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Bachelor Thesis 2008

Water Investments
Pilot Study for a Water Fund in Kenya

Coaching Tutor: Dr. Jason Hauser, ZHAW Winterthur, May 28, 2008 Author: Alex Paur

Wahrheitserklrung (Statement of truth)


Ich erklre hiermit, dass ich die vorliegende Arbeit selbstndig, ohne Mithilfe Dritter und nur unter Bentzung der angegebenen Quellen verfasst habe. Alex Paur, Mai 2008

Contact: Alex Paur Harossenstrasse 3 8311 Brtten alex.p@bluemail.ch

Herausgabeerklrung des Dozenten


Die vorliegende Bachelor-Arbeit wird fr eine uneingeschrnkte Herausgabe1 freigegeben.

Winterthur, 28.05.2008

Jason Hauser

Unter Herausgabe wird sowohl die Einsichtnahme im Hause wie auch die Ausleihe bzw. die Abgabe zu Selbstkostenpreisen verstanden.

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Management Summary
Water is the most precious good on our planet, any form of life depends on it. From the 1.4 billion km3 of water on earth, only about 1% is available for human consumption. These 14 million km3 of fresh-water could satisfy the need of todays population if they were evenly distributed in time and space. Instead, water shortage is an ever present problem in many areas on our planet. Apart from quantity, water quality is an equally important item. About 2 billion people do not have access to adequate sanitation. Due to population growth, every day more people compete for the same amount of fresh-water and the per capita water amount available declines continuously. Water is becoming the most critical natural resource. This capacity constraint can only be faced by improving water management. However, compared to crude oil, natural gas or gold, little attention is being paid to water as a raw material and investment opportunity. This is even more surprising since water is the only raw material which is absolutely essential for the survival of every human being. In cooperation with Swisscontact East Africa this pilot study is exploring the feasibility of developing a water fund as an innovative saving product for the microfinance sector in Kenya. The objective is to get an overview of the water sector in Kenya, to tackle possible bottlenecks and challenges in the water management and to find solutions and potential investment opportunities along the value chain of water management. Water funds are already a well established investing and saving product in Europe. Pictet Funds S.A. and SAM Group were first to enter the market in 2001. Applying this model to a developing country as Kenya seemed to be far from reality, but research revealed the opposite. Although Africa is well known as a predominantly dry continent, Kenya has developed only a small fraction of its available fresh-water resources. Most water is abstracted from surface water, but ground water is used too. In addition to population growth, climatic variability as well as deforestation, water pollution and mismanagement are leading to water scarcity. A lot has changed in the water management of Kenya since 2002 when the new Water Act gave the impulse for the liberalisation of the market. The ongoing reforms clearly define the duties for sector actors. Efficiency has been well enhanced by shifting responsibility from governmental to private ownership of water services and by the decentralisation of decision making authorities.

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The project Water Fund Kenya will provide the Wananchi2 with a microfinance product linked to the life sustaining resource water. Investments in water management projects will accelerate economic growth as well as sustainable development, improve health and reduce poverty. The concerned parties are Swisscontact as project initiator, Equity Bank as fund manager and various companies in the water sector. The author travelled to Nairobi in April 2008 and met more than ten organisations from the water industry. He got an interesting insight into the water management of Kenyas capital Nairobi. It was surprising to see that a great number of private companies are involved in the water sector of Nairobi. Most of them heavily support the idea of the Water Fund. Nevertheless, investment opportunities were identified as major bottleneck for the project since none of those companies is listed on the stock exchange market. The finding of this study is that the project Water Fund Kenya is feasible. However, subsequent research must be executed for the implementation of the product. Another outcome of the various meetings in Nairobi is that Swisscontact organises a workshop with the visited agents. The objective is to bring together the many valuable, but often uncoordinated ideas of water projects in public schools around Kenya.

Wananchi is the Kiswahili word for the plain citizen in Kenya.

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List of content
Wahrheitserklrung (Statement of truth)................................................................. I Management Summary ............................................................................................ II List of content.......................................................................................................... IV List of acronyms ...................................................................................................... VI 1. Introduction ........................................................................................................ 1
1.1 1.2 1.3 1.4 Motivation.......................................................................................................... 1 Research methodology ..................................................................................... 2 Field study in Kenya .......................................................................................... 2 Scope and limits of this paper ........................................................................... 2

Part A - Water investments


2. A scarce resource .............................................................................................. 3
2.1 2.2 2.3 2.4 2.5 2.6 3.1 3.2 3.3 Water quantity................................................................................................... 3 Water quality ..................................................................................................... 4 Water cycle ....................................................................................................... 5 Access to water for everyone ............................................................................ 7 Water management........................................................................................... 8 Summary of chapter 2 ....................................................................................... 9 Water sector.....................................................................................................10 Existing water funds .........................................................................................11 Summary of chapter 3 ......................................................................................15

3. Investment ........................................................................................................ 10

Part B - Pilot Study for a Water Fund in Kenya


4. Water Management in Kenya .......................................................................... 16
4.1 4.2 4.3 4.4 4.5 4.6 Republic of Kenya ............................................................................................16 Kenyas water resources ..................................................................................17 Driver of water scarcity.....................................................................................20 Legislation and reforms ....................................................................................22 Challenges .......................................................................................................25 Summary of chapter 4 ......................................................................................27

5. Project Water Fund Kenya .............................................................................. 28


5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 Vision ...............................................................................................................28 Field study........................................................................................................28 Swisscontact ....................................................................................................29 Water sector in greater Nairobi.........................................................................29 Water supply in Nairobi ....................................................................................30 Financial product..............................................................................................33 Water Fund Kenya ...........................................................................................34 Feasibility analysis ...........................................................................................38 The authors personal experiences and opinion ...............................................43 Summary of chapter 5 ......................................................................................45

6. Summary and Conclusion............................................................................... 46 7. Bibliography ..................................................................................................... 48 8. List of tables..................................................................................................... 52 9. Addendum ........................................................................................................ 53


9.1 9.2 9.3 9.4 9.5 Interview with Daniel Wild ................................................................................53 List of company meetings in Nairobi.................................................................60 Water Map of Kenya ........................................................................................61 Water Availability..............................................................................................62 Impressions from Nairobi .................................................................................63

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List of acronyms
ASAL CAAC EAWAG Arid and Semi-Arid Land Catchment Areas Advisory Committee Eidgenssische Anstalt fr Wasserversorgung, Abwasserreinigung und Gewsserschutz (Swiss Federal Institute of Aquatic Science and Technology) FDI FP GDP GWI IPO KES MDG MSCI MWRMD NCWSC NGO NSE OECD SAM SME UN UNDP WHO WRMA WRUA WSB WSP WSRB WSTF ZHAW Foreign Direct Investment Finance Promotion Gross Domestic Product Global Water Market Index Initial Public Offering Kenyan Schilling (1 CHF = ca. 60.80 KES) Millennium Development Goals Morgan Stanley Capital International Index Ministry of Water Resources Management and Development Nairobi City Water & Sewerage Company Non-Governmental Organisation Nairobi Stock Exchange Organization for Economic Cooperation and Development Sustainable Asset Management Small and Medium-sized Enterprises United Nations United Nations Development Programme World Health Organisation Water Resources Management Authority Water Resources User Associations Water Services Board Water Services Provider Water Services Regulatory Board Water Service Trust Fund Zrcher Hochschule fr Angewandte Wissenschaften (Zurich University for Applied Sciences)

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1. Introduction
The initial idea for a water fund project came from Swisscontact East Africa in Nairobi. This study is a first step towards the implementation of a new financial product in the Kenyan market. It was carried out to judge the feasibility of the project and to identify opportunities, challenges and bottlenecks. This thesis is structured as follow: Part A Water Investments A scarce resource Investments Part B Pilot Study for a Water Fund in Kenya Water Management in Kenya Project Water Fund Kenya After the introduction, the paper starts in Part A with an overview of the resource water in general. Both water quantity and quality play an important role. Investment issues are outlined by looking at the water sector. A brief description of two existing water fund products is also given in this part. In Part B the Kenyan water sector is being explored. Kenyas water resources and their limits are discussed before looking at the water management and legislation in chapter 4. Then the author focuses on the fundamental idea of the study, the Water Fund Kenya. Chapter 5 consists mostly of the lessons learned during the authors field research in Nairobi, Kenya. On the basis of this paper Swisscontact will decide whether and how to continue with the development of the Water Fund project. To assist Swisscontact in this decision, a feasibility analysis is presented in chapter 5. At the end, the author expresses his personal opinion and impressions from his trip to Africa. Chapter 6 summarises the findings and conclusions of the study.

1.1 Motivation
Rather than writing a purely theoretical report, the author desired to work on a subject with strong relation to a practical issue. In November 2007 a contact with Veronique Su from Swisscontact East Africa could be established through a personal relationship. Veronique Su came up with the idea of a Water Fund in Africa. Her intention was to create a new state-ofthe-art saving and investing product in Kenya. No investigation whatsoever had been done on this subject at that time. The main driver for the authors motivation to develop the Water Fund Kenya project is his belief in water being the most important limited and irreplaceable

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natural resource on earth. He accepted the assignment for his Bachelor thesis. The topic was finally approved on November 28th, 2007 by Dr. Stefan Koruna, Head Business Administration Program of the Zurich University of Applied Sciences.

1.2 Research methodology


The author began with desk research in February 2008 right after the start of the thesis semester. Background information about the natural resource water and related investment possibilities were evaluated. An uncountable amount of books, reports and studies have been published during the last 50 years. To guarantee quality and relevance of the literature, the most current releases were considered. Furthermore, data disclosed by large worldwide operating organisations such as the United Nations and the World Bank were preferred. Between February and April 2008, the author contacted 22 organisations involved in the water sector around the world and an interview with Peter Wild from Sustainable Asset Management (SAM) was accomplished on March 17th, 2008. The written version of the interview is available in fully length in addendum 1.

1.3 Field study in Kenya


The author spent 6 workdays from April 11th to 21st, 2008 in Nairobi, Kenya. Swisscontact East Africa arranged for the author 14 appointments with water related institutions and companies and supported him in his research. Detailed information and results from those investigations are specified in Part B of this report. A list of all meetings held during this time is available in addendum 2. The discussions have not been recorded because this might have affected the confidence building process at the beginning of each meeting. Selected photos from this trip are shown in addendum 5.

1.4 Scope and limits of this paper


It is not the purpose of this paper to look at the social, ethical and humanitarian issues related to the human right to water access. That has been made in detailed reports by the UN, the WHO and other NGOs. It is also not the scope of this thesis to analyse business opportunities that arise from social and environmental problems in Europe, America and Asia. Instead, the paper attempts to use the available information to understand and analyse the water management in Kenya. The authors intention is to introduce the reader to the core good of the final product, the Water Fund. Furthermore, the scope lies on Part B, the pilot study for a water fund in Kenya. The result gives a first overview of the market and points out chances and challenges for the further development of the project.

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Part A - Water Investments


2. A scarce resource
Water is an essential life-sustaining element. It pervades our lives and is deeply embedded in our cultural backgrounds. The basic human needs of a secure food supply and freedom from disease depend on it3 UN Secretary Kofi Annan

2.1 Water quantity


Water is a multifaceted good. People not only consume water while drinking it but they also need it for cooking, washing, cleaning, irrigating and in many other ways. Much water is used in the industry and agriculture too. The total amount of water on earth is about 1400 million km3, but only a small fraction thereof is useable for humans.4 About 97.5% lies in oceans as salt-water not suitable for consumption. Two thirds of the remaining fresh-water are frozen in glaciers and icebergs and only about 1% of all the water on earth is basically available for consumption.5 This figure is likely to decline further as a result of urbanisation, contamination of water sources and climate change. The relation between total water amount on the globe and fresh-water available for consumption is shown in table 1.

Table 1: Water deposits on the planet earth

total water on earth

total fresh-water

fresh-water for consumption

Source: Own design (adapted from Helvetas; 2007)

2.1.1 Water shortage


While the amount of water on earth remains constant, demand is changing. The global climate change and the growing world population will lead to a higher demand of water and a
3 4 5

UN World Water Development Report 2; 2006; p. V Nestl Waters: http://www.nestle-waters.com/en/Menu/Environment/PreciousResource/A+precious+resource.htm; 04.03.2008 UBS Investment Research; 2006; p. 3

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shortage of water supply. According to the water report from Nestl Waters fresh-water available per capita risks dropping from 7300 m3 to 5100 m3 by 2025.6 If the available freshwater was evenly distributed in space and time, todays resources would be greatly sufficient to provide water for all. Instead, disparities in water resource distribution are getting worse. Water stress is a world wide phenomenon with regional effects.7 Therefore an analysis of the water shortage problem must take into account the regional differences. With the exception of Antarctica, all continents show concerned regions. In Europe for instance, Cyprus, Italy, Malta and Spain are among the most affected countries.8 Marq de Villiers suggests accomplishing water preservation by price mechanisms or by a more efficient usage through modern technologies.9 Water shortage is also closely related with the acute food shortage the world is facing at the moment.10 The main limiting factor for increasing the global agricultural output to meet rising demand is nothing else than water.

2.1.2 Virtual water


Virtual water is the amount of water that is embedded in food or other products needed for its production. In summer 2008, Professor John Anthony Allan from the Kings College in London and the School of Oriental and African Studies is being awarded for his in 1993 developed pioneer concept of virtual water.11 Human beings dont need water only for direct consumption such as drinking, showering or washing. Prof. Allans concept measures the amount of water required for the production of everyday consumer goods. For instance, a simple cup of coffee requires 140 litres of water to grow, produce, pack and ship the beans.12 He also demonstrated that meat production requires an enormous amount of water. There is a virtual flow of water from producing and exporting countries to countries that consume and import food corps or any other commodity. This is an important fact when speaking about population growth, consumer behaviour and water scarcity. A more resource conscious diet in developed countries could in fact spare water desperately needed in regions short of water. A water scarce country could save water by importing products that require a lot of water for their production, rather than producing them domestically.

2.2 Water quality


Every year some 5 million people die of water-borne infectious diseases. This high fatality rate is partly due to the fact that about 2 billion people have no access to adequate
6 7 8

Nestl Waters: http://www.nestle-waters.com/en/Menu/Environment/PreciousResource/A+precious+resource.htm; 04.03.2008 World Water Council (a): http://www.worldwatercouncil.org/index.php?id=5&L=0target%3D_blank; 06.03.2008 European Environment Agency; 2005; p. 114 9 Wasser, die weltweite Krise um das blaue Gold; 2000; p. 420 10 Media Analytics; 2008; p. 5 11 Presseportal: http://www.presseportal.ch/de/pm/100014749/100557318/stockholm_international_water_institute; 19.03.2008 12 World Water Council (a): http://www.worldwatercouncil.org/index.php?id=866&L=0; 03.04.2008

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sanitation, and the trend is rising.13 It is in the interest not only of developing countries but also the industrialized countries to find a solution to this problem.

