizations (PIC), and have a contractual role in supervising these contracts

While communities were keen to participate in the project, many lacked the financial experience to

implement and manage the subprojects efficiently. The project spent a significant percentage of the

investment (22 percent) on technical assistance to support community and on project preparation,

as well as to train K-Rep Bank field staff.

Additionally, numerous private firms proved to be technically incompetent and/or unsuited to

working with WUAs as clients. The WUAs often lacked the technical expertise to select good

consultants and supervise their performance. K-Rep Bank eventually addressed these problems by

prequalifying consultants and having a contractual role in their supervision.

(6) The lending institution needs a particular set of skills and tools, and sufficient capital and

commitment, to manage micro-financing for community water schemes

K-Rep Bank had to build a competent appraisal team under an experienced water engineer and

work closely with both the communities and the PICs throughout the entire loan process. WSP-AF

worked with K-Rep to develop the appraisal tools appropriate for this kind of lending. K-Rep Bank

eventually had to commit US$3 million to a water credit revolving fund in order to generate

sufficient revenues to cover the costs of managing this portfolio (Advani 2011, pg. 18).

(7) Define a loan disbursement window that ends well before project closing

Several communities that had taken out loans during the project period did not complete their

outputs in time to receive subsidies. Other schemes were completed so close to project closing that

estimates had to be used to calculate whether revenue outputs had been achieved. These problems

could have been avoided by closing the loan disbursement window at least 12 months prior to

project closing.

(8) The scale-up of the approach requires it to be embedded in a programmatic water sector

initiative

Kenya hosts dynamic sector institutions that could increase support to service providers to develop

their capacity for self-financing and management. Presently, national institutions focus on

infrastructure construction, but they could move towards providing technical assistance and project

development support, and subsidize financing/grants to counties and communities to tap other

sources of financing, including commercial funds. Such a scheme would help broaden the initiative

and provide incentives for local governments to develop skills and experience in sector planning,

management and investment, while providing checks and balances through national oversight. A

nationally managed subsidy scheme could attract other local lenders to finance investments in

water, thereby increasing competition for financing. It would also facilitate cooperation between

the national government and local institutions to progress towards poverty alleviation and

sustainable development.

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7. Comments on Issues Raised by Grantee/Implementing Agencies

(a) Grantee/Implementing Agencies

i) Legal registration of the community water projects requires careful attention and early consensus to avoid

regulatory delays in project preparation. This project required a significant amount of time to register

communities to ensure they were recognized as legal entities.

ii) The identification of a competent Project Implementation Consultant was key to improving the rate of

implementation of Phase II projects. The consultant ensured stronger overall project and organizational

oversight.

iii) The Output-based Aid approach led to a greater number of on-budget, outcome-oriented subprojects

than is typical with the upfront grant-financed approach to projects. Incentives for the communities and

financier to pursue savings to fit the project cost to the credit capacity available helped to control costs.

iv) The World Bank’s technical assistance enabled training of the newly prequalified support organizations

and improved consultancy services in managing the 25 projects.

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Appendix A. Project Costs and Financing

(a) Grant Proceeds Allocations (in US$ equivalent)

Category

Appraisal

Estimate

(US$)

Actual/Latest Estimate

(US$)

Percentage of

Appraisal

Goods and Services

Part A: Investment Financing 800,000 1,742,300 218%

Part B: Project Management

(Consultant Services) 351,300 863,945 246%

Bank charges 238

Total Amount 1,151,300 2,606,483* 227%

Source: GPOBA, 2013 “Summary of

Sources and Uses of Funds, 2nd Quarter

ending 30th June 2013”

*Includes EU grant that was not signed at time of appraisal

(b) Financing

Source of Funds Type of

Cofinancing

Appraisal

Estimate

(US$)

Actual/Latest

Estimate

(US$)

Percentage of

Appraisal

Trust Funds Grant 1,151,300 2,606,483 227%

Global Partnership on Output-based Aid

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Appendix B. Outputs by Component

The project comprised two components: investments and consultant services. The first three subsections

below describe the outputs for the investments. The final subsection describes the consultant services.

Appendix B.1: Civil Works

The following quotations from the second supervision report describe the types of investments financed

through the project (WSP, GPOBA, et al, 2011, pgs. 2-3):

Rehabilitation and/ or augmentation projects: Many operational CWPs require investment to upgrade

or replace existing infrastructure, such as house taps, and/or to expand services to those who do not

have higher service levels. Such investments will benefit the community through a higher average level

of service, for example a higher reliability of service for all households, as well as by expanding

services to additional households. These investments include increased storage facilities, expansion and

replacement of pipelines or specific new connections.

New/ Greenfield project: This refers to the establishment of a new water project and would include all

normal components of a piped community water project. The new project is to be registered as a legal

entity. Access to the project will be for members who have paid membership fees as suggested by

project’s by-laws. Such systems serve the entire population through a mixture of service levels, including

individual connections and shared communal water points.

Below, Table B.1 presents the available information on the status of the civil works. This information

comes from the Output Verification Reports, some of which were completed as long ago as 2009. It

therefore does not present a view of the civil works as of project closing (February 2, 2013) except for the

18 subprojects that were visited in February 2013. The table indicates that:

20 percent of the subprojects had no outstanding civil works

26 percent of the subprojects had no available information on the status of the civil works

54 percent of the subprojects had outstanding civil works

Table B.1: Outstanding Civil Works on the 35 Subprojects as documented in Output

Verification Reports, 2009-2013

Sub-Project Outstanding civil works Date of Output

Verification

1 Kiarutara Ragia None 2012 -- October 12

2 Masogo None 2013 -- February 22

3 Fortsmith None 2013 -- January 13

4 Kiambi Network None 2013 -- January 17

5 Kenol Kabati None 2013 -- February 20

6 Kamirithu Ph II None 2013 -- February 28

7 Mt. Kenya Buuri None 2013 -- February 22

8 Kamweli VDC

Construction of the second water kiosk was still

pending with plumping works; minor finishing

works such as construction of chambers for valves

and water meters

2013 -- January 16

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Sub-Project Outstanding civil works Date of Output

