Rift Valley Water Supply and Sanitation Project

Home , Athi River (town), Elburgon, Gilgil, Maralal, Nakuru, Narok County

AFRICAN DEVELOPMENT FUND Language: English Original: English

REPUBLIC OF KENYA

RIFT VALLEY WATER SUPPLY AND SANITATION PROJECT

APPRAISAL REPORT

INFRASTRUCTURE DEPARTMENT ONIN NORTH, EAST AND SOUTH REGIONS

SCCD: N.G.

TABLE OF CONTENTS Page PROJECT INFORMATION SHEET, CURRENCY AND MEASURES, LIST OF TABLES, LIST OF ANNEXES, LIST OF ABBREVIATIONS, BASIC DATA SHEET, PROJECT LOGICAL FRAMEWORK, and EXECUTIVE SUMMARY (i-ix)

1. ORIGIN AND HISTORY OF THE PROJECT 1

2. THE WATER SECTOR 1

3. THE WATER SUPPLY AND SANITATION SUB-SECTOR 5

4. THE PROJECT 9

4.1 Project Concept and Rationale 9 4.2 Project Area and Project Beneficiaries 10 4.3 Strategic Context 12 4.4 Sector Goal and Project Objective 13 4.5 Project Description 14 4.6 Production, Market and Prices 16 4.7 Environmental Impact 18 4.8 Social Impacts 19 4.9 Project Costs 20 4.10 Sources of Finance 21

5. PROJECT IMPLEMENTATION 22

5.1 Executing Agency 22 5.2 Institutional Arrangements 22 5.3 Supervision and Implementation Schedules 22 5.4 Procurement Arrangements 23 5.5 Disbursement Arrangements 25 5.6 Monitoring and Evaluation 26 5.7 Financial Reporting and Auditing 26 5.8 Aid Co-ordination 26

6. PROJECT SUSTAINABILITY AND RISKS 27

6.1 Recurrent Costs 27 6.2 Project Sustainability 27 6.3 Critical Risks and Mitigating Measures 28

7. PROJECT BENEFITS 28

7.1 Financial Analysis 28 7.2 Economic Benefits 29 7.3 Sensitivity Analysis 29 7.4 Social Impact Analysis 30

8. CONCLUSIONS AND RECOMMENDATIONS 30

8.1 Conclusions 30 8.2 Recommendations 30

LIST OF TABLES

Table 3.1 Summary of RVWSB Projected Financial Statements Table 4.1 Incidence of Water Related Diseases in Nakuru Table 4.2 Water Demand Projections in Nakuru District Table 4.3(a) Schedule of Proposed Tariffs Table 4.3(b) Estimated Monthly Expenditure on Water Table 4.4 Project Cost Estimates by Component Table 4.5 Project Cost Estimates by Category of Expenditure Table 4.6 Financing Plan by Source of Finance Table 4.7 Financing Plan by Source of Financing for Grant Financed Activities Table 5.1 Expenditure Schedule by Component Table 5.2 Expenditure Schedule by Source of Finance Table 5.3 Procurement Table

LIST OF ANNEXES Number of pages

Annex 1 Map of Kenya showing Project Area Showing 1 Water Services Board Areas Annex 2 Bank Group Operations in Kenya 1 Annex 3 Organisational Structure of RVWSB 1 Annex 4 RVWSB: Projected Financial Statements 2 Annex 5 Urban Water Schemes under the RVWSB 1 Annex 6 Environmental and Social Management Plan Summary 3 Annex 7 Detailed Cost Estimates 1 Annex 8 Categories of Expenditure 1 Annex 9 Institutional Framework for Project Implementation 1 Annex 10 Implementation Schedule 1 Annex 11 Computation of FIRR 2 Annex 12 Computation of EIRR 1 Annex 13 Chronology of Preparation and Appraisal Activities 1

This Appraisal Report was prepared by Messrs. Sering Jallow, Principal Sanitary Engineer (Ext. 2334), Lamin Barrow, Senior Financial Analyst (Ext. 2592), Daniel Lekoetje, Senior Public Utilities Economist (Ext. 2691) and Idrissa Samba, Senior Environmentalist (Ext. 2657) following a mission to Kenya in December 2003 and a follow up mission in March 2004. All enquiries should be addressed to Mr. Kordje Bedoumra, Director, ONIN (Ext. 2040) or Mr. N. Matondo Fundani, Manager, ONIN.2 (Ext. 2191).

AFRICAN DEVELOPMENT FUND BP 323 Tunis Belvedere, Tunisia Tel: (216) 71102191 Fax: (216) 71333680

PROJECT INFORMATION

This information given hereunder is intended to provide some guidance to prospective suppliers, contractors, consultants and all persons interested in the procurement of goods and services for projects approved by Boards of Directors of the Bank Group. More detailed information and guidance should be obtained from the Executing Agency of the Borrower

1. COUNTRY : Kenya

2. NAME OF PROJECT : Rift Valley Water Supply and Sanitation Project

3. LOCATION : Urban and rural centres within the Rift Valley

4. BORROWER : Republic of Kenya

5. EXECUTING AGENCY : Rift Valley Water Services Board P.O. Box 30521 Tel: +254 20 2716103 Fax: +254 20 2727622

6. PROJECT DESCRIPTION : Project components: A) Institutional Support to Rift Valley Water Services Board (RVWSB) and Nakuru Water and Sanitation Services Company (NAWASSCO)

B) Water and Sanitation Improvements in Nakuru: Development of Olobanita wellfield with capacity of 15,000 m3/day; Rehabilitation of existing sources to restore capacity from 30,000 to 40,000 m3/day, rehabilitation of water distribution, sewerage and stormwater drainage systems; reduction of unaccounted for water and water wastage; provision of 15000 consumer meters, a meter test bench and meter repair kits, tools and equipment for operation and maintenance; provision of 106 public water kiosks, communal and public latrines for low-income peri-urban areas; conduct public awareness campaigns on water, health, gender and other cross- cutting issues.

C) Water and Sanitation Improvements in Small towns in Rift Valley: Study and implement feasible management options and short-term investment needs for the towns.

D) Develop and implement a rural water supply and sanitation programme based on the demand responsive approach.

7. TOTAL PROJECT COST : UA 21.21 million Foreign component UA 11.87 million Local component UA 9.34 million

8. BANK GROUP FINANCING ADF LOAN : UA 13.04 million ADF GRANT : UA 5.02 million

9. OTHER SOURCES OF FINANCE GOVERNMENT : UA 3.01 million Communities : UA 0.14 million

10. DATE OF APPROVAL June 2004

11. ESTIMATED START DATE AND DURATION : January 2005, 42 Months

12. PROCUREMENT In accordance with the Bank's Rules of Procedure for goods, works and services.

Civil works: International Competitive bidding (ICB) for Olobanita wellfield, water transfer pipeline, and rehabilitation of existing sources, and National Competitive Bidding (NCB) for rehabilitation of distribution system, institutional strengthening, sanitation improvements, peri-urban services, rehabilitation of schemes of other towns, rural water supply. Goods: By International shopping (IS) and National Shopping (NS). Consultancy services: Short-listing for all studies, institutional support to RVWSB and NAWASSCO, supervision and audits.

13. CONSULTANCY SERVICES Needed for management options and investments study for secondary towns, for rural water supply programme, Technical Assistance to RVWSB and NAWASSCO, performance and project audits, and supervision of works.

iii EQUIVALENTS AND ABBREVIATIONS CURRENCY EQUIVALENTS (December 2003) 1 UA = USD 1.43958 1 UA = KES 105.606

WEIGHTS AND MEASURES l/c/d = litres per capita per day m3 = cubic metre m3/d = cubic metre per day Mm3 = million cubic metres Km = kilometres

LIST OF ABBREVIATIONS ADF = African Development Fund AFD = Agence Française de Développement CAAC = Catchment Area Advisory Committee CBO = Community Based Organisation EIA = Environmental Impact Assessment EIRR = Economic Internal Rate of Return ESMP = Environmental and Social Management Plan FINIDA = Finnish International Development Agency FIRR = Financial Internal Rate of Return GOK = Government of Kenya ICB = International Competitive Bidding JICA = Japan International Cooperation Agency LA = Local Authority LCA = Local Currency Account MCN = Municipal Council of Nakuru MOA = Ministry of Agriculture MOF = Ministry of Finance MOH = Ministry of Health MOLG = Ministry of Local Government MWRMD = Ministry of Water Resources Management and Development NAWASSCO = Nakuru Water Supply and Sanitation Services Company NCB = National Competitive Bidding NCC = Nairobi City Council NEMA = National Environment Management Authority NGO = Non Governmental Organisation NWCPC = National Water Conservation and Pipeline Corporation NWSS = Nakuru Water and Sewerage Services O&M = Operations and Maintenance PID = Project Implementation Document QPR = Quarterly Progress Report RVWSB = Rift Valley Water Services Board SA = Special Account SHG = Self Help Groups SIDA = Swedish International Development Agency TA = Technical Assistance TOR = Terms of Reference UfW = Unaccounted-for-Water WAB = Water Appeals Board WHO = World Health Organization WRMA = Water Resources Management Authority WSP = Water Service Provider WSRB = Water Services Regulatory Board WSRSC = Water Sector Reform Steering Committee WSRS = Water Sector Reform Secretariat WSTF = Water Services Trust Fund

KENYA: COMPARATIVE SOCIO-ECONOMIC INDICATORS

Develo- Develo- Year Kenya Africa ping ped Countries Countries

Basic Indicators GNI per capita US $ Area ( '000 Km²) 580 30,061 80,976 54,658 Total Population (millions) 2001 31.3 811.6 4,940.3 1,193.9 800 Urban Population (% of Total) 2001 33.3 38.0 40.4 76.0 600 Population Density (per Km²) 2001 53.9 27.0 61.0 21.9 400 GNI per Capita (US $) 2001 340 671 1,250 25,890 Labor Force Participation - Total (%) 2001 51.7 43.3 … … 200 Labor Force Participation - Female (%) 48.0 35.1 … … 0 2001 1995 1996 1997 1998 1999 2000 2001 Gender -Related Development Index Value 1999 0.512 0.476 0.634 0.916 Human Develop. Index (Rank among 174 countries) 134 n.a. n.a. n.a. 2000 Kenya Africa Popul. Living Below $ 1 a Day (% of Population) 1994 26.5 45.0 32.2 …

Demographic Indicators Population Growth Rate - Total (%) 2001 2.0 2.4 1.5 0.2 Population Growth Rate - Urban (%) 2001 4.5 4.1 2.9 0.5 Population < 15 years (%) 2001 42.9 42.4 32.4 18.0 Population >= 65 years (%) 2001 2.9 3.3 5.1 14.3 Population Growth Rate (%) Dependency Ratio (%) 2001 84.4 85.5 61.1 48.3 Sex Ratio (per 100 female) 2001 98.8 99.4 103.3 94.7 3.0 Female Population 15-49 years (% of total population) 2001 24.6 23.6 26.9 25.4 2.5 Life Expectancy at Birth - Total (years) 2001 49.9 52.5 64.5 75.7 2.0 Life Expectancy at Birth - Female (years) 2001 50.6 53.5 66.3 79.3 1.5 Crude Birth Rate (per 1,000) 34.4 37.3 23.4 10.9 2001 1.0 Crude Death Rate (per 1,000) 2001 13.4 14.0 8.4 10.3 0.5 Infant Mortality Rate (per 1,000) 2001 60.2 79.6 57.6 8.9 0.0 Child Mortality Rate (per 1,000) 2001 104.6 116.3 79.8 10.2 1995 1996 1997 1998 1999 2000 2001 Maternal Mortality Rate (per 100,000) 1998 590 641 491 13

Total Fertility Rate (per woman) 2001 4.2 5.1 2.8 1.6 Kenya Africa Women Using Contraception (%) 1998 39.0 … 56.0 70.0

Health & Nutrition Indicators Physicians (per 100,000 people) 1999 3.6 36.7 78.0 287.0 Nurses (per 100,000 people) 1995 90.1 105.8 98.0 782.0 Life Expectancy at Birth (Years) Births attended by Trained Health Personnel (%) 1998 44.0 38.0 58.0 99.0 Access to Safe Water (% of Population) 2000 49.0 60.4 72.0 100.0 71 Access to Health Services (% of Population) 1999 77.0 61.7 80.0 100.0 61 Access to Sanitation (% of Population) 86.0 60.5 44.0 100.0 51 2000 41 Percent. of Adults (aged 15-49) Living with HIV/AIDS 2001 15.0 5.7 … … 31 Incidence of Tuberculosis (per 100,000) 2000 209.2 105.4 157.0 24.0 21 Child Immunization Against Tuberculosis (%) 11 2000 75.0 63.5 82.0 93.0 1 Child Immunization Against Measles (%) 1996 46.0 58.2 79.0 90.0 1995 1996 1997 1998 1999 2000 2001 Underweight Children (% of children under 5 years) 1998 22.1 25.9 31.0 … Daily Calorie Supply per Capita 2000 1,965 2,408 2,663 3,380 Kenya Africa Public Expenditure on Health (as % of GDP) 1998 2.4 3.3 1.8 6.3

Education Indicators Gross Enrolment Ratio (%) Primary School - Total 1998 88.0 80.7 100.7 102.3 Primary School - Female 1998 87.0 73.4 94.5 101.9 Infant Mortality Rate Secondary School - Total 1996 23.8 29.3 50.9 99.5 ( Per 1000 ) Secondary School - Female 1996 21.8 25.7 45.8 100.8 100 Primary School Female Teaching Staff (% of Total) 1998 42.1 40.9 51.0 82.0 90 Adult Illiteracy Rate - Total (%) 2001 16.6 37.7 26.6 1.2 80 Adult Illiteracy Rate - Male (%) 2001 10.5 29.7 19.0 0.8 70 60 Adult Illiteracy Rate - Female (%) 2001 22.7 46.8 34.2 1.6 50 Percentage of GDP Spent on Education 1998 6.5 3.5 3.9 5.9 40 30 20 Environmental Indicators 10 Land Use (Arable Land as % of Total Land Area) 1999 7.0 6.0 9.9 11.6 0 1995 1996 1997 1998 1999 2000 2001 Annual Rate of Deforestation (%) 1995 0.3 0.7 0.4 -0.2 Annual Rate of Reforestation (%) 1990 1.0 4.0 … … Per Capita CO2 Emissions (metric tons) 1997 … 1.1 2.1 12.5 Kenya Africa

Source : Compiled by the Statistics Division from ADB databases; UNAIDS; World Bank Live Database and United Nations Population Division. Notes: n.a. Not Applicable ; … Data Not Available.

v RIFT VALLEY WATER SUPPLY AND SANITATION PROJECT PROJECT MPDE MATRIX Narrative Summary (NS) Verifiable Indicators (OVI) Means of Verification Important Assumptions (MOV)

Sector Goal: (Goal to Supergoal):

1 To improve social well 1. Increased water and sanitation service coverage, to 1.1 National statistical being, enhance national meet the Millennium Development Goals by 2015; reports. economic performance and ensure equitable provision of 2. Healthier population and improved economic adequate water and sanitation performance. services to all competing users at affordable cost on a sustainable basis.

Project Objectives: (Project Object.to Goal):

1. To improve water supply 1.1 Water services improved from 6 to 24 hours and 1. Project progress 1. Government remains and sanitation services in sanitation services improved in urban and peri- reports. committed to urban, peri-urban and rural urban areas for 290,000 people in Nakuru and increasing access to communities within the 120,000 people in 5 other towns within Rift 2. Supervision water and sanitation service area of the Rift Valley Water Service Board area by 2008 Mission’s Reports services at the Valley Water Services national level. Board 1.2 Rural water supply and sanitation services 3. National statistical provided for 100,000 people in rural areas by reports. 2. Public and private 2008. investments in the 4. Audit reports. sector are increased 1.3 Regular billing from 2005 and collection efficiency and sustained. increased from about 60% in 2004 to 90% by end 5. WSRB and RVWSB Reports 3. Government finds 2007. support for other 6. Project Completion 1.4 Unaccounted-for-water reduced from the current WSBs. Report level of 70%to 25% by 2007. 4. The Water Service Trust Fund is 1.5 O&M Cost recovery tariffs in place by end 2007. adequately funded. Outputs: (Output to Project Obj.):

1. Effectively functioning 1.1 New and commercially oriented service delivery 1. Project quarterly 1. Sector institutional water and sewerage service institutions in place in Nakuru by 2005 and in the and monthly and legislative institutions in the project secondary Rift Valley towns by 2007. progress reports. reforms continue. area. 1.2 Improved customer database, 15,000 consumer 1. Supervision 2. The autonomy of the meters installed and meter test bench provided by Mission’s Reports. Regulator is 2006. respected. 2. National statistical 3. Proposed tariff 2.1 Total water production in Nakuru increased from reports. increases are 2. Water supply and sanitation 30,000 m3/day to 55,000 m3/day by mid 2007 with systems rehabilitated and 3. Audit reports. implemented on capacity to supply 500,000 consumers in the time. augmented. medium term (by 2015). 4. Planned JICA and 2.2 Olobanita Wellfield developed with 8 AFD funded projects boreholes, 21km of transmission main, and in environmental 3 providing 15,000 m /day to Nakuru by end 2006. management capacity building and 2.3 Kabatini and Baharini groundwater sources, solid waste Meroroni water supply and bulk transfer systems 3 3 management are restored to provide 15,000m , 5,800m , and implemented. 5,900 m3 respectively, as per their design capacities, and NWCPC providing 13,500 3 m /day as bulk water by 2007. 2.4 Sewer network extended by 15 km and sewage flow increased to treatment plants by end 2007.

2.5 Reduced sewage network blockages by 2007.

2.6 24 hours water supply restored to 290,000 Nakuru municipality residents with access to water supply by 2007.

3.1 106 Public fountains extended to low income areas 3. Water and sanitation services by 2007. extended to high density, low-income areas; 3.2 35 Public and Communal latrines constructed in low-income areas by 2007.

4.1 Communities educated in community health issues, 4. Better informed community hygiene and water related diseases by 2007. on water and health issues 4.2 50% Reduction in incidence of water borne

Narrative Summary (NS) Verifiable Indicators (OVI) Means of Verification Important Assumptions (MOV) diseases by 2008.

5.1 Study of management options and investment

needs completed and approved by mid 2006. 5. Management options and 5.2 Water schemes in Naivasha, Gilgil, Molo, Njoro short-term investment for and Elburgon rehabilitated and production restored small Rift Valley towns from 7,500 m3/day to 11,650 m3/day and serving implemented. about 120,000 consumers by end 2007.

6.1 Rural water supply & sanitation programme 6. Rural water supply and developed by mid 2006. sanitation programme 6.2 RWSS extended to 100,000 people by mid 2008. developed and implemented.

Activities: Inputs (Activity to Output): 1. GOK provides local 1. Rehabilitation of existing Total project costs: UA 21.21 million. 1.1 Appraisal counterpart funding. water sources, sewerage and Estimates Resources: FC LC Total drainage systems. 1.2 MTEF. ADF Loan: 7.81 5.23 13.04 million 2 Development of Olobanita ADF Grant: 4.06 0.96 5.02 million 1.3 Approved wellfield and bulk transfer GOK: -- 3.01 3.01 million Government main. Communities -- 0.14 0.14 million annual budgets 3 Rehabilitation of water ------1.4 Audit Reports distribution and sewer Total: UA 11.87 9.34 21.21 million network and extension of 1.5 Disbursement services to low-income Records areas. 1.6 Progress reports. 4. Development of institutional 1.7 Supervision capacity for technical and reports. financial management, and reduction of UfW. 5. Development of aquifer management system. 6. Raising awareness about water and health issues. 7. Conduct management options and investments study and implement recommendations. 8. Develop and implement rural water supply and sanitation programme.

vii MPDE MATRIX FOR GRANT COMPONENT Narrative Summary (NS) Verifiable Indicators (OVI) Means of Verification Important Assumptions (MOV)

Sector Goal: (Goal to Supergoal):

1 To improve social well 1.1 Increased water and sanitation service coverage, 1. National statistical being, enhance national reports. economic performance and 1.2 Healthier population and improved economic ensure equitable provision of performance. adequate water and sanitation

services to all competing users at affordable cost on a sustainable basis.