2.2.1 Water treatment


Water treatment can be divided into purification, disinfection, desalination of sea water and monitoring. Disinfection of drinking water is mainly used for water treatment. Nevertheless, 80% of all contagious diseases are still disseminated by contaminated water. In some countries desalination of salt-water has gained importance. Desalination plants are expensive due to the high energy consumption. In addition, they release lots of greenhouse gases. However, the production costs have been lowered by 10% annually in the last few years and they continue to fall.14 Therefore, desalination will most probably gain more importance in the coming years.

2.3 Water cycle


The earths water cycle acts like a giant water pump that continually transfers fresh-water from the oceans to the land masses and back again. Through this system, water is being recycled. In this solar-driven cycle, water evaporates from the earth's surface into the atmosphere and is returned as rain or snow. Part of this water evaporates back into the atmosphere, another part flows in streams to the sea. Still another part drains into the soil turning into groundwater. Plants incorporate soil moisture into their tissues and release it into the atmosphere. Much of the groundwater eventually works its way back into the flow of surface waters.15 This hydrological cycle is shown in table 2.

2.3.1 Sustainability
It is a fact that the total amount of water on earth cannot be augmented, which means that today there is still the same mass of water than thousands of years ago. However, nowadays much more water is being tapped. Manhood depends on water and the worlds population is growing continually, increasing the demand for water rapidly. The way water is managed today is not sustainable as the groundwater table is sinking in most places and water quality is often insufficient.16 In the future, the industry will have to widen its focus and start thinking in terms of sustainable provision of water services.

13 14

SAM Study; Precious Blue; 2008; p. 4 Procontra; 2007; p. 65 15 USAID; 1998; p. 6 16 SAM Study; Precious Blue; 2008; p. 13

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2.3.2 Limited resource


Fresh-water should not be treated as a free resource but must be valued to reflect its status as a scarce resource. As the OECD mentions, clever pricing policies can encourage environmentally responsible water-use behaviour as well as ensure an adequate supply of water.17 To accomplish this, water should be valued appropriately in each of its various uses. The introduction of water markets and pricing mechanisms can have immediate and lasting impacts on water use. The questions whether water should be priced or not is a controversial issue. Bankers often reckon water as a commodity similar to gold or wheat. However, it must be taken into account that water can not be transported economically around the world. Thats why water is not freely tradable and must therefore not be seen as a normal commodity. There is not, and there will never be, one single price for water throughout the world.18 The hydrological cycle of water discussed in point 2.3 is shown next.
Table 2: The Hydrological Cycle

Source: USAID, Population Information Program; p. 36

17 18

OECD; 1998; p. 1 - 2 Wild, D.; Interview; 2008; Addendum 1

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2.4 Access to water for everyone


The human right to water entitles everyone to sufficient, safe, acceptable, physically accessible and affordable water for personal and domestic needs.19 People can not live without water and are dependent on access to fresh-water. For some, any attempt to ask a price for water is contrary to the ethical sense of free access to water as a human right. However, even many NGOs came to the conclusion that water has to be priced as an incentive for conservative use, especially in agriculture20. Daniel Wild agrees: Wasser ist ein Menschenrecht, aber es ist nicht gratis21 (water is a human right but it should not be for free). He also mentions the so called smart tariff systems which are getting popular in emerging markets. They control that a certain amount of water, for instance the first 50 litre a day, is for free or at a very low charge. Beyond this daily allowance the unit price increases sharply for those who want to wash their car or sprinkle their garden. Privatisation could be an option to improve efficiency and service at the local level, but in order for water to be retained as a human right across societies, this must be controlled by good governance, firm regulatory frameworks and strong institutions.

2.4.1 Millennium Development Goal


The 7th UN Millennium Development Goal intends to ensure environmental sustainability. One target is to reduce by half the number of people without access to safe drinking water.22 Hygiene and adequate sanitation are equally important for a sustainable development. Unfortunately, progress towards this target has been very modest. In fact, the situation is getting even worse because of population growth, urbanisation and economic development. More than 300 million people in Africa have no satisfactory access to safe water supply and sanitation.23 This results in the spread of water born disease from which about half of the African population suffer. To meet the water related MDG an investment of 20 billion USD24 each year is required:

2.4.2 Value of water


Water is not a normal commodity where demand and supply determine the price of the good. As long as there is sufficient water, it has virtually no value in consumers minds. Gasson says: From a position of relative abundance, a quorum of the worlds population becomes aware of the need to compete for diminishing water resources. The value users attach to
19 20 21

UN; Economic and Social Council; 2003; p. 2 UBS Investment Research; 2006; p. 19 Wild, D.; Interview; 2008; Addendum 1 22 UNDP: http://www.undp.org/mdg/goallist.shtml; 05.04.2008 23 UN-Habitat; 2006; p. 8 24 UN-Habitat; 2006; p. 10

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water starts to climb steeply 25. A higher valuation of water does not automatically result in a higher price for water services if there is no market to balance competing demands. However, it leads to conflicts, headlines, and higher priority on the political agenda. Those bad outcomes have at least the good side effect that investors interest in the sector will continue to grow, and public attitude towards water will continue to change.

2.4.3 Price of water


Den Preis von Wasser gibt es nicht 26 (there is no single price for water) says Daniel Wild from SAM but he immediately adds that there might be a common price for water within a certain region. The reason is that possibilities for transportation of water are limited. For instance, even if Switzerland has enough water and Australia is suffering from water shortage, Switzerland can not profit from the high demand in Australia because the water can not be brought to Australia. Therefore water is not an easily tradable commodity such as gold or wheat. It can only be traded economically in limited quantities in the form of bottled drinking water. According to Daniel Wild the sourcing price of water is normally under CHF 0.5 (= USD 0.47)27 per m3 in western countries.28 For tap water, the price is about six times higher because the whole water management, including the waste water purification, has to be covered too.

2.5 Water management


To improve the water situation in a certain region more than one approach should be taken into consideration. Managing water can mean to enhance supply, reduce demand, improve the handling or protect water resources in a sustainable way. Ismail Serageldin, Vice President for Environmentally Sustainable Development at the World Bank, identifies the following main problems in water management:29 Responsibility is fragmented among sectors and institutions There is too much dependency on centralised administration Undervaluation of fresh-water as a resource and water is not priced according to its economic value Policies do not connect the quality of water to health and environmental issues

25 26

Media Analytics; 2008; p. 5 Wild, D.; Interview; 2008; Addendum 1 27 Exchange rate CHF/USD per 09.05.2008 28 Wild, D.; Interview; 2008; Addendum 1 29 USAID; p. 26

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There are many agencies with interests in the water management but virtually no coordination of policies between sectors of the economy is established. Issues like water quality and health are often omitted because they do not fit within the mandate of any single government agency. Institutions charged with managing water supplies often lack technical competence. At the same time, there is little stakeholder involvement and community participation in setting water policies and regulating the use of water, so projects often do not meet people's needs. Many heavy users of water, such as farmers, receive subsidies from the government and in effect are encouraged to waste water that they otherwise probably would not waste. Most governments have found it politically more successful to develop new water supplies than to charge heavy users the full costs of water. In most cases water is viewed as an unlimited resource to be pumped around and used as often and as much as needed for any purpose. Without adequate consideration of water's key role in human and environmental health, it is no surprise that water resources are degraded nearly everywhere.

2.6 Summary of chapter 2


The natural resource water is also called the blue gold. Other than the precious metal, water is not freely tradable because it cannot be moved. A shortage of water in one area cannot be satisfied by an excess in another area. Not water in general, but access to clean fresh-water is a scarce resource. Less than 1% of the total water deposits on the earth are available for consumption to men. Moreover, water is not evenly distributed over the world. Many countries suffer badly from water stress and the situation is getting worse. The access to clean water is thought of being a human right. However, people must realise that fresh-water has a value and that its reservoirs are not infinite. Even many NGOs came to the conclusion that water has to be priced. Although water is being cleaned by the natural water cycle which transfers fresh-water from the oceans to the land and back again, water pollution is an issue. Many people die every year from water-borne diseases. Water purification, disinfection and desalination are therefore crucial for the well being of a nations population. Water is the most important natural resource. Its management must be improved in order to handle it in a responsible and sustainable way for further generations.

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3. Investment
Water is a scarce and therefore precious good. One important goal of this paper is to find out how investments into water can be made. Worldwide 400 to 500 billion USD are spent every year on the granting, conditioning and purification of water.30 In order to exploit all possibility of investment one should think about putting money into companies offering products and services along the entire value chain of water. Speaking about the value chains the following areas should be looked at in particular: Urban water management (e.g. cooling water) Agriculture (e.g. process water) Industry (e.g. energy production) Promising investments are often found not only at the level of the core product water but also up- and downstream the value chain. So-called enabling technologies and products are often particularly attractive, for instance household fittings, sanitary equipment and pipes.31 Companies may emerge as potential investment opportunities which at first sight do not seem to have any connection to water, but subsequently turn out to be indirectly related to the water sector. Examples are producers of more efficient irrigation systems, water treatment technologies, desalination technologies, pumps and pipes, water meter technologies to control usage and to track water quality.32 The WHO calculated that every dollar spent on water supply, sanitation and water resource management is an investment with a solid return.33 Investments in water can be an engine for accelerated economic growth, sustainable development, improved health and reduced poverty. Poor countries with access to improved water and sanitation services enjoyed annual average growth of 3.7% GDP, those without grew at just 0.1%.

3.1 Water sector


Traditionally, three sectors of water use are distinguished: The domestic sector including household and municipal uses, the industrial sector and the agricultural sector including water for irrigation and livestock.34 The water industry consists of an extensive variety of enterprises across industries and sectors. It can be distinguished between four global trends that shape the future development of the water sector:

30 31

SAM Studie; Zukunftsmarkt Wasser; 2007; S. 4 SAM Study; Precious Blue; 2008; p. 14 32 UBS Investment Research; 2006; p. 14 33 WHO; 2007; p. 1 34 World Water Council (a): http://www.worldwatercouncil.org/index.php?id=5&L=0target%3D_blank; 06.03.2008

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Demographic changes, Ageing infrastructure Increasing health awareness Controversy over the liberalisation of the water market These impacts will have consequences for the supply of a sufficient quantity of water to provide the service required, to assure adequate water quality for the service in question and to set up an appropriate infrastructure to transport water.35

3.1.1 Liberalisation of the water market


In most countries the supply of water is under public management. Nevertheless, the World Bank as well as the International Monetary Fund are in favour of the liberalisation and privatisation of the water sector. Opponents of the liberalisation fear uncontrollable price increases and a deterioration of water quality.36 Supporters of the liberalisation argue that water should be regarded as an economic commodity in the hope of putting a stop to the wasteful handling of water. The World Bank also issued development credits which were conditional on the privatisation of various government-run activities, such as water and wastewater services. To date, only a small minority of about 10% of the worlds population is supplied by private water companies. There also is a strong resistance from nongovernmental organisation against privatisation. Opponents main arguments are based on fears that companies will try to maximise their profits at the expense of the poor. That can happen through price rises for instance. The experiences with private water groups so far are rather mixed.37 To counterbalance the risks of privatisation, a strong regulatory authority issuing strict guidelines, within which the private companies may operate, is essential. On the one hand this means keeping the price below a socially acceptable upper limit; on the other hand it means guaranteeing safety and maintaining the pipe network. Privatisation will result in higher water prices because public sector cross-subsidies will cease.38 Modest price rises are justifiable for sustainability, as encouragement of economic use of water and as incentive for the industry for necessary investments into the infrastructure.

3.2 Existing water funds


While a wide range of sustainable and ecological funds have been available for some time, pure water funds are still rare. This might change soon. 2008 is said to be the year of the

35 36

SAM Study, Precious Blue; 2008; p. 6 Procontra; 2007; p. 63 37 SAM Study, Precious Blue; 2008; p. 11 38 SAM Study, Precious Blue; 2008; p. 12

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water initial public offerings (IPOs).39 Daniel Wild says that investment into water is a low risk investment compared to energy or information technology. As water funds follow a topic approach they do not fit into the traditional classification of funds such as industry, commodity, technology or nourishment investment.40 Water funds typically invest along the value chain of water and across many different sectors. Investment into water is lasting because there is no substitute which could replace water. Infrastructures, for instance water pipes, have a lifetime of up to one hundred years. The water sector is a stable, relatively slowly changing sector. Nevertheless, water funds can not resist the ups and downs of the stock markets in the short-term.

3.2.1 Performance of water funds


In 2007 investing into the water sector was worthwhile compared to other investment areas. Not different to other sectors, the highest gains were achieved by water stocks from China. The Asian market outperformed the others many times. To measure the performance of the water sector the GWI (Global Water Market Index) and the MSCI (Morgan Stanley Capital International Index) are used. The GWI rose by 20.1% in 2007 whereas the MSCI lost 1.9% in the same period.41 The two largest water funds today are the Pictet and the SAM Sustainable Water Fund. Recently other banks like UBS, Credit Suisse and Swisscanto launched water funds. All of them entered the market in the second half of 2007. Significant data are therefore not yet available.

3.2.2 SAM Water Fund


SAM (Sustainable Asset Management AG) launched their first water fund in September 2001. The focus of the fund lies on four investment clusters: 42 Distribution and management Advanced water treatment Demand-side efficiency Water and food 69 companies are currently listed in the portfolio of the fund. 48% of all companies in the portfolio are located in North America, 43% in Europe and 9% in Asia and Pacific. Africa and South America are not represented. The funds performance has been very attractive since

39 40

Media Analytics; 2008; p. 8 Wild, D.; Interview; 2008; Addendum 1 41 Media Analytics; 2008; p. 8 42 Wild, D.; Interview; 2008; Addendum 1

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the launch and has always exceeded the benchmark (MSCI World Index). Since inception in autumn 2001, the fund has gained 53.23%43 in value. Table 3 shows the ten largest positions in the portfolio.
Table 3: The 10 biggest companies in the SAM Water Fund Portfolio

1. Veolia Environment (France) 2. ITT (USA) 3. Danaher (USA) 4. Suez (France) 5. Geberit (Switzerland) 6. Chaoda Modern Agriculture (Hong Kong) 7. Pall (USA) 8. Roper Industries (USA) 9. Wavin (Netherlands) 10. Thermo Fisher Scientific (USA)
Source: SAM Sustainable Water Fund, 2008

3.2.3 Pictet Water Funds


Pictet Funds S.A., founded 1805 in Geneva, is a leading fund management bank. The water fund was introduced in January 2000 as the first water fund offered in the public market and today has the largest volume of all water funds. In 2001, the fund was awarded as one of the best investment ideas. Pictet advises a minimum investment period of 7 years. Since the launch of the fund the average performance indicates 13.61%. The accumulated performance from 2000 to 2007 amounts to 89.26%. Both geographic segmentation and also the companies in the portfolio are similar to SAMs water fund. However, Pictet has two major food producing companies, Nestl and Group Danone44 in its portfolio.