Verification

9 Ng’ondu Installation of chamber covers, air valves and wash

out valves. 2013 -- February 8

10 Kanunga Installation of the vent pipes on top of the newly

constructed 225m3 Ground Masonry Tank (GMT) 2013 -- February 7

11 Nyamasaria Installation of valve chambers and covers; visibility

branding for the project 2013 -- February 28

12 Amani Drive The new water kiosks still required some final

finishing works 2013 -- February 28

13 Kamureito

Construction of the Composite Filtration Unit

(CFU) and the backwash tank; installation of master

meters at the intake works and on the main water

storage tanks, as well as installation of covers for

valve chambers

2013 -- February 27

14 Rabai Power Electricity power connection; master meters were

not yet installed on the system 2013 -- February 26

15 Tuiyobei

Installation of 3 No. water kiosks, extend the water

distribution to Kipkelion town; Installation of

master meters on the main pipeline

2013 -- February 26

16 Ngecherok Construction of water kiosks, and minor finishing

works such as valve chambers and covers 2013 -- February 25

17 Hindi Magogoni To top the newly constructed 225m3 Ground

Masonry Tank (GMT) 2013 -- February 25

18 Kiptere

Installation of valves at some sections and

construction of chambers for valves and water

meters. Installation of a chlorination tank at the

main water storage tank

2013 -- February 21

19 Mukangu Rehabilitation of pipes, consumer connections and

pipe laying works 2013 -- February 21

20 Koibatek Installation of valves and fittings on the pipelines,

and minor tie-in works at the water storage tanks 2013 -- February 19

21 Kayole Soweto Master meter yet to be installed on the distribution

main 2013 -- February 19

22 Rungiri Chamber covers and pipeline testing 2013 -- February

23 Kiamumbi Ph II

Installation of air valve and wash out valve,

chambers and chambers cover slabs, and repairs of

leaks on distribution pipelines especially at the

fittings locations.

2012 -- September

18

24 Ngeteti Installation of zonal meter chambers and chamber

cover slabs 2012 -- October 9

25 Rironi Installation of covers on chambers for air valves,

wash outs and zonal meters 2012 -- October 8

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Sub-Project Outstanding civil works Date of Output

Verification

26 Kamirithu I Unfinished 3m3 water tower 2009

27 Karweti Not detailed in the OV 2009

28 Kiamumbi I Not detailed in the OV 2009

29 Gitaru Not detailed in the OV 2009

30 Mataara Not detailed in the OV 2010

31 Gatangu Not detailed in the OV 2010

32 Kamandura Not detailed in the OV 2010

33 Kinoo Not detailed in the OV 2010

34 Karanjee Not detailed in the OV 2009

35 Olepolos Not detailed in the OV 2010

Source: Information compiled from Output Verification Reports by Project Audit Consultant to WSP-AF, November

2013.

Appendix B.2: Connections

The best estimate for the total number of new connections completed under the project is 11,505,

comprising household connections, agricultural connections used for domestic purposes, kiosks, standpipes,

and institutional connections.14 The note to Table B.2 below explains the different types of connections.

Table B.2: Numbers of New Connections

Schemes

Total New

Connections

(Indicator 2)

Household

Connections, and

Agricultural

Connections Used for

Domestic Purposes

(Indicator 3)

Kiosk and

Standpipe

Connections

(Indicator 4)

Institutional

Connections

Kiamumbi I and II 760 760 0 0

Kamirithu I and II 860 855 5 0

Amani Drive 147 143 4 0

Fortsmith 126 122 3 1

Gatangu 123 123 0 0

Gitaru 113 114 -1 0

Hindi Magogoni 107 100 7 0

Kamandura 263 263 0 0

14 Table J.2 provides figures on the total (new and existing) number of connections by type of connections.

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Schemes

Total New

Connections

(Indicator 2)

Household

Connections, and

Agricultural

Connections Used for

Domestic Purposes

(Indicator 3)

Kiosk and

Standpipe

Connections

(Indicator 4)

Institutional

Connections

Kamureito 455 440 4 11

Kamweli VDC 163 159 4 0

Kanunga 39 39 0 0

Karanjee 224 224 0 0

Karweti 62 62 0 0

Kayole Soweto 1607 1607 0 0

Kenol Kabati 1400 1400 0 0

Kiambi Network 552 544 8 0

Kiarutara Ragia 157 157 0 0

Kinoo 79 79 0 0

Kiptere 392 369 4 19

Koibatek 530 520 2 8

Masogo 183 172 5 6

Mataara 555 555 0 0

Mt. Kenya Buuri 234 231 3 0

Mukangu 85 85 0 0

Ng’ondu 61 61 0 0

Ngecherok 43 41 2 0

Ngeteti 63 63 0 0

Nyamasaria 1558 1557 1 0

Olepolos 62 62 0 0

Rabai Power 30 20 10 0

Rironi 108 109 0 0

Rungiri 214 212 2 0

Tuiyobei 150 150 0 0

Total 11,505 11,398 63 45

Note: The first two schemes listed in the table received two loans each, so the number of sub-projects is 35, but the

number of schemes is 33.

The types of connections referred to in the above table are defined as follows:

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Total connections: This column represents the sum of all other connections in the table.

Household connections: These are connections—usually a standpipe – built within homesteads primarily for

domestic use, which may include productive uses of water such as kitchen gardens, livestock, etc.

Agricultural connections: One scheme, Mt. Kenya Buuri, laid pipes to plots primarily for irrigation;

households also used this water for domestic purposes.

Kiosks and standpipes: Both represent public water points where people can collect water, primarily for

domestic use.

A standpipe is simply a pipe with a tap.

A kiosk can be any one of a number of designs for a cement structure to protect the pipe holding the tap;

usually a kiosk will have at least two taps.

Institutional connections: These are any type of physical connection that was made to an institution, such as

a health center or school.

Source: ICR Team calculations based on Output Verification Reports for subprojects and Tertiary Consulting

Engineers, Ltd (2013, Appendices 3 and 4).

The above table is the source for the figures on final achievements reported on three Outcome Indicators in

the Results Framework Analysis.15 These figures are not completely accurate for the following reasons:

Inconsistent definitions of what constitutes an eligible connection: First, in some schemes

institutional connections were not counted; in other schemes, they were counted as kiosks. Second,

the Output Verification Reports (OVRs) indicate the sometimes “inactive” households connections

were counted, and sometimes not. For the sake of consistency, and because “inactive” was never

defined, both active and inactive household connections were included in the above table whenever

the OVRs reported the two figures. However, the OVRs did not systematically report these figures,

so undetected inconsistencies likely remain in the data.

Connections were only counted at the time of the output verification, rather than at the project

closing date: Connections were counted in order to calculate the subsidy payment to each scheme.

They had to be completed within six months of the end of construction. However, connections that

were subsequently added to the schemes before project closing (February 28, 2013) were also

project outputs, since these connections were made possible by the scheme capacity resulting from

the project. These post-verification connections were not captured in the above statistics, except for

those in the Kiamumbi scheme.