Project Objectives: (Project Object.to Goal):

1. To improve water supply 1.1 New and commercially oriented service delivery 1. Project quarterly 1. Government remains and sanitation services institutions in place in Nakuru and the secondary and monthly committed to increasing delivery and expand access Rift Valley towns by 2007. progress reports. access to water and to rural communities within sanitation services at the the service area of the Rift 1.2 RWSS extended to 100,000 people by mid 2008.. 2. Supervision national level. Valley Water Services Mission’s Reports 2. Public and private Board 1.3 Improved customer database and regular billing by end 2005. 3. National statistical investments in the reports. sector are increased and 1.4 Unaccounted-for-water reduced from the current sustained. level of 70% to 25% by 2007. 4. Audit reports. 3. Government finds 1.5 Regular billing from 2005 and collection support for other WSBs. efficiency increased from about 60% in 2004 to 5. PCR 4. The Water Service 90% by end 2007. Trust Fund is 1.6 O&M cost recovery tariffs in place by end 2007. adequately funded.

Outputs: (Output to Project Obj.):

1. Effectively functioning 1.1 RVWSB and NAWASSCO fully operational and 1. Project quarterly 1. Sector institutional and water and sewerage service strengthened by 2007. and monthly legislative reforms institutions in the project progress reports. continue.

area. 2. The autonomy of the 2.1 Study of management options and investment needs 2. Supervision 2. Report on management Regulator is respected. completed and approved by mid 2006. Mission’s Reports options and short-term 3. Proposed tariff increases investment needs for small 3. National statistical are implemented on Rift Valley towns. reports. time. 3. Rural water supply and 3.1 Rural water supply & sanitation programme 4. Audit reports. 4. Planned JICA and AFD sanitation programme developed by mid 2006 funded projects in developed and implemented. environmental management 3.2 RWSS extended to 100,000 people by mid 2008. capacity building and solid waste management are implemented.

Activities: Inputs (Activity to Output): 1. GOK provides local 1. Development of institutional Total costs of grant financed components: 1.1 Appraisal counterpart funding. capacity for technical and UA 6.11 million. Estimates financial management, and Resources: 1.2 Approved reduction of UfW. Government FC LC Total 2. Development of aquifer annual budgets ADF Grant: 4.06 0.96 5.02 million management system. GOK: -- 0.95 0.95 million 1.3 Audit Reports 3. Conduct management Communities -- 0.14 0.14 million 1.4 Disbursement options and investments ------Records study and implement recommendations. Total: UA 4.06 2.05 6.11 million 1.5 Progress reports. 4. Develop and implement rural 1.6 Supervision reports. water supply and sanitation

programme.

viii

EXECUTIVE SUMMARY

Background Despite the importance of Nakuru as Kenya’s fourth largest town, a major industrial center and agricultural breadbasket with significant tourism potential, the water supply suffers from the problems of (i) insufficient and deteriorating infrastructure and (ii) weak institutional capacity to operate and maintain the facilities, as well as bill and collect revenues. These problems reached a level where they were beginning to impact on poverty levels, as well as the health and livelihood of the people. Besides causing an increase in water borne diseases and the emergence of suppressed demand conditions, the water shortages and poor quality have led to a scaling down of industrial activities, with some industries being forced to either close down or relocate to other areas. Against this backdrop, Government of Kenya (GOK), in 1993, requested the Bank Group to finance a feasibility study of a medium term project for water supply and sanitation for the town of Nakuru and a pre-feasibility study for the long-term project.

The study, which was completed in 2000, proposed a two-phased approach to the solution of the water and sanitation problems in Nakuru. In early 2001, the Government requested the Bank Group to finance phase I, covering the Immediate Works Project, but the appraisal process could not be completed, as key institutional and financial issues could not be resolved. Parallel to the ongoing institutional reforms to operationalize the Water Act (2002), GOK renewed its request for Bank funding of the project under ADF IX in October 2002, but this time included other towns and rural areas within the Rift Valley Water Services Board area. A Bank appraisal mission visited Kenya in December 2003, and subsequently in March 2004, to follow up the outstanding institutional issues. This report is an outcome of these missions.

Purpose of the Loan and Grant The ADF loan of UA 13.04 million, and ADF grant of UA 5.02 million, which represent 85.1% of the total project cost, will finance 100% of foreign costs and 66% of local costs.

Sector Goal and Project Objective GOK’s goal for the water supply and sanitation sector is to improve the social well being of the populace, enhance the performance of the national economy and ensure equitable provision of adequate quantity and quality of water and sanitation services to all competing user groups at affordable cost on a sustainable basis.

The project objective is to improve water supply and sanitation services in urban, peri-urban and rural communities within the service area of the Rift Valley Water Services Board (RVWSB).

Project Description and Outputs The project comprises (a) institutional support to RVWSB and NAWASSCO to build their capacities for carrying out their respective roles under the Water Act (2002); (ii) rehabilitation of the existing urban water and sanitation facilities in Nakuru to reduce the high levels of Unaccounted-for-Water, currently estimated at 70%, augment capacity through development of new source works, and extend services to the unserved peri-urban areas; (iii) address the needs of secondary towns under the RVWSB by studying feasible management options for the water schemes currently operated by National Water Conservation and Pipeline Corporation and the Department for Water Development, and facilitate the transfer of these services to the RVWSB and its contracted Water Services Providers in accordance with the Water Act; determine their short and medium term investment needs and implement the short-term investment program; (iv) determine the rural water supply and sanitation needs of the region and develop a programme based on the demand responsive approach. The envisaged outputs are:

1. Effectively functioning water and sewerage service institutions in the project area. 2. Water supply and sanitation systems rehabilitated and augmented. 3. Water and sanitation services extended to low-income peri-urban areas; 4. Better informed community about environmental health and sanitation issues, as well as malaria, HIV/Aids, gender and other cross-cutting issues. 5. Management options and short-term investment needs for small Rift Valley towns studied and implemented. 6. Rural water supply and sanitation programme developed and implemented.

Project Cost The total project cost, net of taxes and duties, is estimated at UA 21.21 million (KES 2,240.35 million), of which the foreign and local currency contributions are 56% and 44% respectively.

Sources of Finance The project will be financed by ADF loan and grant, GOK and the beneficiary communities. The ADF loan and grant amounts are UA 13.04 million and UA 5.02 million respectively, which represent 85.1% of the total project cost. GOK's contribution of UA 3.01 million represents 14.2% of the total project cost while the beneficiary communities will finance UA 0.14 million or 0.67% of the project costs.

Project Implementation Project implementation is scheduled to last 42 months. The Executing Agency is the Rift Valley Water Services Board.

Conclusion and Recommendations The poor state of the infrastructure and management of water supply and sewerage services in the project area call for urgent action to redress the situation. In line with the GOK strategy articulated in the PRSP, the proposed project will support efforts to promote wider access to water and sanitation services, , and improve the quality of service delivery, as a means of reducing poverty. These would be achieved through institutional reform, capacity building, and maximizing the efficient use of existing infrastructure through rehabilitation, before development of new sources.

The project is technically feasible, financially and economically viable, with important socioeconomic benefits, as well as being environmentally sustainable. It is accorded a high priority in the Bank’s 2002-2004 CSP for Kenya, which advocates for the Fund’s support to GOK’s efforts to achieve the water and sanitation MDGs, through rehabilitation and necessary expansion of the infrastructure. Furthermore, the Bank’s strategy seeks to support the development of institutional capacity for efficient management and operation of these facilities. The project is also in line with the Bank Group’s Integrated Water Resources Management Policy, which supports priority rehabilitation of existing infrastructure and encourages ultimate cost recovery, while taking into account social equity.

It is recommended that an ADF loan not exceeding UA 13.04 million, and ADF grant not exceeding UA 5.02 million, be extended to Republic of Kenya for the purpose of implementing the project as described in this report, subject to the conditions specified in the loan and grant agreements.

1. ORIGIN AND HISTORY OF THE PROJECT

1.1 Nakuru is the fourth largest urban centre in Kenya with a population of about 285,000 and growing at an annual rate of 3.5%. It is situated on the northern shores of Lake Nakuru on the floor of the Great Rift Valley in Central Kenya, with rich agricultural hinterland and high tourism potential as a result of Lake Nakuru, an alkaline water body 1800m above sea level, habitat for one third of the world’s lesser flamingo, and the surrounding wildlife park. The area also has many industries.

1.2 Despite the importance of Nakuru in the Kenyan economy, the water supply suffers from the problems of (i) insufficient capacity of water sources and (ii) weak institutional capacity to operate and maintain, bill and collect revenues from the water supply and sanitation facilities. These problems reached a level where they are impacting on poverty levels, health and livelihood of the people, thereby causing an increase in water borne diseases with families buying water of doubtful quality at high cost from vendors. Some industries closed down or relocated to other areas, while there is increasing competition between the different sectors of demand. In view of these problems, the Government of Kenya, in 1993, requested the Bank Group to finance a feasibility study of a medium term project for water supply and sanitation for the town of Nakuru and a pre-feasibility study for the long-term project.

1.3 The study, completed in 2000, proposed a two-phased approach to the solution of the water and sanitation problems in Nakuru. The first phase, the Immediate Works Project, involves rehabilitation of the existing water supply and sanitation facilities to restore production from less than 30,000 m3/day to the design capacity of 40,000 m3/day; capacity augmentation by 15,000 m3/day by development of a new well field at Olobanita; and institutional capacity building to improve billing, revenue collection and reduce Unaccounted-for-Water (UfW). The second phase would involve construction of a dam on the Itare River to increase capacity to 100,000 m3/day and extension of the sewer network to other parts of the town.

1.4 In early 2001, the Government requested the Bank Group to finance the Immediate Works Project, but the appraisal process could not be completed due to failure to resolve key institutional and financial issues. The Government renewed the request for funding the project under ADF IX in October 2002, but this time included other towns and rural areas within the Rift Valley Water Services Board area, in line with the policy and institutional reforms initiated under the Water Act (2002). The Bank appraised the project in December 2003, with a follow up mission in March 2004 to firm up the outstanding institutional issues. This Appraisal Report is the outcome of these missions.

2. THE WATER SECTOR

2.1 Water Resources

2.1.1 Kenya belongs to the group of water scarce countries with per capita water availability estimated at 647 m3 annually for the present population of about 31 million. Average annual rainfall varies from about 250 mm in the thinly populated arid and semi-arid lands in the north to 1250 mm in the central highlands, covering less than a quarter of the land area but supporting 75% of the population Surface water represents 86% of the available water resources in 5 drainage basins namely: Lake Victoria, Rift Valley, Tana River, Athi River, and Ewaso Ngiro North basins with major rivers flowing into the Indian Ocean, Lake Victoria, and Lake Turkana. Kenya also shares water resources with Tanzania, Uganda, Somalia and Ethiopia.

2.1.2 The country’s groundwater resources are not well developed and information on the aquifers is scanty. It has been used mainly for small water schemes and hand dug well programmes

2 with more than 9,000 registered boreholes abstracting approximately 57 million m3, mostly for domestic and livestock water supplies. Dug wells provide water for 12% of households in Kenya.

2.1.3 The limited water resources compounded by the 1999/2000 droughts and the low priority accorded to water resources management during the last two decades has affected hydrological and climate data collection and analysis, water resources assessment, monitoring, apportionment, enforcement, catchment management and pollution control. It has reduced capability for drought and flood warning, intensified competition for and conflict over water, increased pollution from industry and agriculture, increased catchment degradation with increased soil erosion and sediment deposition, siltation of water sources and reservoirs. The proliferation of aquatic weeds like the water hyacinth, are degrading surface water bodies like Lake Victoria affecting fishing, irrigation, drainage, water supply, while uncontrolled groundwater development is causing salt-water intrusion in coastal areas and resource depletion.

2.2 Water Supply and Sanitation

2.2.1 Water supply coverage in Kenya has been estimated at 70% for 7.5 million urban residents and 48% for 23.7 million rural residents. Sanitation coverage is lower, with only 65% of urban and 40% of rural populations having access to sanitation services. This has resulted in the contamination of water supplies and a high incidence of water related diseases like typhoid and cholera, which affects mostly the children and the poor. More than half of the population below age 15 and close to 50% of the population live below the poverty line.

2.2.2 Most water facilities are 20 to 40 years old, and lack of maintenance and few new investments has ensured that the facilities can no longer meet their design capacities or cater for demand from the increased populations. Most urban schemes are characterised by low water charges, low metering, underestimated consumption for unmetered connections or those with faulty meters, and widespread wastage of the scarce resource. In addition, billing is irregular and revenue collection is inadequate, resulting in poor cost recovery. Rural schemes in many cases do not correspond to the effective demands of the consumers while a high proportion of the schemes are inactive due to lack of spare parts and low capacity for O&M in communities. Other constraints include inadequate qualified manpower, poor technology choices in water supply and sewerage development, and lack of proper coordination of the various actors.

2.3 The Policy Environment

2.3.1 Since independence, the policy has changed from one of providing free basic services or highly subsidized by government with limited involvement of other actors such as beneficiaries and the private sector to one requiring cost recovery with the involvement of many stakeholders. In 1974, the Government established a Ministry of Water Development which set a goal of “Water for All by the year 2000”, and took over many water supplies previously managed by other stakeholders. The goal was not realised due to inadequate investments.

2.3.2 In 1992 the second National Water Master Plan, (the first master Plan was done in 1981) identified other problems and constraints in the sector, including the lack of a comprehensive policy, institutional and legal framework to guide the sector, and inadequate financial resources. It proposed a framework for future water development including the need to generate funds from the services by improving cost recovery through improved revenue collection and tariff revisions. The Master Plan also set out a long-term plan for the implementation of water sector reforms, culminating to the adoption of the National Policy on Water Resources Management and Development under Sessional Paper No. 1 of 1999.

2.3.3 The policy objectives are to: (i) preserve, conserve and protect available water resources and allocate it in a sustainable, rational and economical way; (ii) supply water of good quality in sufficient quantities to meet the various needs, including poverty alleviation, while ensuring safe disposal of wastewater and environmental protection; (iii) establish an efficient and effective institutional framework to achieve a systematic development and management of the water sector; and (iv) develop a sound and sustainable financing system for effective water resources management, water supply and sanitation development.

2.3.4 The policy principles include separation of management of water resources from water supply and sanitation service provision as well as separation of policy, regulatory and implementation functions; establishment of pricing policies that ensure equity, economic, financial and environmental objectives; human resources development and redeployment for more effective institutions; increased public spending in the sector; service provision based on assessed effective demand; combine water supply and sanitation management and related environmental functions; and apply appropriate technology. The policy is in conformity with the Bank’s Integrated Water Resources Management Policy.

2.3.5 Following the adoption of the policy, the Government conducted a review of the water sector in 2000, in collaboration with donors and major stakeholders, and has developed a National Water Resources Management Strategy (NWRMS) and a National Water Services Strategy, for July 2003 to June 2006 to operationalize the policy, and has reviewed the Water Act to ensure harmony with the water policy.

2.3.6 The National Water Services Strategy proposes major changes in the institutional arrangements for the management of the sector These include reducing the involvement of MWRMD and NWCPC in service provision and limiting the role of the former to policy development and the latter to bulk water supply as well as the development of state schemes under the residual powers of the Minister. Water supply and sanitation service provision will henceforth be assumed by Water Services Boards (WSBs) under license from a Water Services Regulatory Board (WSRB). They will be required to contract out operations within their areas of jurisdiction to Water Service Providers (WSP).

2.3.7 The National Water Resources Management Strategy proposes the effective management of catchment areas by decentralization of catchment management to the catchments; mitigating climate variability through flood and drought preparedness; construction of dams and pans to increase water storage capacity (from the current low level of about 4 m3/capita to over 120 m3/capita); curbing water pollution by ensuring adherence to waste water standards before disposal into water bodies; and rational development of water resources to avoid water use conflicts. A Water Resources Management Authority will be in charge of overall water resource management at the national level, assisted by Catchment Area Advisory Committees (CAAC) at the catchment level.

2.4 The Water Sector Programme

2.4.1 The Government of Kenya is in the process of finalizing a Water Sector Investment Programme for the period 2004 to 2007 estimated at about KES 30 billion in the areas of water resources management and water supply and sanitation in line with the National Water Services Strategy and the National Water Resources Management Strategy highlighted above. The first priority in the short term is to implement the reforms by putting in place and strengthening the key institutions, and transferring the water supply and sanitation services and water resources management activities to these institutions for improved service delivery. This will be accompanied by staff training and redeployment. In water supply and sanitation it focuses on increasing service reliability for the served through rehabilitation and reduction of leakage and extending services to the

4 unserved for meeting future demands, extending sewerage services to priority areas and providing water for livestock. For water resources management the plan will focus on improving the institutional sustainability of the WRMA, developing capacity for water resources assessment and water monitoring by rehabilitation and upgrading of the monitoring network, regulation of water abstraction, and increasing water storage.

Donor Supported Activities

2.4.2 The sector has received significant donor support mainly from the Bank Group, World Bank, AFD, KfW, DANIDA, SIDA, JICA, and FINIDA. The World Bank, through the Public Private Infrastructure Advisory Facility, has been providing support for increasing private sector involvement in the sector while GTZ has provided support for the introduction of commercial operations in a number of urban water services. GOK is currently getting support for the water sector reforms from GTZ who are providing assistance to the newly established Water Services Regulatory Board (WSRB) and the Water Sector Reform Secretariat (WSRS), from AFD for the WSB in Kisumu (in Lake Victoria South Region), and from the World Bank for the Nairobi Water Service Board through an institutional support project with plans for later involvement in the Coastal Region. SIDA and DANIDA are supporting the establishment and operationalization of Water Resources Management Authority (WRMA), the CAACs, and the Water Services Trust Fund (WSTF) as well as the development of subsidiary legislation for the Water Act and the restructuring of the Department of Water Development and the National Water Conservation and Pipeline Corporation (NWCPC). The Bank Group’s planned intervention will support the reforms in the Rift Valley Water Services Board.

2.4.3 In line with GOK’s programme, the donors are also supporting rehabilitation works and minor expansions to meet current demand in the different WSBs to ensure that the WSBs take over serviceable schemes. These include the World Bank in Nairobi, AFD in Kisumu (and are considering Nairobi and solid waste management in Nakuru), while SIDA and DANIDA are intervening in rural water supply and sanitation focussing on the arid and semi-arid lands. The Bank’s planned intervention will include rehabilitation and minor extension of services in Nakuru and five secondary towns as well as rural water supply and sanitation to communities in the project area. JICA plans to provide support to capacity building in environmental and sanitation management in Nakuru. A number of other donors are expected to assist GOK in the sector while a number of NGOs are already active in the sector, mostly in rural water supply and sanitation.