3.2.4 Comparison of performance


Pictet and SAM started their first water fund seven respectively six years ago. Daniel Wild is convinced that this is a crucial advantage because confidence and trust is very important for investors and can only be built over time. Practically nobody withdrew money from the SAM fund despite the recent crisis on the financial markets. This shows that investors understand

43 44

SAM, Sustainable Water Fund; 2008 Pictet; http://www.pictetfunds.com/public/folfundperformancechart.html?ci=122; 06.05.2008

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the perspective of the fund.45 The long term performance of both funds has been good and the fluctuations relatively low. In comparison, the water funds of Swisscanto and UBS were launched only a few months ago. Because of the mortgage crisis in the USA no sustainable performance has been achieved yet. Water funds are not yet prevalent as investment opportunity, but the given examples prove that the concept is successful. Further water-related finance product will enter the market in the years to come. In table 4 the annual performance of the two above described water funds and the MSCI World is depicted. In 2001 the SAM Water fund had not yet been launched. It can be seen that both funds always outperformed the benchmark MSCI World with the exception of the peak year 2005. Over all, the SAM Water Fund performed slightly better than the Pictet Water Fund.
Table 4: Performance of Pictet and SAM water funds versus MSCI World

2001 30 25 20 15 Performance in % 10 5 0 -5 -10 -15 -20 -25 -30 -35

2002

2003

2004

2005

2006

2007 Pictet SAM MSCI World

Source: Own design Data source Pictet and MSCI Wold: http://www.pictetfunds.com/public/folfundperformancechart.html?ci=122; 06.05.2008 Data source SAM: http://www.sam-group.com/htmld/products/water/performance.cfm; 06.05.2008

45

Wild, D.; Interview; 2008; Addendum 1

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3.3 Summary of chapter 3


The demand of water will follow the growth of the world population. Long-term measures are needed to assure an efficient water management. Private companies will become more and more important for managing and financing those investments. However, the market for water is still strictly regulated and the prospect of a high rate of return is limited. Furthermore, isolated investments do not yet guarantee sustainability. Desalination, for instance, affects the environment and the facilities account for a very high energy consumption. The first water funds entered the European market seven years ago. They almost always outperformed the Morgan Stanley Capital International Index. The portfolio of those funds consists mostly of large players from Europe and America. The good performance of the water funds prompted many other financial institutions to launch a water-related saving product in 2007. It can be assumed that investments in water management will further increase in the next years.

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Part B Pilot Study for a Water Fund in Kenya


In November 2007 Veronique Su from Swisscontact East Africa Financial Services had the idea of launching a water fund in Kenya. However, both the way to achieve this goal and the market conditions were totally unknown at that time. Therefore, the author was asked to write the present report. The task given by Swisscontact East Africa was: to get an overview of the structure of the water sector in Kenya to tackle possible bottlenecks and challenges in the water management to find solutions and potential investment opportunities along the value

The author will first give an overview of Kenya and its water resources. He than looks closer at the water fund idea and presents the result of the field study in Nairobi. At the end, a feasibility analysis including suggestions for further proceeding is carried out.

4. Water Management in Kenya


This chapter focuses on the water market in Kenya. The local conditions and water resources as well as the sectors structure are examined. The findings are applied in chapter 5 for the Water Fund Kenya. The most important economical figures of Kenya are shown in table 5.
Table 5: Figures about Kenya Area: Population: Population growth: Life expectancy at birth: Capital: GDP real growth rate: GDP per capita (PPP): Inflation rate: Unemployment rate: Population below poverty line: 582650 km 2.8 % (est.) 55.31 years Nairobi 6.3% 1'600 USD (est.) 9.3% (est.) 40% 50%
2

36'913721 (est.)

Source: CIA Fact Book: https://www.cia.gov/library/publications/the-world-factbook/geos/ke.html; 08.05.2008 and Kenya Official: http://www.kenya.go.ke/index.php?option=com_content&task=view&id=11&Itemid=1; 13.05.2008

4.1 Republic of Kenya


Kenya gained independence in 1963. The country is located on the East coast of Africa and lies on the equator. It is about 14 times larger than Switzerland and is bordered by five

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countries, namely Sudan, Somalia, Ethiopia, Uganda and Tanzania. 42 ethnic groups live together in the country which consists of diverse physical features: the low laying arid and semi-arid lands, the coastal belt, the plateau, the highlands and the lake basin around Lake Victoria.46

4.1.1 Conflicts after elections


On December 27th, 2007, Kenya held presidential, parliamentary, and local government elections. Until political unrest struck in early 2008, Kenya had, since gaining independence, maintained remarkable stability despite changes in its political system and crises in neighbouring countries. It was considered as a good example of development and democratisation. However, the elections at the end of 2007 gave rise to violence and tensions between ethnic groups. The instable situation lasted for several weeks and is continuing to present security issues for many Kenyans. Presumably, the outcome of the election was very tight between President Mwai Kibaki (Party of National Unity PNU) and the leader of the opposition, Raila Odinga (Orange Democratic Movement ODM). Both parties blamed each other for electoral fraud. The effects of this explosion of violence in the country are dramatic. Over 1000 people died in the aftermath and more than 300000 had to flee and abandon their homes.47 The sudden and unforeseen clashes came by surprise. However, they can not only be explained by the elections but brought also to light the further reaching frictions between social, politic and ethnic communities. Problems over land ownership have been neglected for too long. Under the mediation of former UN Secretary Kofi Annan, the two leaders have formed a new government on April 13th, 2008.48 The postelection crisis will have repercussions on the economic growth. The GDP forecast for 2008 had to be reduced by about 50% from 8% to 4%. Most hit by this plunge of growth will be the tourism industry.

4.2 Kenyas water resources


Kenyas natural water replenishment rate of only 647 m3 of renewable fresh-water per capita is rated as one of the lowest by the UN.49 Kenya is therefore classified as a chronically waterscarce country (see table 6). Compared to other African countries, Kenya belongs to the most affected regions. This can be seen in the table of addendum 4, where Kenya is listed at the third last place concerning water availability. Nonetheless, it has developed only a small fraction of its available safe water resources. The World Bank explains this discrepancy as

46 47

Kenya Official: http://www.kenya.go.ke/index.php?option=com_content&task=view&id=11&Itemid=1; 13.05.2008 GIGA; 2008 48 U.S. Department of State: http://www.state.gov/r/pa/ei/bgn/2962.htm; 17.05.2008 49 UN-Water; 2006; p. 138

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follow: There is no contradiction in the country being simultaneously water-scarce and able to safely exploit many times the current water usage. It simply means that not only does Kenya receive one of the worlds lowest per capita water replenishment rates each year, but that it has also not developed the limited amount of water available50. Many reasons can be found why the groundwater is not exploited more. Among them are the low levels of funding for assessment, uncoordinated efforts on development and lack of skilled people for monitoring and evaluation.
Table 6: Annual renewable fresh-water supplies

water stressed area water scarce area Kenya


Source: UN-Water; 2006; p. 3 + 138

= = =

1'000 - 1'700 m3/capita less than 1'000 m3/capita 647 m3/capita

The renewable water availability can be divided into two sources: Surface and groundwater resources. In Kenya, there is about ten times more surface water available than groundwater. Obviously, more groundwater is used in the arid and semi-arid lands (ASALs), where only little surface water is available. In contrast, in the cities the huge demand of water is covered by surface water, because the recharge rates of groundwater are limited. Nevertheless, groundwater is an important source of urban drinking water.51 The advantage of ground water is its cleanness. On the other hand, surface water is easier to collect but it has to be treated before it can be used. In Kenya, the morbidity disease pattern shows that over 60% of the diseases are waterborne or related to water. Most often is Malaria, followed by the respiratory system skin diseases, diarrhoea and intestinal worms.52

4.2.1 Surface water


About 2% of Kenyas area is occupied by water, or 11230 km2.53 There are five drainage basins in Kenya: the Tana, Athi, Ewaso Nyiro, Rift Valley and the Lake Victoria Basin. Most lakes are located around the Rift Valley Basin. Many of these lakes are saline. The largest is Lake Victoria with water availability of 11672 million m3. However, due to the great demand from Nairobi, the highest percentage of water is abstracted from the Tana River Basin, which

50

World Bank Working Paper No. 69; 2005; p. 8 World Bank Working Paper No. 69; 2005; p. 56 52 UN-Water; 2006; p. 30 53 UN-Water; 2006; p. 27
51

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has a volume of 3744 million m3 thereof 15.9% is being abstracted.54 The water map in addendum 3 shows the water basins of Kenya.

4.2.2 Ground water


Held in layers of porous rock or aquifers, ground water resources in Kenya are divided into five areas: the volcanic rocks area in the Rift Valley, the volcanic rocks area outside of the Rift Valley, the metamorphic basement rocks area, the eastern quaternary sedimentary rocks area and western quaternary sedimentary rocks area.55 Table 7 shows the above mentioned discrepancy between water deposits and extraction, divided into surface water and ground water.
Table 7: Development of Kenyan water resources

Surface and ground water abstraction in Kenya Million cubic meters per day 20 15 10 5 0 Surface water Ground water Actual abstraction Safe yield

Source: Own design (adapted from World Bank Working Paper No. 69; 2005; p. 10) Data Source: World Bank Working Paper No. 69; 2005; p. 8 9)

4.2.3 Water catchments


Water catchments are the areas where the water for the surface and groundwater is coming from. Five areas are distinguished in Kenya, the so-called Kenyas Water Towers: Mt. Kenya, Aberdares, Mau Complex, Mt. Eglon and Cherangani.56 Deforestation and poor farming methods are to blame for the degradation of catchments. The different areas of water catchments in Kenya can be seen on the Kenyan water map in addendum 3.
54 55 56

UN-Water; 2006; p. 10 World Bank Working Paper No. 69; 2005; p. 8 UN-Water; 2006; p. 36

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4.3 Driver of water scarcity


Water is a scarce resource in Kenya. There are different reasons why the situation is further deteriorating in the near future. Population growth, climate variability, deforestation, water pollution and mismanagement are the most important driver for water scarcity in Kenya. The legislator must provide appropriate measurement for improving the water management in the country. With the Water Act 2002 one step in the right direction has been taken.

4.3.1 Population growth


Water in Kenya is becoming scarcer simply because the demand is increasing as the population growth every year. Not only the population but also the water usage per capita rises. Individuals are using more water for domestic purposes and food security to the point where the needs are exceeding supply. Kenyas population will account 56481427 people in 2020, whereas per capita water availability will fall to 359 m3 per year and person.57 This trend is shown in table 8. The trend can be slowed down by improving the demand efficiency but it can not be stopped. The brown line indicates the population growth until 2020 and the blue one shows the per capita water availability for Kenya.
Table 8: Water availability compared to population growth

60'000'000

800 700 m3 / year 600

50'000'000 population

40'000'000 500 30'000'000 400 300 1999 2010 year population per capita water availability 2020

20'000'000

Source: own design Data source: UN-Water; 2006; p 32

57

UN-Water; 2006; p. 32

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4.3.2 Climatic variability


Damage of infrastructure, power rationing and food shortages are the result of climatic variability and water resource degradation. In the years of drought the immediate effect on agriculture is massive. The agricultural GDP indicates a disastrous deficit with the overall GDP following it.58 Such climatic variability is happening more often in the course of the worldwide climate change. This is a dangerous and threatening phenomenon for Kenya.

4.3.3 Deforestation
Forests are very important for the supply of water. Despite their economic and environmental importance, forests in Kenya continue to be destroyed. Groundwater loss increases because forests are the main absorption for rainwater. Replacing forest with annual crops will lead to a long-term increase in flows and more water will evaporate. There is evidence that after clearance of large parts of water catchments, dry season flows have decreased significantly. Forest clearance generally results in greater investment in infrastructure to achieve the same level of water storage. Furthermore, deforestation leads to increased erosion of the land.59 Big industrial users of water in Kenya, such as Coca Cola and Breweries, are involved in tree-planting projects. For the future development of the water resources in Kenya such commitments are important.

4.3.4 Water pollution


Water pollution appears in untreated urban sewage-water, industrial wastes, sea water intrusion into water aquifers, agricultural chemicals and so on. Regulations controlling polluting activities in place, but no enforced, are useless and simply transfer costs caused by private enterprises to the public sector or future generations.60 The only solution would be to make polluters paying the full cost of the damage. Therefore, monitoring in Kenya needs to be improved and the public awareness should be sensitised. The decentralised treatment plants are run by the local authorities and often operate at an efficiency of less than 50% because of poor management and handling. If contaminated water goes directly into the soil, health damaging crops can be the result of it. Water pollution arising from the industry descends from tanneries, textile mills, breweries, creameries, paper production and recycling plants, chemical processing industries, and slaughter houses.61 Farmers often use fertilizers and pesticides. Both are very dangerous for the environment and jeopardize the surface

58 59

UN-Water; 2006; p. 12 World Bank Working Paper No. 69; 2005; p. 91 60 World Bank Working Paper No. 69; 2005; p. 58 61 World Bank Working Paper No. 69; 2005; p. 60

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waters as well as the ground water. As a result, lakes suffer from invasive weeds and end up in a lack of oxygen.

4.3.5 Mismanagement and conflicts over water resources


More than 50% of water abstractions are estimated to be illegal.62 Existing records of resource assessments are incomplete in time and coverage. Inadequate water resource management imposes high cost on the nations economy. Likewise, there was no developed data network for the river gauging stations. This led to decisions which were based on inaccurate data and opened the doors for mismanagement. The result of such mismanagement are conflicts between groups of water users that sometimes end up in damage to property, violence and even loss of human life.63. Companies operating in regions where water is scarce, have to be aware that they are competing for an essential resource. It is important for them to avoid any bad headline that would damage their reputation.64 Especially critical are water sources that are shared by two or more countries. Such situations can easily become a point of conflict if there is no regional collaboration in place.65 On the world, there are lots of conflicts where the access to water resources plays a crucial role. The Indian Pakistan conflict or the Israel Palestine crisis are only two of them. Kenya shares water bodies with Uganda, Tanzania, Ethiopia and Somalia. It is essential for Kenya to strengthen its capacity to negotiate and manage those waters in sharing issues.