Appendix B.3: Loans

Table B.3: Achievements at the Successive Steps in Loan Process

Loan Process 2006-2010 2011-2013 Total

Expressions of Demand (Interest) Received 24 57 81

Expression of Demand Appraised

Positively 13 45 51

Loan Applications Received 13 35 48

Loan Applications Approved 32 45

15 See data sheet F.2: Intermediate Outcome Indicators, the final column (Actual Value Achieved at Completion) for

Indicators 2, 3, and 4.

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Loan Offers Accepted 10 25 35

Value of Loans Disbursed (US$) 784,692 2,754,123 3,538,815

Value of Subsidies Disbursed (US$) 451,348 1,345,507 1,796,855

Average Per Capita Value of Subsidy (US$) 17.50 15.40 16.90

Source: K-Rep Bank (2013).

Appendix B.4: Consultant Services Component

The following table indicates that by the second phase of the project, there were three major firms that

served as PICs and support organizations. The PAC was the fourth major consulting firm working on the

project. Note that the figures in this table are not comparable with project cost figures elsewhere in the CR,

because the source used a different exchange rate.

Table B.4: Disbursements to Consultants for Support Services, 2011-2013

Loan Preparation and Implementation US$ Description of Services

RURAL FOCUS LTD 278,461 PIC and Support Organization

LUJO CONSULTING 121,700 PIC and Support Organization

ENG. MOGUCHE 112,106 PIC and Support Organization

WASDEV CONSULTANTS 29,138 PIC and Support Organization

FADHILI CONSULTANTS 8,554 PIC and Support Organization

JURASSIC CONSULTANTS 4,800 Support Organization

BATCH ASSOCIATES 4,643 Support Organization

DAVIS & SHIRTLIFF 2,376 Technical Assistance

Auditing Services

TERTIARY CONSULTING ENGINEERS

LTD 111,197 PAC

KIMANI AND ASSOCIATES 6,435

Miscellaneous Services

NATION MEDIA 869 Recruitment of Consultants

SAN VALENCIA 656 Support Organization Workshop

Note: US$ payments are taken directly from source table, and are not based on K Sh=US$ exchange rate used

elsewhere in this report. The table from which these figures are taken incorrectly shows the total as US$874,414. K-

Rep Bank report indicates two support organizations (Norken and Watersan) that are not included in the Tertiary

Consulting Engineers report. Conversely, the former report does mention the Davis and Shirtliff contract, which is

listed in the latter report.

Source: Tertiary Consulting Engineers Ltd., 2013, Appendix 3; K-Rep Bank 2013a, Appendices II and III.

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Appendix C. Economic and Financial Analysis

Background

Maji ni Maisha Financing Product. The Maji ni Maisha is a financing product of the K-Rep Bank

Limited intended to provide loans to communities for water infrastructure where consumers are willing to

pay for clean and safe water. This product addresses a market gap: some communities are not eligible for

public grant funding because they are not situated in arid and semi-arid and flood prone areas, but they are

able to afford a modest level of demand for paid-for water supply. The main product features are

summarized below:

Table C.1: Maji ni Maisha Loan Features Loan Value K Sh 5 to 10 million

Borrower Legally registered community associations, self-help groups and trusts

Equity Requirement 20% of project cost in cash

Interest Charged Fixed at market rates, presently between 16% and 18% per annum

Maximum Loan Tenor Maximum 1 year grace period + 5 year term loan

Subsidy Up to 40% of eligible project costs based on the achievement of the pre-set

connection and revenue targets.

Financing Environment. Kenya experienced periods of volatile inflation during the five years of project

implementation (March 2007 to Feb 2013). In 2008, 2009 and again in 2012, inflation approached 20

percent, versus a historical average of eight percent. Over the same period, commercial bank interest rates

remained steady with base rates around 15 percent, except in 2012 when rates jumped to 20 percent. K-Rep

Bank signed a number of loans at this time, but kept their lending rate for Maji ni Maisha steady at 18

percent. Base rates have since gone back to around 17 percent in the first half of 2013. There are currently

30 active loans with between one-year and four-years repayment periods remaining.

Application and Credit Appraisal. Applications from communities were received at various branches of

K-Rep bank, many of which were referred through the respective water services board in charge of the

region. In total, the project considered over 65 proposals, out of which 35 subprojects were approved for

financing. The bank would usually evaluate the applicant entity’s organizational and leadership status, the

membership’s commitment to the project – especially their willingness to contribute cash equity, and the

likely feasibility of the project, which depended on access to a sustainable source of adequate water. Upon

assessment by the bank that the project has potential merit, it used project-provided resources to mobilize

support organizations (SOs) to assist the communities in developing the technical designs and financial

plans for the subprojects. Communities would share in the cost of preparation with a K Sh 10,000

contribution, or 10 percent of the preparation cost. During the preparation period, communities were

required to meet certain loan conditions. These included the mobilization of 20 percent equity contribution;

special service provider agreement granted by the water services board with concurrence of any existing

licensed service provider in the area; and a permit to extract water from the resources authority. K-Rep

Bank preferred a financial rate of return of higher than the interest rate hurdle (18 percent) and a debt-

service coverage ratio of 1.3.

Portfolio Profile

Investment Cost and Sharing. In total, the portfolio represents new investments in community water

worth US$4.2 million across 35 sub-projects. The number of people benefiting from improved services at

output verification stage totaled 190,119. The subprojects added approximately 115,000 people to the

baseline who gained access to improved water supply. Thus, counting only those people added through the

investment, the unit investment cost per capita is low, at US$48/person. Only 34 percent of the investment

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capital was effectively sourced from public funding via the output subsidies ultimately mobilized under the

project. The majority of the finance came from community equity (35 percent) and financing from Maji ni

Maisha (31 percent). Under the project, communities mobilized US$1.70 million of cash to invest in their

own water supply and are poised to service debts in the community association’s name, making the project

predominantly privately financed (66 percent). Cash contributions mostly came from the community’s

savings, while a small portion (18 percent) came from a constituency development fund through Members

of Parliament.

Types of Investment. Investments were made to 18 green field projects and to the rehabilitation and

increasing capacity of existing networks. Works aimed to increase production capacity by rehabilitating

existing boreholes and dams as well as by establishing supplementary water sources, increasing the size of

the distribution network by as much as 14 kilometers of pipes, and augmenting network water storage to a

maximum of 500 cubic meters.

Achievement of Targets. Salient features of the 35 subprojects taken from the baseline and output

verification are found below, indicating significant positive changes.

Table C.2: Baseline and Endline Outcomes Changes Indicator Baseline Endline Change

Non-revenue water* 43% 40% 3%

Collection efficiency** na 88% na *Only 8 sub-projects are able to report on non-revenue water. ** Only 24 sub-projects were able to report on collection efficiency.

