Kenya’s Water Sector Drowns in Sh137.9 Billion Debt Crisis as Treasury Explores Comprehensive Restructuring Amid Devolution Challenges

Kenya’s water service providers are grappling with a massive debt crisis as billions of shillings in loans remain largely unpaid, prompting the National Treasury to explore ways to restructure the obligations. The arrears have left taxpayers exposed to financial losses, while repayment of both domestic and foreign loans has stalled, creating what has become one of the worst default rates in Kenya’s public sector lending history.

Data from the Treasury shows that out of Sh140.4 billion lent to water agencies over the years, only Sh2.5 billion has been recovered as of June 2025. This leaves a huge outstanding balance of Sh137.9 billion, with most utilities failing to meet their repayment obligations. The figures translate to an overall default rate of approximately 98.2 percent, representing near-total failure of the sector to honor its debt commitments.

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Treasury Officials Signal Comprehensive Restructuring Strategy

Treasury officials have said the restructuring will focus on aligning loan repayments with county revenue flows to help utilities that struggle with collection and remittance. While specific details of the restructuring mechanism have not been disclosed, the initiative represents the government’s acknowledgment that the current debt servicing framework is fundamentally unsustainable given the realities of devolved water management.

“The water sector continues to face financial challenges arising from ongoing legal reforms, given that water is a devolved function. Some county government-owned water companies have not been remitting funds to the respective water agencies, thereby constraining debt-servicing capacity and exacerbating arrears accumulation,” the Treasury stated in its latest annual debt report.

The report emphasizes that resolving these challenges will require stricter enforcement to ensure funds are remitted on time, clearer intergovernmental financing rules, and the potential restructuring of water sector debt to fit county revenue realities. The admission represents a stark recognition that devolution’s implementation in the water sector has created structural challenges that were not adequately anticipated or addressed when the loans were originally extended.

Catastrophic Default Rates Across Water Agencies and Utilities

The Treasury records show a paltry two utilities out of 17 water sector entities have shown meaningful repayment efforts. Eldoret Water & Sanitation Company has repaid Sh849 million out of Sh1.06 billion disbursed, leaving about a fifth (19.8 percent) of the loan outstanding, while Nyeri Water and Sewerage Company has repaid Sh807 million out of Sh1.16 billion borrowed. The repayment record signals that recovery may be possible where utilities have stronger billing and revenue collection systems.

However, the majority of water sector entities present a dramatically different picture. The Lake Victoria North Water Works Development Agency has an outstanding balance of Sh16.16 billion out of Sh16.19 billion, a repayment rate of 0.2 percent, while the Lake Victoria South Water Works Development Agency has not repaid 99.9 percent of its Sh9.61 billion loan.

Several coastal region utilities have recorded zero repayment. Kilifi Mariakani Water & Sewerage Company, which owes Sh1.26 billion, Kwale Water & Sewerage (Sh1.39 billion), Malindi Water, Sewerage & Sanitation Company (Sh1.58 billion), Mombasa Water & Sanitation Company (Sh1.30 billion), and Tavevo Water & Sewerage Company (Sh964 million) have all recorded zero repayment. This coastal concentration of defaults suggests regional patterns in revenue collection challenges that may require geographically targeted interventions.

The Devolution Dilemma: Structural Challenges in Water Management

The water sector debt crisis is inextricably linked to Kenya’s devolution framework implemented under the 2010 Constitution. The Water Act 2016 recognized devolution of water management activities between the two levels of government—national and county—creating a complex institutional framework that has proven challenging to implement effectively.

Under this framework, county governments took responsibility for water and sanitation service delivery, fundamentally altering the operational and financial landscape of water utilities. However, the transition has been marked by confusion over asset ownership, unclear intergovernmental financing frameworks, and capacity constraints at the county level that have undermined effective service delivery and revenue collection.

The challenges are compounded by the fact that some county government-owned water companies have not been remitting funds to the respective water agencies, creating a disconnect in the financial chain that was supposed to enable debt servicing. This non-remittance reflects deeper governance issues including political interference, weak financial management systems, and competing priorities at the county level where water services must compete with other devolved functions for limited resources.