4.4 Legislation and reforms


The author met agents from the Ministry of Water, the Water Resources Management Authority and the Athi River Water Board. He was pleased by the straightforward communication and the commitment to further improvements in the water sector by the government. The Water Act 2002, described in point 4.4.1, was an important step towards more efficient water management, but everybody agreed that further developments and reforms are needed. The lack of legislative uniformity and the uncertainty of the reform process make it difficult for private investors to gain confidence in the system.66 Historically, the government has assumed the leading role as a water resource developer and manager, whereas the private sector has only been involved in groundwater development.67 For many years, the water management in Kenya was being neglected and the Ministry failed in putting up a coordinated water management. The lack of water has

62 63 64

UN-Water; 2006; p. 7 World Bank Working Paper No. 69; 2005; p. 58 UBS Investment Research; 2006; p. 7 65 World Water Council (b): http://www.worldwatercouncil.org/index.php?id=25; 27.04.2008 66 SBA Consulting; 2008; p. 5 67 World Bank Working Paper No. 69; 2005; p. 44

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become a limiting factor in some regions of Kenya for development activities. In the meanwhile, the management and protection of water resources to ensure that water is available for equitable allocation for all demands, including water for domestic and public use, industry, agriculture, energy, livestock, wildlife, tourism and ecosystems, has become a high priority.68 In 1997, the Ministry of Water and Irrigation started with major water sector reforms by putting in place provisions for service delivery as well as better management of water resources and services.69 In 1999, after two years of negotiating, Kenya adopted a new water policy introducing several important innovations: The policy takes an integrative approach, involving all relevant ministries in dialogues on water issues. The Ministry of Water is no longer a direct service agency but carries a coordinating and supporting function. Decision-making has been decentralised, and the concerns of local communities, as well as those of women, are consistently taken account of. The objective is to achieve a development in water resources that is ecologically sustainable and contributes to reducing poverty. Understanding the process the country has gone through in the past ten years implies to remember the times when Kenya was a British colony. Mahboub M., engineer and Permanent Secretary of the Kenyan Ministry of Water and Irrigation says: During colonial times all resources were at free disposal to the colonial authorities. When Kenya became independent, we had the impression that now all the resources should also be free available to the Kenyan people70. The attitude towards water of this people had to be changed before a new water policy process could have been started. It took two year to work out a new water policy. The main point was the changed role of the government from direct service provision to regulatory and enabling functions. There was also a consensus that appropriate tariffs were needed in order to raise the money needed for investments in further development of the waster sector. In so far, the user-and-polluter-pays principle was one of the most important steps. The involvement of other ministries was significant for the success.71 The Water Act was accepted in the year 2002 and stands for a marked shift in water delivery in Kenya.

4.4.1 Water Act 2002


The Water Act 2002 finally came into force in 2005. The political changes after the elections in 2002 helped a lot since the willingness for reforms was great afterwards. The political change was crucial for the realisation and implementation of the Water Act. Before the new elections at the end of 2007, Mahboub M. stated that the reform would not be reversed even
68 69

UN-Water; 2006; p. 7 Ministry of Water and Irrigation; 2007; p. 7 70 InfoResources; 2007; p. 1 71 InfoResources; 2007; p. 2

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if the government should change.72 The water Act defines the roles for sector actors clearly. The establishment of these institutions would allow for decentralisation, participation and sustainability in the management of water resources.73 Through the swift from governmental to private ownership of water services and the decentralisation of decisions-making authority, the efficiency has been enhanced. Even if in many areas less water is available than required, water availability has generally augmented due to water loss reduction. In conclusion, through the reform the water services and management have been improved significantly and the water sector is much more interesting for investors nowadays.

4.4.2 Structure after the Water Act


There are different levels in the structure of the Kenyan water sector. Delivery of water and water resources management are divided into seven Water Service Boards (WSBs) and six Catchment Area Advisory Commitees (CAACs). The Water Services Regulatory Board (WSRB) and the Water Resource Management Authority (WRMA) have regulatory functions. A non-governmental provider of services, such as Runda Water Company for instance, must sign an agreement with the Water Service Board. The structure including the level and task for each institution is shown in table 9.
Table 9: Structure of Water Act 2002

Name
Ministry of Water Resources Management and Development (MWRMD) Water Resources Management Authority (WRMA) Water Services Regulatory Board (WSRB) Catchment Areas Advisory Committees (CAACs) Water Services Boards (WSBs) Water Resources User Associations (WRUAs) Water Services Providers (WSPs)
Source: Own design (adapted from NCWSC; 2007; p. 5)

Level
National level National level National level Regional level Regional level Local level Local level

Task / Responsibility
Policy formulation Regulation Regulation Regulation Service Provision Service Provision: Water Resources Management Service Provision: Water and Sewerage Service

72 73

InfoResources; 2007; p.2 UN-Water; 2006; p. 7

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4.4.3 Trust Fund


It is not possible to find a provider organisation for all communities in Kenya. The Water Services Trust Fund (WSTF) has been set up to finance micro-projects and to provide direct funding for small communities which would otherwise suffer from the privatisation of water service delivery. Some companies first believed that Swisscontact wants to run a similar fund. It was the task of the author to make clear that this is not the case. The intention is to come up with a fully commercial fund. Development aid through donating money to individuals is not the philosophy of Swisscontact.

4.4.4 Result of the reform


The beginning of the process with the implementation of the new, decentralised structure posed a great challenge to all involved. However, the new political setting in 2002 favoured the reform process. Without the new government that came into power in that time, the reform could have hardly been implemented in this manner.74 Six years after the establishment of the decentralised structures, first positive effects can be seen. The water sector is functioning more efficiently and is able to react more promptly to the concerns of the population. Communities are involved in water management and water users contribute financially to the water sector according to a tariff structure. In autumn 2007, Mahoub M. was confident that the new structures are stable enough to persist in a changed political environment.75 Earlier than expected, the time has come for this to be proven.

4.5 Challenges
Currently, accessibility to water remains a major problem in rural Kenya and among the countrys poor urban dwellers 76 - Wanja Njuguna-Githinji, winner of the CNN African Journalist of the Year Award 2008 Even if the water supply has been improved, there is still a lot to do. Statistics show that over 50% of the rural population and more than 25% of the urban population have no access to clean water. In many areas of Africa the collection of water is still a task only carried out by women. As the demand for water and therefore its price increases, the poorest part of the population is the first one to suffer. The irony is that families living in poor informal settlements are paying much more for water compared to residents who are connected to the city council water meters. They also have to walk long distances and spend many hours

74 75 76

InfoResources; 2007; p. 4 InfoResources; 2007; p. 5 ITT Industries: http://www.itt.com/WATERBOOK/Kenya.asp; 09.05.2008

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hauling water. Another problem is the poor quality of tap water. Many people in Kenya boil or treat the water before consuming it because of fear of water borne diseases.

4.5.1 Privatisations
A new privatisation law was enacted in 2005 in Kenya. In the sequel the electricity generating company KenGen, Kenya Railways, Telkom Kenya and Kenya Re-Insurance have been privatized and in 2008, the government sold 25% of Safaricom.77 The shares were divided into very small pieces in order to give the poor population the opportunity to invest into the mobile company. Further privatisations in all sectors are anticipated. In a report written by Strategic Business Advisors it is said that finding the right structures to encourage private sector investments in the water sector became an imperative.78 Even organisations as the Kenya Association of Manufacturing became active in lobbying policy changes that envision a private sector solution in order to deal with the shortcoming of the public operator. Owners of real property, property developer and community based organisations have a huge incentive to invest in water services and sanitations. Property values are retained and enhanced by the availability of basic services. A number of private individuals are filling the gap in service provision by investing in boreholes, water tanks, standpipes and other systems.

4.5.2 Investments and risks


In the past years the average annual investment in water and sanitation systems in Kenya was approximately 35 million US Dollar per year. Only 38.5% thereof came from the government, the rest came from other countries as FDI. This shows that Kenya is depending on international investments.79 The African Development Bank assessed in 2007 a 67% investment gap for water supply and sanitation in Africa. Governments are required to raise their budget for the water sector and to encourage the private sector. According to Daniel Wild, getting a credit it is often easier for a private company than for a state.80 Water infrastructure requires intensive fixed capital investment, with the risk of eventual political and regulatory troubles when prices have to be raised. Furthermore, it should also be thought of the risk of reputation damage.81 The lack of governmental ability, will and means to expand infrastructure, gave rise to the model of public-private partnership framework. In Kenya, for instance, private companies operate water services while the government is holding a

77 78

U.S. Department of State: http://www.state.gov/r/pa/ei/bgn/2962.htm; 17.05.2008 SBA Consulting; 2008; p. 1 79 Global Water Finance; 2007; p. 35 80 Wild, D.; Interview; 2008; Addendum 1 81 UBS Investment Research; 2006; p. 19

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majority stake in those companies.82 Local conditions in Kenya are different from community to community. Thats way technologies and water systems should be varied among communities. Local research and the domestic peoples knowledge should be used to find the most efficient ways to invest. Foreign companies must discuss and assess the activities with the local population because they know which solution fits best.

4.6 Summary of chapter 4


Although Kenya was hit by political unrests at the beginning of the year, the country has a prosperous economy. With only 647 m3 of renewable fresh-water supply per capita and year, Kenya is known as a water scarce country. Nevertheless, there is a great potential for developing more water sources because only a tiny part of the deposits is used nowadays. Population growth, climate variability, deforestation, water pollution, mismanagement and conflicts over water resources are the main reasons for Kenyas water scarcity. A consequence of the strong population growth will be that the per capita water availability falls further. This trend can only be retarded by better water management. The water legislation is therefore very important for the country. The water sector reform including the Water Act 2002 empowered individuals in the sector and was essential for the development in the past years. The act allocates clearly the duties and responsibilities to the different actors in the sector. This also raised the incentives for private companies to enter the market. Major investment in infrastructure is needed in the near future in Kenya. This opens new opportunities for both, domestic and foreign investors.

82

UBS Investment Research; 2006; p. 19

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5. Project Water Fund Kenya


After the examination of water in general and the water market in Kenya in particular, the following part focuses on the idea of a new financial saving and investment product. The project Water Fund Kenya has been initiated by Ms. Veronique Su from Swisscontact East Africa and represents the root of the study.

5.1 Vision
Water can make a difference to Africas development if it is managed well and used wisely.83 UNEP and UN-Habitat, Africities Conference in Nairobi The authors vision is a water fund consisting of shares of different Kenyan companies along the value chain of water. There should be no restrictions to participating in the fund. The plain citizen in Kenya, the so called Wananchi in Kiswahili, will be able to invest his little savings in water and indirectly in his own future. Through the investments made by the fund, much more liquidity will be poured into the water sector of Kenya and companies will have the means to invest into water management and service. The result will be a win-win situation, both the investors and the companies will be better off. The overall goal of the Water Fund Kenya is to achieve economic development in the water sector and to improve the peoples standard of living in Kenya. Furthermore, it provides a saving product for the local, directly from water scarcity affected people.

5.2 Field study


The author travelled to Nairobi in order to collect data and information. Between 14th and 21st April he attended 14 meetings which lasted up to 3 hours. A list of all meetings is available in addendum 2. The discussions were very fruitful and also crucial for exploring the local situation. The authors main goal, among many others, was to tackle the following tasks: Who are the players in the water sector of Nairobi and how do they conduct business? What are the challenges in the water management of Nairobi and how are they faced? Spotting opportunities for investments and building relations for the development of the project.

83

UN-Habitat; 2006; p. 10

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As the research was made in a totally unknown and foreign environment to the author, local business culture and rules had to be considered. Confidence building was very important at the beginning of each meeting. The communication style was a mix of interview and discussion and notes were taken by the author. In most cases the met people were open minded, willing to provide information and very much interested in the idea of a water fund.

5.3 Swisscontact
Swisscontact is a non-profit organisation engaged in development cooperation. It was established in 1959 as a non-political foundation by a group of Swiss private businesses and universities. Its Head Office is located in Zurich, Switzerland. Swisscontact is currently implementing projects in 30 countries throughout Africa, Asia, Eastern Europe and Latin America. The organisation supports economic development by directly or indirectly influencing the living standards of target communities. Its goal is to promote sustainable private sector development in selected developing and transitional countries. The field of activities includes: Small and Medium enterprise (SME) promotions Financial services for SME and rural finance promotion (FP) Vocational education and training Reduction of urban environmental pollution Swisscontact promotes sustainable development according to their leading principle Helping others to help themselves84.

5.3.1 Swisscontact Financial Services East Africa


Swisscontact Financial Services East Africa is based in Nairobi and covers Kenya, Tanzania and Uganda.85 The team consists of six Kenyan employees plus the team leader, Ms. V. Su. They provide capacity building and technical assistance in the field of organisational development, human resources development, research, microfinance curriculum development and consultancy to local financial institutions active in microfinance.

5.4 Water sector in greater Nairobi


The field research was conducted in and around Nairobi because of Swisscontacts location in the capital of Kenya. Some findings are applicable for all Kenya, others must be further
84 85

Swisscontact: http://www.swisscontact.ch/english/pages/UB/UB_Wn.php?navanchor=2110041; 11.05.2008 Swisscontact East Africa: http://www.swisscontact.co.ke/home.html; 18.05.2008

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developed for other areas in the country. In the following chapter the findings and results of the field research are evaluated and discussed by the author of the paper.

5.4.1 Nairobi
Nairobi is the capital of Kenya. Officially, the population of Nairobi is almost 3 million people86 whereas estimations are much higher because of the informal settlements. Despite the postelection crisis, Nairobi continues to be the primary communication and financial hub of East Africa. It enjoys the region's best transportation linkages, communications infrastructure, and trained personnel, although these advantages are less prominent than in past years.87

5.4.2 Stakeholders in the water sector


One could think that the task of water management including extraction, purification and distribution is centralised and only carried out by the state, especially in a developing country such as Kenya. However, research has shown that many private companies are active in that field. The Water Act 2002, outlined in point 4.4.1, was a major enabler for privately owned companies to enter the market. There are many organisations with an interest in the water sector. Table 10 on the next page shows the stakeholders in the Kenyan water market. Agents from all areas but the striped ones have been contacted by the author during his research in Nairobi.

