GAZETTE NOTICE NO. 7045

under the Constitution of Kenya, 2010, the County Governments Act, 2012, the Companies Act, 2015 and the Water Act, 2016 and other relevant statutes. WASREB in licensing and monitoring the water service sector institutions will use the standards in this guideline to gauge the commercial viability of a WSP under section 77 of the Water Act, 2016. 1. Background to Corporate Governance in the Water Services Sector 1.1 Corporate Governance (a) Water governance refers to the political, social, economic and administrative systems in place that influence water's use and management. Essentially, who gets what water, when and how, and who has the right to water and related - services, and their benefits (WGF). Governing the water sector includes the formulation, establishment and implementation of water policies, legislation and creation of institutions so as to clarify the roles and responsibilities of government and its different layers; the role of other stakeholders in relation water resources and services. The outcomes depend on the synergy created by these different bodies in relation to the rules and roles that have been taken or assigned to them. The water sector is a part of broader social, political and economic developments and is thus also affected by decisions by actors outside of the water sector. Hence the need for clarity in how the entities that provide the right to water are governed. (b) Corporate governance refers to the establishment of an appropriate legal, economic and institutional environment that allows institutions to thrive for advancing long-term shareholder value and maximum human-centred development while . remaining conscious of their other responsibilities to stakeholders, the environment and the society in general. In the context of water services, shareholder value is realized in universal coverage in safe, clean water in adequate quantities and reasonable standards of sanitation. (c) Efficient and effective provision of ware- services and progressive realization of the basic human right water can only be achieved if the leadership and management in the water sector institutions is guided by the tenets of good governance. (d) In the water services sector good corporate governance requires that water sector institutions be governed with integrity and thrifty enterprise in a manner which entrenches and enhances the objectives efficient and effective water service provision. The statutory guidance also being that they are to be run as commercial enterprises following sound business principles. (e) The board of directors is accountable to the owners of the water service providers (shareholders) for achieving the corporate objectives. The shareholder is accountable to the citizen who requires the services and owes fidelity to the Constitution, 2010. The competence and conduct of the board, in regard to factors such as business ethics and the environment has an impact on legitimate societal interests (stakeholders) and thereby influences the reputation and long-term interests of the water sector enterprise in the whole country and attainment of Vision 2030 and the Sustainable Development Goals. 1.2 The Need for Corporate Governance The principles of corporate governance need to be embedded in the water services sector so as to: 1. Ensure the profitability and efficiency of water services delivery. 2. To create ethical business enterprises and their capacity to create wealth and employment as water is an enabler under Agenda 4. 3. Ensure the long-term competitiveness of the water sector by ensuring the pricing and affordability promotes source protection. 4. Ensure the stability and credibility of the water sector financially and thus attract finance for asset development. 5. Improve relationships between the different players in the water sector so as to be able to deliver quality, affordable water services in a sustainable manner. 6. Improve the relationship between water enterprises and their various stakeholders comprising shareholders, water catchment areas, managers, employees, customers, suppliers, labour unions, communities, providers of finance and other government agencies. 7. Define leadership at board level so as to attain the following objectives: (a) maintaining arm's length relationships that are based on the vision of creating and sustaining a commercially viable WSP. (b) leadership geared towards efficiency in the provision and distribution of water services. • (c) leadership with probity for the sustainability of the financial resources. (d) leadership with responsibility focused towards attainment of water for all. (e) leadership which is transparent and which is accountable to the public. 1.3 Evolution of Corporate Governance Standards in the Water Services Sector 'T1 Corporate Governance Guidelines for water services were init introduced in 2009 and used to largely formalize the leas1.0 and management structure of newly corporatized Water SerViii4 "stovItlers (WSPs) that were formally either departments of water in tivt *fa authorities or water schemes run by the national Ministry *( Water. The Guidelines were also applicable the water service boards who were the licensees under the Water Act, 2002. Their use since 2010 to 2018 has embedded material improvements in the way WSPs ate led and managed and entrenched public participation. However, challenges remain and become more pronounced after every national election cycle since 2013 thus introducing a level of uncertainty in the leadership and management of WSPs and the sector as a whole. In 2010 after the adoption of the Constitution of Kenya, 2010, there was introduction of the two tiers of government at National and County level. The County Governments Act, 2012, the Public Finance and Management Act, 2012 were introduced and affect corporate governance of the WSPs and all public From 2014, cases in the High Court concerned challenges in the implementation of the Corporate