2.4.4 The Bank Group has been one of the main donors in the sector since 1978, financing water supply projects for Nairobi and the towns of, Ndia, Thika, and Nanyuki, and sewerage projects in Nyeri, Muranga, Kisii and Bungoma in 6 operations totalling UA 75.87 million, including the study for the proposed project. These schemes continue to benefit the towns and the Ndakaini Dam financed under the Third Nairobi Water Supply project was the main source of supply for the city of Nairobi during the severe drought of 1999/2000. The sector also partly benefited from the UA 11.52 million multi-sector El Nino Infrastructure Rehabilitation project under which Bank financing rehabilitated water schemes in 33 secondary towns of 13 districts and 3 provinces serving about 1.3 million people. The agriculture sector benefited from a number of irrigation projects while the energy sector benefited for one hydropower project. Overall, the Bank Group has financed 52 operations in Kenya for a total amount of UA 566.98 million net of cancellations (See Annex 2).

2.4.5 While past Bank Group financed projects in the sector have been affected by problems of implementation delay, cost overruns, and lack of counterpart funds; they have in general achieved their development objective of increasing access to services although sustainability has not always been assured. Some of the implementation problems of the past were addressed in the design of the

El Nino project, some of which have also been taken into account in the design of the proposed project. While earlier Bank Group interventions focused on physical infrastructure provision in urban areas, the proposed project will also address institutional development aspects, and will include interventions in rural areas.

3. THE WATER SUPPLY AND SANITATION SUB-SECTOR

3.1 Institutional Framework

3.1.1 The main institutions involved in the water supply and sanitation sub-sector were the MWRMD, the National Water Conservation and Pipeline Corporation (NWCPC), the Ministry of Local Government (MOLG), Local Authorities (LAs), NGOs and Self Help Groups (SHG). MWRMD was responsible for water supply systems development, service provision, sector regulation and coordination, policy formulation, appointment of water undertakers and water tariff approvals. These multiple roles led to conflict of interest, particularly with regard to MWRMD’s role as both primary service provider and principal regulator.

3.1.2 MOLG was mainly responsible for overall coordination and monitoring of the planning, and financial and operational performance of the LAs in their roles as designated water undertakers and sewerage service providers. NWCPC served as a bulk water supplier to other water undertakers but also served as water distributor for some LAs. In Nairobi and 6 large municipalities, the LAs were the water undertakers. The LAs and NWCPC also set their respective tariffs for approval by the MWRMD. There are over 1500 water supplies under the various agencies. MWRMD operate 630 piped schemes, NWCPC runs 48 schemes including Mombasa, municipalities operate 7 schemes, including Nairobi, while communities, SHGs and NGOs operate more than 865 schemes.

3.1.3 Sewerage services are mostly provided by local authorities in urban centres apart from a few Government institutions that operate their own systems, and can be found in only 215 urban centres serving about 14% of the populations with low standards of operation and major operation and maintenance problems, low service delivery and low revenues.

3.1.4 Private Sector Participation (PSP) in water supply and sewerage service provision in Kenya has essentially been limited to provision of consulting and contracting services or as water vendors. However, recently a few local authorities namely, Eldoret and Nyeri, in a bid to address some of the sector constraints have commercialised water and sewerage operations by setting up autonomous companies with reasonable success. MWRMD is experimenting with a trusteeship approach in Meru municipality; while Malindi was put under 5-year performance based Management Contract between the NWCPC and a private firm in February 2000. The main factors hindering effective PSP in the sector include: lack of well defined regulation; undefined criteria and guidelines for entry; inadequate legislation; administrative barriers to PSP licensing; as well as limited local private sector financial, technical and management capacity.

3.1.5 GOK has moved relatively fast in operationalising the Water Act (2002), with the establishment of the Water Services Regulatory Board (WSRB) in March 2003 as independent regulator and the division of the country into 7 Water Service Board (WSB) areas, namely: Upper Athi (Nairobi) Region Water Services Board, Rift Valley Region, Northern Region, Lake Victoria North Region, Lake Victoria South Region, Central Region, and Coast Region (see Annex 1). All the WSBs have been established. These WSBs comprise a number of local authorities clustered on the basis of viability but following the provincial and catchment boundaries as much as possible. Under the new institutional dispensation, WSBs will be licensed by the Regulator (WSRB) as Licensees in their areas of jurisdiction but will be required to contract out the service provision function to Water Service Providers (WSPs), which could be either local authority owned

6 companies, private companies, NGOs and Community Based Organisations. MWRMD will continue to be responsible for policy formulation but will no longer be involved in service provision in any form, while NWCPC would concentrate instead on bulk water supply and development of state schemes under the residual powers of the Minister.

3.1.6 Operations of rural supply schemes, which are currently under the purview of MWRMD, would also come under the WSBs who will contract out their operations to community Self Help Groups. A Water Service Trust Fund (WSTF) has also been set up for funding investments in the sector, particularly for rural water supply and sanitation. There is provision for an Appeals Board with whom WSBs, operators, and consumers may lodge their complaints related to service provision.

3.1.7 The institutional framework for service delivery under the Water Act (2002) is supported by all the donors active in Kenya’s water and sanitation sector. In collaboration with development partners, the Government has defined a Transition Plan for implementation of the reform program over a three-year period. A high-level Inter-Ministerial Water Sector Reform Steering Committee (WSRSC) will guide and oversee this process. The Committee comprises one representative each from the MWRMD, MOLG, MOF, MOH, Ministry of Environment and Natural Resources, Ministry of Agriculture, the National Council of NGOs, Kenya Association of Manufacturers (KAM), Water Service Providers Association, and Water Users Association. A Water Sector Reform Secretariat (WSRS) established at the MWRMD supports the WSRSC, with mandate to operationalize the Water Act. This includes building consensus among the stakeholders, establishment of the new institutions, and ensuring the transfer of the services to the new actors.

3.2 Rift Valley Water Services Board

3.2.1 In Nakuru, water and sewerage services were for a long time provided by the Municipal Council of Nakuru (MCN). However, GOK revoked MCN’s water undertakership in February 2001 due to poor performance, and Department of Water Development (DWD) of MWRMD has since managed the operations of Nakuru Water and Sewerage Services (NWSS).

3.2.2 The accounting and financial policies of NWSS are based on the government system, which imply a cash convention. The lack of a ring fenced accounting for the Services and the mingling of revenues with central government finances has prevented the independent reporting of NWSS operations. Budgetary control is generally weak, and the actual processes and systems supporting the revenue cycle do not effectively relate billing to actual consumption. At KES 22.25/m3, the average tariff for water services represents 2.2% of the rate sold by water vendors (KES 20 per 20 litre Jerry can) to consumers in Nakuru and peri-urban areas.

3.2.3 Commercial management is inefficient, characterized by unreliable customer records and obsolete billing systems. About 70% of the meter connections are either disconnected or malfunctioning, and since the breakdown of the computer system in 1995, billing is done manually based on flat and average rates. This untenable situation is aggravated by the absence of a formal credit control policy, and has resulted in the build up of customer payment arrears. It is estimated that only 60% of billed amounts is collected. As at July 2003, NWSS’s debtors stood at KES 1.14 billion, which included KES 385 million from the Municipal Estates, KES 435 million from other domestic consumers and KES 269 million from GOK and other public sector institutions. The liabilities of NWSS have also increased, with the accrued arrears on long-term debt estimated to have reached KES 51.3 million, as at March 2004. Some KES 177 million and KES 27 million of NWSS accounts payable (KES 243 million), is owed to the Service’s major creditors, NWCPC and Kenya Power and Lighting Company respectively. In terms of the transitional arrangements, NWSS liabilities would be placed in a Suspense Account pending resolution by MCN and GOK in

7 the context of the latter’s efforts to find a comprehensive solution to the problem of pending bills for GOK and other public institutions. This notwithstanding, GOK’s submission of a plan, acceptable to the Fund, for resolving the liabilities of NWSS and indebtedness of GOK institutions to NWSS by December 2005 is a condition for the ADF loan.

3.2.4 NWSS is currently incurring an average monthly cash operating deficit of KES 5 million, with monthly revenue collection of KES 8.5 million, against a cash expenditure of KES 13.5 million. The poor financial performance of NWSS is mainly attributed to high system losses poor financial management, billing and collection practices. Under the proposed project, all the existing unmetered connections and new customers will be metered, as this would contribute significantly towards the reduction of commercial losses.

3.2.5 Since the Services in the project area maintained poor records and do not have audited accounts that comply with international accounting standards, the financial analysis will focus on RVWSB, which shall be responsible for service delivery within the project area, as well as serve as Executing Agency for the project.

3.2.6 RVWSB was established through Kenya Gazette Vol. CVI - No.22 of 12 March 2004, and members of the Board of Directors appointed. These comprise representatives of Municipal Council of Nakuru, Naivasha and Narok County Councils, Kenya Association of Manufacturers, Kenya Chamber of Commerce and Industry, WorldWild Fund for Nature (East Africa Region) and a Chairperson. As an asset holding company, the Board’s mandate under the Water Act (2002) is essentially to plan and finance capital investments in the RVWSB area, as well as monitor Water Service Providers contracted to manage the various services. To ensure financial sustainability, RVWSB’s organizational structure (see Annex 3) is designed to be lean, but it will be adequately resourced, in terms of personnel with the requisite skills and experience, to fulfil its mandate and meet its responsibilities under the project.

3.2.7 In accordance with the institutional framework for service delivery under the Water Act (2002), a set of agreements, contracts and Licences will underpin the transactions between the various parties, consistent with the practice adopted for Kenya’s other regions. WSRB will issue a Provisional Licence to RVWSB as the Licensee in the Rift Valley cluster. GOK, through the Ministry of Finance, would enter into a Development Agreement with the RVWSB, which will stipulate the conditions for restructuring the provision of water and sewerage services, as well as financing conditions for the institutional, commercial and technical improvements to be implemented by RVWSB. Significantly, the Agreement will articulate a clear framework to ensure prompt settlement of water bills incurred by GOK institutions.

3.2.8 As owner, MCN will lease the existing fixed assets in Nakuru Municipality, comprising the infrastructure and facilities for provision of water and sewerage services, to RVWSB. For this purpose, an independent valuation of MCN’s fixed assets inventory would be carried out. Fixed assets developed by MWRMD during the period of its operation of NWSS will be transferred to RVWSB while new assets, including those provided under the project, shall belong to RVWSB. The staff and operational assets of NWSS, including all existing Customer Contracts, would be transferred to NAWASSCO.

3.2.9 Upon the issuance of the Provisional License to RVWSB, and execution of the Development Agreement, Lease Contract and Deed of Handover, RVWSB would proceed to contract out the service provision function to a Water Service Provider for Nakuru Municipality. The process would subsequently be extended to the other project towns. While the Water Act envisaged that WSPs would be recruited on competitive basis, the interim arrangement adopted by GOK for all WSB areas is that the newly established municipality owned companies would serve

8 as WSPs for an initial period of 5 years. Hence, NAWASSCO will be contracted to operate and manage the services in Nakuru, and remuneration would partly be based on the achievement of agreed performance targets. The execution of a Services Provision Agreement between RVWSB and NAWASSCO, in form and substance acceptable to the Fund, is a condition precedent to first disbursement of the ADF loan.

3.2.10 In Nakuru, a Transition Committee, comprising representatives of MCN, MWRDM and NAWASSCO was established in August 2003 to oversee the management of NWSS and transfer of the services to NAWASSCO. Agreement has been reached to effect the transfer of the services to NAWASSCO by 31 May 2004, who will then be contracted by RVWSB to continue to provide the services under a Service Provision Agreement.

Financial Performance of RVWSB

3.2.11 The projected financial statements of RVWSB are summarised in Table 3.1 below and detailed in Annex 4.

Table 3.1: Summary of RVWSB Projected Financial Statements (KES "million”)

2004/05 2005/06 2006/07 2007/08 2008/09 Income Statement Revenues 29,137.45 40,552.97 65,569.52 160,565.10 165,445.67 Nakuru Water & Sanitation Services Naivasha & 4 Towns DWD Water Supplies in RVWSB Area

Operating Expenses 13,580.00 15,798.40 19,971.93 23,130.01 23,851.21 Depreciation 26,398.29 50,574.95 82,790.27 91,826.96 92,446.19 Operating Income/ (Loss) (10,840.84) (25,820.38) (37,192.69) 45,608.13 49,148.26 Financial Costs Lease Fee 0.00 0.00 0.00 7,962.02 8,073.42 Regulator Fee/Licences 736.61 1,039.15 2,298.53 3,981.01 4,036.71 Interest 0.00 7,384.76 17,341.10 20,617.36 20,650.03 Earnings Before Tax (EBT) (11,577.44) (34,244.29) (56,832.32) 13,047.75 16,388.12 Net Income (11,577.44) (34,244.29) (56,832.32) 9,133.42 11,471.68 Balance Sheet Fixed Assets (net) 659,957.27 1,264,373.71 2,069,756.71 2,295,673.94 2,311,154.94 Current Assets 2,913.75 4,055.30 6,556.95 16,056.51 16,544.57 Current Liabilities 4,074.00 4,739.52 5,991.58 6,939.00 7,155.36 Long Term Debt (net) 0.00 492,317.20 1,156,073.20 1,374,490.44 1,376,668.44 Capital Employed 658,797.01 771,372.28 914,248.88 930,301.01 943,875.71 Ratios Current Ratio 0.72 0.86 1.09 2.31 2.31 Debt Service Coverage Ratio n.a 3.35 2.63 6.48 6.62 Operating Ratio (%) 137 164 157 72 70 Working Ratio 46.6 38.9 30.5 14.4 14.4 Staff Costs/Revenues (%) 26.4 25.2 22.7 11.2 11.3 Return on Assets (%) (1.75) (2.7) (2.75) 0.40 0.84 Debt Ratio (%) n.a 40.0 57.4 59.4 65.0

Source: MWRMD, NWSS and Mission Estimates n.a – not applicable

3.2.12 The projections of RVWSB’s financial statements have incorporated the financial results of the water supply operations in Nakuru municipality, Naivasha and the four other project towns (Elburgon, Gilgil, Molo and Njoro), as well as the DWD Water Supplies in the RVWSB area. The underlying assumptions are stated in Annex 4, the most important of which include i) 18% of the Customer Tariff charged by WSPs is payable to RVWSB, which represent the embedded portion of the Service Provider Tariff attributed to RVWSB’s operations and the Regulator Tariff/License Levy; ii) UfW in the project area is reduced dramatically as a result of the infrastructure rehabilitation works and metering program supported under the project; iii) the terms and conditions for the on-lending of UA 13.04 million from the ADF loan to RVWSB include an

9 interest rate of 1.5% and a tenor of 30 years, including a 5 year grace period; and v) Lease payments to MCN, factored at 1% of NWSS operating revenues, are assumed to commence one year after the commissioning of the project.

3.2.13 As shown in Table 3.2, RVWSB’s financial performance will witness a turnaround by 2007 when the Board starts posting a positive operating income, i.e. it is able to generate adequate revenues to fully cover its operating expenses, including depreciation charges. Whereas the operating ratio would remain high, especially in the early years, the RVWSB’s financial sustainability will improve as the benefits from cost control measures, improved billing and collection performance and reduction of UfW are realized in the operations of the WSPs, particularly in Nakuru. This is borne out by a working ratio; which measures operating costs less depreciation expenses as a percentage of operating revenues, that remains within satisfactory levels. It is projected to drop from 46% in 2004 to 14% by 2007.

3.2.14 The operations of RVWSB would turn profitable from 2007 onwards, when it posts KES 9.13 million as net income, rising to KES 11.47 million in 2008. However, profitability, as measured by return on assets, remains low, although it becomes slightly positive (0.40%) by 2007. Notwithstanding the increase to the Board’s leverage (from 40% in 2005 to 59% by 2007), the liquidity position would improve during the projection period. For instance, the current ratio is expected to rise from a period low of 0.72 in 2004, and peak at 2.31 by 2007. Similarly, Debt Service Coverage ratio (DSCR) will remain within acceptable levels, at the average of 4.7 during the period, helped by the build up of internally generated funds.

4. THE PROJECT

4.1 Project Concept and Rationale

4.1.1 The project is designed to increase water supply and sanitation coverage in some parts of the Rift Valley Water Services Board (i.e. Nakuru municipality and the town of Naivasha, Gilgil, Molo, Elburgon and Njoro and the rural communities). This will ensure that the RVWSB takes over schemes that have been rehabilitated to an acceptable state with low levels of UfW, and good knowledge of its consumers. The production capacity will be increased to meet current and medium term demand in Nakuru, current demand in the 5 other towns, and provide services to 100,000 rural consumers. There is consensus among donors and GOK that assistance in the rehabilitation and expansion of services would be more effective if accompanied by the transfer of services to the new WSBs and their WSPs and capacity building for the new institutions.

4.1.2 Unlike earlier Bank Group financed projects in Kenya, which focussed on physical infrastructure, this project will ensure that new institutions are put in place and strengthened while the infrastructure is being rehabilitated and extended. The project, as designed, will provide technical assistance to RVWSB and NAWASSCO, the WSP for Nakuru, to ensure that RVWSB develops adequate institutional capacity to manage its contracts with the WSPs, and that NAWASSCO will have adequate capacity for operation and maintenance, as well as financial management of the Nakuru schemes. The project will not provide long-term training to staff of the new institutions as they are expected to recruit qualified staff from the market or be redeployed from the existing institutions. The project will however provide short-term training, on-the-job training as well as arrange study tours for some of the key staff. Capacity building support to WSRB, the Regulator, WSTF and WSRS, is being provided by other donors.

4.1.3 In designing the works for Nakuru, emphasis was placed on increasing the efficiency of use of the existing facilities. Hence priority is accorded to rehabilitation and restoration of the facilities before increasing production capacity, reduction of wastage and losses by introducing full scale metering of

10 connections, as well as the gradual introduction of full cost recovery tariffs. In trying to increase the production capacity, the first choice was to increase capacity by developing more boreholes in existing wellfields within the Lake Nakuru catchment, but studies revealed that these are being exploited at close to their safe yields. A number of combinations of sources to meet the long-term 2020 demand were also considered but it was decided to only slightly augment capacity to address the medium term needs, improve the management of the services before addressing the longer term needs. This led to the decision to develop the Olobanita wellfield, which should meet Nakuru municipality demand to 2015.

4.1.4 Sanitation improvements in Nakuru took into consideration the need to improve access to services by the poor in low-income peri-urban areas by providing communal and public latrines and extending community managed and metered water kiosks into these areas. The improvements also focus on replacing undersized sewers and rehabilitating damaged sewer lines to increase the flows to the sewage treatment stations and to reduce incidence of blocked sewers that lead to overflowing on sewage and the attendant health hazards. Parts of the storm water drainage system will also be rehabilitated to reduce the incidence of flooding during rainstorms. The sanitation improvements will also raise awareness about water quality and the many water borne diseases, reduce the contamination of water supplies known to occur during collection, transportation and storage, combating malaria and avoiding HIV/AIDS. As connections to the Nakuru sewerage system are low and the system is operating below capacity, the project will contribute to increasing the number of connections by adding 15 km of sewer lines. The project does not address solid waste management as AFD is planning to assist the municipality.

4.1.5 For the secondary towns in the Rift Valley, taking into account their failure to run commercially as individual entities, the management options study will investigate how best they can be managed, and to ensure that they are not a burden to the RVWSB when handed over. The recommended management option and the short-term investment needs will be implemented, again giving priority to maximizing on the existing facilities by rehabilitating them and implementing minor expansions to meet current demand.