5.5 Water supply in Nairobi


Investments in water and sanitation are high in Nairobi compared with other parts of the country.88 Nevertheless, insufficient levels of public investment in water and sanitation service infrastructures have led to inadequate supply to meet the increasing population. Most of the surface water used in Nairobi derives form the Athi River. Groundwater is being pumped from beneath the city mostly by private users such as hotels or swimming pool owners. One challenge is to improve the poor state of the distribution system. A huge percentage of the water gets lost through leakage, illegal abstractions and other shortcomings. Also inefficiency in the handling of water is a problem. Wasteful usage by some people can even be observed during periods of drought. There are signs that the groundwater level in Greater Nairobi is lowering. However, no cogently studies have been pursued so far and no accurate figures are available. The abstraction of groundwater started in the early 50s. Nowadays, groundwater represents about 21% of the water supply in

86 87 88

Cities of the World: http://www.city-data.com/world-cities/Nairobi.html; 15.05.2008 U.S. Department of State: http://www.state.gov/r/pa/ei/bgn/2962.htm; 17.05.2008 Global Water Finance; 2007; page 37

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Greater Nairobi. Due to over extraction, the average well depth has increased from 60 to 84 meters89.
Table 10: Stakeholders in the Water Sector of Nairobi

Neighbouring Countries

General Public

International Organisations

Government

Water Sector
Investments Agencies Legislators

Water Management Institutions

Industry and Agriculture Sectors

Community based Organisations

Source: Own design

5.5.1 From the source to the consumer


In Nairobi water is either abstracted from rivers (surface water) or through boreholes (ground water). Collecting tanks for rainwater are seldom seen in the town but are used in remote areas of the country. After extraction, the water is purified with chlorine. Before distributing it to the consumer, the quality of water is analysed. In order to being able to charge the consumer for the water used, the consumption should be measured. Much water is lost through illegal abstractions and leakages. Another problem is the re-pollution of the water after purification as a result of the old and badly maintained infrastructure. Finding a solution to this problem means to take into account expensive investments in infrastructure. Table 11 on the next page shows the most common way of the water from the source to the end consumer and its losses during the distribution.

89

World Bank Working Paper No. 69; 2005; p. 56 - 57

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Table 11: From the source to the consumer

Loss by illegal abstraction

Re-pollution

Source: Surface or ground water

Purification

Loss by leakages

Source: own design

5.5.2 Quality of tap water


Most people in Nairobi would never drink tap water without having cooked it before because they dont trust in the quality of the water. The Nairobi Water Company as well as Runda Water90 purifies the water according to international standards. Both filtration and chlorination are used for that purpose. Samples of the water are being tested regularly. Nevertheless, the worries of the consumer are not completely out of reason. During distribution the purified water gets polluted again as a result of the badly maintained pipes. Better infrastructure would be needed to ensure sufficient water quality. Another method of purification is the application of UV light at the place of consumption. The installation of the technology is relatively expensive but also a promising investment for the future. Mr. Maina from Trojan UV mentioned that the widespread use of chlorination in Kenya is problematic. The application of chlorine is forbidden in North America by fear of health concerns since it might cause cancer. Furthermore, chlorine damages the infrastructure. UV light is a good alternative but difficult to apply for large quantities of water.

5.5.3 Nairobi City Water & Sewerage Company


Nairobi Water Company is the most important water provider in the city. It employs about 2000 people. The company is wholly owned by the Nairobi City Council and serves about 200000 customers. Water is sourced from different dams around Nairobi. Thika Dam is the biggest dam and has been visited by the author. It was built between 1989 and 1994 by a British company and provides 85% of the water extracted by the company. The dam is located at about 100 kilometres outside Nairobi and 2041 meter above sea level. Therefore,

90

These companies are presented in chapter 6.5.3 and 6.7.

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force of gravity can be used to transport the water in the pipes, so no pumps are needed. The water extracted from Thika dam is not sufficient anymore. Thats the reason way studies are carried out in cooperation with the World Bank in order to find new way to extract more water. The construction of a new dam would be critical since it implicates the resettlement of people living in the concerned area as well as damaging the natural environment.

5.5.4 Athi Water Services Board


The Athi River Basin drains an area of 67000 km2 that is used for agriculture and industrial production, but the area is also urbanised. The length of Athi River is about 591 km and its water quality after passing Nairobi is rated as poor due to untreated or semi-treated sewage from the capital.91 The AWSB had been founded to develop infrastructure and delivery of water and sanitation services in that area.

5.5.5 Informal settlements


Informal settlement is another name for the many slums in Nairobi. Kibera is even the largest slum throughout all Africa. 60%92 of the population of Nairobi live in informal settlements around the city. Often, water infrastructure is not fully developed in those areas and people have to walk long distance to get their water. Those circumstances are exploited by some water dealers who sell water to the people from the informal settlements. Mostly, they pay a much higher price per litre than normal tap water would cost them. However, community groups with the help of NGOs came up with innovative solutions for those areas to improve the situation. Community based organisations are self-help groups formed to provide basic services to residents in informal settlements, low income areas and rural villages. Pit latrines, drainage ditches, storage tanks and standpipes are some of the ways they are making water available.93 Another source of funds might be large companies which have set aside money for social responsibility issues, even though the motivation lies in a desire to improve their image and serves as a form of advertisement of their humane side.

5.6 Financial product


The goal of this project is to launch a fully commercial financial product in Kenya. In fact, only very few fund manager can be found in Kenya. Equity Bank, described in point 5.6.1, offers a wide palette of credit products, but only a few in the saving and investing area. The bank does not have a fund manager so far. It is not within this paper to analyse and describe the

91 92 93

UN-Water; 2006; p. 46 SBA Consulting; 2008; p. 3 SBA Consulting; 2008; p. 1

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detailed mechanism of a fund. However, the basic understanding of the product is important. Usually, a fund pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, or other securities.94 The capital gains of the companies, known as dividends in the case of listed shares, are passed along to the individual investors. Usually, the fund manager deducts the management fee from the dividends before forwarding them.

5.6.1 Equity Bank


When finally Equity Bank was named the best retail bank in Kenya and was variously referred to as the peoples bank, our partnership with our people, those in lower income brackets, was vindicated 95- Peter Munga, Chairman of Equity Bank Equity Bank and Swisscontact East Africa have been partnering for a long time. In 1984 the Equity Bank Society was founded with the aim to provide financial services to poor Kenyans. After struggling during the first 10 years of existence, the Society decided in 1994 to shift its focus from mortgages only to general microfinance. Diversification of risks was the reason for this move. As history illustrated, this strategic reorientation proved to be very successful. In 2004 Equity Bank became appropriately registered as a commercial bank as a result of remarkable growth. As a commercial bank, Equity Bank still follows its microfinance principles. During the authors stay in Nairobi, Equity Bank just opened its 80th branch in Kenya and announced the expansion to Uganda. During the last few years the Bank received many different awards such as the 2007 Vision Award at the Vision Summit in Germany or the Euromoney 2007 Award for Excellence. Equity Bank will be the financial institution responsible for the Water Fund Kenya. Even though the Bank doesnt have any fund products yet, they are very excited about the idea.

5.7 Water Fund Kenya


Basically, three parties are involved: The investors (1) who buy small part of the fund, the fund manager (2) who buys parts of companies with the fund money and the companies (3) who sell parts of ownership to the fund. As soon as the companies pay out some profit, the fund manager distributes it among the fund holder in proportion to their investment. This basic system of the Water Fund Kenya is shown in table 12 on the next page.

94 95

U.S. Securities and Exchange Commission: http://www.sec.gov/answers/mutfund.htm; 12.05.2008 Equity Bank; p. 4

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Table 12: Mechanism of the fund

Clients

Fund

Companies

Clients invest their money into the fund. They possess a small part of the fund accoring to their investments. The fund manager buys parts of companies. An ownership-certificate (stocks, bonds, shortterm money-market instruments or other securities) is handed over by the company. Companies make profits which are forwarded to the clients in proportion to their investment.

2 3

Source: Own design

5.7.1 Targeted investors


The Water Fund Kenya should not be restricted to anyone and no specific segmentation will be executed. Insofar, everybody is a potential client of the fund. A challenge might be to make the fund available for foreign investors from America, Asia and Europe. However, this issue is not in the scope of this paper. In a first step, the fund should focus on the individual in Kenya with a low income and little savings. Therefore, the fund must be available in very little pieces of about KES 1000 (= ca. CHF 17).

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5.7.2 Targeted companies


One important task of the study was to find out in which companies the fund should invest. Answering this question means looking at the idea of the fund, which is to profit from the high importance water has and will have in the future. Therefore, all companies making more profit if the importance of water management rises, are a potential target of the fund. They might be placed anywhere along the value chain of water, whether they deal directly with water or only provide facilities for it. In the following, companies that have been visited and would be interesting to invest in are described. It is important to notice that no analyses of their financial reports have been accomplished. A list of the meetings is available in addendum 2.

5.7.2.1 Equipment provider


Companies dealing with any kind of water-related equipment belong to the water value chain. It can be questioned whether a company which buys water pumps abroad and sells them afterwards in Kenya belongs to the water market. The author noticed that most companies dealing with such devices also have interests in any kind of water related project. Furthermore, equipment such as metering devices or purification systems is crucial for the development of the Kenyan water sector. Trojan UV Trojan UV is a Canadian company with factories in Canada, India and China. The company has entered the African market three years ago. Trojan UV is based in Nairobi but does also business in Uganda, Tanzania, Burundi and Rwanda. They are specialised in water treatment and provide technologies for municipalities, industries and privates for purifying water through UV light. The company is also engaged in water project and cooperates with various partners in the sector. The company is fully owned by its parent company in Canada. They have shown much interest in the water fund project and are ready to give assistance for the further development of the project. Davis & Shirtliff Group Davis & Shirtliff seems to be the market leader in water related equipment in the East African region. This purely Kenyan company has been founded in 1946 and their headquarters are located in Nairobi. They have regional subsidiaries in Uganda, Tanzania, Rwanda and Zambia. Davis & Shirtliff focuses their activities on water pumps, water treatment, swimming pools and solar products. Some products are in house made, other are bought from partners such as Trojan UV. The company is privately owned and managed.

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Tropical Hydrosystems Tropical Hydrosystems is a small company with 10 employees which provides equipments, installation and service for boreholes, water treatment and swimming pools. The company is privately owned and has been founded in 1998. They where also interested in the Water Fund and believe that the market will grow very much in the next few years. Engineering Supplies Ltd Engineering Supplies Ltd. deals mainly with water pumps which are imported from Italy and China. The headquarters are in Mombassa and about 40 people are employed in Nairobi. Their clients are, among others, hotels, borehole owners and agricultural firms. The company is not listed at any stock exchange.

5.7.2.2 Bottling companies


The increasing health awareness among the population is boosting sales of bottled water. The author met Aquamist, a local mineral water provider in Kenya but also spoke to Coca Cola East & Central Africa. Bottling companies are tightly surveyed by the public eye, because they had some bad publicity in the past. They are dealing with a highly sensitive market since they use a natural resource and transform it into an economical commodity with a price. Therefore, social responsibility is especially important in the bottling business. Aquamist Aquamist Limited Company is owned by its Indian founders and is 10 years old. They extract mineral water in the Great Rift Valley where they have a modern filtration plant and a washing, rinsing, filling and sealing machinery. Among others, Aquamist provides hotels, schools, airlines, embassies, supermarkets and hospitals with high quality drinking water. Their vision is to grow gradually and to expand to other East African countries in the near future. Regarding social responsibility they supply water to orphanage childrens home, churches, mosques and temples. They also raised money for the United Nations Malaria Campaign. Coca Cola East & Central Africa The company is a subsidiary and totally owned by its parent company in the USA. Coca Cola East & Central Africa has no production plant in Kenya but supplies contractors with the concentrate for producing soft drinks. They also set up new bottling plants with local investors. The pressure of social responsible behaviour is high because a world company such as Coca Cola can not afford any damaging publicity. Therefore, Coca Cola looks very carefully at its contractors behaviour.

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5.7.2.3 Water distributor


The main water management company in Nairobi, the Nairobi City Water & Sewerage Company, has already been described in point 5.5.3. Water distribution is, as in most other countries, in the hand of the state. However, there are privately run companies active in the Kenyan water sector. Runda Water Runda Water Limited is a private water service provider licensed to operate under the Water Act 2002. The company abstracts both surface and ground water. After extraction they treat and distribute it to different households in the Runda area. Runda is a well off district in the northern part of Nairobi. The company supplies only consumer from this neighbourhood. It started to operate in 1975 and currently supplies water to about 800 residential houses. Ruaka River is the main source of raw water for the company. It is allowed to abstract 2700 m3 of water daily by the Water Resources Management Authority. In January 2008 a 230 meter deep borehole was drilled which, however, does not provide enough ground water to be considered as an alternative source of water. As the quarter is growing rapidly, major investments are needed in the near future. 25% of the company belongs to the manager. The rest is hold by the Runda residents association. Runda Water not only supplies water, but also security guards, electricity and roads to its clients.

5.8 Feasibility analysis


On the basis of this thesis Swisscontact will decide whether and how to continue with the development of the water fund project. To assist Swisscontact in this decision, a feasibility analysis is presented next. For the practicability of the Water Fund Kenya the following questions must be considered: Are there enough companies in the water sector of Kenya? Are those companies available for investments by the Water Fund Kenya? Is there a demand for a Water Fund Kenya?

5.8.1 Companies in the water sector


First of all, it must be determined how many companies at least are needed for starting the Water Fund Kenya and which of them belong to the targeted water sector. Basically, a fund is nothing else than a risk diversification since the risk is spread over several shares respectively companies. As many people in Kenya hold only shares of one company, a fund

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consisting of two companies does already stand for a reduction of risk. In comparison, the water fund of SAM and Pictet, described in chapter 3.2, consists of about 70 different companies. The author suggests a minimal number of five companies for starting the fund. Later, more companies can be added. It must also be defined who belongs to the water sector of Kenya. The author counts all companies to the water sector which directly or indirectly act along the value chain of water. Therefore, if a companys turnover depends directly or indirectly on the demand and value of water, this company is interesting for the Water Fund Kenya. At the first sight one could think that there are only few, state-owned organisations dealing in the defined water sector. However, in only one week the author had the opportunity to meet nine different companies fitting in the above definition of the water sector. There are with no doubts many more companies which are worth to be considered too. Hence, there are definitely enough companies doing business in the water sector of Kenya.