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A large majority of subprojects met or exceeded their targets in water connections, while fewer than half

met their targets for kiosks and average monthly revenues. Kiosk targets were not met mainly due to

increased demand for individual connections. Estimation difficulties resulted in some financial targets not

being met. For example, given a 20 percent margin of error, about 75 percent of the subprojects would have

met or exceeded their revenue generation targets.

Table C.3: Outcome Achievement Rate against Targets

Indicator Total Target for 35 Sub-

Projects

% Sub-Project Meeting

or Exceeding Targets

Additional water connections 11,505 134%

Additional kiosks 62 NA

Total average monthly revenues (US$) 140,000 49%

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Customer satisfaction regarding water supply and management.

Customer satisfaction levels were assessed via participants’ opinions on the continuity of supply, water

quality and the price of water across six project sites. There was a clear shift in opinion before and after the

project in terms of the taste and color of the water. Respondents in all six sites appreciated improved water

quality supplied under the project.

Respondents at five project sites felt that the continuity and reliability of supply attained a satisfactory level

after the implementation of the Maji ni Maisha project; however in Olepolos, a pre-existing project,

respondents rated continuity and reliability of supply as “average” because the project did not meet growing

demand.

Response was mixed regarding the question on connection fees. Beneficiaries in the three brownfield

projects (Olepolos, Hindi and Gitangu) were unsatisfied. Many participants, especially those who depended

on standpipes or intermittent water supply prior to the project, felt that the new connection fees were high.

In cases where the beneficiaries had not had access to piped water, respondents felt that the connection fees

charged were fair.

Feedback gathered from the FGD discussions indicates that beneficiaries ranked their management’s

performance highly. The management teams in five areas were comprised of community members elected

by beneficiaries as well as salaried personnel hired to support the daily operation and maintenance works in

the water supply system. The exception was Nyamasaria, where the local urban water utility manages the

subproject. The subproject experienced long periods without water due to the disconnection of the main

supply pipe to facilitate ongoing road works. Nevertheless, the community acknowledged the efforts made

by the utility to restore supply and ranked its performance favorably.

Financial assumptions and limitations. The financial review was conducted just one or two months after

the 35 subprojects had been commissioned. Therefore, assumptions based on the original factors assigned in

the business plans were used to project revenues and cost escalation. The annual rate for revenue increases

ranged from two percent to 14 percent, while cost escalation rates ranged from one percent to seven percent.

The beginning balances were taken from the average actual operating months of the subprojects, which in

most cases equaled two to three months of operation. A 10-year asset life was assumed.

Financial performance. The financial performance of the portfolio has been only moderately satisfactory.

All 35 subprojects are able to cover the cost of their operation and are likely able to generate enough cash to

cover debt payments throughout their loan life. However, under the current projection scenario, which is

based on only two months of operation, a number of subprojects need to raise revenues by increasing the

number of customers. The current financial projection scenario estimates a financial internal rate of return

of 18 percent for the total portfolio (taking subsidy payments into account). This is just at the point of the

hurdle rate, equivalent to K-Rep Bank’s lending rate. The portfolio, however, yields a negative net present

value of US$–50,000. The financial performance of the subprojects is summarized below:

Table C.4: Subproject Summary Financial Performance

Sub-Project Summary Financial Performance

IRR with

subsidy

IRR without

subsidy

Net Present

Value (US$)

Operating

Cost

Coverage

Loan Life

Debt Service

Coverage

Mean 24% 10% -1,400 2.17 1.97

Minimum -9% -19% -166,000 1.19 0.26

Maximum 159 76% 130,000 8.53 4.72

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No. meeting 18% hurdle rate 15 13

No. with NPV or OCC > 1 14 35

No. with DSCR > 1.5 18

% of 35 meeting relevant

criteria

43% 37% 40% 100% 51%

Tariffs, consumption and affordability. The tariff rate in the 35 projects ranged from US$0.4 and US$1.8

per cubic meter. In some cases, a standing charge or a fee was also collected each month. Projects

implemented and managed by the water utilities on behalf of communities had lower tariffs than those

managed by communities themselves.

Information collected from focus group discussions in six project sites indicates that effective tariffs from

piped connections averaged US$0.05 per liter, ranging from US$0.01 to US$0.07 per liter. Effective tariffs

at water kiosk averaged US$0.04 per liter. Households with piped connections reported spending an

average of US$18 per month; the average monthly spending ranging from US$10.60 in Gitangu and

US$23.88 in Nyamasaria. Consumption averaged 3.85 liters per capita per day, with ranges from 1 lpcd in

Gitangu to 6 lpcd in Nyamasaria. Households collecting water from kiosks reported spending between

US$8 and US$9 per month for a consumption of a just over 1 lpcd.

In Koibatek, Hindi and Nyamasaria reported spending a significant portion of monthly household income

on water, at 20 percent, 10 percent and 9 percent, respectively. In the remaining areas, water bills cost four

percent to five percent of monthly household income. Despite the large portion of monthly household

income spent on water, FGDs in Koibatek, Hindi and Nyamasaria were either neutral or satisfied with the

monthly bills. There were no piped water supply in Koibatek and Nyamasaria before the project, so the

level of satisfaction may represent the value the households perceive from the new source. Households in

Olepolos expressed the greatest dissatisfaction with the level of their monthly water bills, which is ironic

given that Olepolos households enjoy the highest income among the six sites (US$446). However, it should

be noted that the standing fee charged in Olepolos (K Sh 500) is more expensive than other vended water.

Households were also generally neutral or satisfied with the level of connection fee charged. Connection

charge ranged from US$24 in Nyamasaria to US$282 in Olepolos. There was greater dissatisfaction

regarding the connection fees in Hindi and Olepolos, where fees were the highest.

Loan financing arrangement. The project had two prominent financing features: a loan and an output-

based subsidy. The efficiency of the subsidy is justified under the project, as discussed in more detail in the

next section. This section looks at the appropriate use of commercial financing in the project. A simulation

of the financial performance of 35 projects using a “no loan” scenario resulted in 20 out of 35 improving

their financial rates of return. This improvement enabled four subprojects to meet the hurdle rate of 18

percent. (Under a “with loan” scenario, 15 sub-projects are able to generate an IRR of 18 percent and above,

while in a “no-loan” scenario, 19 of them can generate an IRR of at least 18 percent..) However, in the case

where loans are not used, the hurdle rate needs to be adjusted to reflect the higher cost of equity as capital.