Governance Guidelines in the water service providers especially in relation to open competition in the appointment of directors and the role of stakeholders in the appointment of directors and the management of the WSPs have increased; the general thrust of the rulings in these cases being that article 10 of the constitution 2010 changed the landscape of how citizens are governed by introducing meaningful public participation and good governance in the manner in which the State renders services. There was also the enactment of the Companies Act, No. 17 of 2015, the Insolvency Act, 2015 and finally the Water Act, 2016 which commenced on 21st April, 2017 which have pronounced themselves in matters that affect the governance of the water service providers. In 2015, WASREB also started measuring of improvement of governance of WSPs through the governance indicator. It is clear from that measurement, that poorly governed WSPs would inevitably enter into a decline in performance standards thus affecting service delivery. The results of the assessed WSPs on the indicator are published in IMPACT a publication under section 72 (1) (m) of the Water Act, 2016. 2. LEGAL FRAMEWORK OF THE WATER SERVICES SECTOR 2.1 The Water Act, 2002 The Water Policy No. I of 1999 led to reforms in the water sector in the Republic of Kenya and committed to introduce the tenets of Integrated Water Resource Management in the governing of water. The adoption of the policy led to the enactment of the Water Act, 2002 reformed the water sector in the country by unbundling the roles and separating institutionally to introduce: (a) Policy making which remained the role of the Ministry of Water (b) Economic and quality of service regulation of water services which became the role of the Water Services Regulatory Board (c) Regulation of water resources which became the role of the Water Resource Management Authority. (d) Water service delivery which became the role of water service boards as asset developers. (e) Introduction of commercialized autonomous water service providers who became agents of the water service boards. (f) Dispute resolution which was placed in the Water Appeals Board. (g) Introducing mandatory public participation in decisions and actions that affected water users by section 107 of the Water Act, 2002. (h) Introducing ring fencing of water revenue and the professionalization of the provision of the services by providing for removal of politics from the management and use of water. 2.2 The Constitution, 2010 The Constitution introduced the following changes in the governance framework of the country: (a) Article 2 the place of international law as part of Kenyan law; (b) Article 6 Devolution of power to two levels of government with the objective of improvement of delivery of services and further elaboration of its purpose in article 174; (c) Article 10 the introduction of national values and principles of governance of relevance to the water services sector being participation of the people, rule of law, human rights, accountability, good governance and sustainable development; (d) Article 21(2) the requirement that the State take legislative, policy and other measures including the setting of standards to achieve the progressive realisation to the rights to clean and adequate water and reasonable standards of sanitation; (e) Article 43(1)d the right to clean and safe water in adequate quantities and the right to reasonable standards of sanitation 43(1) e; (f) Article 46 the consumer's right to goods and services of a reasonable quality, the right to information to gain full benefit from goods and services and the protection of their health, safety and economic interests; (g) Article 259 of the Constitution provides the manner of construing the Constitution. (h) Fourth Schedule of the Constitution which gave the functional allocation of roles as follows: National Government (i) Use of international water and water resources (ii) Protection of the environment and natural resources with a view to establishing a durable and sustainable system of development including water protection, securing sufficient residual water, hydraulic engineering and safety of dams County Governments (i) Implementation of specific National Government policies on natural resources and environmental conservation including soil and water conservation (ii) county public works and services including water and sanitation services 2.3 The County Governments Act, 2012 For the institutions serving in the County, The County Governments Act, 2012 is clear in sections 34 and 36 that supervision of service delivery is a key function of the County Executive and it must be in accordance with the law. The place of meaningful public participation for the public is also captured in great detail in section 87 and 115 (2) of the Act. 2.4 The Water Act, 2016 Under the Water Act, 2016, the following institutional framework has been created for the water services sector: (a) The Ministry of Water and Sanitation makes the policy (b) The County Governments own and establishes all the water service providers (c) The Water Services Regulatory Board (WASREB) retains its name and role as a regulator of water services with a mandate of setting national standards foi water service provision for consumer protection and licensing WSPs. (d) The former Water Services Boards (WSBs) which were also licensed under the Water Act, 2002 and are listed below transform to Water Works Development Agencies (WWDAs) after a consultative process with the county governments with a mandate to develop national public water service works and residual water service provision on material default of county water service provision. Athi Water Services Board Tana Water Services Board Northern Water Services Board Rift Valley Water Services Board Coast Water Services Board (vi) Lake Victoria North Water Services Board (vii) Lake Victoria South Water Services Board (viii) Tanathi Water Services Board 