5.8.2 Investment possibilities


A company is available for the Water Fund Kenya as soon as a part of it can be bought. If the companies were listed at the Nairobi Stock Exchange (NSE), it would be simple to buy a share of them. However, none of the contacted and above described companies are listed at any stock exchange so far. Even though more privatisations will occur in the next years in Kenya and some companies might even go public, listed companies in the water sector will still be rare. From the authors point of view, finding a way to invest in those companies will be the biggest challenge to the project. Private equity investment might be a possible solution. It should also be thought of broadening the focus of the fund. For instance, a water and agriculture fund would make it easier to find suitable companies because there are already agricultural companies listed on the NSE.

5.8.3 Demand in the market


A lot has been done in Kenya in the field of micro credits in the last few years, but there are almost no tailored micro investment or saving products available. The IPO of Safaricom in spring 2008 was a great success and has shown that people are eager to invest their little savings. Furthermore, Equity Bank has shown great interest in the Water Fund Kenya. The water topic is very current in the Kenyan newspaper and TV news since everybody is concerned. Potential investors are described in point 5.7.1. No market study on the demand side has been carried out yet but the author of this paper concludes that there is a strong demand because of the above mentioned reasons.

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5.8.4 Suitability test


Different companies have been presented in point 5.7.2. The author is going to assess their suitability for the Water Fund Kenya on the basis of table 13. The horizontal axis of the framework measures the grade of complexity to invest in the company. Companies on the left hand side are difficult to invest in, whereas for those on the right hand side investments are possible. The vertical axis measures the relation of the companys activities to water management. The higher a company is placed, the closer is its business related to water management. A company in the top right side corner of the graphic would be the perfect one for the Water Fund Kenya since it would deal directly with water and were easy to invest in. In the bottom left corner a company such as Safaricom would be placed. Safaricom is listed on the NSE hence it would be very easy for investing by buying some shares of it. However, Safaricoms business has nothing to do with water. On the bottom left hand side would be a company which does not deal with water at all and is also not available for investments. All companies visited during the authors stay in Nairobi are listed in the following graphic. Their position is shortly discussed afterwards.
Table 13: Suitability of companies for the Water Fund Kenya

Source: Own design

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5.8.4.1 Positioning of the companies


The companies were described one by one in point 5.7.2. The Nairobi Water Company in the top left hand corner is totally involved in water management and the company is state owned. If it were privatised, its position would slide to the right hand side. Runda Waters core business is also water management, but they provide other services too. Its position in the middle of the horizontal axis can be explained by the private legal form. As a bottling company, Aquamist is closely involved in the water business. It is also a privately owned company and there is no governmental involvement in that area. Even though Davis & Shirtliff is also a private company, the author got the impression that the patron is not willing to sell a part of his company. Tropical Hydro and Engineering Suppliers are two private and not listed companies. Engineering Suppliers is not so closely related to the water business because it is a pure dealer. Aquavit is part of an apartment company. If it were independent from the apartment business, it would shift to the left hand side. Trojan UV produces devices for water treatment. Their parental company is listed in Canada and seems to be interested in the Water Fund Kenya. Therefore, investment opportunities are estimated to be good. Looking at Coca Cola, it depends very much on whether we take the worldwide company or only Coca Cola East & Central Africa into consideration. Coca Cola East & Central Africa does not deal directly with water but contracts bottling companies. Therefore, their contractors are more closely to the water sector than Coca Cola itself.

5.8.4.2 Outcome of the suitability test


The most suitable company for the fund would be positioned in the top right hand corner of table 13. None of the investigated companies could have been placed there. However, many companies bustle in the middle. Further development in the water sector and upcoming privatisations will improve the picture and move the company to the right hand side. Drawing a line indicating which companies are close enough to water management for being considered for the fund, will be a strategic decision of the fund manager. Many companies from totally different stages in the water value chain are close to the water management business. This shows that the range of suitable companies is wide.

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5.8.5 Result of the feasibility study


The three questions raised at the beginning of the feasibility study can now be considered: YES ? YES

Are there enough companies in the water sector of Kenya? Are those companies available for investments by the Water Fund Kenya?

Is there a demand for a Water Fund Kenya?

The research clearly shows that enough companies can be found in the water sector of Nairobi. Furthermore, there is a demand for such a financial saving and investing product. On the other hand, a challenge will be to find a way to invest in those companies since they are not listed at the NSE. At this point, the question, whether it is possible to invest in those companies or not, cannot be fully answered. Further studies about this topic are needed. Nevertheless, one possible way to tackle the challenge might be private equity investment.

5.8.5.1 Private Equity


Private equity enables investments in companies which have not gone public and therefore are not listed at any stock exchange. Those can be young, rapid growing and expanding, but also large and mature companies. Returns on private equity generally occur when the firm goes public, is sold or merges with another firm or is recapitalized. Often, private equity investors are institutional investors who want to influence the company directly. Conducted in the right way, private equity investments result in attractive returns.96 Private equity investment might be a solution to the investment issue of the Water Fund Kenya, even though it is not the aim of the fund to intervene in the companies operational or strategic decisions.

5.8.6 Outlook
The present paper stands at the very beginning of the development of the Water Fund Kenya. The pilot survey of the water sector in Nairobi points out that the idea is realisable. Therefore, the author recommends progressing the project with the goal of launching the Water Fund Kenya in 2009. He also agreed to pass on the present report as well as additional information in a face-to-face meeting to the next person investigating in the project. The launch of the Water Fund Kenya, consisting of both finding companies to invest in and finding fund investors, will be the task of the fund manager at Equity Bank. Swisscontact East Africa can give support in this process.
96

UBS; Strategische Bedeutung von Private Equity; 2006

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5.8.6.1 Further studies on the financial instrument fund


Further studies on the financial instrument of mutual fund should be done. The goal will be to structure the fund and to explain the mechanism in detail. A close cooperation with the future fund manager, the Equity Bank, will be very important at this stage. At the same time a solution to acquire parts of not listed companies must be found. Most likely individual arrangements with the companies have to be established. Private equity investment, as explained above, is recommended to take into consideration. Furthermore, a lawyer with knowledge in the financial regulations of the local market should be included into the project.

5.8.6.2 Booklet of Water Fund Kenya


As mentioned, bilateral agreements with companies in the water sector will be needed. Good and trustfully relationships have to be established with the companies. Once the detailed layout of the financial product is clear, a booklet with all relevant information for the targeted companies could be printed. This booklet should explain how the product function and list the chances and challenges for the companies. The fund business is not prevalent in Kenya yet and many people dont know how a mutual fund functions. Therefore, such as booklet could help in convincing the companies to cooperate.

5.9 The authors personal experiences and opinion


For a long time it was not sure if I would be able to travel to Kenya. Two weeks before I took the aeroplane to Nairobi, I hadnt booked the ticket yet. Fortunately, and thanks to the flexibility of Swisscontact East Africa, I finally flew to Nairobi on April 11th. The ten days in Kenya were an extraordinary and unforgettable experience. Not only the arranged meetings but also all the discussions between were very enriching. I got known a country with two faces. On the one hand a very vibrant business life and totally friendly people, on the other hand groups of people who antagonise each other because of tribal and land issues. All Kenyans I talked to said that it is of most importance that peace was back in the country after the post-election crisis. They just want to go on with their normal life.

5.9.1 Think across boarders


Before my visit to Kenya, neither I nor anybody else I spoke to from Switzerland seemed to believe in the project Water Fund Kenya. In many heads the picture of Africa as a hopeless underdeveloped continent with no, or at least no functioning economy, is engraved. However, what I saw in Nairobi was the opposite, namely a highly potential and growing economy with a lot of opportunities. Coming up with a new idea and visiting companies and institution with no clear idea what the outcome could be, was an unconventional procedure,

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but it proved to be successful. In a rather young market as Kenya, things are still possible which would be unthinkable in our altitudes. It only needs an open mind and the readiness to think outside the box. Further unconventional ideas and solutions are needed for the ongoing development of the Water Fund Kenya.

5.9.2 Corruption
Corruption is by no doubt a problem in Africa and in many other areas around the world. Alone the fact that corruption is made a subject of discussion in Kenya showed me, that this issue is taken seriously and that people are willing to improve the situation. Almost all offices I visited were equipped with a notification of fighting against corruption. Discussions with different people in Nairobi, locals and foreigners, convinced me that business can be conducted in Kenya without corruption. For the future development of the country, it will be of utmost importance that corruption is also band from politics.

5.9.3 Future
I am convinced that the Kenyan market is doing well in the future. The unrests at the binning of this year have not changed the fact that Kenya has one of the strongest economies in Africa. It just slowed it down a bit. Reforms and political solutions are important for the country and I hope that the politicians in charge devote their work to the Wananchi97. The same applies to the many development aid organisations which sometimes seem to bring more harm than help. The principle of Swisscontact Helping Others to Help Themselves" through encouraging vocational training, promoting small and medium-sized enterprises and improving the possibilities for SMEs, is in my opinion the most promising and sustainable way to help. Even though this report contributes only a first step to the Water Fund Kenya, I am sure that it will be realised. Therefore, I am also highly motivated to forward all my experiences to the next person working on the project.

5.9.4 Workshop on water issues in Nairobi


It was difficult for me to draw a clear line between the idea of a totally commercial water fund in Kenya and the humanitarian challenges related to the topic. As a result of my stay in Nairobi, Swisscontact is going to organise a workshop with the people I met during the week. The goal is to coordinate and bring together the ideas and knowledge of those professionals in order to foster water projects in Kenyan schools. First meetings have already taken place

97

Wananchi is the Kiswahili word for the plain citizen in Kenya

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and the workshop is planned for mid or end of June. From my point of view, this is a fantastic initiative and I am looking forward to its outcome.

5.10 Summary of chapter 5


The vision of this project is to set up a water fund in Kenya. Both economic development in the water sector and improvements in the peoples quality of life can be achieved by this project. The infrastructure for distributing water in Nairobi is in bad condition. A huge amount of water is lost every day by leakages and illegal abstractions. Furthermore, once the water has been purified in a centralised station, it gets polluted again during distribution. Usually, water is managed by governmental institutions, but also private companies are active in that field. The value chain of water, from extraction to consumption, includes many more companies than only distributors. Equipment providers and bottling companies, for instance, gain its money in the water sector too. The Water Fund Kenya is a saving and investment product in the microfinance area. It is constructed for people with little money and gives them a small share of the large water sector. The authors field research in Nairobi revealed that many companies are involved in the water sector. The different parties involved in the project, Swisscontact, Equity Bank and the companies from the water sector, need to cooperate. In only one week many companies which are interested in the idea of the Water Fund have been encountered. The feasibility study suggests continuing with the project but also indicates challenges and bottlenecks. A way to invest in not listed companies must be found. Equity investment might be a solution. Further studies on the fund are needed but the author of this paper is convinced that the Water Fund Kenya is feasible.

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6. Summary and Conclusion


This thesis is the first step in the development of a microfinance product in Kenya. It is accomplished for Swisscontact East Africa, a non-profit organisation engaged in development cooperation. The paper points out potential investment opportunities along the value chain of water, provides an overview of the structure of the water sector in Kenya and tackles possible bottlenecks and challenges in the water management of Nairobi. Water is not only a free natural resource and of vital importance, but experts also agree on the fact that water is more than ever a scarce good. Contrary to the widespread perception, there is not too little water on the earth to satisfy the human needs, but poor management of water resources and climatic changes lead to water scarcity in many areas around the globe. Fresh-water supply is often undervalued and not priced according to its economic value. Responsible water management is crucial for economic growth as well as sustainable development and reduction of poverty. Demographic changes, ageing infrastructure, increasing health awareness and controversy over the liberalisation of the water market are issues that shape the water market. A shift from public to privately managed companies can be observed, but there is also strong resistance against those changes. It is feared that private companies do not ensure a socially responsible allocation of water. There is no doubt that the water industry is becoming very attractive to investors. Water fund products offered by financial institutions are relatively new in the market, but they have proved to be successful. The economy of the Republic of Kenya has progressed a lot in the last years and is performing well. Nevertheless, both the poverty and unemployment rates are still high. The recent unrests in Kenya have harmed the countrys good reputation for economical growth and democratisation. Kenyas water resources are limited and many people dont have enough fresh-water for daily life. The only way to change Kenyas stressed water situation for the better is to improve its water management. Reforms in the water sector were introduced and the Water Act 2002 enhances incentives for investments. The goals of the Water Fund Kenya are firstly to provide an investment instrument to the Kenyan citizen, which is linked to the most important source of life they have, secondly to give people around the globe the possibility to invest in a sustainable financial product in the emerging African market and thirdly to attract investments into the Kenyan water industry in order to foster sustainable development and access to clean water for the population. Making

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the fund affordable for every Kenyan requires a fragmentation into very small pieces of not more than KES 1000 (= ca. CHF 17). The field study in and around Nairobi revealed that the conditions for launching a water fund in Kenya are given. The water sector of Kenyas capital consists of many organisations from water distributors to equipment suppliers and bottling companies. All of them agree that water management in Kenya needs to be improved. In the near future, more companies will enter the market. The visited companies seemed to be very interested in the project. As none of them is listed at the stock exchange market, the biggest challenge is to find ways to invest in those companies. The next research will have to tackle this issue. The overall result of the study is the recognition that the Water Fund Kenya is feasible and the project should be continued. Investments in the water sector of Nairobi make sense and the project is practicable. However, further investigation, especially in the area of equity investment, is required. The immediate result of the various meetings in Nairobi between Swisscontact, numerous organisations from the water sector and the author is that Swisscontact will initiate a workshop with those people in June 2008. The goal is to promote the various excellent ideas of water projects in public schools across the country and provide a platform to discuss different concepts.