In this case, we use the assumption of 35 percent. Under this scenario, fewer subprojects (12) would meet

the appropriate hurdle rate compared to a “with loan” scenario (15). These communities are not likely to be

eligible for other funding, since government programs prioritize areas in arid and semi-arid or flood-prone

regions. Thus, evidence suggests that the use of commercial lending as leverage for the modest ability of the

beneficiary communities to mobilize equity was well justified.

The FGDs suggested that community members in all six of the project areas are willing to replicate the

financing model in other projects that address community challenges, such as in agricultural projects, power

supply projects and for sanitation facilities.

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Economic Analysis Background

Focus Group Discussions. The economic analysis was conducted based on information collected in focus

group discussions (FGDs) conducted in six subproject areas. These areas were selected to represent the

geophysical conditions of all the 35 subprojects:

Coastal (1)

Humid Urban (2)

Humid Rural (3)

Officials involved in the community water projects identified households to include in the FGDs.

Respondents were divided into three groups: Group 1 comprised women, Group 2 comprised men and

Group 3 comprised a mix of women and men. A total of 177 respondents participated in the FGDs, with 66

percent male and 33 percent female. The table below provides additional details.

Table C.5: Distribution of FGD Participants

Area Group 1 Group 2 Group 3

Hindi 10 8 8

Koibatek 12 12 9

Kiptere 10 12 17

Nyamasaria 12 10 15

Olepolos 15 12 0

Gitangu 8 7 0

Total 67 61 49

The FGDs primarily focused on collecting and comparing information on residents’ water supply collection

and consumption practices. They also focused on households’ health situation before and after the

introduction of the piped water supply project. The FGD also asked residents to rate the performance of the

water system and its management, which was discussed in the previous section.

Assumptions. Subprojects had been commissioned only two months before this economic review was

conducted. Therefore, this economic analysis assumes that the number of people with access to the system

at the time of verification would increase according to the rates given in the business plan projections. The

sample mean from the FGD respondents was assumed to represent the mean of the population presently

with access to the system and was used to project the benefits for the population universe.

The aspects included in the economic analysis are summarized in the table below:

Table C.6: Assumptions of Economic Analysis

Aspect Benefits Considered Basis/Assumptions

1. Health a. Avoided treatment cost of

children under age 5

a. Reduction in # of diarrheal cases reported

before and after the project

b. Diarrheal disease exposure rate per WHO

(0.61)16 based on FGD responses that prior to

16 WHO Exposure Scenario for improved water supply and improved sanitation in a country that is not extensively

covered by those services, and where water supply is not routinely controlled. This scenario 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 services.

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Aspect Benefits Considered Basis/Assumptions

the project, most household had improved

sources of water such as boreholes

c. Unit cost per treatment based on reporting by

FGD participants

b. Productive days gained a. Reduction in # of diarrheal cases reported

before and after the project

b. Days off work per case resulting in missed

working time per working adult

c. Adult working population estimated from

FGD reports

d. Opportunity cost based on income per

working adult

2. Income a. Productive use of time for

fetching and waiting

a. Time for fetching

b. Opportunity cost based on 50% of income of

working adult (as fetchers are mostly children

and non-working adults)

b. Reduced/avoided cost of

water services

a. Comparison of cost of paid-for water before

and after the project

Economic Analysis Results. Despite the portfolio’s weak financial performance, the project confirms that

investments in water produce significant positive economic returns. In the six subprojects analyzed, the

economic internal rate of return ranged from 64% in Hindi to as high as 392% in Nyamasaria. Every dollar

(US$1) invested in water yielded benefits of between US$2 to US$10. The economic internal rate of return

results for the six subprojects are summarized in table C.7 below:

Table C.7: Summary Results of Economic Analysis

Hindi Koibatek Kiptere Nyamasaria Olepolos Gitangu

Economic Internal

Rate of Return 64% 261% 161% 392% 72% 182%

Economic Net

Present Value (US$) 715,000 1,115,000 1,285,000 5,124,000 1,945,000 608,000

Cost of Investment

from Project (US$) 112,000 200,000 166,000 341,000 119,000 39,000

Cost of Household

Investment (US$) 241,000 47,000 136,000 157,000 684,000 29,000

Total Cost of

Investment (US$) 353,000 247,000 302,000 499,000 803,000 68,000

Benefit-Cost Ratio 2.0 4.5 4.3 10.3 2.4 9.0

Health Benefits. Exposure to diarrhea-causing agents is frequently related to the use of contaminated water

and to unhygienic practices in food preparation and disposal of excreta. In the six subproject areas, families

with children under the age of five (CU5) reported between 12 and 14 incidences of diarrhea per year prior

to the project. This dropped to an average of four incidences per year after the project. A portion of this

(based on the WHO Exposure Scenario) was attributed to water. This benefit commonly comprised 12

percent to 64 percent of net inflows of total.

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FGDs indicated that the project’s health benefits resulted in greater productivity. FGD participants reported

24 incidence of diarrhea per year on average, causing them to miss work about five to six of those days.

After the project, the average annual incidence of diarrhea decline to 11 for five of the subprojects. In

Hindi, FGD participants reported an average of 12.9 cases of diarrhea per year prior to the project, and

about one case per year after. This benefit comprised less than one percent of total benefits flows.

Income Benefits. Besides Olepolos, where a few households already had a piped connection to the existing

water system, most FGD respondents relied on hand dug wells, boreholes, river and rainwater harvesting as

water sources before the project. They carried water through various modes of transport, including hand

carrying, bicycle and donkey, traveling an average distance of 1.6 kilometers (with distances ranging from

20 meters to seven kilometers). Women and children overwhelmingly comprised water collectors. The

benefit inflows from time saved in water collection after the project ranged between 42 percent and 89

percent of the total flows.

Communities had different experiences on whether they benefited from avoided costs of paying for

alternative sources. Out of the 176 households that participated in the FGDs, 139 typically took water from

distant but free sources so that they did not pay for water prior to the project. Thirty-seven households paid

less for their previous source than what is currently charged under the subproject. This results in negative

net flows of US$65,000. Thus, in all but one case did this benefit result in a positive portion of total

economic benefits.

Economic Activities. In addition to the benefits quantified in the economic analysis, the FGDs also

revealed that a number of households were able to increase incomes due to the availability of water supply.

For example, households reported generating supplementary income by selling agricultural products

derived from increased activity in animal husbandry and vegetable farming, for example. Individual

families and local primary schools also reported making longer-term investments in tree nurseries and fish

farming, facilitated by the availability of water.

Subsidies. The strong economic performance of the subprojects, yielding US$2 to US$10 for every dollar

invested, demonstrates the development cost-effectiveness of the investment, including the subsidy. The

efficiency and incidence of the subsidy is discussed below.

