Sustainable Urban Economic Development Programme
Unlocking Investment in Intermediary Municipalities in Kenya
Introduction
The Sustainable Urban Economic Development (SUED) Programme is a £70 million, six-year programme supported by the UK Government. SUED is supporting selected municipalities in Kenya to attract investment for climate-resilient infrastructure and value chain projects. The programme is working with county governments, municipality leadership and the private sector to improve urban economic planning and raise investment for bankable, climate-resilient infrastructure and value chain projects with the aim of helping to create the right conditions for these emerging urban areas to grow in an inclusive and sustainable way.
Urbanisation in Kenya has not translated into high rates of economic growth that are sustainable due to lack of economic planning and an unfavourable business environment in municipalities and cities to sustain industrialisation.1 Urbanisation is a driver of economic growth through expanded access to jobs, markets, services and infrastructure for the urban population and businesses. Small and mid-sized cities can deliver many of the benefits of urbanisation that larger cities provide,2 implying that investing in intermediary cities and municipalities can deliver economic development for the urban populations as well as surrounding rural communities.
These lessons are based on SUED’s provision of investment attraction and management support to three municipalities, Kisii, Iten and Kathwana (Group Two municipalities) SUED’s activities included: project screening assessments based on selected criteria to shortlist potential projects; feasibility studies; market sounding and investor outreach; screening of prospective investors; due diligence for preferred investors; and transaction support. SUED’s engagement with Kathwana Municipality did not progress beyond the project screening stage.
In addition, SUED carried out capacity building of county and municipal staff on the investment attraction process. This included customised training workshops on investment attraction and aspects that investors consider in determining the bankability of a project such as feasibility studies, market size, operating model, enabling environment, innovation and additionality, project economics, investment readiness and project risk.
SUED identified bankable investment projects in selected agricultural value chains and infrastructure that have the potential to attract investors to the municipalities. Agroprocessing projects identified spanned the following value chains; avocados and bananas fibre in Kisii, and groundnuts and Irish potatoes in Iten. Infrastructure projects included an integrated sports hub and sports medicine centre in Iten and an integrated waste management project in Kisii This article focuses on learnings from working with Kisii and Iten municipalities to attract investment in value chain and infrastructure projects. It includes the challenges and successes and provides key lessons to inform future engagements with municipalities/counties and investors. SUED’s experience of successfully attracting investment in two projects in Kisii and Iten municipalities is used as an illustration, as well as other projects which had not reached financial close by the end of the Group Two phase. A conclusion and recommendations are also provided. The case studies highlight the two successful projects, the avocado oil processing project by Avofresh Processors Limited in Kisii Municipality, Kisii County, and the Irish and sweet potatoes project by Select Fresh Produce Kenya Limited in Iten Municipality, Elgeyo Marakwet County.
Context
SUED aimed to promote well-planned, market-driven economic growth in the municipalities under the programme The general approach that SUED followed is described below.
I. Development of Urban Economic Plans
Counties need to embrace better local economic planning to drive economic development. Sound economic development plans can help to attract investors by demonstrating the county’s priorities and progress in supporting the
1 SUED Business Case
2 OECD/UN ECA/AfDB. 2022. Africa’s Urbanisation Dynamics 2022: The Economic Power of Africa’s Cities
growth of certain sectors and its commitments in creating an enabling business environment. However, development and implementation of economic plans is constrained by limitations in funding and institutional capacity.
The initial phase of the SUED programme entailed supporting the municipalities in developing urban economic plans (UEPs). The plans served as an advisory guide for the municipalities on developing in a planned and coordinated manner and provided a longer-term roadmap for building resilient economies They offered an integrated multidisciplinary approach to planning for economic growth, aligning the municipalities’ economic strategies and infrastructure development. They also included a long list of potential climate resilient value chain and infrastructure projects developed in consultation with the respective municipality and county governments, as well as other stakeholders, based on their development priorities. The aim was to support inclusive and sustainable economic growth in the municipalities.
II. The Investment Attraction Process
The second phase of the programme focused on attracting investment into selected climate-resilient agriculture and infrastructure projects. The process is summarised below.