4.1.6 Taking into account the low levels of coverage in rural areas, the project will extend services to the Arid and Semi-Arid Lands (ASAL). The rural water supply and sanitation component will develop a programme within the area drawing from lessons of other donors and the Bank’s Rural Water Supply and Sanitation Initiative on using the demand responsive approach, which will ensure more community participation, ownership and management of their schemes. Communities will be trained to operate and maintain the schemes of their choice and mechanisms to ensure availability of spare parts will be put in place.

4.2 Project Area and Beneficiaries

4.2.1 The project area covers the Rift Valley Water Services Board service area, which constitutes 7 of 19 districts in the Rift Valley province. The Province has a population of about 7 million and stretches from the north-western tip to the south west of the country. The service area of the RVWSB has a population of about 2.88 million inhabitants (1999 Census), 22% or 643,122 live in urban areas and 78% in rural. The districts within the RVWSB are: Nakuru, Narok, Baringo, Koibatek, Turkana, West Pokot and Elgeyo Marakwet, and within them are 14 urban water supply schemes serving a total population of 310,400, or 48% of the urban population. Seven of the schemes, including Nakuru, are currently run by the DWD, 6 by NWCPC and 1 by the Naivasha Municipal Council. It also has 49 rural schemes run by the DWD serving about 210,000 people or 10% of the rural population. The details of the RVWSB urban schemes are given in Annex 5.

4.2.2 Poverty in Kenya is widespread, a critical development challenge and has been worsening, with per capita income in 2002, at US$ 360 - lower than it was a decade earlier. Based on the 1997 Welfare Monitoring Survey, the number of poor increased from 3.7 million in 1972-3, through 11.5 million, or 48.4 percent of the population in 1990, to 52% in 1997. It was estimated at 56.8 percent in 2003. In the Rift Valley Province, poverty levels increased from 42% in 1994 to 51% in 1997, when it had the highest number of individuals living below the poverty line in rural areas. Inequality in the distribution of income is also high, with the Gini Coefficient estimated at 0.42 in 1997.

4.2.3 The rural poor are characterized by landlessness and lack of education. They are clustered in certain socio-economic categories, which include small farmers, pastoralists in the ASAL areas, agricultural labourers, casual labourers, unskilled and semi-skilled workers, female-headed households, the physically handicapped, HIV/AIDS orphans and street children. In particular, there is a high incidence of poverty amongst rural female-headed households owing to high male out- migration in the rural areas and relatively poor access to productive assets. The majority of the urban poor live in peri-urban and slum settlements, which are characterised by inadequate/low quality basic services, including inadequate water supply and sanitation services, limited access to quality schools and health services and unhygienic living conditions.

4.2.4 Nakuru is the fourth largest city in Kenya after Nairobi, Mombasa and Kisumu. It is located at the heart of the Great Rift Valley and is the headquarters of the Rift Valley Province. To the south lies the highly alkaline Lake Nakuru, a RAMSAR site that is a major tourist attraction as a habitat of the Lesser Flamingos and pelicans. There are several lakes in the Rift Valley the largest of them being Lake Turkana in the northwest of Kenya, with Lake Baringo, Bogoria, Nakuru and Naivasha further south. The lakes are highly alkaline, except Lake Naivasha.

4.2.5 The economy of Nakuru Basin is based on agriculture, and is often referred to as the breadbasket of Kenya, forestry, mining, quarrying, and manufacturing. Cereal crops like wheat, barley, maize, beans, and sunflower are common in the north and northwestern parts whilst potatoes thrive in the higher wetter parts of the basin. The grasslands to the east of the lake are developed to sustain livestock production mostly sheep and cattle ranching. There is also growing interest in tourism in the area due to attractive and numerous wildlife species.

4.2.6 Large scale to medium and light agro-based industrial and manufacturing activities include dairy processing, meat products, vegetable oil extracts, cereal milling and confectioneries, rubber products, tyre re-treading, battery manufacturing, paint, chemicals, glass products and ceramic industries, metal works, engineering, vehicles, textiles, leather, timber and wood industries. There is also large growing informal sector know as Jua Kali enterprises. A large part of the Rift Valley province is arid and semi-arid and about 67% of the population depend on livestock for their livelihood, but water problems are widespread in the area.

4.2.7 Nakuru town is presently supplied with water from 4 different schemes, with a total capacity of 40,079 m3/day, but only about 30,000 m3/d is currently produced for a population of about 290,000, 60% of whom live in low income and peri-urban areas. The infrastructure is old, and defective, and has deteriorated due to poor maintenance. The water supply infrastructure is experiencing high levels of UfW, which is currently estimated at 70% and is largely attributed to the high number of illegal and unmetered connections, faulty meters in the system with low estimates of consumption, (only about 17,300 out of 24,892 connections are metered, most of them faulty), and the poor condition of the transmission mains and reticulation network. Water supply is down to 4 hours a day in some areas with the result that women and children spend long hours collecting water or buying it at very high cost from vendors. The services are also overstaffed, with 101 connections per employee, as against 150 to 250 connections per employee for well-run water utilities.

4.2.8 The existing sewerage system covers an area of 16.6 km2 or 26% of the present municipal area, which is served by 2 sewage treatment plants – the Njoro Sewage Treatment Plant, with a capacity of 9,600 m3/day, and the Town Sewage Treatment Works with a capacity of 6,600 m3/day. There are about 9,608 registered sewer connections and the recorded average daily sewage flow is 8,991 m3/day compared to the design flow of 16,200 m3/day. With over 70% of the system consisting of 150 mm pipes, the system suffers an average of four blockages per day. The town also has a stormwater drainage system, which only serves the central built-up area.

4.2.9 Rapid unplanned settlement growth in the peri-urban areas has not been matched by the provision of basic amenities like clean water, sanitation, electricity and even health facilities, resulting in deplorable living conditions. Currently only 4% of the people in the slum settlements have access to clean water, while sanitation is generally lacking.

4.2.10 As a result of the poor access to clean water and sanitation services, there is high incidence of water-borne diseases like cholera, dysentery and diarrhoea in the project centres, which is more pronounced in the poorer communities. Table 4.1 shows the incidence of water related diseases in Nakuru District attributed to the use of water from unprotected sources, and low awareness of personal hygiene among the population. Prevalence of HIV/AIDS in the area is high as it also the transit route of heavy trucks to and from Uganda, affecting an estimated 25% of the population in the project area. The Government’s response to the very high incidences of both Malaria and HIV/AIDS is to mainstream the campaigns to combat these two scourges in its development programmes.

Table 4.1 - Incidence of Water related diseases in Nakuru District 2000-2003 Diseases 2000 2001 2002 Treatment Cost 2002 KES)/incident Malaria 179,124 163,774 153,195 2,500 Intestinal Worms 18,600 16,092 15,609 3,500 Diarrhoeal diseases 46,524 33,679 29,981 3,500 Skin Diseases 40,728 46,506 51,421 3,500 Eye Infections 17,928 15,601 16,226 3,500 Typhoid Fever 9,036 11,295 9,352 7,000 Bilharzia 828 701 324 (Source: Ministry of Health Nakuru District)

4.2.11 The situation is similar in the secondary towns under the RVWSB. The schemes are old with little or no recent improvements. Total production capacity for the 5 towns to be rehabilitated under the project (Naivasha, Gilgil, Njoro, Molo and Elburgon) has decreased from 11,650 m3/day to7,500 m3/day for a served population of about 120,000. UfW is estimated at 50%, with low metering and high levels of faulty meters, poor billing and collection and unreliable services, with less than 6 hours of supply a day for some consumers.

4.3 Strategic Context

4.3.1 In both its Poverty Reduction Strategy Paper of 2001 and the Economic Recovery Strategy for Wealth and Employment Creation of 2003, GOK recognises the strong link between its diminishing water resources, the lack of access to improved water supply and sanitation and poverty. The strategy also recognises that the current institutional framework constitutes a bottleneck to achieving the poverty reduction objectives, and is therefore undertaking the institutional reforms to improve resource management and service delivery.

4.3.2 The project is in line with the Government’s Economic Recovery Strategy, the National Water policy, the water resources management strategy, and the National Water Services Strategy through its focus on the reform process to establish and strengthen the new institutions, maximize the efficiency

13 of use of the existing infrastructure through rehabilitation and reduction of unaccounted for water before developing new sources. The focus on the Rift Valley Water Services Board, a large part of which is in the ASAL areas, is also in line with the importance given to the development of the ASAL regions in the Economic Recovery Strategy, which aims to integrate the most vulnerable groups into the mainstream of economic activities. In recognition of this, other Bank Group interventions in Kenya under ADF IX such as the ASAL Based Livestock Development project, the Education III project and the Health III project, have components focusing on the ASAL and the Rift Valley province.

4.3.3 The project is also in line with the 2002 to 2004 Country Strategy Paper, which states “The strategy to improve equity and reduce poverty will be in the areas where the Bank can make immediate and notable impact on poverty and MDGs by focussing on the social sector of education and health, and water supply and sanitation.” The CSP recognises that under-investment in maintenance, coupled with inadequately qualified manpower and poor technology choices, has resulted in the deterioration of Kenya’s water supply and sanitation infrastructure. It calls for substantial investment to rehabilitate the physical infrastructure as well as expand the facilities to increase access to water and sanitation services. It also calls for improved cost recovery performance of the service providers in urban areas, and greater community participation in the provision of water supply and sanitation facilities in the rural centres for ensuring financial viability and institutional sustainability. The Bank Group strategy in the sector is to support efforts to rehabilitate the infrastructure pursuant to achieving the MDGs including necessary expansion to satisfy medium term demand growth, and to support the development of appropriate institutional capacity to manage and operate the water supply and sanitation facilities. The strategy for the rural water supply and sanitation component will be in line with the Bank’s Rural Water Supply and Sanitation Initiative with possibilities of scaling up with additional funding under the Initiative.

4.4 Sector Goal and Project Objective

Sector Goal

4.4.1 GOK’s goal for the water supply and sanitation sector is to improve the social well being of the populace, enhance the performance of the national economy and ensure equitable provision of adequate quantity and quality of water and sanitation services to all competing user groups at affordable cost on a sustainable basis.

Project Objective

4.4.2 The project objective is to, improve water supply and sanitation services in urban, peri- urban and rural communities within the service area of the Rift Valley Water Services Board.

4.4.3 The indicators for achieving the project objectives are: Water availability improved from 6 to 24 hours and sanitation services improved in urban and peri-urban areas for 290,000 people in Nakuru and 120,000 people in Naivasha, Gilgil, Molo, Njoro and Elburgon; and rural water supply and sanitation services extended to 100,000 people within the Rift Valley Water Service Board area; with regular billing and collection efficiency increased from about 60% to 90%, Unaccounted- for-water reduced from the current level of 70% to 25% and O&M (including depreciation charges) cost recovery tariffs in place by project completion in 2008.

4.5 Project Description

The description of the project components and outputs is given below:

A. Institutional Support to RVWSB and NAWASSCO

(i) Institutional Support to Rift Valley Water Services Board (RVWSB): To operationalize the Board as the licensed Water Undertaker in the project area. Technical Assistance (TA), including a full time Transactions Adviser, will assist in (a) preparation of the Board’s Business Plan and Strategic Plan for the development and extension of water supply and sewerage schemes in its area of jurisdiction; and (b) structuring and administration of the agreements between the RVWSB and various parties; including MOF (On-lending Agreement and Development Agreement), NAWASSCO (Service Provision Agreement). The consultants will also assist in the preparation of technical, commercial and financial performance targets that would constitute the overall framework for the provision of water and sewerage services in the Rift Valley cluster. A Procurement Specialist will assist in project management activities and logistical support, equipment and training will be provided to the RVWSB. Short-term training including study tours, will also be undertaken for key staff. Due to the wide geographical extent covered by the RVWSB, they will be provided with vehicles to assist the project management and coordination activities as well as to monitor the different contracts with urban and rural WSPs.

Under this component, three consultancy studies will also be undertaken. These will include (i) update and valuation of the NWSS fixed assets inventory; (ii) preparation of Performance Targets and monitoring indicators in terms of the Service Provision Agreement between RVWSB and NAWASSCO; and (iii) a Cost of Services Supply Study. The recommendations of the latter study will constitute an input for adjustment to water and sewerage services tariffs by 2007. Budgetary provision has also been made for the annual technical and financial audits of NAWASSCO’s performance.

(ii) Institutional Support to Nakuru Water Supply and Sanitation Services Company (NAWASSCO): to strengthen its capacity as Water Service Provider in Nakuru municipality. TA will be provided in operations and maintenance management (Utility management expert-12m/m, Commercial Manager-12 m/m, Accounting/Finance and Computer experts-12 m/m, O&M expert-12 m/m) to improve operations, billing and collection performance, provide training to complement the rehabilitation works as part of the measures under the project that are aimed at reducing UfW from the current level of 70% to about 25% by 2007. Short-term training in the form of study tours will also be undertaken for key staff.

B. Water Supply and Sanitation Improvements for Nakuru:

(i) Development of Olobanita Wellfield: A wellfield with 8 new boreholes will be established at Olobanita, just north of the Menengai Crater to increase capacity by 15,000 m3/day. Water from the boreholes will be pumped to a 500m capacity ground level collector tank, and then on to a 2500m capacity high level storage tank about 4.52 km away, from where it gravitates 16.42 km to Nakuru town, and then mixed with water from other sources and distributed. Communities living along the route of the transfer pipeline will also be served.

(ii) Rehabilitation and optimisation of Kabatini, and Baharini Boreholes and Bulk Transfer Systems: Four of six Kabatini boreholes and two of four Baharini boreholes will be relocated and the pumps and motors replaced to allow more space between the boreholes

and ensure optimum operation of all six boreholes. The electrical switchgear will be rehabilitated and the manifold systems linking the new boreholes to the bulk transfer pipelines will be constructed and bulk meters provided for all the boreholes. The bulk transfer mains will be rehabilitated and all connections along the Kabatini line will be transferred to a service line and metered. Also rehabilitation and optimisation of Meroroni water supply raw water main by repairing chambers and leaks and swabbing, and the many illegal connections along the pipeline identified for metering under (iii) below.

(iii) Reinforcement of the Water Distribution System: The sub-component will include the provision of distribution pipes and fittings, constant flow valves, bulk and consumer meters, meter test bench and meter repair kits. It will involve the installation constant flow valves to regulate supply into different water supply zones, installation or replacement of bulk meters in the water supply zones to monitor flows and losses, identification and replacement of leaking pipes and fittings in the water distribution system, identification and replacement or repair of faulty consumer meters and installation of new meters. About 106 metered public water kiosks will be installed mainly in the peri-urban areas, and the rural communities along the Olobanita pipeline, to be managed by community representatives.

(iv) Institutional strengthening: This will include computerisation for billing, revenue collection, and provision of O&M plant, equipment, tools, offices and workshops, conduct a consumer survey, mapping, and improve consumer database. Under this component, NAWASSCO’s financial management and information systems will be upgraded through installation of computerized accounting packages well interfaced with the billing and collection functions, including the necessary staff training.

(v) Aquifer Management and Monitoring Programme. This will include establishment of a system of observation boreholes, development of a database system for storage, retrieval and monitoring of hydrological and environmental data for aquifer management of the lake Nakuru catchment, and development of an integrated surface and groundwater model of the aquifer. It will provide laboratory equipment and chemicals to reinforce the capacity of the water quality laboratory for catchment monitoring. Complementary reforestation and conservation activities in the aquifer recharge zones of the Bahati and Dundori forests are being undertaken by other stakeholders.

(vi) Sanitation Improvements - Rehabilitation of existing sewers and storm water drains, replacement of critical sewers and construction of storm water outfalls, provision of on-site sanitation through repair and construction on new public and communal latrines for low- income areas. The sewer network will be extended by 15 km to enhance the connections to the system. Also a public awareness and hygiene education campaign will focus on issues of water quality and health, water related diseases, malaria, HIV/AIDS, etc. It will also assist MCN to apply the council by-laws in order to reduce pollution of the lake catchment by industries, and address the use of untreated sewage for vegetable gardening, etc.

C. Water Supply and Sanitation Improvements for other Rift Valley Towns:

(i) Study of the management options and immediate and medium term investment needs for water supply and sanitation services in 13 secondary towns within the Rift Valley Water Services Board that are currently provided by the NWCPC, DWD and municipalities (An investment needs study has already been conducted for Naivasha), and determine their short and medium term investment needs.

(ii) Rehabilitation of Water and sanitation infrastructure in other secondary towns in Nakuru District under the Rift Valley Water Services Board to ensure more reliable services for 120,000 people; and facilitate the transfer of services to the RVWSB and its Water Services Providers according to the Act and the recommended management option. The towns are: Naivasha, Gilgil, Molo, Elburgon and Njoro and the type of work envisaged include borehole construction, rehabilitation of river intakes, replacement of pumps, transmission and distribution pipelines, zonal and consumer metering.

D. Rural Water Supply and Sanitation Programme

(i) Development and Implementation of RVWSB Rural Water Supply and Sanitation Programme. This will involve determining the current levels of rural water supply in the country and in the Rift Valley in particular, and development of a rural water supply and sanitation programme based on the demand responsive approach. The programme will use implementation guidelines and training manuals being developed with assistance from SIDA and DANIDA, which will identify roles for the different players including the MWRMD, RVWSB, the WSTF, the communities, and local service providers such as NGOs, artisans, consultants and contractors. The guidelines will focus on putting in place institutional arrangements and financing mechanisms with criteria that will allow community requests to be evaluated in a transparent manner, prioritised and funded. Technology choices for water supply will range from hand dug wells, drilled wells, protected springs, boreholes, gravity schemes, rainwater harvesting, sub-surface dams, small piped systems, and pumping systems (hand pumps, motorized, solar or windmill pumps). Sanitation options will be limited to on-site sanitation systems, mostly households or communal VIP latrines. The programme is expected to reach about 100,000 people but can be scaled up with additional funding, once the institutional and funding arrangements are in place.

4.6 Production, Market and Prices

Water Demand

4.6.1 Projections of water demand over the project horizon are based on analysis on the Nakuru study, the current consumption patterns in the project area, observed patterns in the other province as well as the projected changes in demographic patterns. For design purposes domestic water demand is estimated at 180, 120, 60, and 30 litres per capita per day (l/c/d) for high, medium, low cost and peri-urban settlements. Water demand for Nakuru municipality is projected to increase from 10.25 million m3 per annum in 2004 for a population of 274,667 to 15.29 million m3 for a 2015 population of 401,000. The population projections for water demand are summarized in table 4.2 below.