Efficiency. No willingness-to-connect data were available from the project. However, feedback from FGDs

indicate that connection fees in three out of the six project sites were found by residents to be “prohibitive”

or “unsatisfactory” whereas residents in the other three sites found their fees “satisfactory.” The upper

bound of fees in those sites where residents were satisfied with the amount is K Sh 2,500 or US$30 per

connection. We use this as a proxy for what households would have been willing to pay to connect to the

network. The effective subsidy per person is US$16.60, and using the average of six households per

connection, each household benefiting from the project received an effective subsidy of US$100. On the

other hand, the actual cost of the project investment is US$290 per household. If households perceive

private utility to be US$30 per connection (their WTP), this leaves a gap of US$160. The fact that the

US$100 subsidy is much lower than the gap between what households can afford and the actual cost of

investments suggests that the subsidy was efficient.

Incidence of subsidy. Five of the selected sites are located in rural areas; only Olepolos is situated in an

urban setting. Adjusting the 2005 rural and urban national poverty line17 to 2012 prices, the portion of

people represented in the focus group that fell below the poverty line was calculated. In the six areas where

17 Kenya Integrated Household Survey (2005). The national poverty line for 2012 is estimated at K Sh 3,048 per

person per month in the rural areas and K Sh 5,684 in the urban area.

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FGDs were conducted, between 33 percent and 78 percent of respondents fell below the poverty line, with a

weighted average of 58 percent.

Access to the poor

Project

Name

Total

respondents

Number of people below

poverty line

%

Representation

Hindi 27 21 78%

Koibatek 33 25 76%

Kiptere 39 22 56%

Nyamasaria 36 14 39%

Olepolos 27 17 63%

Gitangu 15 5 33%

Total 177 104

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Appendix D. Beneficiary Survey Results

None (optional for a Core CR)

Appendix E. Beneficiary Survey Results

None (optional for a Core CR)

Appendix F. Summary of Grantee's CR and/or Comments on Draft CR

None

Appendix G. Comments of Cofinanciers and Other Partners/Stakeholders

None

Appendix H. List of Supporting Documents

Advani, R. (2011). “Financing Small Piped Water Systems in Rural and Peri-Urban Kenya.” Water and

Sanitation Program. Nairobi, Kenya.

Bruce, C. (2007). Re: Global Partnership on Output-based Aid, Kenya: Microfinance for Community-

Managed Water Projects, Grant Amendment (Grant Numbers - TF057614, TF057614, and TF057616).

Filed with World Bank. Washington, D.C.

Concessional Finance and Global Partnerships (2013). Trust Fund Handbook: Digital Edition.

http://www.cfpto.org/TFHandbook/index.htm.

EU (2007). Trust Fund Administration Agreement concerning the Global Partnership for Output Based Aid

Project "Microfinance for Community Managed Water Projects" in Kenya, TF070963 between The

European Community represented by the Commissioner of the European Communities and International

Bank for Reconstruction and Development and International Development Association. Filed with World

Bank. Washington, D.C.

GPOBA (2006). Microfinance for Community-Managed Water Projects: An Output Based Aid Pilot Project

in Kenya: Eligibility Note. World Bank. Washington, D.C.

GPOBA (2006b). Minutes from the Meeting with the Panel of Experts, April 11, 2006. World Bank.

Washington D.C.

GPOBA (2007). Micro-Finance for Small Piped Water Schemes - Kenya. Semi-Annual Status Report,

GPOBA. World Bank. Washington, D.C.

GPOBA (2009). Micro-Finance for Small Piped Water Schemes - Kenya. Semi-Annual Status Report,

GPOBA. World Bank. Washington, D.C.

GPOBA (2010). Micro-Finance for Small Piped Water Schemes - Kenya. Semi-Annual Status Report,

GPOBA. World Bank. Washington, D.C.

GPOBA (2013). “Summary of Sources and Uses of Funds, 2nd Quarter ending 30th June 2013.” Mimeo

provided by GPOBA. World Bank. Washington, D.C.

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38

IDA (2006). Global Partnership on Output-based Aid Grant Agreement (Kenya - Microfinance for

Community-Managed Water Projects) between K-Rep Bank Limited and International Development

Association Acting as Administrator of the Global Partnership on Output-based Aid. Filed with The World

Bank, International Development Association.

Kimani and Associates (2012). K-Rep Audit Report for the Period 1 July 2010 to 30 June 2012.

K-Rep Bank (2006). Kenya Microfinance for Water Services Project Operations Manual (draft). Nairobi.

K-Rep Bank (2012). Kenya Microfinance for Community-Managed Water Project P104075: First

Addendum to the Operations Manual. Nairobi.

K-Rep Bank (2013a). Semi-Annual Status Report Dated 2013.

K-Rep Bank (2013b). Final Project Completion Report.

Mehta, M. and K. Virjee (2003). “Financing Small Water Supply and Sanitation Service Providers:

Exploring the Microfinance Option in Sub-Saharan Africa.” Water and Sanitation Program. Nairobi, Kenya.

Mehta, M. and K. Virjee (2007). “Microfinance for Rural Piped Water Services in Kenya: Using an Output-

Based Aid Approach for Leveraging and Increasing Sustainability.” Water and Sanitation Program. Nairobi,

Kenya.

Njonjo, A. and J. Lane (2002). “Rural Piped Water Supplies in Ethiopia, Malawi, and Kenya: Community

Management and Sustainability.” Water and Sanitation Program. Nairobi, Kenya.

Tertiary Consulting Engineers Ltd. (2013). Project Audit Consultancy to Evaluate the Performance of

Borrowers under the Kenya Microfinance for Community Water Projects (draft). Nairobi, Kenya.

World Bank (2004). Memorandum of the President of the International Development Association and the

International Finance Corporation to the Executive Directors on a Country Assistance Strategy for the

Republic of Kenya. Washington, D.C.

World Bank (2009a). Aide Memoire: Microfinance for Water Projects First Supervision Mission.

Washington, D.C.

World Bank (2009b). Aide Memoire: Kenya Microfinance for Water Projects (P104075) Second

Supervision Mission. Washington, D.C.

World Bank (2010). “The International Development Associations, The International Finance Corporation,

and The Multilateral Investment Guarantee Agency Country Partnership Strategy for The Republic of

Kenya for the Period FY2010-2013.” Washington D.C.

World Bank (2011). “Restructuring Paper on a Proposed Project Restructuring of Kenya-Micro Finance for

Community Managed Water Project (Trust Fund Grant Numbers 057614, 057615, 057616 Dated December

6, 2006, and Trust Fund Grant Number 093392 Dated June 17, 2010, to the K-Rep Bank Ltd.).”