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7. Bibliography
Internet
CIA Fact Book: https://www.cia.gov/library/publications/the-world-factbook/geos/ke.html; 16.05.2008 Cities of the World: http://www.city-data.com/world-cities/Nairobi.html; 15.05.2008

ITT Industries: http://www.itt.com/WATERBOOK/Kenya.asp; 09.05.2008 Kenya Official: http://www.kenya.go.ke/index.php?option=com_content&task=view&id=11&Itemid=1; 16.05.2008 Nestl Waters: http://www.nestlewaters.com/en/Menu/Environment/PreciousResource/A+precious+resource .htm; 04.03.2008 Pictet: http://www.pictetfunds.com/public/folfundperformancechart.html?ci=122; 06.05.2008 Presseportal: http://www.presseportal.ch/de/pm/100014749/100557318/stockholm_international_water_ins titute; 19.03.2008 SAM: http://www.sam-group.com/htmld/products/water/performance.cfm; 06.05.2008 Swisscontact: http://www.swisscontact.ch/english/pages/UB/UB_Wn.php?navanchor=2110041; 11.05.2008 Swisscontact East Africa: http://www.swisscontact.co.ke/home.html; 18.05.2008

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UNDP: http://www.undp.org/mdg/goallist.shtml; 05.04.2008 UNEP: http://maps.grida.no/go/graphic/water_availability_in_africa; 20.05.2008 UNESCO: http://www.unesco.org/water/wwap/wwdr/wwdr2/case_studies/img/kenya_big.gif; 13.05.2008 U.S. Department of State: http://www.state.gov/r/pa/ei/bgn/2962.htm; 17.05.2008 U.S. Securities and Exchange Commission: http://www.sec.gov/answers/mutfund.htm; 12.05.2008 World Water Council (a): http://www.worldwatercouncil.org/index.php?id=5&L=0target%3D_blank; 06.03.2008 World Water Council (b): http://www.worldwatercouncil.org/index.php?id=25; 27.04.2008

Publications
European Environment Agency, the Europe environment State and outlook 2005: Freshwater, Copenhagen; 2005 Equity Bank, Celebrating our journey, Nairobi, Kenya; 2007 GIGA, Institute of Global and Area Studies, Institut fr Afrika-Studien Kenia: Wahlen und die Eskalation der Gewalt, Nummer 1, Hamburg; 2008 Global Water Finance, Assessment of the Funding Needed to Attain the Millennium Development Goals for Water and Sanitation, Hideyuki H., University of Pennsylvania; 2007

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Global Water Partnership, Technical Advisory Committee, Background papers No. 3, The Dublin Principles for Water, Solanes M. and Gonzalez F., Stockholm, Sweden; 06.1999 Helvetas, Wasser fr alle!, Die Herausforderung des 21. Jahrhunderts, Zrich; 11.2007 InfoResources, Water sector reform in Kenya: First experiences are positive, Interview with Engineer Mahboub Maalim, Permanent Secretary of Kenyan Ministry of Water and Irrigation, Bern; 2007 Media Analytics, Global Water Intelligence, Volume 9, Issue 1, Market Leading Analysis of the International Water Industry, Oxford, UK; 01.2008 Ministry of Water and Irrigation, the Water News, Volume 1, Nairobi, Kenya; 07.2007 NCWSC, Presentation at the Nairobi Water and Sewerage Institutional Restructuring Project, Milestones and Challenges, Nairobi; 04.05.2007 Procontra, Die Fachzeitschrift fr Finanzprofis, Wasser Zukunft Megachance, Wasser ist alles, Berlin; 04.2007 OECD, Water management performance and challenges in OECD countries, Paris; 1998 SAM Studie, Zukunftsmarkt Wasser, Zrich; 12.2007 SAM Sustainable Water Fund, Fact Sheet; 02. 2008 SAM Study, Precious Blue, Investment Opportunities in the Water Sector, 3rd edition, Zurich; 01.2006 SBA Consulting, A study of options for private sector participation in investment in secondary and tertiary water and sewerage infrastructure, Nairobi, Kenya; 2008 UBS Investment Research: Water scarcity: The defining crisis of the 21st century?, Knott S., New York, USA; 10.10.2006 UBS, Strategische Bedeutung von Private Equity, Nr. 3; 05.2006

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UN, Economic and Social Council, General Comment No. 15 (2002), Geneva; 20.01.2003 UN-Habitat, UNEP, Millennium Development Goal 7, Ensure Environmental Sustainability, Nairobi; 09.2006 UN-Water, Wold Water Assessment Programme, Kenya National Water Development Report, Kenya; 2006 USAID, Population Information Program, Solutions for a Water-Short World, Baltimore, Maryland, USA; 09.1998 Wasser, die weltweite Krise um das blaue Gold, De Villiers, M., Econ Ullstein List Verlag, Mnchen, Germany; 2000 WHO, Driving development by investing in water and sanitation, Five facts support the argument, Geneva; 05.2007 World Bank Working Paper No. 69, Climate Variability and Water Resources Degradation in Kenya, Improving Water Resources Development and Management, Washington, USA; 2005

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8. List of tables
Table 1: Water deposits on the planet earth .......................................................................... 3 Table 2: The Hydrological Cycle ............................................................................................ 6 Table 3: The 10 biggest companies in the SAM Water Fund Portfolio ..................................13 Table 4: Performance of Pictet and SAM water funds versus MSCI World ...........................14 Table 5: Figures about Kenya...............................................................................................16 Table 6: Annual renewable fresh-water supplies ..................................................................18 Table 7: Development of Kenyan water resources ...............................................................19 Table 8: Water availability compared to population growth ...................................................20 Table 9: Structure of Water Act 2002....................................................................................24 Table 10: Stakeholders in the Water Sector of Nairobi .........................................................31 Table 11: From the source to the consumer .........................................................................32 Table 12: Mechanism of the fund .........................................................................................35 Table 13: Suitability of companies for the Water Fund Kenya...............................................40

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9. Addendum
9.1 Interview with Daniel Wild
Interview mit Daniel Wild, Senior Water Analyst bei SAM Sustainable Asset Management AG Datum: 17. Mrz 2008 Ort: Seefeldstrasse 215, 8008 Zrich Die Grundlage unseres Gesprches war der Sustainable Water Fund von SAM sowie die SAM Studie Zukunftsmarkt Wasser. Herr Wild hat das Interview gegengelesen und am 2. April 2008 dieser Version zugestimmt. Was ist das Erfolgsrezept von SAM im Bereich Wasserfond? Ein Vorteil ist sicher, dass wir schon sehr frh angefangen haben und deshalb viel Erfahrung in diesem Beriech haben. Fr Investoren ist es wichtig zu sehen, dass wir etwas machen, von dem wir berzeugt sind. Erfahrung ist gerade in diesem Geschft sehr wichtig, denn es besteht immer noch ein grosses Risiko, da man ja nicht weiss, was die Zukunft bringt. Aber immerhin haben die Investoren die Gewissheit, dass hier Leute am Werk sind, die etwas vom Thema verstehen. Haben Sie mit Investitionen in Wasser im 2001 begonnen als Sie diesen Wasserfond lancierten oder gab es schon zuvor hnliche Projekte? Dies ist unser erster Fond im Wasserbereich. Im Herbst 2001 starteten wir mit dem Wasserfonds. Die Performance bis heute ist sehr attraktiv. Gemessen am Benchmark, dem MSCI World Index (Aktienindex, der die Entwicklung von weltweiten Aktien widerspiegelt), hat er sogar berdurchschnittliche Ertrge abgeworfen. Dies ist, insbesondere wenn man die Risikokennzahlen des Fonds bercksichtigt, sehr gut, da diese relativ tief sind. Im Gegensatz zum IT- oder Energiesektor, wo man nicht weiss wohin sich die Zukunft entwickelt, ist der Wassersektor stabiler und die Risiken sind deshalb tiefer. Die Technologien im Bereich Wasser sind grundstzlich bekannt und die Entwicklung ist trge, da die Lebensdauer der Technologien sehr lange ist. Dies erstaunt mich jetzt doch einwenig. Ich habe gedacht, das Risiko bei diesem Fonds werde als hoch eingestuft? Schauen wir uns einmal die Risikokennzahlen an. Ein Faktor ist die Standartabweichung, welche tiefer als diese vom Gesamtmarkt ist. Wenn Sie also die Schwankungen des Fonds anschauen, sind diese kleiner als jene der Gesamtbrse. Selbstverstndliche kommt es aber immer darauf an, mit was sie den Fonds vergleichen. Natrlich sind Bonds sicherer. Oder wenn Sie beispielsweise nur Aktien von traditionellen Anbietern, z.B. den Stadtzricher Wasserwerken kaufen, ist das Risiko auch sehr tief, da es sehr unwahrscheinlich ist, dass jemand mit einer anderen Technik diese bertrumpfen wird. Aber wie gesagt, zu den Hochrisikofonds werden IT bzw. Technologien im Allgemeinen und Energien

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gezhlt. Wasser gehrt da nicht dazu. Was das Risiko ebenfalls erhht ist, wenn sie kleine Firmen haben. Es liegt in der Natur der Sache, dass man im Wasserbereich viele kleine bis mittlere Anbieter hat, welche auch anflliger auf Strungen sind. Weiter spielt das Currency-Risk mit. Der Fonds ist in Euro, je nach dem wo der Investor ist, kann er profitieren oder aber verlieren. Amerikaner investieren indirekt in Euro, wenn sie in den Fonds investieren. Dies gilt aber fr alle Fonds. Ein gewisses Kursrisiko besteht natrlich auch bei Firmen, die weltweit ttig sind. Zuletzt wird noch der Management style beurteilt. Hier unterscheidet man zwischen Growth und ValueFirmen. Also Firmen, die interessant sind, weil sie sehr stark wachsen und die Gewinnaussichten in der Zukunft liegen, dies sind eher kleine Firmen, die z.B. neue Patente erwerben oder Mrkte erschliessen und die Value-Firmen, die bereits eine starke Stellung haben, wo man also auf ein regelmssiges Einkommen zhlt. Weil wir aber Themenfonds haben und oft querdurch investieren, kann man uns oft nicht in solche Schubladen einteilen. Wir haben aber tendenziell mehr Growth-Firmen in unserem Portfolio. Gab es auch Probleme bei der Lancierung des Fonds? Eines der Probleme war sicher, wie soeben angesprochen, dass die Leute mit einem solchen Themen-Approach nicht so komfortabel waren. Im letzten Herbst haben wir unsere Fonds in den USA lanciert und wenn man mit den Amerikaner redet, dann sind diese etwa soweit wie dir Europer vor 5 Jahren. Sie wollen wissen, ob es nun ein Value- oder ein Growth-Fond ist, oder ob es sich um ein Commodity- oder Industrialfond handelt. Hier gibt es sehr viele Missverstndnisse, weil wir nicht mehr in diese traditionellen Gefsse passen. Das Problem ist, dass die Amerikaner oft Vorgaben haben und die Fonds nach den erwhnten Kriterien einteilen mssen. Die meisten Kunden reagieren aber flexibel. Ist Wasser jetzt eine Commodity oder nicht? Das ist die Schwierigkeit dieses Themas. In der Finanzwelt wird Wasser oft als Commodity wie z.B: Gold oder Weizen betrachtet. Dies ist aber nicht korrekt, weil wir Wasser nicht auf der ganzen Welt herumschicken knnen. Es gibt keinen Marktpreis fr Wasser und es wird auch nie einen geben. Da mchte ich gleich Nachhacken. Was ist den der Preis von Wasser? Wie setzt sich dieser zusammen? Den Preis von Wasser gibt es nicht. Im besten Fall knnen Sie einen Preis von Wasser in einem Einzugsgebiet definieren. Da gibt es ein paar interessante Beispiele, z.B. hat Las Vegas angeboten, Meerentsalzungsanlagen in Kalifornien zu bauen mit der Idee, dass Kalifornien weniger Wasser dem Colorado River entnimmt und dann mehr fr Las Vegas brig bleibt. Wasser bekommt damit einen Wert, nmlich jener der Produktionskosten der Entsalzungsanlagen. So kann ein Wasserpreis zustande kommen. Oder in Gebieten von Australien, wo man eine Wasserbrsen eingefhrt hat. Auch da kommt ein Preis zustande. Nur ntzt dies Kenia wenig, wenn der Wasserpreis in Australien hoch ist, weil der Transport von Wasser nicht mglich bzw. zu teuer ist. Es gab verschiedene Versuche dieses Problem zu lsen, beispielsweise mit Eisbergen herumziehen. Diese sind aber alle an den Kosten gescheitert. Man kam auf ca. 1 CHF pro Liter, wobei der Wasserpreis sonst eher 0.5 CHF pro Kubikmeter entspricht, also 1000 bis 2000 Mal weniger.

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In Ihrer Wasserstudie habe ich von einem durchschnittlichen Wasserpreis von 2.2 Euro pro Kubikmeter gelesen. Wie setzt sich dieser zusammen? Man muss genau definieren, von welchem Preis man spricht. Hier reden wir vom Preis, welcher der Konsument zu Hause bezahlt. Dazu kommen hier die Kosten fr das ganze Wassermanagement inklusive fr die Abwasserreinigung. Aber der Rohwasserpreis ist natrlich viel tiefer, meist weniger als 50 Rappen pro Kubikmeter. Kann man grundstzlich sagen, dass Obenflchenwasser gnstiger ist als Grundwasser? Nein, dies kommt ganz drauf an. Obenflchenwasser muss man nicht mhsam rauspumpen, dafr muss es behandelt werden. Grundwasser kann man oft ohne Behandlung trinken. Manche Grundwasserleiter haben sogar eine Spannung, es muss also nicht einmal gepumpt werden, es spritzt einfach raus. Zurck aber zu unserem Wasserfonds. Dieser ist weniger daran interessiert, in eine Commodity zu investieren, sondern wir wollen in die gesamte Wertschpfungskette des Wassers investieren, also ins Wassermanagement auf allen Ebenen. Auch die Verbraucherebene ist sehr wichtig. Hier geht es vor allem um Effizienz. Oft kann man auf der Verbraucherseite sehr viel einsparen. Gerne wrde ich die genaue Zusammensetzung der Fonds anschauen. Wie viele Firmen deckt der Fonds ab? Im ganzen Fonds haben wir ungefhr 70 Firmen. Sind diese Firmen alle im Wassermanagement ttig? Dies ist unterschiedlich. Z.B. hat es Industrietitel wie ITT, die Equipment herstellt, vertreibt und verkauft. Dann gibt es eigentliche Wasserversorger, dazu gehren Veolia und Suez. Weiter gibt es Chaoda, welche nachhaltige Nahrungsmittelproduktion in China betreibt. Geberit wiederum steht dann mehr auf der Verwenderseite. Wavin ist ein Rohrhersteller und Thermo Fisher stellt analytische Gerte her, mit denen man die Wasserverschmutzung messen kann. Wir halten uns auch an ein Investment Cluster. Dort sehen Sie, dass der ganze Landwirtschaftbereich sehr wichtig ist, weil er 70% des Wasserverbrauchs ausmacht. Damit verbunden sind die biologische Nahrungsmittelproduktion sowie die effiziente Bewsserung. Wichtig sind auch Wasserzhler. Solange man nicht fr Wasser bezahlt, fehlen die Anreize zum sparsamen Umgang mit Wasser. Gibt es eine Definition, wie Wassernah ein Geschft sein muss, damit es in den Wasserfonds reinpasst? Grundstzliche muss eine Firma 20% des Umsatzes im Wasserbereich erwirtschaften, damit wir sie im Wasserfond aufnehmen knnen. Es gibt aber Ausnahmen, wenn eine Firma durch ihre Strke und Position ein sehr wichtiger Player ist, auch wenn sie weniger als 20% im Wasserbereich umsetzt. Ein Beispiel dafr ist Siemens, in welche wir investiert haben. Das Management von Siemens hat ein klares Commitment abgegeben, dass sie den Wasserbereich bei Siemens ausbauen wollen. GE hingegen haben wir nicht aufgenommen, weil sie nur 2% Umsatz im Wasserbereich hat. Ziel ist es

