SCARCITY TO SUSTAINABILITY: GREEN BONDS AS A PANACEA TO KENYA’S WATER AND SANITATION CHALLENGES

Kenya, a country renowned for its stunning natural beauty and rich diversity, faces severe water and
sanitation crises that put the well-being and socio-economic progress of its people at risk. Based on
the findings from the Kenya Demographic and Health Survey report of 2022, conducted by the Kenya
National Bureau of Statistics (KNBS), it has been determined that 68 percent of the Household population in Kenya have access to at least basic drinking water services with 41 percent having basic sanitation services.

Kenya has officially been classified by the United Nations as a water-scarce nation with 398 m3 per
capita per annum, indicating that the country possesses one of the lowest national water replenishment
rates. The scarcity of clean water and sanitation services poses significant challenges to public health,
environmental conservation and economic development. A country is classified as water-scarce if its renewable freshwater potential is less than 1,000 m3 per capita per annum.

 According to Food and Agriculture Authority, AQUASTAT Data and Agusto & Co. Research statistics, the rate of renewable internal fresh water resources of Sub-Saharan Africa is below 3374 m3 per
capita per annum. Tanzania leads with 1361 m3 followed by Uganda with 878 m3 and Rwanda with 723 m3.

Water Sanitation Crisis
The water and sanitation crisis in Kenya is characterized by insufficient access to clean water and
inadequate sanitation facilities, particularly in rural areas. Insufficient infrastructure, inefficient water
management practices and climate variability have exacerbated the situation resulting in water
shortages and an alarming rise in sanitation-related diseases. The crises have had severe implications
for public health, environmental degradation and overall socio-economic development. According to Kenya’s Ministry of Water, Sanitation and Irrigation, various capital models will be required to finance the country’s Kshs. 652 billion water funding gap and also implement the Kenya National Water and Sanitation Investment and Financing Plan (NAWASIP) over the next seven years towards 2030.

Capital Market Interventions
In response to this pressing issue, the Government of Kenya (GOK) has taken significant steps towards
promoting sustainable development particularly through the adoption of various financing mechanisms
including Green Bonds to address its water and sanitation crisis. In January 2019, the Capital Markets
Authority (CMA) of Kenya issued a Policy Guidance Note on Green Bonds outlining the procedure for
issuing and listing Green Bonds in the country. This policy also specifies the eligibility of independent
verifiers (such as Agusto & Co. Limited, which is licensed by the Climate Bonds Standard Board as an
Approved Green Bond Verifier) to provide verification services in line with the Climate Bond Initiatives
(CBI) standards.

Furthermore, the country’s premier stock exchange, the Nairobi Securities Exchange (NSE), has developed guidelines for listing Green Bonds which has paved way for the issuance of the first ever
and only Green Bond in Kenya, Accorn Holdings worth Kshs. 4.3 billion Green Bonds. The Green Bonds were cross listed in Nairobi and London in October 2019. The bond proceeds were used to construct low carbon student residential building; Qwetu student hostel at Strathmore University in Nairobi. This model of financing has helped in setting a positive precedent for Green Bond financing in Kenya.

In the bustling capital city of Nairobi, the county government, under the leadership of the Governor, H.E
Johnson Sakaja, has recognized the urgency of the situation and embraced the concept of Green Bonds. Currently, the Nairobi City County government is considering floating a Green Bond issue as a means of securing funding for the estimated Kshs. 150 billion-investment required to modernize the city’s infrastructure. These unique financial instruments aim to raise funds for projects that champion environmental sustainability. The ideas are simple but powerful: by channeling investments into eco-friendly initiatives, Nairobi City County could address the water crisis while also fostering economic growth, killing two birds with the same stone.

The Green Bond Initiative
Green Bonds are fixed-income financial instruments designed to raise capital for green projects with positive environmental impacts. Their emergence stemmed from the need to channel investments into eco-friendly initiatives, thereby addressing environmental challenges like water scarcity, pollution, soil erosion, loss of biodiversity, deforestation, global warming and waste disposal, amongst others. Green
bonds serve as a financing mechanism and offer a unique opportunity to mobilize long-term funds to
catalyse sustainable infrastructure development while simultaneously ensuring Kenya’s alignment with
the Paris Climate Agreement goals of reducing greenhouse gas emissions and transitioning to net zero
emissions by 2050.

Financing from Green Bonds can be utilized for the rehabilitation and expansion of existing water
treatment plants in rural counties to improve water distribution networks, enhance water conservation
practices and upgrade infrastructure to meet growing demand sustainably. These initiatives can help
tackle the water and sanitation crises, thus aligning with the United Nations Sustainable Development
Goal UN (SDG 6) of Clean Water and Sanitation for all.

Through the use of Green Bonds, Kenya and its 47 counties can proactively mitigate the water and sanitation crisis, contribute to reducing greenhouse gas emissions and attract foreign and local investors committed to sustainability and positive societal impact while also enhancing public health, creating economic opportunities and demonstrating transparent governance.

Green Bonds can be raised in local or foreign currency directly by the Government of Kenya, County Governments or through the use of a Special Purpose Vehicles (SPVs), wherein the project or
assets can be ring-fenced and serve as the primary source of repaying the obligation over a long tenor
while immediately resolving the water challenges. For example, in Tanzania, the Tanga Urban Water
Authority and Sanitation (TANGA UWASA) in Tanga City, is on the verge of issuing a USD$ 23 million
water infrastructure Green Bond. Proceeds from this Green Bond will fund the construction of water infrastructure in Tanzania, including the rehabilitation and expansion of drinking water supply networks, wastewater treatment plants and renewable energy-based pumping systems.

Critical Factors
Project selection, risk assessment and effective monitoring are three key areas that could prove difficult for the Green Bond approach despite its enormous potential. Consequently, addressing these problems requires establishing processes of openness, accountability, and efficient governance mechanisms. Kenya, like other countries is already feeling the negative effects of climate change and global warming, and now water scarcity is worsening as a result of protracted droughts. Without sustainable financing and investment in critical water infrastructure, access to clean water and proper sanitation facilities would continue to be limited, posing significant risks to public health, agricultural productivity and overall socio-economic development.

Therefore, urgent action through Green Bonds is essential to mitigate the effects of the water crisis
and build climate-resilient water systems that can sustain communities in the face of ongoing climate
change. In addition, expanding public awareness and investor education about Green Bonds will
play a crucial role in fostering support and participation capital-wise.

Conclusion
The Green Bond collaborative approach, coupled with innovative water and sanitation projects, will
ensure that sustainable financing solutions can significantly impact water security and environmental
conservation. As Kenya plans and continues to harness the essence of Green Bonds, it stands as a beacon of hope, inspiring other African nations to take up responsible and purpose-driven finance solutions to address pressing environmental issues to pave the way for a greener, more sustainable and eco-friendly future.