Washington D.C.

WSP, GPOBA, et al. (2011). Aide Memoire: Kenya Implementation Support Mission for the Microfinance

for Community Managed Water Project, (Grant Numbers - TF057614, TF057615, TF057616 and

TF093392), (March 14 to March 25, 2011).” World Bank. Washington D.C.

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Wormser, M. (2008). Kenya: Microfinance for Community Managed Water Projects (Grant Numbers:

TF057614, TF057615 and TF057616) Amendment of Grant Agreement. World Bank. Washington D.C.

Zutt, J. (2010). Kenya: Microfinance for Community Managed Water Project (Grant Number-TF057614,

TF057615, TF057616 and TF093392) Amendment of Grant Agreement. World Bank. Washington D.C.

Zutt, J. (2011). Kenya Microfinance for Community Managed Water Project (Grant Number- TF 057614,

TF 057615, TF057616 and TF 093392), Notice of Extension of Closing Date. World Bank/IFC/M.I.G.A.

Office Memorandum. Washington D.C.

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Appendix I. Additional Notes on the Selection and Measurement of PDO and Intermediate

Outcome Indicators

Indicators for the PDO and Intermediate Outcomes are a key input into an CR. Most significantly, the

achieved values relative to target values on these indicators influence significantly the assessment ratings

for project outcomes.

Usually these indicators and the original target values are taken from the Results Framework in the project

PAD, and entered into the Operations Portal at project start-up. A formal restructuring of the project may

lead to formally revised target values, but the original target and baseline values are also reported in the CR

data sheet F: Results Framework Analysis. The CR Team completes the provided table by filling in the

achieved targets plus comments.

However, this project did not have a PAD, because at the time of project approval, PADs were not required

for small recipient-executed trust funds such as this one.

The CR team reviewed project documents in an effort to determine which indicators and values best

represent the thinking at project start-up about how to measure results with respect to the project objective

and intermediate outcomes. These documents comprised the GPOBA Eligibility Note, Project Operations

Manual, original grant agreements, and the formally approved restructuring paper.

This task has proved challenging. The various original project documents do not consistently state the same

set of indicators. Furthermore, there are often no target values given. On the other hand, the restructuring

paper lists three performance indicators, and these must be included among the selected indicators. There is

also a general consensus in the original documents regarding the expected results from the project, with the

exception of the 2007 EU Agreement. This consensus suggests three additional indicators. Therefore, six

indicators were selected, as described in Appendix J, table J.1 below:

Table J.1: Rationale for Selecting the PDO and Five Intermediate Outcome Indicators

Ref Indicator Rationale for Selection

PDO Number of people with access to water under the

Project

Given in Project Restructuring Paper

(World Bank 2011).

1 Number of community subprojects accessing

finance under the Project

Given in Project Restructuring Paper

(World Bank 2011)

2 Number of new working connections Given in Project Restructuring Paper

(World Bank 2011)

3 Number of new individual household connections

at agreed working conditions and service standards

Given in the Eligibility Note and

Operations Manual (GPOBA 2006, pg. 11;

K-Rep 2006, pgs. 4, 6-7)

4 Number of [new] kiosk facilities at agreed working

conditions and service standards

Given in the Eligibility Note and

Operations Manual (GPOBA 2006, pg. 11;

K-Rep 2006, pgs. 4, 6-7).

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Ref Indicator Rationale for Selection

5

Number of existing projects with an increase in

gross revenue; measured as the average monthly

revenue collected from water sales over two

months after project commissioning

Given in the Eligibility Note and

Operations Manual (GPOBA 2006, pg. 11;

K-Rep 2006, pgs. 4, 6-7).

Note that the PDO Indicator, “Number of people with access to water under the Project,” measures both

people who gained access to water, and people who already had access to water from existing scheme

connections and kiosks. The project, as stated in the PDO, aimed not only to expand coverage but also to

improve the efficiency of water services, to both existing and new consumers.

Appendix J, Table 2 shows how the number of beneficiaries was calculated, based on the estimated number

of household, agricultural connections used for domestic purposes, and kiosks and communal standpipes.

People served through institutional connections were not counted, partly because this would result in

significant double counting,18 and partly because there was no information available to estimate the number

of people served in this way.

18 Many of the people served through institutional connections would also be served through household or kiosk

connections.

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Table J.2: Calculation of Beneficiaries Based on Number and Type of Connections

Columns A B C D E F G= A*E H=A*E I=C*F J= G+H+I

Subprojects

Total Number of Connections Socio-economic data Total Number of Beneficiaries

Household Agricultural Kiosks and Standpipes

Institutional Average

Household Size

Persons per

Kiosk Household Agricultural

Kiosks and Standpipes

Total

Kiamumbi I and II

760 0 0 0 6 4560 0 0 4560

Kamirithu I and II

855 0 5 0 6 150 5130 0 750 5880

Amani Drive 143 0 4 0 6 160 858 0 640 1498

Fortsmith 122 0 3 1 6 125 732 0 375 1107

Gatangu 191 0 4 0 6 250 1146 0 1000 2146

Gitaru 721 0 0 0 20 0 14420 0 0 14420

Hindi Magogoni 266 0 29 0 5 110 1330 0 3190 4520

Kamandura 263 0 0 0 5 250 1315 0 0 1315

Kamureito 440 0 4 11 6 200 2640 0 800 3440

Kamweli VDC 159 0 4 0 6 100 954 0 400 1354

Kanunga 792 0 4 0 6 80 4752 0 320 5072

Karanjee 400 0 2 0 5 250 2000 0 500 2500

Karweti 715 0 0 0 6 0 4290 0 0 4290

Kayole Soweto 1607 0 0 0 40 0 64280 0 0 64280

Kenol Kabati 1400 0 0 0 6 80 8400 0 0 8400

Kiambi Network 544 0 10 0 5 200 2720 0 2000 4720

Kiarutara Ragia 910 0 0 0 6 80 5460 0 0 5460

Kinoo 442 0 1 0 15 250 6630 0 250 6880

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Columns A B C D E F G= A*E H=A*E I=C*F J= G+H+I