Table 4.2 - Projections for Water Demand in Urban Centres of Nakuru District Annual Demand Population of Daily Demand of Annual Demand for Nakuru, Population of Total Daily Annual Water Naivasha and Naivasha and for Naivasha and Naivasha and 5 Nakuru Demand demand (Nakuru) other Nakuru other Nakuru Other Rift Valley other towns in Year Municipality (Nakuru) m3/yr District Towns District Towns Towns (m3/yr) Nakuru District

2004 274,667 28,093.52 10,254,136.09 150,500.00 15,050.00 5,493,250.00 15,747,386.09 2005 284,280 29,717.90 10,847,033.62 155,767.50 15,576.75 5,685,513.75 16,532,547.37 2006 294,230 30,922.58 11,286,742.37 161,219.36 16,121.94 5,884,506.73 17,171,249.11 2007 304,528 32,154.45 11,736,373.23 166,862.04 16,686.20 6,090,464.47 17,826,837.70 2008 315,186 33,414.45 12,196,273.47 172,702.21 17,270.22 6,303,630.72 18,499,904.19 2009 326,218 34,703.57 12,666,802.52 178,746.79 17,874.68 6,524,257.80 19,191,060.32 2010 337,636 35,251.02 12,866,622.10 185,002.93 18,500.29 6,752,606.82 19,619,228.92 2011 349,453 36,695.53 13,393,868.50 191,478.03 19,147.80 6,988,948.06 20,382,816.56 2012 361,684 38,171.38 13,932,555.05 198,179.76 19,817.98 7,233,561.24 21,166,116.29 2013 374,343 39,679.68 14,483,082.15 205,116.05 20,511.61 7,486,735.89 21,969,818.04 2014 387,445 41,221.55 15,045,864.23 212,295.11 21,229.51 7,748,771.64 22,794,635.87 2015 401,005 41,883.87 15,287,613.77 219,725.44 21,972.54 8,019,978.65 23,307,592.42 2016 415,040 43,615.46 15,919,642.50 227,415.83 22,741.58 8,300,677.90 24,220,320.41 2017 429,567 45,383.15 16,564,849.74 235,375.39 23,537.54 8,591,201.63 25,156,051.37 2018 444,601 47,188.21 17,223,696.73 243,613.53 24,361.35 8,891,893.69 26,115,590.42 2019 460,163 49,031.95 17,896,660.87 252,140.00 25,214.00 9,203,109.96 27,099,770.83 2020 476,268 50,915.72 18,584,236.25 260,964.90 26,096.49 9,525,218.81 28,109,455.06

Production

4.6.2 Olobanita well field has the projected production capacity of 15,000 m3/day. Kabatini and Baharini ground sources and Meroroni water supply and bulk supplies from NWCPC will be restored to 40,000 m3/day from the current level of 30,000 m3/day. With a production of 55,000 m3/day and UfW levels reduced from 70% to 25%, this will be enough to meet the 2015 demand for Nakuru. The high levels of UfW is primarily due to high levels of illegal connections, low level of metering and under estimates of consumption. The population with access to potable water is expected to increase from the current level of 48% to 95% by 2015.

4.6.3 The implementation of the immediate rehabilitation works in Naivasha, Gilgil, Njoro, Molo and Elburgon will restore production capacity from the current level of 7,490 m3/day to the design levels of 11,650 m3/day and reduce UfW from 52% to 25%. This will not be enough to meet current and future demand but will improve the services for commercial operations.

Tariffs

4.6.4 The national water and sanitation policy recognizes the need for full cost recovery through user charges. However, the majority of consumers in the project area are currently charged flat rates based on grossly understated consumption figures and these are low compared with other similar towns and are lower than cost recovery tariffs. In line with the National Policy on Water Resources Management and Development, and as a condition of the ADF loan, cost reflective tariffs will be introduced gradually to ensure that NAWASSCO attains O&M cost recovery tariffs, including depreciation charges, not later than July 2007, and upon the commissioning of the scheme. The proposed cost of service supply study under the project should help NAWASSCO to optimise demand, incorporate a lifeline tariff and also embed charges for sewerage services. On the basis of the proposed investment and the projected operational costs, the proposed tariffs are presented in Table 4.3(a) below.

Table 4.3 (a): Schedule of Proposed Tariffs

Consumer Category Proposed Water tariff Sewerage Sewerage tariff US Tariff US $/ m3 tariff $/ m3 (KES/ m3) KES/ m3 Water Kiosks 20.85 0.27 12.8 0.17 0-10m3 20.85 0.27 12.8 0.17 3 10-20m 30.55 0.40 16.64 0.22 20-40m3 52.81 0.69 19.2 0.25 40-100m3 87.36 1.15 25.6 0.340 Industrial/Commercial 87.36 1.15 25.6 0.340

4.6.5 Water demand for low-income households is estimated at 30 l/c/d. As such, household water expenditure in the lowest income areas, based on the proposed tariff, is estimated to be about KES 85.70 per month, representing about 5% of household income for the low-income group of the beneficiary population. At this level of expenditure, it is expected that poor households would be able to afford the consumption of at least a subsistence level of safe piped water. The indicative household water expenditures for the various consumer categories, based on the proposed tariffs are shown in table 4.3 (b) below:

Table 4.3(b) – Estimated monthly household expenditure on water (KES) Income Group Proposed Tariff Av. Monthly bill1 Expenditure as % of Income Low-Icome1 <5,000 20.87 85.70 4.8% Low Income2 <5,000-10,000 21.12 217.37 5.0% Medium-Income 10,000-30,000 25.37 475.21 5% High-Income>30,000 38.23 1421.33 4.8% Industry/Commercial 55.29 3317.39 Average tariff 30.65

4.7 Environmental Impact

4.7.1 The Rift Valley Water Supply and Sanitation Project is classified in the environmental category 1, with potential negative environmental impacts requiring detailed field review, and an Environmental Impact Assessment (EIA) study. The project is particularly environmentally sensitive because of the involvement of lake Nakuru, a RAMSAR site, into which the treated sewage effluent will be discharged. EIA reports have been produced for the Nakuru component namely for the Immediate Rehabilitation of Water and Sanitation Infrastructures, and for the Olobanita Wellfield Development. All the findings of the EIAs, as well as mitigation measures for the Nakuru component are integrated in the Environmental and Social Management Plan (ESMP) for the project.

4.7.2 Potential impacts of the project will arise from activities like: rehabilitation works, pollutants, nutrients, on-site sanitation, drinking water treatment works, impacts of sewage and solid wastes, sewage treatment works, bulk transfer pipelines, provision of water to populations en- route, storage reservoirs, and Olobanita well-field development. The potential impacts for the Nakuru component were detailed in the EIA reports and summarized in the Board EIA Summary and the mitigation measures integrated in the project. (See Board EIA Summary ADF/BD/IF/2004/18 of 11/02/2004 for the English version and 01/04/2004 for the French version and Annex 6).

4.7.3 For the secondary towns of the Rift Valley covered by the project, the work envisaged includes borehole construction, rehabilitation of river intakes, replacement of pumps, rehabilitation of transmission and distribution pipelines, and metering. For the rural water supply technology

1 Average income in Peri-urban areas is taken as the lowest income recorded in the 1999 Census.

19 choices will range from hand dug wells, drilled wells, protected springs, boreholes, gravity schemes, rainwater harvesting, sub-surface dams, small piped systems, and pumping systems (hand pumps, motorized, solar or windmill pumps). Sanitation options will be limited to on-site sanitation. The adverse environmental impacts are those related to pollution of aquifers through wells, springs, boreholes and depletion of aquifers. To minimize pollution the wells and boreholes will be located away from and upstream of sources of pollution like latrines, sewer pipes, waste dumps and densely populated areas and they will be designed with proper seals to limit point source pollution, providing concrete lining, drainage aprons, and fencing. Aquifer depletion will be prevented through aquifer monitoring to determine the safe yield and limit abstraction levels to the safe yields. Construction related impacts like erosion and cut slope destabilization will be addressed by including the mitigation measures like landscaping and grassing, carting away and proper disposal of construction wastes in the works contracts.

4.7.4 There will be no displacement of people living in the project area. However, 10 small parcels of land totalling about 10,000 m2 (1 hectare), will be purchased from farmers at the Olobanita wellfield for the new boreholes, the water tank site and pumping station. This has been included in the cost estimates. The acquisition of land will be a condition of the loan.

4.7.5 Environmental monitoring of key indicators will include:- (i) Quality of drinking water in the town distribution network; (ii) water related diseases outbreaks; (iii)) quality of raw and treated sewage ; (iv) organic matter, heavy metals, pesticide residues in animal and plant tissues, etc. in Lake Nakuru; and (v) quality and quantity of industrial effluent before discharge into the sewage works.

4.7.6 The positive environmental impacts will include the following: Flows of treated sewage to lake Nakuru will increase and reduce the potential of its drying up; abstractions from the groundwater aquifers will be better controlled to prevent over-abstraction; overflowing of sewage into residential areas and the associated health hazards will be minimized.

4.7.7 Environmental Management in Nakuru is mainly under the responsibility of the District Offices of NEMA, KWS, and the District Forest Office. These institutions are responsible for the implementation of the District Environmental Management Plan and other projects, which include protection of the wellfield recharge areas under the project. They will coordinate the implementation of the Environmental and Social Management Plan (ESMP) for the project, in collaboration with RVWSB and NAWASSCO.

4.8 Social Impacts

4.8.1 The project will improve the reliability of water supply and sanitation facilities for the over 500,000 consumers of urban and peri-urban areas of Nakuru, Naivasha, Elburgon, Gilgil, Molo, and Njoro by 2008 (290,000 in Nakuru, 120,000 in the secondary towns), particularly the poor in low-income households who constitute 60% of the population. It will restore 24-hour services to those who are currently served but only get water for between 4 and 6 hours a day. It will enhance the quality of life within the Rift Valley Water Services Board area. The project will also increase capacity to gradually extend the water supply to 110,000 previously unserved people in Nakuru municipality by 2015.

4.8.2 The project will have significant impact on public health and general living condition of the people, who currently use water of doubtful quality from vendors, and unsafe and unreliable sources like shallow wells for their water supply. It will address the frequent blockages of the sewerage system and overflowing of sewage into public and residential areas and reduce the outbreaks of water related diseases, like cholera and diarrhoea by about 50%. These, together with the hygiene education program, will contribute to improved health conditions among the population

20 by increasing awareness of water related diseases and how to minimize them. The improved health will translate into lower healthcare costs for families and reduction in morbidity and mortality.

4.8.3 The expected reduction in water collection distances and times will be particularly beneficial to women and children, especially girls, who bear the burden of fetching water and have to walk long distances or queue for long periods. It will mean more time for girls to attend schools and more time for women to engage in other economically beneficial activities. The project will also set the conditions for development of income generating activities such as commercial water service providers.

4.8.4 In rural areas of the ASAL where many families are nomadic, moving from place to place in search of water and pasture for themselves and their cattle, and in some instances leading to conflict among them, the project will improve the situation for about 100,000 people and put in place institutional arrangements which will allow replication of the activities in the future. Women will have more direct involvement in the selection, location and management of sub-projects through their participation on water committees.

4.8.5 The implementation of the project will also create employment in the area while the improved services will attract more industries, hence create more jobs and boost the local economy. The management of public water kiosks will create employment for community representatives, at least half of whom will be women.

4.9 Project Costs

4.9.1 The estimated cost of the project net of taxes and duties is KES 2,240.35 million (UA 21.21 million). The costs are based on the findings of the Nakuru Water Supply and Sanitation study that was completed in 2000, adjusted for inflation, and the JICA financed Preparatory Study on the Water and Sewerage System of Naivasha Town completed in 2003 as well as the costs of similar projects in Kenya. The rural water supply and sanitation estimates are based on per capita costs of US$ 40 from similar projects in the country and in other countries in the region. A physical contingency of 10% and a price contingency of 3% per annum on foreign costs and 7% per annum on local costs have been allowed on the base costs. The project costs by component are given in table 4.4 below and detailed in Annex 7 and the Project Implementation Document.

Summary Cost Estimates by Component KES (Million) UA (Million) Component Forex Local Total Forex Local Total A Technical Assistance to RVWSB and NAWASSCO 132.89 49.22 182.10 1.26 0.47 1.72

B Water Supply and Sanitation Improvements for Nakuru 497.64 530.39 1,028.03 4.71 5.02 9.73

C Water Supply and Sanitation Improvements for other RV Towns 287.51 145.66 433.17 2.72 1.38 4.10 D Rural Water Supply and Sanitation 197.66 118.00 315.65 1.87 1.12 2.99 Total Base Costs 1,115.69 843.25 1,958.95 10.56 7.98 18.55 Physical Contingency (10%) 104.06 81.11 185.17 0.99 0.77 1.75 Price Contingency (3% pa and 7% pa on foreign and local costs) 34.51 61.73 96.23 0.33 0.58 0.91 Total Costs 1,254.26 986.09 2,240.35 11.88 9.34 21.21 Table 4.4: Summary of Project Costs Estimates by Component (UA 1 = KES 105.606)

4.9.2 The project cost estimates by category of expenditure are given in table 4.5 below.

Table 4.5: Smmary of Project Cost Estimates by Category of Expenditure

KES (Million) UA (Million) Category Forex Local Total Forex Local Total Civil Works 732.79 719.72 1,452.51 6.94 6.82 13.75 Goods 110.97 6.30 117.28 1.05 0.06 1.11 Consulting Services 271.93 87.03 358.96 2.57 0.82 3.40 Miscellaneous 30.20 30.20 - 0.29 0.29 Total Base Costs 1,115.69 843.25 1,958.95 10.56 7.98 18.55 Physical Contingencies (10%) 104.06 81.11 185.17 0.99 0.77 1.75 Price Contingencies 34.51 61.73 96.23 0.33 0.58 0.91 Total Costs 1,254.26 986.09 2,240.35 11.88 9.34 21.21

4.10 Sources of Finance

4.10.1 The project will be jointly financed by the Bank, the Government of Kenya and beneficiary communities. The Bank will finance 85.13% of the project costs, equivalent to KES 1,907.12 million (or UA 18.06 million) through an ADF loan of KES 1,376.80 million (UA 13.04 million) and ADF grant of KES 530.32 million (UA 5.02 million). GOK will finance KES 318.23 million (UA 3.01 million) equivalent to 14.2% while beneficiary communities will finance KES 15.0 million (UA 0.14 million) or 0.67% of the project costs. ADF financing will be used for meeting all the foreign and 66% of the local costs. Community financing will be in cash, labour and materials for the rural water supply and sanitation component. The financing plan by source is given in table 4.6 below.

Table 4.6: Financing Plan by Source of Finance: SOURCE FC LC Total ADF Loan 7.81 5.23 13.04 ADF Grant 4.06 0.96 5.02 GOK 3.01 3.01 Communities 0.14 0.14 Total 11.88 9.34 21.21

4.10.2 The grant will finance the Institutional Support to RVWSB and NAWASSCO (Component A), the Aquifer Management and Monitoring under the Water and Sanitation Improvements in Nakuru (component B), the Management Options Study under component C, the Rural Water Supply and Sanitation programme (Component D) and the supervision and audits of the RWSS programme. The financing plan by source of financing for the grant-financed activities is given below and detailed in the Categories of Expenditure (Annex 8):

Table 4.7: Financing Plan by Source for Grant Financed Activities Source FC LC Total UA million UA million UA million ADF Grant 4.06 0.96 5.02 GOK 0.0 .95 0.95 Communities 0.0 0.14 0.14 Total 4.06 2.05 6.11

4.10.3 As a condition precedent to first disbursement of the ADF loan, GOK will on-lend to RVWSB the portion of the ADF loan earmarked for rehabilitation and expansion of the water supply and sewerage infrastructure, on terms and conditions acceptable to the Fund. The proposed terms include an interest rate not exceeding 3.0% per annum over a tenor of 30 years, including a grace period of 5 years.

5. PROJECT IMPLEMENTATION

5.1 Executing Agency

The Republic of Kenya shall be the Borrower of the ADF loan and Recipient of the ADF grant. Rift Valley Region Water Service Board (RVWSB) will be the Executing Agency (EA) of the project, with overall responsibility for coordination of all project implementation activities, procurement, processing of disbursement requests and reporting to the Government and the Fund.

5.2 Institutional Arrangements

5.2.1 The institutional framework for project implementation is provided in Annex 9. Project implementation will be mainstreamed within the RVWSB organization. Under the supervision of the Chief Executive Officer (CEO), the Contracts Administration Department will coordinate the implementation of all project components. The Department shall be responsible for the preparation and monitoring of agreements with GOK, MCN, NAWASSCO and the other Water Service Providers; procurement and administration of all contracts under the project; as well as the relationships with WSTF, Municipalities and community liaison. The Department will also be directly responsible for implementation of the water supply rehabilitation and expansion, sewerage and drainage components. It would be adequately staffed, with a Manager and four professionals (2 Water and Sanitation Engineers, a Finance Officer and a Sociologist) to enable it to effectively perform its responsibilities under the project. Considering that National Water Conservation & Pipeline Corporation (NWCPC) had served as Executing Agency for the preparatory study for the project, and has gained experience in implementing similar civil works contracts, two staff members of NWCPC with the requisite experience will be seconded to RVWSB. As a condition precedent for first disbursement of the ADF loan and grant, GOK would be required to provide evidence of the appointment of RVWSB’s key staff, comprising the CEO and the line managers responsible for Contracts Administration, Planning and Finance Departments, whose qualifications are acceptable to the Fund.

5.2.2 RVWSB will work with the Councils, NGOs and CBOs, using existing national and community structures for implementing the public awareness campaigns. In terms of the Service Provision Agreement, NAWASSCO will implement aspects of the institutional strengthening component related to UfW reduction in Nakuru, on behalf of RVWSB. These include the development of accounting and financial management systems, consumer surveys and database development, and the metering programme. Although the rural water supply and sanitation program will be funded through the Water Services Trust Fund, implementation of the program would be the responsibility of RVWSB, utilizing the implementation and training manuals/guidelines developed by WSTF.

5.2.3 Technical assistance will be provided under the proposed project to address anticipated gaps in the RVWSB’s capacity, particularly in the areas of contract and project management. These inputs will also benefit the procurement and administration of the various contracts under the project, and hence the overall project implementation. Support functions will be provided by RVWSB’s Finance Department, which shall maintain the project accounts and undertake financial management duties.

5.3 Supervision and Implementation Schedules

5.3.1 The project will be implemented over a period of 42 months in accordance with the implementation schedule in Annex 10. Board presentation of the project is scheduled for end June 2004, signature for August and effectiveness by end December 2004. Project implementation activities will commence in January 2005 and end in June 2008. Physical works under the Nakuru component are expected to commence in February 2005 for a period of 22 months, ending in December 2006. For the secondary towns, the management options and investments study will also commence in April

2005 for 6 months while the rehabilitation works will commence in January 2006 for 18 months and end in June 2007. The study for the rural water supply component is expected to commence in April 2005 and last for 4 months, while the programme implementation will commence in August 2005 and last for 34 months, thus ending in June 2008. Technical assistance programmes for both RVWSB and NAWASSCO will commence in March 2005 and last for 3 years. The project will be launched in September 2004 and supervised twice a year and a Mid-Term Review conducted not later than 22 months after loan effectiveness.

5.3.2 Tables 5.1 and 5.2 below give the expenditure schedules by component and by source of financing respectively.

Table 5.1 Expenditure Schedule by Component

Component 2005 2006 2007 2008 Total A TA to RVWSB & NAWASSCO 0.81 0.61 0.55 - 1.97 B Watsan Improvements for Nakuru 4.56 5.28 1.13 0.03 11.01 C Watsan Improvements for other RV Towns 1.48 2.01 1.20 - 4.69 D Rural Water Supply and Sanitation 0.96 1.02 1.08 0.47 3.54 Total UA (M illion) 7.82 8.93 3.96 0.50 21.21 Percentage 36.85 42.09 18.68 2.38 100.00

Table 5.2 Expenditure Schedule by Source of Finance

2005 2006 2007 2008 Total ADF Loan 4.63 6.30 2.09 0.02 13.04 ADF Grant 2.17 1.28 1.22 0.36 5.02 GOK 1.00 1.31 0.60 0.10 3.01 Communities 0.02 0.05 0.05 0.02 0.14 Total 7.82 8.93 3.96 0.50 21.21

5.4 Procurement Arrangements

5.4.1 Procurement arrangements are summarised in table 5.3 below. Procurement of all goods, works and services will be in accordance with the Bank Group’s Rules of Procedure for the Procurement of Goods and Works and the Rules of Procedure for the Use of Consultants, using the relevant Bank’s Standard Bidding Documents.