Historical Context: Pre-Devolution Debt Burden

Part of the loans are historical, with some dating back to the pre-devolution period when the utilities operated under defunct municipal and county councils. This historical dimension complicates the debt restructuring process, as it raises questions about whether current county governments should bear full responsibility for debt obligations incurred under previous institutional arrangements.

The pre-devolution debts were contracted when water utilities operated under different governance structures with different revenue collection systems and accountability mechanisms. The dissolution of municipal councils and the creation of county governments created institutional discontinuities that have affected debt servicing capacity. Some county governments have questioned the legitimacy of inheriting these historical debts, particularly where project outcomes did not materialize or where assets have deteriorated due to poor maintenance during the transition period.

Treasury’s On-Lending Model Under Scrutiny

Treasury often borrows from local and international lenders and on-lends the money to state-owned enterprises that cannot secure funding independently due to weak finances. The loans are expected to fund projects of national importance, but poor performance and ineffective remittance systems have turned many of them into near-grants.

The water sector debacle is part of a broader pattern of on-lending failures that has prompted Treasury to announce new measures. The National Treasury has established a Fiscal Risk Committee to vet and approve all future government-backed projects after an audit by the Office of the Auditor-General revealed Sh153.8 billion in unpaid on-lent loans by state corporations across various sectors as of June 2024.

The Treasury has also announced that parastatals which have defaulted on loans will be barred from getting approval for further borrowing in a bid to slow down the growing burden on taxpayers. This hardline stance reflects frustration with chronic default patterns, though its application to devolved water entities raises complex questions about how to balance fiscal discipline with the constitutional mandate to ensure access to water services.

Broader Fiscal Context: Kenya’s Mounting Debt Burden

The water sector debt crisis unfolds against a backdrop of escalating national debt obligations that are straining Kenya’s fiscal capacity. As of March 2025, Kenya’s total public debt stood at Sh11.02 trillion, an increase from Sh10.5 trillion in June 2024, representing 65.7 percent of the country’s gross domestic product.

More recent data shows the debt has continued climbing. Kenya’s public debt has shot up by more than Sh1 trillion in eight months, with the overall public debt stock reaching Sh11.9 trillion by August 2025. This represents 67.4 percent of GDP, with domestic debt accounting for two-thirds of recent growth, reflecting the government’s increased reliance on local borrowing sources.

The debt servicing burden has reached unprecedented levels. The National Treasury will spend Sh1.09 trillion in interest payments on public debt in the 2025-26 financial year, marking a Sh94.2 billion rise compared to the estimated Sh995.76 billion spent in the current fiscal year. These interest payments represent the biggest line item in the national budget, diverting resources from productive investments including water infrastructure development.

Impact on Development Spending and County Allocations

The mounting debt service obligations are crowding out development expenditure across all sectors including water. In 2015, development spending was more than three times larger than debt interest payments. By January 2025, the situation has flipped, with debt interest payments now more than double development expenditure.

Debt servicing has also impacted the amount of revenue that is disbursed to County Governments by decreasing the available sharable revenue. Although there has been an increase in the allocations since devolution, there has been stagnation in the revenue allocated to counties in real terms when adjusted for inflation and population growth.

This fiscal squeeze at the county level directly affects the capacity of county governments to invest in water infrastructure, maintain existing systems, and ensure adequate operational funding for water utilities. The result is a vicious cycle where inadequate county funding undermines revenue collection capacity, which in turn constrains debt servicing ability, further limiting access to development finance.

Revenue Collection Challenges at the Utility Level

The debt crisis reflects fundamental challenges in revenue collection at the water utility level. Recent examples highlight the magnitude of the problem. Kilifi County has moved to disconnect defaulters as water bill debts hit Sh600 million, with MAWASCO (Malindi Water and Sewerage Company) struggling to meet operational costs.

Kilifi County Water, Sanitation and Irrigation Executive Cllr. Jamaal Omar explained that the utility relies entirely on customer payments to meet essential expenses such as electricity bills, bulk water purchases from Coast Water Works Development Agency, and staff salaries. Without robust revenue collection, water utilities cannot sustain operations, let alone service debt obligations.