Project screening and selection: the programme applied an approved screening criteria to determine the value chain and infrastructure projects that should progress to the pre-feasibility study phase of the investment attraction process. The project screening and selection phase shortlisted the most feasible projects for investment with three projects per municipality finally selected, comprising a mix of value chain and infrastructure projects.
Development of pre-feasibility studies: To assess the viability of the selected projects in detail, gain a deeper understanding of the operating environment and explore their social and environmental impact, the programme completed comprehensive pre-feasibility studies for each project.
Investor outreach and identification of preferred investor/operator: Market sounding informed the project screening, selection and feasibility study phases. SUED scanned for appropriate potential investors, both domestic and international, and engaged them to introduce the projects and gauge their appetite for investment in the municipalities. Seed funding and financial close: SUED provided seed funding for the selected projects. The funding was demand-led and intended to provide an incentive to investors to catalyse investment and de-risk the projects. SUED worked with the preferred investors to determine the need, amount and use of seed capital for the projects, in line with the conditions set for the seed fund. Once the seed fund application was approved, due diligence was undertaken on the proposed operators/investors The seed fund grant agreement was then signed with the investor, marking financial close
Lessons learned
This section draws on our experience in county/municipal and investor engagement, attracting investors and financial closure of projects to provide key learnings.
Lesson 1: Coordination and buy-in of different stakeholders SUED is anchored at the municipality level and aims at providing technical support to selected municipalities. However, the municipalities have delegated responsibilities from the county governments Therefore, careful navigation was required between the municipality and county government stakeholders. It was important to keep both municipality and county government leadership updated and engaged on the project activities. SUED’s focal point was the Municipality Manager who helped to drive the programme’s implementation. Obtaining political buy-in and goodwill from the Governors provided a positive signal to county government officials to engage with and facilitate the implementation of the programme.
SUED coordinated with both the county governments, municipality managers and boards for the project screening and selection process, sought their concurrence on the selected projects, and kept them apprised on investor outreach and identification of the preferred investors. This resulted in buy-in from the stakeholders, ensured that they were aligned on the projects selected for investment and were better able to champion them.
The alignment of the municipality and county government leadership in supporting and facilitating implementation of the avocado oil processing project in Kisii and the Irish potato processing project in Iten, contributed to the successful engagement of the investors.
Lesson 2: Capacity building in investment attraction. This was achieved through customised training workshops on pre-feasibility studies and investor readiness for selected municipality and county representatives. The training resulted in a better understanding of the SUED programme, management of expectations in terms of project implementation and investment timeframes and underscored the role of the municipality and county in facilitating the projects. SUED also supported the municipalities and county governments through handholding in the investment attraction process and facilitated engagements with potential investors. Collaborating with the counties/municipalities in the investment attraction process helped to build institutional memory, cumulative skills and knowledge development. For instance, in
Kisii Municipality as a result of SUED’s technical assistance in investment attraction, the municipal board and the County Government leadership were able to package projects in the UEP into pitch decks that were shared with other donor agencies and private investors. This resulted in additional funding for a water project in Kisii. Furthermore, due to SUED’s prioritisation of urban development with an investment focus, the county put priority on developing an Integrated Strategic Urban Development Plan (ISUDP) that helped developed a realistic implementation plan for all identified projects along with capital investment plan.
Lesson 3: Identifying the right investors for the projects Market sounding commenced early in the investment attraction process. Assessing the appetite and capability of investors to invest in the projects helped to inform the project selection process and the pre-feasibility studies Multiple investors were approached for each project. This enabled SUED to assess their suitability across a variety of criteria, sense check the project and select the most suitable investor. The investors’ proposed operating models were also checked for alignment with SUED objectives and potential to deliver the desired outcomes and impact for the municipality and county. In addition, SUED facilitated engagements between the potential investors, the municipalities and county governments to align expectations. Several meetings were held with the preferred investors to ensure they were the right investors for the projects. It is important to note that different approaches work for different investment opportunities, projects that are deemed to be for public good such as waste management need a more elucidated approach to ensure that the investor truly understands the intricacies of the project and its offerings to ensure an alignment on objectives. For other projects while on paper they seem to work, getting investors within the sector who have the appetite to scale up the opportunity might be more challenging. As such ensuring the convergence of the programme’s objectives, the investors risk appetite and income potential of the project is imperative for the success of the project.