29th November, 2019 THE KENYA GAZETTE 4677 (e) Existing water service providers under section 154 continue to operate as the county water service providers and their mandate as set out in section 78 is to provide water services within the area specified in the license and the development of county assets. W The National Water Conservation and Pipeline Corporation changes name to National Water Harvesting and Storage Authority (NWHSA) with the mandate to undertake, on behalf of the National Government, the development of national public works for water storage and flood control. (g) The Water Services Trust Fund (WSTF) changes from a financing mechanism to a financing institution and is renamed the Water Sector Trust Fund, with an expanded mandate for collaboration with County Governments and Water Resource Users Associations (WRUAs) over water service provision in underserved areas and catchment management respectively. Further, the WSTF has the mandate to mobilize financial resources from private investors for onward lending to creditworthy utilities and to promote research on water services and water resources. Its core mandate is to assist in financing the development and management of water services in marginalized areas or any underserved area. (h) The Water Appeals Board changes name to Water Tribunal. It has powers to hear and determine appeals from any person or institution directly affected by the decision or order of the Cabinet Secretary, the Water Resources Authority and the Water Services Regulatory Board. The tribunal also has powers to hear and determine any dispute concerning water resources or water services where there is a business contract, unless the parties have otherwise agreed to alternative dispute resolution. 3. CORPORATE GOVERNANCE STANDARDS IN WATER SERVICE PROVISION 3.1 Water Act, 2016 In relation to governance of water service providers the Water Act, 2016 provides the following; (a) In section 72 (1) (e) that WASREB shall develop a model memorandum and articles of association to be used by all water companies applying to be licensed by WASREB to operate as water service providers. (b) In section 75 (4) it is also stated that WASREB shall develop and publish guidelines to regulate the conduct of licensed water service providers. (c) In section 77(2) the institutional structure is elaborated by providing that County Governments in establishing WSPs shall follow standards of commercial viability. (d) The recommended model is that they be public limited liability companies established under the Companies Act, 2015 under section 77 (3) (e) That the memorandum and articles of association of the WSP shall conform to the model and guidelines issued by WASREB. W In section 79 a water service provider shall have a board of directors and in the case of a company the members of its board of directors shall be constituted in accordance with the Companies Act, 2015 or any other written law and shall be nominated to service in accordance with company's memorandum of objects and articles of association. (g) In section 79 (2) all members of the board shall possess the qualifications which meet the national standards set by WASREB. (h) In section 80 it is required that elected political officials of the county governments or political parties or serving Member of Parliament are not eligible to be board members. (i) Section 83 is clear that all WSPs established as public institutions hold the public water service assets on behalf of the public and thus those assets cannot be alienated to the detriment of the public. In section 91 water service providers are supposed to ensure economic and efficient provision (k) Section 154 there is the direction that existing WSPs continue operating as county water service providers or cross county water service providers as the case may be. From the direction given by the law the purpose of this guideline is thus to elaborate on section 72 (1).(e) and sections 77 (1) 4 and 91 of the Water Act, 2016. 3.2 Institutional model 1. Commercially viable water service providers shall be corporate bodies operating under the Companies Act, 2015. This is to maintain the benefits of corporatization where revenue is ring-fenced, human resource is professionalized and commercial principles are used to drive the creation of a efficient and economical water service provision that will fulfil the right to water for the country as per section 91 of the Water Act, 2016. 2. Ring fencing of revenue is a national standard under section 131 of the Water Act, 2016. 3. The recommended model by the Water Act, 2016 is a public limited liability company under the Companies Act, 2015 and the memorandum and articles of that entity is required to be compliant to the Model issued by WASREB. This is annex 1 to the Guideline. 4. Currently most companies are private limited liability companies; the issue of them being private being that transfer of shares to the public is restricted. This change to a public limited liability company shall be done in compliance to section 77 of the Water Act, 2016. 3.3 Shareholders 3.3.1 Shareholding 1. The shareholder of a WSP will for public providers remain the county government especially with regard to companies which have been providing services with assets developed publicly either by the former local authorities, water service boards , national water conservation and pipeline corporation or the ministry of water under the Water Act, 2002. 2. Section 154 of the Water Act, 2016 states these companies shall continue to operate as the county water service providers. 3. If their memorandum of objects and articles of association do not already state that they are owned by the county government which has taken up the shares of the defunct local authorities, amendments should be made to reflect this legal reality. This complies with the decision made by the Transition Authority through L.N. 137-182 of 2013 and clarified by Transition Authority in the