Civil Engineering Works

5.4.2 Procurement of civil works for the Olobanita wellfield (UA 2.13 million), the Water transfer pipeline (UA 2.63 million), the rehabilitation of the existing water sources at Kabatini, Baharini and Meroroni (UA 0.78 million), and the rehabilitation of water and sanitation schemes in the other Rift Valley towns (UA 3.84 million) totalling UA 9.35 million will be through International Competitive Bidding (ICB). Local contractors will receive a 10% preferential margin for ICB contracts.

5.4.3 Procurement of civil works for the rehabilitation of distribution system (UA 0.23 million), Institutional strengthening (construction of office buildings and workshops) (UA 0.70 million), sanitation improvements (UA 2.48 million), peri-urban water and sanitation works (communal water points, and public latrines) (UA 0.28 million), rural water supply and sanitation facilities (UA 2.77 million) totalling UA 6.46 million will be through National Competitive Bidding (NCB). NCB has been selected for these civil works contracts because local contractor capacity exists in Kenya for such works and most of the contracts are relatively small in value and not likely to attract

24 international firms. Procurement of works of less than UA 100,000 for the Rural Water Supply component will be subject to post-procurement review.

Goods

5.4.4 The goods to be procured under the project including computer software and hardware, printers, photocopiers, facsimile machines, office furniture and vehicles totalling UA 0.26 million will be procured by National Shopping. Other goods like consumer water meters, meter repair kits, meter test bench, bulk meters, constant flow valves, leak detection equipment, tools for operation and maintenance, aquifer management and monitoring equipment, laboratory equipment and chemicals totalling UA 1.28 million will be procured by International Shopping.

Procurement of Consultancy Services

5.4.5 Procurement of consultants for the supervision of the works (UA 0.97 million), the management options and investments study (UA 0.60 million) and the rural water supply and sanitation study (UA 0.43 million) will be through shortlists of eligible consulting firms. Procurement of Audit services (UA 0.10 million) will be by a shortlist of eligible audit firms. Procurement of experts for the technical assistance to RVWSB (UA 0.77 million) and NAWASSCO (UA 0.70 million) will by shortlists of firms of water utility operators. The total cost of services is UA 3.57 million. In all cases selection will be based on a combination of technical content and price considerations using ADF rules, except for audits which will be based on lowest price for comparable services.

Miscellaneous

5.4.6 The public awareness campaign totalling UA 0.02 million will be procured by direct negotiation with the participating councils. Operating costs for RVWSB totalling UA 0.24 million and Land acquisition totalling UA 0.03 million will be financed by GOK.

Table 5.3: Procurement Table Category ICB NCB Other Shortlist Non- Total Bank Funded CIVIL WORKS 1. Olobanita Wellfield 2.10 (1.81) 2.10 (1.81) 2. Water Transfer Pipeline 2.63 (2.24) 2.63 (2.24) 3. Rehab. Of Existing Sources 0.78 (0.66) 0.78 (0.66) 4. Rehab. Of Distribution System 0.23 (0.19) 0.23 (0.19) 5. Institutional Strengthening 0.70 (0.60) 0.70 (0.60) 6. Sanitation Improvements 2.48 (2.11) 2.48 (2.11) 7. Peri Urban Water & Sanitation 0.28 (0.24) 0.28 (0.24) 8. Rehab. Of Other Towns 3.84 (3.46) 3.84 (3.46) 9. Rural Water Supply & Sanitation 2.77 (2.08) 2.77 (2.08)

GOODS 10. Computers, Office Equipment 0.26 (0.20) 0.26 (0.20) and Furniture, vehicles 11. Meters, Meter repair kits, Meter 1.28 (1.09) 1.28 (1.09) Test Bench, Valves, Leak Detection Equipment, O&M Tools, Aquifer Management & Monitoring

SERVICES 12. Management Options Study 0.60 (0.60) 0.60 (0.60) 13. TA to RVWSB 0.77 (0.74) 0.77 (0.74) 14. TA to NAWASSCO 0.70 (0.70) 0.70 (0.70) 15. RWSS Study 0.43 (0.43) 0.43 (0.43) 16. Supervision 0.97 (0.79) 0.97 (0.79) 17. Audits 0.10 (0.10) 0.10 (0.10)

MISCELLANEOUS 18. Public Awareness Campaign 0.02 (0.02) 0.02 (0.02) 19. Operating Costs 0.24 0.24 20. Land Acquisition 0.03 0.03

TOTAL 9.35 (8.17) 6.46 (5.22) 1.56 (1.31) 3.57 (3.36) 0.27 21.21 (18.06)

National Laws and regulations

5.4.7 National Laws concerning the award of contracts in Kenya have been examined and considered acceptable.

General Procurement Notice

5.4.8 The text of the general procurement notice has been agreed with the borrower during the project negotiations and will be issued for publication in United Nations Development Business as soon as the loan is approved by the Bank’s Board of Directors.

Review Procedures

5.4.9 The following documents will be submitted for review and approval by the Bank before publication: (i) specific procurement notices; (ii) tender documents or invitation letters to consultants; (iii) evaluation reports on bids by contractors and suppliers or consultants’ proposals comprising recommendations for contract award; (iv) draft contracts, if those included in the tender documents have been amended.

5.5 Disbursement Arrangements

5.5.1 The direct payment method and the special account method will be used. The Borrower will open two Special foreign currency Accounts (SA) at the Central Bank of Kenya (one each for the loan and grant) and two Local Currency Accounts (LCA) in a commercial bank acceptable to the ADF. The SAs will be used to deposit part of the loan and grant resources. Thereafter funds will be withdrawn from the SAs to be deposited in the LCA to finance eligible expenses. The ADF will replenish the SAs after the Executing Agency had provided valid justifications for the use of at least 50% of the previous deposit. The opening of the SAs and the LCAs will be a condition precedent to first disbursement.

5.5.2 Disbursements for the supervision contract, ICB and IS contracts and all NCB contracts above UA 200,000 will be by Direct Disbursement in accordance with the Bank Group rules, while disbursements for NS and other contracts below UA 200.000 will be through Special Accounts.

5.6 Monitoring and Evaluation

5.6.1 The EA will assume primary responsibility for monitoring project implementation, and the Borrower’s reporting obligations to the Fund. Quarterly Progress Reports (QPRs) will be submitted by the EA in accordance with Fund requirements. These reports shall cover all aspects of project implementation, including the status of progress against agreed implementation and disbursement schedules for all components; implementation of environmental and social mitigation measures; and updates on key performance indicators for NAWASSCO, including UfW reduction and collections on billings and arrears. The QPRs will also highlight issues and unforeseen problems, as well as proffer corrective actions. In addition to the desk reviews of QPRs and annual audit reports, the supervision missions to be undertaken twice a year will permit the Fund to monitor the project implementation progress and the performance of the institutions implicated with the project. As the regulator for the sector, WSRB shall monitor RVWSB’s performance in terms of its licensing obligations.

5.6.2 Results of the MTR will inform any adjustments to the project design to ensure that project objectives are achieved. The supervision and institutional support consultants will each be required to prepare and submit to the EA and the Fund, final reports at the completion of their assignments. These reports shall serve as input into the preparation of the Borrower’s PCR and the Fund, utilizing these reports as background material, will prepare its own PCR in the established format.

5.7 Financial Reporting and Auditing

5.7.1 As Executing Agency, RVWSB shall be responsible for ensuring overall compliance with fiduciary arrangements for the project. RVWSB will therefore maintain separate accounts for the project that will permit identification of commitments and expenditures by category and financing source for all components. The Finance Department will be responsible for maintaining the project accounts and records, as well as the preparation and submission of withdrawal applications to the Bank, through MOF. RVWSB will also collect detailed information on NAWASSCO’s production volumes, operating costs, technical and commercial losses, billing and collection performance. These data will be included in the QPR to be submitted to the Fund. Moreover, the performance of NAWASSCO, in terms of the performance targets set in the Service Provision Agreement, will be subjected to annual technical and financial audits by an independent audit firm appointed by RVWSB, and acceptable to the Fund.

5.7.2 The Terms of Reference for the annual audits will be submitted for comments by the Fund prior to issue while the project accounts, including the Special Accounts, will also be audited annually by an external auditing firm appointed by the Auditor-General, in accordance with the Bank’s Financial Reporting and Auditing Guidelines. Certified copies of the audited project accounts, for each year during implementation, will be submitted to the Fund by the EA within six months after the end of the fiscal year.

5.8 Aid/Donor Co-ordination

5.8.1 The donors are in support of the water sector reforms and have adopted a joint approach on the way forward, and as detailed in section 2.4, are providing assistance in different parts of the country, complementing each other’s intervention. The proposed project has been prepared in consultation with other development partners active in the sector (including World Bank, GTZ, AFD, SIDA, JICA, DANIDA) through various meetings and exchanges of Aide Memoirs. This close collaboration will be maintained during project implementation through direct contacts by the supervision missions.

5.8.2 The Bank participates in the annual Consultative Group meetings to monitor progress of the Government’s development programme. In addition a number of sector working groups consisting of GOK and Donor representatives have been established which meet regularly to discuss issues pertaining to ongoing projects in the various sectors. The regular GOK/Donor meetings on the water sector have been an important platform for donor coordination, which will also be maintained during project implementation. Bank missions have participated in a number of these meetings and it is kept informed of developments through the minutes of the meetings. There is also an Inter- Ministerial Committee, which reports to donors on progress and problems encountered in the implementation of donor-assisted programmes and projects, including the Government's sector and macro-economic adjustment programmes.

6. PROJECT SUSTAINABILITY AND RISKS

6.1 Recurrent Costs

6.1.1 The water supply infrastructure involves relatively simple and well-known technologies that require minimum inputs for operation and maintenance. With the exclusive use of ground water resources and major rehabilitation of bulk transfer mains under the project, the O&M costs will be held within the industry norms. With regard to the sanitation component, minimum specialised skills or equipment are needed to operate and maintain the stabilisation ponds, which rely mainly on natural processes for sewage treatment.

6.1.2 The project is, therefore, not expected to impose any additional financial burden on the Government, as the water and sewerage services will be ring-fenced and operated on commercial principles, with full cost-recovery tariffs gradually introduced. As borne out by the financial analysis, projected increases in annual recurrent costs, at about KES 140 million would be more than offset by the incremental revenues of KES 467 million to be generated annually by the project at full maturity. Hence, budgetary support from the Government, either directly or indirectly, would not be required.

6.1.3 GOK will meet part of RVWSB’s operating costs for the first three years of operations. However, as revenues from the Water Service Providers increase with service expansion and the gradual introduction of cost recovery tariffs, RVWSB would, over time, be able to fully meet its recurrent expenses, including depreciation costs and debt service charges. This will obviate the need for further GOK subventions to the Board.

6.2 Project Sustainability

6.2.1 The project is being implemented against the backdrop of reforms in Kenya’s institutional framework for water and sanitation services delivery. The reforms involve the establishment of new and entities, including RVWSB and NAWASSCO, whose autonomy would contribute towards eliminating the mingling of water and sewerage revenues with other council or government revenues, as well as allow for the proper use of internally generated funds for normal operations and recurrent investments. By providing targeted assistance to NAWASSCO and RVWSB in the crucial areas related to business planning, and project management, the Fund’s intervention would assist improve the sector governance framework, thereby foster institutional sustainability.

6.2.2 The technology choices for which a lot of experience exists in Kenya and spare parts are readily available, will enhance technical sustainability. Implementation of cost recovery tariffs would ensure that water and sewerage operations could meet their revenue requirements from user charges. In addition, incorporating lifeline tariffs to cater for the needs of the poor would enhance the prospects for extending the services to unserved areas. Concerning the rural water supply programme, adoption of the demand responsive approach, involving beneficiary participation in the

28 selection of options and management of the facilities will require their commitment to meeting the O&M costs before the schemes are implemented. Hence, the necessary conditions would be established for long-term sustainability.

6.2.3 Environmental sustainability has been built in the project by integrating mitigation measures, which will be complemented with activities that create awareness. A significant monitoring component has been included to monitor the quality and quantity of the natural resources and to serve as a planning tool. Special attention has been paid to the Lake Nakuru and water resources, and key safeguards such as protection from pollutants, built into the project. Provision has also been made to rehabilitate and protect the groundwater recharge areas in order to contribute to the sustainability of the resources.

6.3 Critical Risks and Mitigating Measures

6.3.1 The effectiveness of the new institutions is cause for concern as they may face opposition in some quarters and will not have the required capacity to carry out their mandate at the beginning. There may also be delays in establishing some of them. To mitigate this risk, the transition plan put in place by the Government with the assistance of donors includes building awareness and acceptance by the key stakeholders, while the technical assistance component of the project will address the capacity issues within the Rift Valley Water Services Board. Other donors are assisting the other institutions like the WSRB, the WSTF and WRMA. Donors have in principle agreed with the GOK that the reforms must precede the investments.

6.3.2 Affordability of the services by the very poor is another cause for concern but the adoption of a tariff structure which enables the poor to pay much lower than the average tariff and cross subsidise from the richer parts of the community will reduce this risk. In addition, the proposed tariffs will be much lower that the cost of water bought from vendors. The many years of paying low water bills may encourage illegal connections, but the new arrangements will allow for offenders to be prosecuted, which was not the case in the past.

6.3.3 Although the project will extend the sewerage network by 15 km it does not directly finance the connections to the sewerage system and many households may decide to continue using their septic tank-soakaway systems and pit latrines. Also the project does not address solid waste management, which may continue to clog the drainage system. The public awareness campaign as well as the planned intervention by JICA will generate demand for sewer connections while the planned AFD intervention will address solid waste management problems.

7. PROJECT BENEFITS

7.1 Financial Analysis

7.1.1 The results of the financial analysis conducted for the project, which is defined as the provision and operation of all those assets required for meeting the demand for potable water and sewerage services in Nakuru municipality, Naivasha and four other towns (Elburgon, Gilgil, Molo and Njoro) over the project life span, is presented in Annex 11. Based on the assumptions, the net benefits of the project have been determined on the basis of comparing (i) the incremental benefits accruing from the project and (ii) costs arising from the project implementation.

7.1.2 The project posts a Financial Internal Rate of Return (FIRR) of 13.86% and NPV of KES 2,738 million, excluding residual values. This relatively high return is not surprising, considering that minimal capital investment is required to capture significant financial benefits through reduction of the current high levels of UfW in the project area.

7.2 Economic Benefits

7.2.1 All the project components have a strong economic rationale since they provide minimum acceptable standards for basic living conditions and assist in removing existing constraints on social development and economic growth. Similarly, all components were designed along sound principles of priority need, consultation and targeting, and demand management and rehabilitation before new investment. They represent technically feasible options at the least cost.

7.2.2 The socioeconomic survey shows a willingness to pay for municipal services. An affordability analysis, based on proposed tariffs and household income data from the social survey, shows that the proposed tariffs for water supply and sewerage surcharge are within the generally acceptable limit of 5% of average household income. The risk that the proposed tariffs are not affordable is minimal since the tariffs are within the affordability limit. In addition, a lifeline tariff will be applied in line with the new water policy to assist low-income households with cross- subsidy from the other consumer groups.

7.2.3 In analyzing the economics of the project, consideration has been given to the investment costs required, current cost of water to the target communities, and the potential for the operation and maintenance cost to be fully covered by the Rift valley services Board. The opportunity cost due to lack of access to water has also been considered, highlighting for instance the benefit of the project in releasing more time for the communities, particularly women and children, to pursue other economic activities.

7.2.4 Direct benefits have been calculated on the basis of increased revenues as result of charging an effective tariff based on the level of water consumption at the estimated average full cost recovery tariff of KES 30.56/m3 and the sewerage revenue regarded as about 14% of water revenue. Health Benefits: health related savings considered in the analysis, involved increase in cases of water-borne diseases is projected with reference to the 5% population without access to clean water, ii) the monthly medical bill are around KES 570 and this happening mostly during the dry and rainy season for a maximum of 4 months in a year gives KES 3,500 and about 120 households affected. The results of the analysis show that the project investment shows a positive EIRR of 24%. See Annex 12.

7.3 Sensitivity Analysis

7.3.1 Sensitivity analysis was conducted to assess the performance of the project as a result of likely changes in the main risk variables, namely investment costs and revenues. A 10% increase in investment costs reduces the FIRR to 11.66% while a 10% decrease in operating revenues, with O&M costs unchanged, reduces the FIRR to 11.29%. A combined increase in these risk variables by the same magnitude reduces the FIRR to 9.21%, which is well above the discount rate. These results indicate that while the project is robust, it manifests greater sensitivity to fluctuations in operating revenues than to increases in investment costs.

7.3.2 For the EIRR, the sensitivity analysis was carried out based on 10% increase or decrease in investment cost. As a result the EIRR moved to 22% and 26% respectively. A similar exercise of increasing or decreasing the operational and maintenance costs by 10% resulted in changes in EIRR to 23% and 24% respectively. A 10% increase or decrease in benefits resulted in an increase in EIRR to 25% and decrease to 22%. A 20% increase or decrease in benefits resulted in an increase in EIRR to 27% and decrease to 20%. The project is slightly sensitive to decrease in project benefits and investment cost.

7.4 Social-Impact Analysis

7.4.1 In addition to ensuring an equitable provision of adequate quantity and quality of water to user groups, particularly the 60% of the population that constitute low income households, and improved sanitation services to all at acceptable costs and on sustainable basis, the project will bring about significant changes by way of improving the quality of people’s lives in the project area and tackling poverty. Adequate drinking water supply and improved sanitation, together with interventions on raising awareness of malaria and other water borne diseases would have a direct impact resulting in improved overall health of communities. Incidences of morbidity and mortality especially from water related diseases, like outbreaks of cholera and malaria, would be reduced. A direct benefit of the water supply component will be the reduction of women's work in fetching, storing, and using water. The improved levels of water delivery and accessibility will reduce the overall time for collecting water and the need for storage in both urban and rural areas, attract industries, enhance industrial output and create more jobs.

7.4.2 The benefits of the sewerage and sanitation components are primarily public health and environmental improvement. There are direct impacts through improvements in the service provision but, as with water, there are considerable indirect impacts that result from improvement in the living conditions of the population and the overall urban environment. Sewerage and sanitation components have been valued using the willingness to pay of residential households and businesses. Improved drainage facilities will bring indirect benefits of a healthier environment for women and a reduced work burden in the household.

8. CONCLUSION AND RECOMMENDATIONS

8.1 Conclusion

The current institutional deficiencies and the poor state of the infrastructure in the project area call for urgent actions to implement the project, in line with ongoing GOK reforms to improve the institutional framework for the financing and operation of water supply and sanitation services. The proposed project, which will operationalize the institutional reforms under the Water Act (2002), rehabilitate and expand the infrastructure in the Rift Valley Board area, is technically feasible, financially and economically viable, with important social benefits. It is also environmentally sustainable.

8.2 Recommendations

8.2.1 It is recommended that an ADF loan not exceeding UA 13.04 million and an ADF grant not exceeding UA 5.02 million be extended to the Republic of Kenya for the purposes of implementing the Rift Valley Water Supply and Sanitation Project as described in this report and subject to the following conditions:

Loan Conditions

(a) Conditions Precedent to Entry into Force

The entry into force of the Loan Agreement shall be subject to the fulfillment by the Borrower of the provisions of Section 5.01 of the General Conditions Applicable to Loans and Grants of the ADF.