Lesson 4: The seed funding as a catalyst for investment The provision of seed funding can help to attract investors and catalyse investment. SUED supported the preferred investors in completing the seed fund application and supporting documents for submission to the British High Commission. SUED also supported the investors in developing funding proposals to source funds for the projects, engaging with financial institutions and in developing company profiles and pitch decks. For both the avocado oil and Irish potato processing projects, the seed fund grant and accompanying technical assistance catalysed the investment in the municipalities through persuading the investors to invest in Kisii and Iten respectively. This was done by demonstrating the projects’ viability, accelerating the investment process, and contributing to de-risking the investments.
Lesson 5: Infrastructure projects may require longer timelines An infrastructure project is likely to require a longer time to close, unless it is a brownfield project. Infrastructure projects requiring public investment could mean longer timelines before implementation as the contributions and funding of all the actors are lined up. SUED addressed this challenge by providing seed funding of up to 75% of the total investment needed for the integrated waste management project in Kisii Municipality The Kisii County Government is providing land and a cash contribution of 9%, with the private investor funding the balance. Waste management is viewed as a public utility and the seed funding was critical to incentivise the private operator to set up a materials recovery facility in Kisii.
Lesson 6: Ensuring project implementation aligns with SUED objectives A project’s operating model could align with SUED’s objectives and demonstrate the potential to deliver the desired outcomes and impact for a municipality and county. However, implementation may face challenges that ultimately lead to the project not benefitting a county as anticipated. The groundnuts processing project in Iten Municipality can support over 2,000 raw groundnut farmers in Kerio Valley and beyond. However, the risk of aflatoxin contamination needs to be managed to avoid a situation where the processor would be compelled to import the bulk of the groundnuts to get the desired quality for production. Therefore, SUED facilitated introduction of the investor to Technoserve to discuss supporting farmers in Elgeyo Marakwet County on managing aflatoxin risk in groundnuts under the Commercial Agriculture for Smallholders and Agribusiness Technical Assistance Facility (CASA TAF).
Lesson 7: Adjustments may be required to align with investor needs To facilitate the investment, adjustments may be required to accommodate the investor’s needs, depending on the characteristics of the proposed project The integrated sports hub and sports medicine project required 50 acres for the facilities. However, obtaining a suitable piece of land in Elgeyo Marakwet County proved difficult despite the strong support of the county government. The investor proposed to locate the project in neighbouring Uasin Gishu County which has available land.
Lesson 8: Suitable investors may not be able or willing to commit Identifying and securing committed investors is a lengthy process which may not bear fruit within the programme timelines. The market sounding and investor outreach process entailed casting a wide net for potential investors. Further engagement was sought with firms that had the technical know-how and experience to implement the projects. However, despite the effort to engage suitable investors, obtaining a commitment from a potential investor may not happen. This was the case for the banana fibre and banana fibre products processing project in Kisii in which no committed investor was identified by the close of the Group Two
phase Whilst some investors provided positive feedback on the project, they were unable to commit as they indicated they could not raise the investment required despite the availability of seed fund support. Efforts to engage with a social enterprise involved in production of sanitary towels made from banana fibres also did not lead to a commitment.
Lesson 9: Portfolio management There has been need for continued investor handholding after financial close. This includes supporting the investor to navigate the county related dynamics and continued fundraising support to become fully operational. This has been necessary to facilitate commencement of the projects and potentially avoid reputational damage for SUED.
Lesson 10: Programme flexibility and adaptation SUED incorporated flexibility and adaptability to reflect changing circumstances over the course of the programme. The Covid-19 pandemic affected implementation of the project, with planned meetings and travel being cancelled, postponed or modified in order to meet Covid-19 restrictions. This also necessitated the enhanced use of technology to maintain the relationships such as virtual meetings. Programme activities in Kathwana Municipality did not progress beyond the project screening and selection stage due to various challenges Therefore, programme deliverables and targets were adjusted accordingly.