Subprojects

Total Number of Connections Socio-economic data Total Number of Beneficiaries

Household Agricultural Kiosks and Standpipes

Institutional Average

Household Size

Persons per

Kiosk Household Agricultural

Kiosks and Standpipes

Total

Kiptere 369 0 4 19 6 200 2214 0 800 3014

Koibatek 520 0 2 8 6 100 3120 0 200 3320

Masogo 172 0 5 6 6 250 1032 0 1250 2282

Mataara 555 0 0 0 5 0 2775 0 0 2775

Mt. Kenya Buuri 0 231 3 0 6 250 0 1386 750 2136

Mukangu 1034 0 0 0 6 0 6204 0 0 6204

Ng’ondu 237 0 1 0 6 80 1422 0 80 1502

Ngecherok 41 0 2 0 6 100 246 0 200 446

Ngeteti 282 0 0 0 6 80 1692 0 0 1692

Nyamasaria 1557 0 1 0 5 250 7785 0 250 8035

Olepolos 683 0 2 0 8 250 5464 0 500 5964

Rabai Power 20 0 10 0 6 250 120 0 2500 2620

Rironi 789 0 4 0 5 250 3945 0 1000 4945

Rungiri 212 0 2 0 6 250 1272 0 500 1772

Tuiyobei 314 0 0 0 5 250 1570 0 0 1570

Totals 17,515 106 231 45 170,478 1,386 18,255 190,119

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Appendix K. Summary of Project Agreements and Amendments

Date Purpose Reference

April 3, 2006 Draft Eligibility Note for project GPOBA 2006

December 6, 2006 Grant agreement between IDA, IFC (TF057614),

and DFID (TF057615) to fund project IDA 2006

December 12, 2006 Grant agreement between IDA and the Netherlands

(TF057616) to fund project

March 5, 2007 Project effectiveness date

June 18, 2007

Grant agreement amendment to apportion project

funding equally among the three donors (TF057614-

IFC, TF057615-DFID, and TF057616-NETH)

Bruce 2007

December 28, 2007 Administrative Agreement between EU and

IBRD/IDA for TF070963 project funding EU 2007

December 18, 2008

Grant agreement amendment to extend closing date

to June 30, 2010 and extend project area to “a larger

geographic area”

Wormser 2008

December 31, 2008 Original closing date IDA 2006

June 17, 2010

Grant agreement amendment to extend closing date

to June 30, 2011 and to incorporate EU funding from

2007 (now called TF093392). Small reduction in

amount of EU financing.

Zutt 2010

June 22, 2011

Restructuring proposal to extend closing date to

February 28, 2013, and to set new target values for

certain indicators

World Bank

2011

June 29, 2011 Grant agreement amendment to extend closing date

to February 28, 2013 Zutt 2011

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Appendix L. Breakdown of Original and Revised Financing Figures Presented in Data Sheet

A: Basic Information

Normally the information in Data Sheet A would be generated by the Operations Portal system.

However RETF Trust Grants with concept notes approved prior to March 31, 2012 were only

required to have ICRs and Implementation Supervision Reports if they were stand-alone projects

above US$5million (RE Product Line - Large).19 Since this project fell into the category of

recipient-executed trust funded projects for which ICRs were not required, the Operations Portal

did not create an CR template with all the attendant data sheets.

Therefore, the CR Team manually constructed Data Sheet A, based on the following information.

Table L.1: Original Financing: Details of Figures Presented in Data Sheet A: Basic

Information

Trust Fund Donors Date Signed Original US$

TF057614 IFC December 6, 2006 575,650

TF057615 DFID December 6, 2006 575,650

Total 1,151,300

Note: The € 1,520,570 which the EU made available to the project through TF070963 from December 28, 2007, was

not incorporated into the amended grant agreement until June 17, 2010 as TF093392. See also Tables B and C below

and Appendix X.

Sources: IDA 2006, EU 2007. See Appendix K for a guide on which source provided which figures.

19 See Concessional Finance and Global Partnerships. 2013, Trust Fund Handbook: Digital Edition. Originally

published December 4, 2008. Updated July 2013, Section 5.3, Footnote 4

(http://www.cfpto.org/TFHandbook/index.htm)

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Table L.2: Details of Revised Financing (Original Grants) Presented in Data Sheet A: Basic

Information

Trust

Fund Donors Date Signed

Original Grant US$

(Revised June 2010)

Original Grant

(Revised June 2010)

TF057614 IFC December 6, 2006 383,767 --

TF057615 DFID December 6, 2006 383,766 --

TF057616 Netherlands December 12, 2006

(June 18, 2007#) 383,767 --

TF093392 EU June 17, 2010 Equivalent

US$1,837,227* 1,400,539

Approximate Total

in US$(US$1.31 =

€1.00)*: US$2,988,528*

# Project agreement amended June 18, 2007 to include the Netherlands TF (World Bank 2011). See Appendix K.

* CR Guidelines specify that the exchange rate should be the one on the project’s closing date, in this case February

28, 2013. The Client Connection>World Bank Currency Converter was used to determine this rate.

Sources: Bruce 2007, EU 2007, Zutt 2010. See Appendix K for a guide as to which source provided which figures.

Table L.3: Financing Not Included in Data Sheet A: Basic Information

Trust

Fund Donors Date Signed Original US$ Original €

TF070963 EU December 28, 2007# 1,520,570#

PPIAF SNTA 523,000

U.S. Development

Credit Authority February 18, 2008 5,000,000

# The grant agreement was not amended to include EU financing until June 17, 2010. At that time, a lesser amount

was included (see Table B above). Therefore, it has not been entered in the Data Sheet A. Basic Information. However

this additional funding had a profound effect on the project, enabling it to scale up from five districts (covered by the

Athi Water Sector Board) to all districts, and to increase the number of projects. The change in geographic scale and

the EU funding were incorporated in the project agreement as amended on December 18, 2008 (World Bank 2011).

See Appendix I for a timeline of project amendments.

Sources: EU 2007; GPOBA 2010

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Table L.4: Partial Summary of Donor Final Disbursements

Table does not include WSP and IDA financing.

Trust Fund Donors Date Signed Final Disbursement

(US$)

TF057614 IFC December 6, 2006 383,767

TF057615 DFID December 6, 2006 383,766

TF057616 Netherlands December 12, 2006

(June 18, 2007)# 383,767

TF070963 EU December 28, 2007

TF093392 EU June 14, 2010 1,455,183

PPIAF Sub-National

Technical Assistance Not available 350,000

USAID Development

Credit Authority February 18, 2008 Not available

# The grant agreement was not amended to include EU financing until June 17, 2010. At that time, a lesser amount

was included (see Table B above).

Source for Final Disbursements: The final Financial Management Report submitted for K-Rep Bank. The amount

of the EU grant is the reported disbursement (US$1,499,930) minus US$44,747 that K-Rep Bank is expected to

reimburse. The PPIAF final disbursement figure comes from personal communication with Rajesh Advani, former

TTL, August 2013.