Similar challenges exist in other urban centers. Nairobi Water put defaulters on notice in October 2025, warning of widespread disconnection as the utility sought to recover overdue arrears and protect the long-term sustainability of water service provision in the city. The aggressive enforcement measures reflect the desperate financial situation facing even relatively well-established urban water utilities.

The Enforcement and Accountability Gap

One key challenge highlighted by county officials is the inability to access some homes for meter reading and enforcement. Nairobi Governor Johnson Sakaja, appearing before the Senate County Public Investment and Special Funds Committee in July 2025, noted: “In some estates, our teams are denied access to meters. This is interfering with accurate billing and planning.”

The enforcement challenges extend beyond physical access to meters. They encompass weak legal frameworks for debt recovery, inadequate penalties for non-payment, political interference in disconnection decisions, and corruption in billing and payment systems. These institutional weaknesses undermine the financial viability of water utilities and make it nearly impossible to generate the cash flows required for debt servicing.

The proposed restructuring plan will look at strengthening enforcement mechanisms to ensure timely remittances and clarifying intergovernmental financing frameworks. However, enforcement alone cannot solve the crisis without addressing underlying capacity constraints, governance weaknesses, and the structural challenges created by devolution.

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The Broader Water Sector Debt Landscape

The Sh137.9 billion debt owed to Treasury through on-lending arrangements represents only one dimension of the water sector’s financial challenges. An estimated sector debt of Sh225.7 billion poses a significant threat to Kenya’s water sector sustainability when all forms of debt including trade creditors, unpaid bills to bulk water providers, and other obligations are considered.

This broader debt burden affects the operational viability of water service providers. The Water Services Regulatory Board (WASREB) has been implementing the Conditional Liquidity Support Grant Phase II (CLSG II), a targeted financing initiative aimed at strengthening the Operational Cost Coverage Ratio of 34 water service providers. With a total funding allocation of Sh2.983 billion, the program focuses on addressing key inefficiencies in billing, revenue collection, and metering while also expanding access through implementation of structured Financial Recovery Plans.

Between fiscal year 2022/23 and 2023/24, the average Operational Cost Coverage Ratio among the 34 supported utilities improved, demonstrating that targeted interventions can yield results. However, the scale of support required far exceeds available resources, and the improvements remain fragile absent systemic reforms to address root causes of poor financial performance.

Implications for Water Access and Service Delivery

The debt crisis has direct implications for water access and service delivery across Kenya. Financially distressed utilities struggle to maintain and expand infrastructure, resulting in service interruptions, water rationing, and stagnant or declining service coverage. Capital investment in new infrastructure becomes impossible when utilities cannot service existing debt or even cover operational costs.

This is particularly problematic given Kenya’s water access challenges. Despite progress over the past two decades, significant portions of the population still lack access to improved water sources and sanitation facilities. The water sector’s financial distress threatens to reverse gains achieved and makes it virtually impossible to meet national targets for universal water access.

The crisis also affects water quality and public health. Financially constrained utilities often defer maintenance, operate inefficient treatment systems, and struggle to maintain adequate water quality monitoring. The result is increased risk of waterborne diseases and public health emergencies that impose additional costs on the health sector and affected communities.

Proposed Solutions and Path Forward

Addressing the water sector debt crisis will require comprehensive reforms across multiple dimensions. The proposed debt restructuring must go beyond simply extending repayment periods to address fundamental structural issues in the sector.

First, clearer intergovernmental financing frameworks are essential to clarify responsibilities and financial flows between national and county governments. This includes resolving questions about asset ownership, establishing clear accountability for debt obligations, and creating transparent mechanisms for resource allocation.

Second, stronger enforcement mechanisms to ensure timely remittances from county governments to water agencies must be implemented. This may require legislative reforms to give regulatory bodies greater authority to enforce compliance and impose sanctions for non-remittance.

Third, capacity building at the county level is critical. County governments took responsibility for water service delivery but many lacked the technical, managerial, and financial capacity to effectively manage this function. Sustained investment in human resource development, financial management systems, and governance structures is essential.

Fourth, revenue enhancement initiatives must be prioritized. This includes improving metering coverage, strengthening billing systems, enhancing enforcement of payment obligations, reducing non-revenue water through leak detection and repair, and implementing appropriate tariff structures that balance affordability with cost recovery requirements.