Conclusion and recommendations
Kenya’s urban population is expected to rise to 50 percent of the total population by 2030, presenting challenges and opportunities.3 Counties are at the forefront of promoting job creation through investment attraction and a significant number of these investments are likely to be in emerging cities and municipalities. Programmes such as SUED are supporting these emerging urban centres in improving their local economic planning process to create an enabling business environment to attract investment. Long-term investments will not only create jobs in a municipality and in the wider county, they can also boost own source revenue collection that can be utilised to fund development initiatives and projects that enhance county competitiveness
Considerations and recommendations for future investment attraction programmes include:
• The investment attraction firm should engage with the county governments and municipalities from the beginning of the project given the potentially lengthy timelines required for some projects to close. Capacity building on investment attraction should be continuous and incorporate customised workshops as well as on-the-job training and coaching for selected municipality and county government officials A core team of county and municipality staff should be committed to engage with the programme for its entire duration therefore gaining cumulative skills and knowledge that can be utilised beyond the life of the programme.
• Programme design for investment attraction should include portfolio management as one of the components as investors may need continued handholding beyond seed funding to set up the projects, for example, engaging with other funders and investors as well as transaction advisory.
• The selected investors may benefit from technical assistance to ensure gender and social inclusion and climate resilience to align with programme objectives as well as emerging global standards on environment, social and governance (ESG) and sustainability.
• Baseline studies could have provided additional data on the different activities, actors and their numbers in the value chains assessed which would enhance reporting on the impact of the projects.
Case studies
The following are profiles of two projects that SUED successfully closed in Kisii and Iten municipalities.
Case study 1: Avocado Oil Processing Plant in Kisii
Project highlights:
Project details
The project entailed setting up a 70-tonne avocado oil extraction facility in Kisii Municipality. The extraction facility will utilise locally sourced avocado fruits to produce avocado oil, mainly for the export market. The expected volume of raw materials required per day is 70 tonnes of fruits which will ripen for a period of 7-10 days before the extraction of oil. The raw materials will be sourced from farmers in Kisii County, with any shortfall met through sourcing from the
3 World Bank Group. 2019. 'Creating Markets in Kenya: Unleashing Private Sector Dynamism to Achieve Full Potential'. Country Private Sector Diagnostic.
Project highlights:
Funding raised
Funder/programme
Beneficiary population
Expected jobs to be created
Expected impact
neighbouring counties. The project was commissioned in April 2023 and is being undertaken by Avofresh Processors Limited.
Total funding raised: £2,576,965
Investor contribution: £2,107,160
SUED Seed fund contribution: £469,805
The project will mainly benefit avocado farmers in Kisii and neighbouring counties, and other participants in the value chain such as transporters.
The project is expected to generate 1,195 jobs. These comprise 95 direct full-time equivalent jobs for the day-to-day operations; approximately 1,000 farmers will benefit through a ready market for their products, with this number expected to increase to 3,000 in the medium to long term; and 100 induced jobs are expected to be generated because of the project being implemented.
Climate resilience: Approximately 3,000 people will be prepared to respond effectively to the impacts of climate change.
Avocado trees present multiple benefits to the environment, sustainable land management and climate change regulation. The growing of avocado trees in Kisii is being undertaken as agroforestry which enhances biodiversity and soil fertility, together with diversified food production. Therefore, increased avocado tree planting and growing, combined with good agricultural practices, will result in strengthened resilience.
In addition, prompt delivery of the harvest to the aggregation centres by farmers will reduce the risk of avocado damage and post-harvest losses. Farmers will deliver their avocados to the nearest aggregation centre for collection in bulk by trucks operated by Avofresh Processors Limited. The aggregation centres will be set up across the wards where avocado growing is undertaken.