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schon, Firmen zu finden, die mglichst viel im Wasserbereich machen. Wenn man alle 69 Firmen im Portfolio betrachtet, erwirtschaften diese im Durchschnitt 50 bis 55% des Umsatzes im Wasserbereich. Mir ist aufgefallen, dass keine Getrnkehersteller im Fonds sind wie z.B. Nestl oder Coca -Cola. Was ist der Grund dafr? Wir haben Getrnkehersteller nicht ausgeschlossen. Die Diskussionen darber werden oft sehr kontrovers gefhrt. Wir haben zum Beispiel Danone, ein wichtiger Mineralwasserhersteller, drin. Wenn Sie aber unsere Studie lesen, dann sehen Sie, dass all die weltweiten Wasserprobleme nicht mit Flaschenwasser gelst werden knnen. Flaschenwasser ist viel zu teuer. Aber natrlich ist Trinkwasser das Wichtigste wenn es um Qualitt geht. In China besteht ein reisen Markt fr Flaschenwasser. Wir erwarten, dass der Konsum dort noch stark anwachsen wird. Unser Hahnenwasser in Europa ist eigentlich sehr gut, jedoch zeigen neue Studien aus Deutschland, dass unser Wasser doch nicht immer so sauber ist. Grundstzlich schliessen wir also Firmen nicht aus, die Wasser abfllen, wir achten aber darauf, dass wenn sie es schon machen, sie dies in bereinstimmung mit Sozialenund Umweltansprchen machen. Wasserrechte mssen bercksichtigt werden und natrlich darf die Natur nicht darunter leiden. Haben Sie Kenntnisse darber, wie das bei Nestl konkret aussieht? Nestl besitzt ja viele Flaschenwasserfirmen und kam deswegen auch schon unter Beschuss. Unterdessen hat Nestl aber Vorsichtsmassnahmen getroffen und arbeitet mit der lokalen Bevlkerung zusammen. Es ist aber gut, wenn die ffentlichkeit diese Ttigkeiten kritisch beobachtet. Nestl ist aber auch interessant, weil sie massgebend bei der Sustainable Water Initiative beteiligt ist. Hier geht es um den nachhaltigen Umgang mit Wasser im Landwirtschaftsbereich. Geographisch sind Europa, Amerika und Asien abgedeckt, in Afrika haben Sie jedoch keine Investitionen. Warum? Dies ist schwierig, weil wir nur in brsenkodierte Firmen investieren. Da haben Sie in Afrika leider nichts, abgesehen vielleicht von Nordafrika oder ein paar Bauunternehmen in Sdafrika, wobei der Wasserbezug sehr begrenzt ist. Deshalb bietet sich Afrika fr unsere Produkte nicht an. Wie sieht es aber mit Firmen aus, die in Afrika ttig sind? Man muss hier unterscheiden zwischen wo sind die Problem auf der Welt, hier ist Afrika natrlich ganz vorne dabei, und wo gibt es berhaupt Investitionsmglichkeiten. Wir sind kein Fond, der Projekte startet. Weiter sind wir Bottom-up getrieben, dies bedeutet, dass wir Trends und Entwicklungen beobachten und darin investieren. In Afrika gibt es da leider nicht viele Mglichkeiten. Um in Kenia etwas zu machen, sehe ich keine Mglichkeiten. Mir ist keine Firma in Kenia bekannt, welche an der Brse gelistet ist. Zudem ist ein Grossteil der Wasserversorgung verstaatlicht. In Kenia zu investieren ist zudem extrem risikoreich. Unsere Kunden sind teilweise Private oft aber auch Institutionen wie Pensionskassen, die ihr Geld mglichst sicher und gewinnbringend Anlegen mssen. Eine andere Mglichkeit wren Entwicklungsprojekte, wobei diese keinen Return generieren. Sie werden aber

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keinen Investor finden, der auf sein Geld freiwillig verzichtet. Ein anderer Ansatz ist es, wenn Sie Spender suchen. Knnen Sie noch etwas zu der erwhnten Fondstrategie sagen, wo neue Projekte aufgebaut werden? Dies ist eine ganz andere Strategie. Z.B. knnen Sie einen Start-Up Fond bilden, wobei dies sehr langfristige Investitionen sind. Oft ist es das Ziel, diese Firmen an die Brse zu bringen und so das Geld wieder reinzuholen. Eine andere Mglichkeit sind Venture Capital Fonds, wobei es hier um Hochrisikofonds geht, die sehr viel Geld und eine sehr grosse Risikobereitschaft voraussetzten. Projektfinanzierungsfonds gibt es auch noch, welche z.B. eine Wasserversorgung in China aufbauen. Hier besteht mehr das politische Risiko wie z.B. momentan in gewissen Lndern in Lateinamerika, wo Regierungen private Firmen verstaatlichen. Sie sind also ein Verfechter der Privatisierung der Wasserversorgung? Da bin ich weder dafr noch dagegen, es gibt Argument fr beides und es gibt gute und schlechte Beispiele. Am Ende zhlt, ob die Wasserversorgung gut gehandhabt ist oder nicht. Wenn der Staat fhig ist, dies selber zu machen, dann ist das okay. Es zeigt sich einfach, dass gerade in Schwellenund Entwicklungslndern der Staat dies nicht kann. Oft kommen Private gnstiger zu Geld, sprich du Darlehen, als der Staat. Diese berlegung vergessen die Gegner der Privatisierung oft. Ein weiteres Problem ist oft das Management- und Finanzwissen, besonders in Entwicklungslndern. Private knnten dies aus dem Ausland importieren, beim Staat fehlt es. Wichtig ist auch der Werterhalt der Installationen, was Staaten oft nicht machen, wie das Beispiel England zeigt, wo ein Drittel der Leitungen ber 150 Jahre alt sind. Die Tarife mssen Kostendeckend sein, darum sind diese bei Privaten oft hher. Der Staat nimmt einfach Steuergelder wenn die Kosten nicht gedeckt werden knnen. Was halten Sie von der Zweipreisstrategie in Entwicklungslndern. Ein Preis fr die Basic-Needs und einen hheren fr Luxury? Das ist ein weiterer Punkt, den ich erwhnen wollte: Wie geht man mit der armen Bevlkerung um? Wasser ist ein Menschenrecht, aber es ist nicht gratis. Jemand muss es bezahlen und die Frage ist, wer das macht. Es gibt so genannte smarte Tarifsysteme, welche in Schwellenlndern immer populrer werden. Diese erzeugen, dass die ersten z.B. 20 Liter pro Tag sehr billig oder gratis sind, danach steigt der Preis aber massiv an. Leute die ihr Auto waschen oder den Garten bewssern wollen, werden somit zur Kasse gebeten. Persnlich finde ich ganz gratis nicht so gut, weil das Bewusstsein in die falsche Richtung geleitet wird. Ein minimaler Betrag reicht um zu zeigen, dass Wasser eben etwas Wert ist. Das Problem bei den ganz Armen ist aber, dass sie oft fr Wassertrger viel mehr bezahlen, als diese minimale Gebhr. Darum sollte sichergestellt werden, dass alle Zugang zu einer Wasserversorgung haben. Ob Staatlich oder Privat kommt nicht drauf an. Sehen Sie Mglichkeiten, unsere Technologien gewinnbringend nach Afrika zu transferieren? Sie haben das Dilemma, dass die Leute dort kein Geld haben. Unsere Technologien sind nicht geeignet, um im grossen Stiel aufzuholen, was ja Afrika tun sollte. Unser System ist auch nicht so toll,

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dass es einfach bernommen werden sollte. Die Frage ist, ob es nicht viel schlauere Lsungen gibt, wie z.B. ein dezentrales Abwasserreinigungssystem. Auch die EAWAG hat gute Projekte, nur sind die fr uns Investoren nicht interessant. Wie sieht es mit Entsalzungsanlagen aus? Die Kosten fr Entsalzungsanlagen kommen zwar runter, aber sie sind immer noch viel zu hoch. Im Nahen Osten mag dies gehen, weil es dort sehr gnstige Energien gibt. In vielen Fllen wrde es aber mehr bringen, auf der Effizienzseite etwas zu machen. Fr Afrika wrde ich keine Entsalzungsanlagen vorschlagen. Oft bieten sich auch traditionelle Methoden an, wie z.B. Tauwassersammlung. Ist Wasser wirklich das Gold von morgen? Ich mchte es nicht dramatisieren, aber Wasser spielt schon seit 2000 Jahren eine wichtige Rolle bei Auseinandersetzungen und Kriegen. Wenn Sie den Nahostkonflikt anschauen, dann hat Wasser einen extrem starken Einfluss und das ist in anderen Gebieten nicht anders. Ihre These ist also, dass die im Fond vorhandene Firmen davon profitieren werden, dass der Wert von Wasser steigt? Genau, ich sage aber lieber statt das Wasser wird teurer, das Management von Wasser muss besser werden und zwar entlang der gesamten Wertschpfungskette. Unserer Firmen werden davon profitieren, weil sie einen Teil zur Wertschpfungskette beitragen. Die gute Nachricht ist, dass unser Umgang mit Wasser so ineffizient ist, dass es ein riesiges Potential gibt, besser zu werden. Ein hherer Wasserwert ist positiv, weil man dann die Mittel hat, die Effizient auch wirklich zu steigern. Das Problem ist, dass Wasser an vielen Orten stark subventioniert ist. Z.B. zahlen die Bauern nichts bis fast nichts fr Wasser. Sehen Sie eine Mglichkeit, die 1:1 Korrelation zwischen Wasserpreis und Fond zu erreichen? Die Frage ist, wer von steigenden Wasserpreisen profitiert, also welche Firmen dann hhere Einkommen erzielen. Dies kann irgendeine Firma in der Wasserwertschpfungskette sein. Es knnten auch Firmen, die Land- oder Wasserrechten besitzen, sein. Die ist aber ein kritisches Thema. Es macht sicher Sinn, Wasserrecht mit Lizenzen an Private zu geben, jedoch mssen genaue Bestimmungen daran geknpfte werden. Es gibt durchaus Firmen, die Land aufkaufen mit der Hoffnung, spter einmal durch den Anstieg des Wasserpreises zu verdienen. Wir empfehlen die Risiken mglichst zu streuen, sowohl in den Aktivitten wie auch Geographisch. Ich kann mir aber vorstellen, dass es in Kenia keine Mglichkeiten gibt, solche Investitionen zu machen oder dann nur sehr risikoreiche. Vielleicht wrde ein Afrika-Fond mehr Sinn machen, aber auch da ist das Risiko noch gross. Investieren in Afrika ist fr sie also nicht interessant? So grundstzlich wrde ich es nicht sagen, aber ich wrde andere Anstze suchen. Persnlich sehr interessant finde ich das Thema Mikrokredite. Warum nicht damit arbeiten, damit sich die Leute eigene kleine Klranlagen kaufen knnen? Oder zum Beispiel Wasserdesinfektion durch UV-Licht?

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Meiner Meinung nach sollte eine Investition in Wasser sehr nachhaltig sein und daher nicht so sensible die Brsenschwankungen wie z.B. die Kreditkrise reagieren. Wie sieht das konkret beim Wasserfond aus? Der Fonds ist stabil, denn sie haben keine Ausweichmglichkeiten, es gibt kein Substitut fr Wasser. Trotzdem regiert auch dieser Fonds aber auf die Krisen. Der Wasserfonds ist bei der Kreditkrise in etwa mit der Brse mitgegangen. Man muss hier aber einen langfristigen Horizont behalten. Was zurzeit an der Brse passiert, ist sowieso nicht rational. Wir sind aber sehr zufrieden mit den Investitionen in unseren Fond. Wir hatten praktisch keine Abflsse. Dies bedeutet, dass unsere Investoren verstanden haben, um was es geht, nmlich dass es sich um eine langfristige Story handelt, an die wir glauben. Herr Wild, vielen Dank fr dieses Gesprch.

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9.2 List of company meetings in Nairobi


Date Time Organisation Contact Person

14th April 08

09.30 a.m. 11.30 a.m. 03.00 p.m.

Nairobi City Water & Sewerage Company Water Resources Management Authority Runda Water

Mr. J. Karanja, Corporate Affairs Officer Mr. Edalia Mr. C. Agingu

15th April 08

09.00 a.m. 11.30 a.m. 02.00 p.m.

Ministry of Water

Mr. Nyaoro Mr. Maina, Managing Director & Mr. Machibi, Finance Manager Mr. S. Karanja

Trojan UV

Aquavit

16th April 08

08.30 a.m. 02.00 p.m.

Thika Dam (NCWSC) Engineering Supplies Limited

Mr. J. Karanja, Dam Coordinator Mr. Mutali

17th April 08

09.00 a.m. 02.00 p.m.

Equity Bank Tropical Hydro Systems

Ms. W. Kathurima, General Manager Mr. Kimani, Project Coordinator Mr. J. Kamau Mr. K. Trimgi Mr. Gatende, Managing Director & Ms. Busolo, Water treatment Engineer Mr. Tchouambe, General Manager & Mr. Mutiso, Head of Communication

18th April 08

08.00 a.m. 11.00 a.m. 02.30 p.m.

Athi River Water Board Aquamist

Davis & Shirtliff

21st April 08

12.00 a.m.

Coca Cola East & Central Africa

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9.3 Water Map of Kenya

Source: UNESCO: http://www.unesco.org/water/wwap/wwdr/wwdr2/case_studies/img/kenya_big.gif; 13.05.2008

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9.4 Water Availability

Source: UNEP: http://maps.grida.no/go/graphic/water_availability_in_africa; 20.05.2008

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9.5 Impressions from Nairobi

Part of the Swisscontact Team in Nairobi. From left to right: Veronique Su, Esther Wainaina, John Njoroge, Evan Mwangi, Alice Hiribae

Thika Dam, Nairobi City Water & Sewerage Company

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Ms. Su and Mr. Edalia from the Water Resources Management Authority

Ms. Busolo from Davis & Shirtliff

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Mr. Agingu from Runda Water and Ms. Su

Water transport in Nairobi, Kenya

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Alex Paur, author of this thesis and Mr. Karanja, Thika Dam Coordinator