Learning from Successful Examples

The fact that Eldoret Water & Sanitation Company and Nyeri Water and Sewerage Company have achieved significant repayment progress demonstrates that success is possible under the right conditions. These utilities share certain characteristics including strong management, effective billing and collection systems, supportive county government relationships, and relatively favorable operating environments.

Studying and replicating the success factors from these utilities could inform broader sector reforms. This includes examining their governance structures, financial management practices, customer service approaches, and relationships with county governments and regulators. The challenge is adapting successful practices to different contexts, particularly in regions with more challenging economic conditions or weaker institutional capacity.

The Role of Commercial Finance and Private Sector Participation

The encouragement of commercial financing approaches in international development has also targeted basic services sectors. In Kenya, where half of the population still lacks access to regulated water, there has been a push toward positioning water utilities as entities capable of borrowing from private commercial lenders.

However, the current debt crisis raises serious questions about the viability of this approach. Water utilities that cannot service concessional government loans are unlikely to be able to handle commercial lending obligations with higher interest rates and stricter enforcement mechanisms. The push toward commercial financing may be premature absent fundamental reforms to strengthen utility financial performance and governance.

That said, many of the more financially robust utilities will be responsible for their own capital planning and will need to generate more free cash flow from ongoing operations to leverage debt financing. This will require better investment planning, improved financial management, and increased performance to access commercial finance at a later date.

Political Economy Considerations

The water sector debt crisis cannot be understood purely in technical or financial terms. It is fundamentally shaped by political economy dynamics including electoral cycles, patronage relationships, ethnic politics, and competing interests over water resource allocation and management.

Water services have become sites of political contestation, with county governments sometimes using water utilities for political patronage or treating them as sources of employment rather than service delivery entities. Disconnection campaigns are politically sensitive, particularly during election periods, undermining enforcement of payment obligations.

Resolving the debt crisis will require political will at both national and county levels to prioritize long-term sector sustainability over short-term political considerations. This includes resisting pressures to provide free water services without corresponding budget allocations, supporting utility management independence from political interference, and backing enforcement measures even when they are politically unpopular.

Regional and International Context

Kenya’s water sector challenges reflect broader patterns observed across Sub-Saharan Africa where devolution of water services has created similar tensions and challenges. Countries across the continent are grappling with questions about the appropriate level of government for water service delivery, balancing local responsiveness against economies of scale and technical capacity requirements.

International development partners who supported both devolution reforms and water sector lending bear some responsibility for the current crisis. The optimistic assumptions about institutional capacity development and smooth transitions embedded in project designs proved unrealistic. Going forward, development assistance must be better calibrated to political and institutional realities, with more attention to implementation challenges and longer-term capacity building requirements.

Looking Ahead: Critical Decision Point

The water sector stands at a critical decision point. The proposed restructuring represents an opportunity to reset the sector’s financial and institutional foundations, but only if it is accompanied by genuine commitment to comprehensive reforms. Merely extending repayment terms without addressing underlying structural problems will simply defer the crisis rather than resolve it.

The stakes are high not just for the water sector but for Kenya’s broader devolution project and fiscal sustainability. The water crisis illustrates how institutional design flaws, inadequate implementation planning, and weak accountability mechanisms can turn constitutional reforms into sources of fiscal liability. Lessons from the water sector should inform approaches to other devolved functions and government lending programs.

For Kenya’s taxpayers, the Sh137.9 billion in outstanding water sector debt represents a significant burden that will ultimately require resolution through some combination of restructuring, write-offs, or continued accumulation of unpaid obligations. For water service users, particularly the urban and rural poor who lack access to improved services, the crisis threatens to perpetuate inadequate service delivery and block pathways to universal access.

The Treasury’s acknowledgment of the crisis and exploration of restructuring options is a necessary first step. But meaningful progress will require moving beyond technocratic solutions to address the governance, capacity, and political economy challenges that created the crisis in the first place. Whether Kenya can successfully navigate this transition will significantly shape the country’s water future and the broader success of devolution as a governance reform.

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By: Montel Kamau

Serrari Financial Analyst

18th December, 2025