A suitable circular economy model will be adopted in the Kisii plant. Extraction of oil from avocado will result in organic waste that will be utilised as raw material for other value products. These include manure, animal feed or waste-to-energy generation.
Gender and social inclusion: Women are the main avocado producers in Kisii and predominantly sell in local markets to other retailers and to brokers. Of the 3,200 members in the Kisii Avocado Cooperative, 60% are women. The avocado oil processing plant provides an additional avenue for income generation for these women.
Avofresh Processors Limited is setting up aggregation centres around Kisii County and in neighbouring counties. The aggregation centres will mainly offer job opportunities for youth, with two to three people permanently stationed at each aggregation centre to receive, weigh, record and relay information to the office for collection of the avocadoes. Youth in Kisii are also currently involved in harvesting and transportation They could be engaged by farmers, in particular women farmers, to transport their produce to the aggregation centres.
Case study 2: Irish Potato Processing Plant in Iten
Project highlights:
Project details The project entails establishment of a fresh and frozen Irish and sweet potato fries processing plant in Iten Municipality. The proposed plant will commence with processing 30,000 tonnes of Irish potatoes and 30,000 tonnes of sweet potatoes into fresh and frozen fries in its first year of operation. The output of the factory will include fresh and frozen Irish and sweet potato fries and puree, which will be sold in East Africa and the European, Asian and Egyptian export markets. Production is expected to grow to the full capacity of 100,000 tonnes per annum for both Irish potatoes and sweet potatoes by the fifth year of operation. The project was launched in January 2023 and is being undertaken by Select Fresh Produce Kenya Limited.
Funding raised
Funder/programme
Total funding raised: £15,495,850.00
Investor contribution/other funding: £14,760,850
SUED Seed fund contribution: £735,000
Project highlights:
Beneficiary population
Expected jobs to be created
Expected impact
The project will mainly benefit Irish potato and sweet potato farmers in Elgeyo Marakwet and neighbouring counties, and other participants in the value chain such as transporters.
The project is expected to generate 5,226 jobs in the first year. These comprise 75 direct fulltime equivalent jobs for the day-to-day operations; approximately 5,000 farmers will benefit through a ready market for their produce, with this number expected to increase to 10,000 within five years; and 151 induced jobs are expected to be generated because of the project being implemented.
Climate resilience: Approximately 10,000 people will be prepared to respond effectively to the impacts of climate change.
Select Fresh Produce Kenya Limited will collaborate with the County Government and other implementing partners such as COLEACP4 to provide technical support to farmers to produce higher-yielding potatoes and reduce post-harvest losses, which are currently estimated at 20% of the produce.
Select Fresh will purchase curing trucks and establish a curing room The curing process will reduce the risk of the produce being damaged and extend the shelf life of the Irish and sweet potatoes by up to one year.
The processing facility will adopt a circular economy approach through upcycling the generated waste products into animal feeds and organic manure which will reduce or eliminate the facility’s solid waste footprint.
Select Fresh currently has a centralised facility in Nairobi where packing and processing of customer orders are undertaken. The company sources raw materials from other counties and then transports them to the processing plant in Nairobi. The establishment of the processing plant in Iten will reduce collection distances with respect to Irish and sweet potatoes thus resulting in lower emissions from diesel trucks, some of which are greenhouse gases.
Gender and social inclusion: At least 41% to 60% of the county population engages in Irish potato farming, typically rain-fed, smallholder farms Women and youth actively participate across the value chain and are major actors. Women groups are more involved in seed propagation. Women and youth are engaged in farm production, with harvesting mainly done by youth men and women. Transportation of the Irish potatoes is dominated by youth men who also double as brokers. Women and youth are also engaged in retail trade.
The proposed contract farming model provides a ready market for women and youth, while ensuring raw materials for the processor. Women farmers are more predisposed to brokers due to selling at the farm gate because of limited mobility and lack of information on available markets.
Inclusion will be enhanced through ensuring farmers from special interest groups are aware of Select Fresh’s project during farmer mobilisation exercises across the counties, for example, through engagement with grassroots organisations such as women and youth groups, when seeking to mobilise and contract farmers