(b) Conditions Precedent to First Disbursement of the ADF Loan

The obligations of the Fund to make the first disbursement of the loan shall be conditional upon the entry into force of the agreement and the fulfilment by the Borrower of the following conditions:

(i) Provide evidence of RVWSB and NAWASSCO having concluded a Service Provision Agreement in form and substance acceptable to the Fund (para. 3.2.9); (ii) Provide evidence of MOF having executed an On-lending Agreement with RVWSB, on terms and conditions acceptable to the Fund, for the portion of the loan earmarked for rehabilitation and extension of the water supply and sewerage infrastructure in Nakuru (para. 4.10.3); (iii) Provide evidence of having appointed the key staff of RVWSB, comprising the CEO and the Managers responsible for Contracts Administration, Finance, and Planning & Development, whose qualifications are acceptable to the Fund (para 5.2.1); (iv) Provide evidence of having opened a Special foreign currency account at the Central Bank of Kenya and a Local Currency Account in a commercial bank acceptable to the Fund, into which the proceeds of the loan shall be deposited (para.5.5.1);

The Borrower shall undertake to:

(i) Provide a plan, acceptable to the Fund, for resolving the liabilities of NWSS, and indebtedness of GOK institutions to NWSS by December 2005 (para. 3.2.3); (ii) In consultation with the Regulator, cause the implementation of the recommendations of the tariff Study for water supply and sewerage services, incorporating a lifeline tariff, to ensure that NAWASSCO attains O&M cost recovery tariffs (including depreciation charges) by July 2007 (para.4.6.4); (iii) Acquire the land for the development of the Olobanita wellfield before commencement of the borehole construction works in Nakuru (para. 4.7.3).

(d) Other Conditions

The Borrower shall:

(i) Submit the plan for resolving the liabilities of NWSS, and indebtedness of GOK institutions to NWSS by December 2005 (para.3.2.3); (ii) Implement a programme for regular adjustment to the water and sewerage services tariff, incorporating a lifeline tariff, to ensure that NAWASSCO attains O&M cost recovery tariffs (including depreciation charges), not later than June 2007 (para. 4.6.4); (iii) Provide evidence of having acquired those lands required for the development of Olobanita wellfield, before commencement of borehole construction works in Nakuru (para. 4.7.3);

Grant Conditions

(a) Conditions Precedent to Entry into Force:

The Protocol Agreement shall enter into force upon its signature

(b) Conditions Precedent to First Disbursement of the ADF Grant

The obligations of the Fund to make the first disbursement of the grant shall be conditional upon the entry into force of the agreement and the fulfilment by the Borrower of the following conditions:

(i) Provide evidence of having appointed the key staff of RVWSB, comprising the CEO and the Managers responsible for Contracts Administration, Finance, and Planning & Development, whose qualifications are acceptable to the Fund (para 5.2.1);

(ii) Provide evidence of having opened a Special foreign currency account at the Central Bank of Kenya and a Local Currency Account in a commercial bank acceptable to the Fund, into which the proceeds of the grant shall be deposited (para.5.5.1);

Annex 1

MAP OF KENYA SHOWING PROJECT AREA AND WATER SERVICES BOARDS

This map is provided by the African Development Bank exclusively for the use of the readers of the report to which it is attached. The names used and the borders shown do not imply on the part of the Bank and its members any judgement concerning the legal status of a territory nor any approval or acceptance of these borders.

Annex 2 SUMMARY OF BANK GROUP OPERATIONS SECTOR/PROJECT DATE AMNT DATE DATE AMNT PERCENT LAST DISB. APPROVED (UA Mill.) SIGNED EFFECTIVE DISB. DISB. DATE AGRICULTURE

COMPLETED 1 Agric. Sector Adjustment Programme (ADF/ADB/TAF) 26 Feb. 1991 11.05 28 Nov. 1991 14 Apr.1991 11.10 100.45 30 June 1996 12.00 12.00 100.00 1.38 0.63 45.65 2 West Kenya Rainfed Rice Development (ADF) 27 Nov. 1986 14.87 09 Feb. 1987 16 Dec. 1987 13.76 92.54 31 Dec. 1999 3 Nyayo Tea Zones and Forestry Development (ADF) 21 May 1991 15.11 28 Nov. 1991 23 Apr. 1992 8.74 57.84 30 Jun. 2001 4 Livestock Project (ADF) 24 June 1992 4.61 17 Nov. 1993 18 Jan. 1996 1.91 41.43 31 Dec. 1999

ONGOING 5 Horticulture and Traditional Food Crops (ADF) 24 Nov. 1993 9.21 23 May 1995 18 Nov. 1996 0.22 2.39 31 Dec. 2000 6 Ewaso N'giro River Catchement Conservation Study (TAF) 11 June 1997 1.10 04 Apr. 1998 23 Feb. 2000 1.09 99.09 31 Dec. 2000 7 Kimira-Oluch Smallholder Irrigation Study (TAF) 11 Nov. 1998 1.35 27 Jul. 1999 16 Nov. 2000 0.60 44.44 31 Sept. 2001 8 Asal Based Livestock Development 17.12.2003 18.41 3.17 SUB-TOTAL 92.26 50.05 70.81 INDUSTRY COMPLETED 9 Pan-African Paper Mills (ADB) 25 June 1970 1.20 23 Sept. 1970 N/A 1.32 110.00 10 1st Line of Credit to Industrial Development Bank (ADB) 16 July 1976 3.00 04 Nov. 1976 N/A 3.00 100.00 11 2nd Line of Credit to Industrial Development Bank (ADB) 21 Mar. 1979 5.00 16 May 1979 31 Dec. 1980 5.00 100.00 12 3rd Line of Credit to Industrial Development Bank (ADB)*** 10 May 1984 20.00 10 May 1985 16 Apr. 1987 19.47 97.35 30 June 1996 13 Industrial Sector Adjustment Operation (ADF/ADB) 23 Feb. 1989 18.42 21 Apr. 1989 26 Jun. 1989 18.42 100.00 30 June 1991 30.00 30.00 100.00 14 Line of Credit to Kenya Industrial Estates (ADF) 22 Dec. 1986 4.61 09 Feb. 187 27 Feb.1989 4.52 98.05 30 June 1996 15 Feasibility Study for Mombasa EPZ (TAF) 27 Aug. 1990 0.73 15 Nov. 1990 02 Sept. 1991 0.73 100.00 30 June 1994 16 Export Development Programme(ADF)*** 22 Oct. 1993 28.42 17 Nov. 1993 24 Apr. 1995 24.42 85.93 30 June 1996

ONGOING 17 Line of Credit to CFC Bank Ltd. 29.10.2003 4.67 SUB-TOTAL 118.05 106.88 95.96 TRANSPORT COMPLETED 18 Two International Roads (ADB) 21 Apr. 1967 2.30 08 Aug. 1967 N/A 2.30 100.00 19 Yala-Busia Road (ADB) 24 Nov. 1972 3.00 09 Dec. 1972 N/A 3.00 100.00 20 Makutano-Tana Bridge (ADB) 08 May 1974 3.00 07 Jul. 1974 N/A 3.00 100.00 21 Kitale-Kapenguria Road (ADB) 24 June 1975 3.00 14 Aug. 1975 N/A 3.00 100.00 22 South Nyanza Sugar Road (ADB) 18 Aug. 1977 5.00 21 Sept. 1977 N/A 5.22 104.40 23 Meru-Mau Road (ADB) 19 Sept. 1977 4.10 21 Feb. 1978 N/A 4.10 100.00 24 Kenya Railways (ADB)*** 28 Oct. 1980 10.00 11 May 1981 30 Sept. 1981 9.99 99.90 31 Dec. 1996 25 Homa Bay-Rongo Road (ADB) 27 June 1980 5.30 06 Feb. 1981 26 Aug. 1981 5.30 100.00 26 Thika-Makutano Road (ADF)*** 14 Dec. 1988 10.90 21 Apr. 1989 27 Mar. 1991 10.85 99.54 31 Dec. 1996 27 Nakuru-Nyahururu Road (ADB) - Savings Utilisation 23 June 1981 9.00 31 Dec. 1981 08 Sept. 1983 8.69 96.56 30 Oct. 1999 28 Mumias-Kakamega Road (ADF) - Savings Utilisation 24 Feb. 1983 6.01 11 Aug. 1983 03 Oct. 1983 5.99 99.67 30 Oct. 1999 29 Kakuma-Lokichokio Road (ADB) - Savings Utilisation 27 Sept. 1983 27.00 14 Dec. 1983 20 Mar. 1984 26.96 99.85 30 Oct. 1999 30 Rural Roads Upgrading(ADF/ADB) 11 June 1990 23.03 03 Feb. 1991 27 Jul. 1992 23.00 99.87 30 June 1999 12.21 12.21 100.00 31 Rumuruti-Maralal Road Study (TAF) 02 May 1991 1.00 01 Feb. 1991 10 Aug. 1993 0.89 89.00 30 Jun. 2000 32 Ziwa-Kitale Road (ADF) 02 May 1991 17.04 28 Nov. 1991 10 Aug. 1993 12.05 70.72 30 June 2002 33 El-Nino Infrastructure Rehabilitation Project (ADF) 29 Oct.1998 11.52 29 Jan. 1999 11 May 1999 7.33 63.63 31 Dec. 2002

ONGOING 34 Roads 2000-District Rural Roads Rehab. Project (ADF) 12 July 2001 20.00 15 Feb. 2002 N/A 0.00 0.00 31 Dec. 2006 SUB-TOTAL 173.41 143.88 82.97 PUBLIC UTILITIES COMPLETED 35 Nyeri Sewerage/Nanyuki Water Supply (ADF)*** 19 Dec. 1978 7.37 19 Oct.1979 23 Oct. 1979 7.35 99.73 36 Thika Water Supply (ADB)*** 27 Nov. 1979 8.00 04 Feb. 1980 03 Nov. 1983 7.84 98.00 37 Ndia Water Supply (ADF) 27 June 1981 6.91 30 Dec. 1981 12 Oct. 1984 6.90 99.86 31 Dec. 1996 38 Kiambere Hydro-electric (ADB)*** 08 Nov. 1983 20.34 14 Dec. 1983 12 Sept. 1984 20.31 99.85 31 Dec.1996 39 Third Nairobi Water Supply (ADF/ADB/Supp. Loan) 23 Feb. 1989 13.82 21 Apr. 1989 23 Feb. 1990 13.81 99.93 31 Dec. 1994 13.02 13.03 100.08 18 Oct. 1996 13.95 13.71 98.28 31 Dec 1997 40 Rural Electrification Study (TAF) 05 May 1993 0.76 17 Nov. 1993 03 Nov. 1994 0.71 93.42 30 Jun. 1997 41 Nakuru Water Supply Study (TAF) 23 June 1993 0.83 17 Nov. 1993 26 June 1995 0.78 93.98 30 Jun. 1998 42 Murang'a, Kisii & Bungoma Sewerage (ADF) 25 Nov. 1982 11.97 01 Feb. 1983 09 Dec. 1992 11.58 96.74 31 Dec. 1999

ONGOING None SUB-TOTAL 96.97 96.02 99.02 SOCIAL SECTORS COMPLETED 43 Sec. Teacher Training College (ADF) - Reallocation** 17 Aug. 1982 10.24 11 May 1983 31 Oct. 1984 9.20 89.84 31 Dec. 1996 44 Rural Health (ADF)*** 20 Nov. 1985 7.83 27 Jan. 1986 14 Aug. 1987 7.81 99.74 31 Dec. 1995 45 Education II (ADF)*** 16 Dec. 1991 18.42 17 Nov. 1993 06 Sept. 1994 0.13 0.71 31 Dec. 2000 46 Health Sector Rehabilitation Study (TAF) 23 June 1993 1.47 17 Nov. 1993 21 Mar. 1995 1.30 88.44 31 Dec. 1998

ONGOING 47 Rural Health II (ADF) 15 July 1998 8.00 20 July 1998 06 May 1999 2.53 31.63 31 Dec. 2002 48 Education III Project 17.12.2003 24.26 6.75 SUB-TOTAL 45.96 20.97 45.63 MULTI-SECTOR COMPLETED 49 Institutional Support for Tax Modernisation I (TAF) 30 Jan. 1990 3.32 03 Feb. 1991 11 Sept. 1991 3.32 100.00 31 Dec. 1995 50 Institutional Support for Tax Modernisation II (See 41) 16 Feb. 1995 2.65 05 May 1995 05 May 1995 2.62 98.87

ONGOING 51 Structural Adjustment Loan (ADF) 03 Nov. 2000 28.25 27 Nov. 2000 N/A 0.00 0.00 31 Oct. 2002 SUB-TOTAL 76.97 5.94 17.36 ENVIRONMENT COMPLETED 52 Aberdares Natural Resources Dev. Project (ADF/TAF)*** 27 Oct. 1999 15.00 N/A N/A 0.00 0.00 N/A 0.50 0.00 0.00 ONGOING None SUB-TOTAL 15.50 GRAND TOTAL 605.38 423.74 77.31 TOTAL ADB 201.14 195.74 99.63 TOTAL ADF 404.24 228.00 64.84 NET OF CANCALLATIONS 566.98 83.13 ADB 200.60 99.90 ADF 366.38 72.66

Annex 3

ORGANISATIONAL STRUCTURE OF RVWSB

Board of Directors (10)

Chief Executive Officer (1) Secretary (1)

Internal Auditor (1) Finance Manager (1) Public Relations Officer (1) Accountant (1) Legal Officer (1) Office Administrator (1) Secretary (2) Procurement Officer (1)

Manager - Contracts Administration (1) Manager - Planning and Development (1) Secretary (1) Secretary (1)

Contracts Management Community Affairs Services Monitoring Investment Planning WSS Engineer (1) Sociologist (1) WSS Engineer (1) WSS Engineer (1) Finance Officer (1) WSS Engineer (1) Economist (1) Economist (1)

Annex 4 Page 1/2 Assumptions for the Projection of RVWSB Financial Statements

The financial projections of RVWSB incorporate the financial operations of licensed Water Service Providers in the RVWSB area: NAWASSCO, Department of Water Development Water Supplies in RVWSB area, Naivasha and the 4 other project towns (Elburgon, Gilgil, Molo, Njoro). The financial year runs from July to June. In addition to the assumptions for FIRR, the projections are based on the following:

1. Projections take into account the operations under the new project and do not include the current assets and liabilities of ongoing operations. An update and valuation of the MCN’s fixed assets will be undertaken to ascertain their values in terms of the Lease Contract with RVWSB. 2. RVWSB’s revenues: Water production, sales and the relative consumption shares of domestic, and non-domestic (industrial/commercial) consumers are derived directly from the design report. A portion of the Customer Tariff charged by the Water Service Providers, which include a provision for the payment of a Lease/Rental Fee to the Licensee and the License Fee/ Regulatory Levy to be paid by the Licensee (RVWSB) to NWRB, the Sector Regulator. It is assumed that 18% of the Customer Tariff charged by the WSPs is attributed as RVWSB revenues. Potential other sources of income including connection fees, tanker services and minor works at customers’ premises have, as a conservative measure, not been included in the analysis. 3. Operations & Maintenance (O&M) cost: comprising chemicals, electricity and water consumption, administration and staff costs etc. are based on the historical costs, and projected to increase in line with water production volumes. Staff costs are increased in real terms by 2% per annum. 4. Depreciation: A straight-line method is used for depreciation of fixed assets, at an annual rate of 4%. 5. Management Contract Fee: Estimated at 3% of collected water revenue. The amount is therefore deducted from NWSS’s income statement, and not included in RVWSB’s . 6. On-Lending Terms: The amount of the ADF loan to be on-lent to RVWSB is assumed at UA 13.03 million, at 1.5% interest rate, amortized over a period of 30 years, including a grace period of 5 years. 7. Collection: The collection rate for water sales is assumed to increase progressively during the period of projection, from the current level of around 60% to 90% from 2007/2008 onwards. 8. Lease Fee: Lease payments from RVWSB to MCN at 1% of NWSS operating revenue, and are assumed to commence after the commissioning of the project. 9. Long Term Loans: It is assumed that the term loans of NWSS, estimated at KES 47.1 million, with the accrued arrears on principal and interest reaching KES 51.3 million as at December 1999, are placed in a Suspense Account by MCN pending its resolution with GOK and RVWSB. Hence the new loans are increased, net of repayments, to reflect disbursements for the project sponsored capital investment program of RVWSB. 10. Capital Employed: Includes retained earnings and capital grants to RVWSB. 11. Fixed Assets: Fixed assets increased to reflect the capital investment program, including institutional support components.

Annex 4 Page2/2

Annex 5 URBAN WATER SCHEMES UNDER THE RVWSB

Annex 6 ENVIRONMENTAL AND SOCIAL MANAGEMENT PLAN SUMMARY

Project Title: Rift Valley Water Supply and Sanitation Project Project Number: P-KE-E00-002 Country: Kenya Department: ONIN Division: ONIN.2 a) Brief description of the project and key environmental and social components

The components of the project include:

A: Institutional Support to Rift Valley Water Services Board (RVWSB) and Nakuru Water and Sanitation Services Company (NAWASSCO): i) Technical Assistance for the establishment; operationalization of the Rift Valley Water Services Board (RVWSB) and management of its contracts with various Water Service Providers;

B: Water and Sanitation Improvements in Nakuru i) Development of Olobanita Wellfield with capacity for 15,000 m3/day and connect to Nakuru by a 21 km water transfer pipeline with branches to serves en-route communities; ii) Rehabilitation and optimization of supplies from existing sources to restore production capacity from 30,000 m3/day to 40,000 m3/day ; iii) Rehabilitation and reinforcement of water distribution system, zoning and bulk metering and introduction of 15,800 consumer meters, meter repair kits and meter test bench, and provision of public water fountains for low-income areas; iv) Institutional strengthening and unaccounted-for-water management will include comprterization for billing and revenue collection, provision of O&M plant and equipment, offices and workshops, improving the customer database, . v) Sanitation improvements including: extension of sewer network by 15 km, rehabilitation of existing sewers and storm water drains, replacement of sewers and construction of storm water outfalls, provision of on-site sanitation in the form of public and communal latrines for low-income areas, and public awareness and hygiene education campaign to improve awareness of water and health issues, encourage the Municipal Council of Nakuru (MCN) to apply the Council by-laws in order to reduce pollution of the lake catchment by industries, and address the use of untreated sewage for vegetable gardening and generate demand for sewerage connections; vi) Peri-urban water and sanitation will involve extending water supply and sanitation services to low-income and peri-urban communities, who constitutes 60% of the Nakuru population. vii) Establishment of Aquifer Management and Monitoring Programme: establishment of a system for observation and monitoring of boreholes; development of aquifer management tools; development of an integrated surface and groundwater model of the aquifer; equipping and reinforcing the capacity of laboratory for monitoring of the water quality in the catchments; reforestation and conservation of the aquifer recharge areas of Bahati and Dandori forests;

C: Water and Sanitation Improvements for Other Rift Valley Towns i) Study of the management options and immediate and medium-term investment needs of water supply and sanitation services in the secondary towns within the RVWSB that are currently operated by the National Water Conservation and Pipeline Corporation (NWCPC) and Department for Water Development (DWD); ii) Implementation of the approved management option and rehabilitation/extension of water and sanitation services in Naivasha and 5 other secondary towns; and

D: Rural Water Supply and Sanitation i) Development and implementation of RVWSB rural water supply and sanitation programme based on the demand responsive approach. b) Major environmental and social impacts

The Rift Valley Water Supply and Sanitation Project is classified in the environmental category 1, with potential negative environmental impacts. The project is particularly environmentally sensitive because of the involvement of lake Nakuru, a RAMSAR site, into which the treated sewage effluent will be discharged. A detailed EIA was conducted and EIA reports produced for component A and all findings of the EIA, as well as mitigation measures integrated in the Environmental and Social Management Plan (ESMP) for the project.

The positive environmental impacts will include the following: Flows of treated sewage to lake Nakuru will increase and reduce the potential of its drying up; abstractions from the groundwater aquifers will be better controlled to prevent over-abstraction; overflowing of sewage into residential areas and the associated health hazards will be minimized. In addition improved water supply quantity and quality will improve populations health conditions and well-being. Availability of water will serve the industry and income generating sectors and participate in people’s livelihood by significantly alleviating the burdens on women and children who spend long periods collecting water.

Potential adverse impacts of the project will arise from construction activities such as rehabilitation works, pollutants, nutrients, on-site sanitation, drinking water treatment works, impacts of sewage and solid wastes, sewage treatment works, bulk transfer pipelines, provision of water to populations en-route, storage reservoirs, and Olobanita well-field development. The potential impacts for the Nakuru component were detailed in the EIA reports and summarized in the Board EIA Summary and the mitigation measures integrated in the project. (See Board EIA Summary ADF/BD/IF/2004/18 of 11/02/2004 for the English version and 01/04/2004 for the French version).

For the secondary towns of the Rift Valley covered by the project, the work envisaged includes borehole construction, rehabilitation of river intakes, replacement of pumps, rehabilitation of transmission and distribution pipelines, and metering. For the rural water supply technology choices will range from hand dug wells, drilled wells, protected springs, boreholes, gravity schemes, rainwater harvesting, sub-surface dams, small piped systems, and pumping systems (hand pumps, motorized, solar or windmill pumps). Sanitation options will be limited to on-site sanitation. The adverse environmental impacts are those related pollution of aquifers through wells, springs, boreholes and depletion of aquifers as well as construction activities.

There will be no displacement of people living in the project area. However, 9 small parcels of land with total area of about 10,000 m2 (1 hectare) will be purchased from farm owners at the Olobanita well field for the new boreholes. The acquisition of the land is on-going and will be a condition of the loan. c) Enhancement and mitigation program

The mitigation measures for the Nakuru town component of the project are fully detailed in the EIA summary that is one of the project implement tools to be referred to. The mitigation program aims at alleviating the adverse impacts while maximizing the beneficial effects. Project implementation will constantly refer to the EIA and the EIA report summary.

In small towns and rural areas, to minimize pollution the wells, springs and boreholes will be located away from and upstream of sources of pollution like latrines, sewer pipes, waste dumps and densely populated areas, and they will designed with proper seals to limit point source pollution, providing concrete lining, drainage aprons, and fencing. Aquifer depletion will be prevented through aquifer monitoring to determine the safe yield and limit abstraction levels to the safe yields. Construction related impacts like erosion and cut slope destabilization will be addressed by including the mitigation measures like landscaping and grassing, carting away and proper disposal of construction wastes in the works contracts.

d) Monitoring program and complementary initiatives

Environmental monitoring of key indicators will include: (i) Quality of drinking water in the town distribution network; (ii) water related diseases outbreaks; (iii) quality of raw and treated sewage; (iv) organic matter, heavy metals, pesticide residues in animal and plant tissues, etc. in Lake Nakuru; and (v) quality and quantity of industrial effluent before discharge into the sewage works. e) Institutional arrangements and capacity building requirements

Environmental Management in Nakuru District is mainly under the responsibility of the District Offices of NEMA, KWS, and the District Forest Office. These institutions are responsible for the implementation of the District Environmental Management Plan and other projects, which include protection of the well field recharge areas under the project. They will coordinate the implementation of the Environmental and Social Management Plan (ESMP) for the project, in collaboration with RVWSB and NAWASSCO. f) Public consultations and disclosure requirements

Public consultations have been carried out during and after EIA preparation. This includes meetings, gathering opinions and ideas on how to maximize project benefits according to the perception of the population. The various contacts and wok sessions held with the population certainly increased significantly ownership. g) Estimated costs

Mitigation measures are streamlined in the project activities and their cost fully integrated. In addition there are a number of activities that are planned or ongoing in the Nakuru area that are catering for the mitigation of most adverse impacts. Those activities are: 1) Actions by international organizations: Localizing Agenda 21 (Belgium); Strategic Nakuru structure plan (UNSCH & Belgium); Nakuru urban environment project (UNEP); Global environmental facility project for conservation and sustainable use of biodiversity in the Eastern Rift Valley lake’s in Ethiopia, Kenya and Tanzania (GEF/UNEP). 2) Actions by NGOs & CBOs: World Wildlife Fund for Nature (DFID/EU then EU) does environmental conservation, monitoring and planning; NGOs & CBOs in Nakuru working mainly on education, awareness and rehabilitation; Water Quality Testing Laboratory activities; Environmental monitoring and research by National Museum of Kenya, the University of Nairobi, and Egerton University. h) Implementation schedule and reporting

Implementation schedule is closely calibrated to project implementation.

Annex 7 DETAILED COST ESTIMATES

Annex 8

CATEGORIES OF EXPENDITURE

Category KES (million) UA (million) ADF Loan ADF Grant GOK Comm. FC LC Total FC LC Total UA (Million) 1. Works 1.1 Olobanita Wellfield 114.98 76.80 191.78 1.09 0.73 1.82 1.57 0.25 1.2 Water Transfer Pipeline 142.80 99.23 242.03 1.35 0.94 2.29 1.95 0.34 1.3 Rehab. of existing sources 43.71 27.94 71.65 0.41 0.26 0.68 0.58 0.10 1.4 Distribution System 13.35 7.51 20.86 0.13 0.07 0.20 0.16 0.03 1.5 Institutional strengthening 64.28 64.28 - 0.61 0.61 0.52 0.09 1.6 Sanitation improvements 40.94 186.49 227.43 0.39 1.77 2.15 1.83 0.32 1.7 Peri-urban watsan 7.81 18.23 26.05 0.07 0.17 0.25 0.21 0.04 1.8 Watsan rehab. In other RV towns 226.20 127.23 353.43 2.14 1.20 3.35 3.01 0.33 1.9 Rural Watsan 163.20 91.80 255.00 1.55 0.87 2.41 1.81 0.48 0.12

2. Goods 2.1 Equipment, tools, meters, 84.47 20.20 104.67 0.80 0.99 0.84 0.15 2.2 Aquifer Mngt & Monitoring 6.30 6.30 12.61 0.06 0.06 0.12 0.10 0.02 2.3 Computers, office equipt, furniture, vehicles 20.74 3.92 24.66 0.20 0.04 0.23 0.19 0.05

3. Consulting Services 3.1 Mngt. Options study 44.00 11.00 55.00 0.42 0.10 0.52 0.52 3.2 TA to RVWSB 62.41 6.54 68.95 0.59 0.06 0.65 0.65 3.3 TA to NAWASSCO 49.74 13.40 63.14 0.47 0.13 0.60 0.60 3.4 RWS Study 20.00 20.00 40.00 0.19 0.19 0.38 0.38 3.5 Supervision, Audits 75.05 32.16 107.21 0.71 0.30 1.02 0.71 0.14 0.16 0.00

4. Miscellaneous 4.1 Public Awareness Campaign 1.75 1.75 0.02 0.02 0.02 4.2 Land Acquisition 3.10 3.10 0.03 0.03 0.03 4.3 Operating Costs 25.35 25.35 0.24 0.24 0.24

Total Base Costs 1,115.69 843.26 1,958.95 10.56 7.98 18.55 11.40 4.39 2.63 0.12 Physical Contingencies (10%) 104.06 81.11 185.17 0.99 0.77 1.75 1.08 0.42 0.25 0.01 Price Contingencies (3% pa FC & 7% pa LC) 34.51 61.73 96.23 0.33 0.58 0.91 0.56 0.22 0.13 0.01 Total Costs 1,254.26 986.10 2,240.35 11.88 9.34 21.21 13.04 5.02 3.01 0.14

Annex 9 INSTITUTIONAL FRAMEWORK FOR PROJECT IMPLEMENTATION

GOK ( represented by MoF) WSRB Water Services On lending Agreement & (Regulator) Trust Fund Development Agreement Licence Rural water Supply Program RVWSB (Executing Agency & Licensee) Lease

WS Appeals Municipal Council Board of Nakuru Services Provision Agreement NAWASSCO Shareholding Agreement Water Service Provider A ( )

Participating Customer Contracts Municipal Councils NWCPC

Customers

Communities

Annex 10

IMPLEMENTATION SCHEDULE

2004 2005 2006 2007 2008 ID Task Name Duration 5678 91011121234567 8910111212345 67891011121 23 4567 8910111212345 678 9 1 Loan & Grant Approval to Effectiveness 26.6 wks? 2 Loan and Grant Approval 1 day? 3 Loan and Grant signature 1 day? 4 Effective Date 1 day? 5 6 Construction Supervision 202.2 wks? 7 GPN 0.2 wks? 8 SPN 0.2 wks? 9 Approval of Shortlist 5.4 wks? 10 LOI to Contract Award 12 wks? 11 Consturction Supervision 174 wks? 12 13 Nakuru Works 114.5 wks? 14 IFB 8.5 wks? 15 Evaluation to Contract approval 10 wks? 16 Works 96 wks 17 18 Goods for Nakuru 20.5 wks 19 Request for Quotations 6.5 wks 20 Evaluation to Contract Approval 6 wks 21 Delivery of Goods 8 wks 22 23 Management Options Study for Other Town 143.4 wks? 24 SPN 0.2 wks? 25 Approval of Shortlist 6.5 wks 26 LOI to Contract Award 12 wks 27 Management Options Study 26 wks? 28 29 Works and Goods for Other Towns 91.2 wks? 30 IFB 8.5 wks? 31 Evaluation to Contract Award 8.5 wks 32 Implementation of Works 74.2 wks 33 34 Rural Water Supply and Sanitation 195.6 wks? 35 SPN 0.2 wks? 36 Approval of Shortlist 6.5 wks 37 LOI to Contract Award 12 wks 38 Rural Water Supply & Sanitation Study 17.2 wks? 39 Implementation of RWSS programme 152.2 wks 40 41 Technical Assistance to RVWSB and NAWA 180.1 wks? 42 SPN 0.2 wks? 43 Approval of Shortlist 6.5 wks 44 LOI to Contract Award 10.9 wks? 45 Technical Assistance 156.5 wks

Annex 11 Page 1/2

COMPUTATION OF FIRR & EIRR

Assumptions for Computation of FIRR

The projections are based on constant December 2004 US dollar and Kenya Shilling (KES) prices. Project Life: A 25-year project life span is assumed. Investment Cost: Includes the base cost for the water supply and sewerage infrastructure rehabilitation and extension component, increased by physical contingency and including replacements. Operations and Maintenance (O&M) Cost: Incremental O&M costs are estimated at 8.5% of capital costs. Unaccounted For Water (UFW): Expected losses of water are factored to reduce drastically from their current levels, estimated at 70% as a result of the rehabilitation and UfW management program during the first two years of the project implementation. Losses are assumed at an average of 60% by 2005, and to stabilize around 25% from 2007 onwards. Tariff: The current average tariff of KES 22.25/m3 (US$ 0.30/m3) is maintained until the commissioning of the project by early 2007. This average tariff is increased gradually towards reaching full cost recovery tariffs by the year 2010, when they are kept constant at the computed full cost recovery average tariff of KES 30.65/m3 (approximately US$ 0.42/m3). Incremental Water Revenue: Water production, sales and the relative consumption shares among domestic, commercial and industrial consumers are derived directly from the design report. Incremental water sales attributed to the project are valued at the applicable average tariff. Sewerage Revenue: is estimated at 14% of water revenues.

Assumptions For EIRR

The calculation of EIRR for the project is based on the cost and benefit streams used for the FIRR, with the following adjustments:

Health Benefits: health related savings considered in the analysis, and the assumptions used to evaluate them are as follows: i) The potential increase in cases of water-borne diseases is projected with reference to the 5% of population without access to clean water, ii) the monthly medical bill are around KES 570 and this happening mostly during the dry and rain season for a maximum of 4 months in a year gives KES 3500 and about 120 household affected, iii) In the absence of the project, the incidence of water-borne disease is projected to increase by 1% per annum due to deterioration of service. Standard conversion factor of 0.9 applied to all cost.

Annex 11 Page 2/2

COMPUTATION OF FINANCIAL INTERNAL RATE OF RETURN

Project Investment Incremental Total Incremental Water Sewerage Net Year Year Cost O&M Cost Cost Water Sales Revenue Revenue Benefits (KES 'million'(KES 'million')(KES 'million') (in '000' m3)(KES 'million'KES 'million' (KES 'million') 0 2005 602.92 51.25 654.16 1,095 24.36 3.17 -626.63 1 2006 804.57 119.64 924.21 6,362 148.99 17.05 -758.16 2 2007 225.92 138.84 364.76 10,275 272.14 30.27 -62.34 3 2008 15.48 140.16 155.64 10,735 293.82 33.31 171.50 4 2009 0.00 140.16 140.16 11,205 316.82 36.53 213.20 5 2010 0.00 140.16 140.16 11,405 349.57 41.11 250.53 6 2011 0.00 140.16 140.16 11,932 365.73 43.38 268.95 7 2012 0.00 140.16 140.16 12,471 382.24 45.69 287.77 8 2013 0.00 140.16 140.16 13,022 399.11 48.05 307.01 9 2014 0.00 140.16 140.16 13,584 416.36 50.47 326.67 10 2015 0.00 140.16 140.16 13,595 416.68 50.51 327.04 11 2016 0.00 140.16 140.16 13,595 416.68 50.51 327.04 12 2017 132.92 140.16 273.08 13,595 416.68 50.51 194.12 13 2018 157.29 140.16 297.45 13,595 416.68 50.51 169.75 14 2019 0.00 140.16 297.45 13,595 416.68 50.51 169.75 15 2020 0.00 140.16 297.45 13,595 416.68 50.51 169.75 16 2021 0.00 140.16 297.45 13,595 416.68 50.51 169.75 17 2022 0.00 140.16 140.16 13,595 416.68 50.51 327.04 18 2023 0.00 140.16 140.16 13,595 416.68 50.51 327.04 19 2024 0.00 140.16 140.16 13,595 416.68 50.51 327.04 20 2025 0.00 140.16 140.16 13,595 416.68 50.51 327.04 21 2026 0.00 140.16 140.16 13,595 416.68 50.51 327.04 22 2027 0.00 140.16 140.16 13,595 416.68 50.51 327.04 23 2028 0.00 140.16 140.16 13,595 416.68 50.51 327.04 24 2029 0.00 140.16 140.16 13,595 416.68 50.51 327.04 25 2030 0.00 140.16 140.16 13,595 416.68 50.51 327.04

NPV = 2,738.03

IRR = 13.86%

Annex 12

COMPUTATION OF ECONOMIC INTERNAL RATE OF RETURN

Year Costs O&M Total cost Incremental Incremental Sales Health Total Net Consumption Sales/ Water /sewerage savings benefits Benefit

KES MillionKES MillionKES Million m3(000) KES Million KES Million KES MillionKES Million KES Million 2004 2005 542.63 46.13 588.75 1,095 24.36 3.17 12.0 35.6 (553.18) 2006 724.11 107.68 831.79 6,362 148.99 17.06 69.7 212.1 (619.65) 2007 203.33 124.96 328.28 10,275 272.14 30.26 112.5 373.4 45.14 2008 13.93 126.14 140.08 10,735 293.82 33.32 117.5 400.2 260.14 2009 113.55 113.55 11,205 316.82 36.43 122.7 428.4 314.80 2010 102.21 102.21 11,404 349.57 41.07 124.9 464.0 361.76 2011 92.00 92.00 11,932 365.73 43.34 130.7 485.8 393.75 2012 82.81 82.81 12,471 382.24 45.64 136.6 508.0 425.18 2013 74.54 74.54 13,022 399.11 48.09 142.6 530.8 456.27 2014 67.10 67.10 13,584 416.36 50.42 148.7 554.0 486.87 2015 60.40 60.40 13,595 416.68 50.51 148.9 554.4 494.05 2016 54.37 54.37 13,595 360.79 50.51 148.9 504.1 449.78 2017 119.628 48.94 168.56 13,595 360.79 50.51 148.9 504.1 335.58 2018 141.813 44.05 185.86 13,595 360.79 50.51 148.9 504.1 318.28 2019 39.65 39.65 13,595 360.79 50.51 148.9 504.1 464.50 2020 35.69 35.69 13,595 360.79 50.51 148.9 504.1 468.46 2021 32.13 32.13 13,595 360.79 50.51 148.9 504.1 472.02 2022 28.92 28.92 13,595 360.79 50.51 148.9 504.1 475.23 2023 26.03 26.03 13,595 360.79 50.51 148.9 504.1 478.12 2024 23.43 23.43 13,595 360.79 50.51 148.9 504.1 480.72 2025 21.09 21.09 13,595 360.79 50.51 148.9 504.1 483.06 2026 18.98 18.98 13,595 360.79 50.51 148.9 504.1 485.16 2027 17.09 17.09 13,595 360.79 50.51 148.9 504.1 487.06 2028 15.38 15.38 13,595 360.79 50.51 148.9 504.1 488.76 2029 13.85 13.85 13,595 360.79 50.51 148.9 504.1 490.30 2030 12.46 12.46 13,595 360.79 50.51 148.9 504.1 491.68 Total 1,745 1,430 3,175 319,605 8,798 1,157 3,500 12,109 8,934 NPV(12%) 1,355 622 1,893 82,351 2,302 286 902 3,140 1,247 EIRR 24% Sensitivity 10% decreas10% increase 20% increase20% increase Analysis Invest 26 22 o&m 24 23 Benefits 22 25 20 27

Annex 13 KENYA RIFT VALLEY WATER AND SANITATION PROJECT CHRONOLOGY OF PREPARATION AND APPRAISAL ACTIVITIES

Date Activity Key Agencies Met Mission Team June 1993 Bank approved ADF grant of UA 0.83 million for Nakuru Water Supply and Sanitation Study to conduct feasibility study for medium term project and pre-feasibility study for long term project. 31/10 to Preparation mission for Nakuru Water Supply MOF, MWRMD, Sanitary Engineer 14/11/1998 and Sanitation Project: Recommended NWCPC, MOLG, Public Utilities Economist additional drilling activities before project MCN, NCC, KWS, Financial Analyst could be appraised. Consultants Environmentalist 25/05 to Pre-appraisal mission but GOK failed to MOF, MWRMD, Sanitary Engineer 16/06/2001 resolve key institutional and financial issues by NWCPC, MOLG, Public Utilities Economist September 2001. Mission also prepared terms MCN, NCC, KWS, Financial Analyst of reference for management options study for JICA, AFD, WB, Environmentalist secondary towns but processing stopped for GTZ, KfW, FINIDA, unresolved institutional issues UNCHS, PPIAF, WWF, Consultants October 2002 GOK renewed request for financing under ADF IX 25/11 to Appraisal Mission. Project renamed Rift Valley MOF, MWRMD, Sanitary Engineer 11/1220/03 Water Supply and Sanitation Project, including NWCPC, MCN, Public Utilities Economist Nakuru, secondary towns in the Rift Valley NMC, JICA, AFD, Financial Analyst region and rural areas. WB, DANIDA, Environmentalist SIDA, Consultants 11/02/2004 English version of EIA Summary distributed to Board and later published on web site. 01/04/2004 French version of EIA Summary distributed to the Board. 16 to Appraisal Mission follow up to resolve MOF, MWRMD, Sanitary Engineer 26/03/2004 outstanding institutional issues NWCPC, MCN, Financial Analyst NMC, JICA, AFD, WB,