1
Intermediary Cities Competitiveness: A Look into Kenya’s Investment Landscape
The UK Government through its Sustainable Urban Economic Development Programme (SUED)SUED is working with selected municipalities in Kenya to attract investment for climate resilient infrastructure and value chain projects. The programme is working with county governments and the private sector to improve urban economic planning and raise investment for bankable, climate-resilient infrastructure and value chain projects to ensure that these emerging urban centres develop in an inclusive and sustainable way.
Kenya’s urban population is expected to increase by 50 percent by 2030, presenting both challenges and opportunities.1 With nearly 1 million young people entering the job market each year, it is critical to generate adequate jobs. Post devolution in Kenya, counties are at the forefront of promoting job creation and poverty reduction through a multisectoral approach towards investment attraction and a significant number of these investments are likely to be located in emerging cities and municipalities.
The following sections highlight aspects that can promote sustainable investment in municipalities in Kenya that are being supported by SUED, with examples from Kisii and Iten municipalities. SUED’s experience of successfully attracting investment in two projects in the municipalities is used as an illustration. This includes investment by Avofresh Processors Limited in the avocado oil project in Kisii Municipality, Kisii County; and investment by Select Fresh Produce Kenya Limited in the Irish and sweet potatoes project in Iten Municipality, Elgeyo Marakwet County.
Governance and Creation of an Enabling Business Environment for Investors
The municipalities and county governments have the responsibility of creating an enabling environment for investment. According to KenInvest, some of the considerations to attract investors to counties include a clear investment policy; secure and predictable investment environment; simplified procedures for investment and business operations; well-packaged information on investment opportunities; investment incentives; comprehensive masterplan and land/property database; good and serviceable infrastructure and utilities; access to affordable financing; availability of developed human resources; and availability of technical support, in particular for SMEs.2
These activities require direction and coordination within the county government and with national government. However, counties face capacity limitations in investment promotion. KenInvest proposes the creation of a county level investment promotion unit to deliver investment promotion services to potential and existing investors3 The unit could initially have a simple but functional structure that aligns with the current needs of the County. Staff could be seconded on part-time basis from the department dealing with trade and investment to work in the unit. As the number of investors increases, the unit can also evolve, employing more staff on a full-time basis to provide specialised investment promotion services.
Many counties are yet to set up or operationalise investment promotion units. In addition, capacity building of investment promotion officers in trade and investment departments or county level investment promotion agencies, as well as other officials that engage with
2 Kenya Investment Authority (KenInvest). 2019. County Investment Handbook: Enhancing Investment in the Counties.
3 Ibid.
World Bank Group. 2019. 'Creating Markets in Kenya: Unleashing Private Sector Dynamism to Achieve Full Potential'. Country Private Sector Diagnostic.1
investors is needed. SUED is supporting capacity building of the municipalities and counties through customised training workshops and collaboration in the investment attraction process, helping to build institutional memory, cumulative skills and knowledge development. Additionally, the programme worked closely with Kisii Municipality to develop by-laws that ensure a conducive environment for incoming investors.
In its third County Integrated Development Plan, Kisii County acknowledges the need for a county investment unit to continuously engage with investors and market available investment opportunities in the county.4 The county will establish a county investment unit to identify and market sustainable investment opportunities, coordinate investment activities, and spearhead the development of a policy and regulatory framework for investment promotion.
SUED supported investment in the avocado oil processing project in Kisii Municipality. The project was formally launched in June 2022 and the avocado oil extraction facility commissioned in April 2023. The Kisii County Government championed this project and facilitated its implementation, including providing 1.3 acres of land at the Agricultural Training Centre and a godown for leasing.
SUED is also supporting investment in the Irish and sweet potatoes project in Iten Municipality. The project was launched in January 2023. The county government has supported the investor by facilitating connections with farmer groups and identification of suitable land for setting up the processing facility. The county is yet to establish an investment promotion unit.
The support provided by the county government leadership in Kisii and Iten demonstrates that while investment promotion structures are important and should be established to provide guidance and clarity to investors on the processes, ownership and buy-in of projects and political goodwill also play a vital role in facilitating investment in the municipalities.
Urbanisation and the Impact of Economic Planning in Attracting inward Investments
Urbanisation is a driver of economic growth through expanded access to jobs, markets, services and infrastructure for the urban population and businesses. A study on African urbanisation shows that small and mid-sized cities can deliver many of the benefits of urbanisation that larger cities provide,5 implying that investing in intermediary cities and municipalities can deliver economic development for the urban populations as well as surrounding rural communities.
Kenya has yet to leverage urbanisation for economic transformation and no country has reached high-income status without urbanising.6 In comparison, East Asia urbanised with economic transformation driven primarily through investment in infrastructure and industrialisation. The SUED business case also recognises that 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.
To drive economic development, counties need to embrace better local economic planning. As investment projects must be located at county-level, sound economic development plans can help to attract investors by demonstrating the county’s priorities and progress in supporting the growth of certain sectors and its commitments in creating an enabling business environment.
4 Kisii County. County Integrated Development Plan 2023-2027. 5 OECD/UN ECA/AfDB. 2022. Africa’s Urbanisation Dynamics 2022: The Economic Power of Africa’s Cities.2
6 World Bank. 2016. Kenya Urbanization Review.
The third generation County Integrated Development Plans (CIDPs) covering the period 2023 to 2027 have been prepared and published by the counties. CIDPs combine economic, spatial and sector plans and inform county budgets over five years. They define priorities and provide flagship investment projects. The CIDPs therefore offer an opportunity for counties to organise their economic development efforts.7
Development and implementation of economic plans is constrained by resource limitations, both funding and institutional capacity. Counties facing resource challenges tend to deprioritise economic development initiatives that would enhance competitiveness to cover recurrent expenditure and basic service-delivery. Different models for financing urban investments are needed, alongside the current funding from national government, own source revenue and development partners. Institutional development and capacity strengthening are also needed at municipality level to plan better for urbanisation.
SUED has supported the development of urban economic plans (UEPs) to promote wellplanned, market-driven economic growth in the municipalities.. The plans serve as an advisory guide for the municipalities on developing in a planned and coordinated manner and provide a longer-term roadmap for building resilient economies. The UEPs offer an integrated multi-disciplinary approach to planning for economic growth, aligning the municipalities’ economic strategies and infrastructure development. They also identify value chain and infrastructure projects with potential to attract investment. The aim is to support inclusive and sustainable economic growth in the municipalities.
In addition to the development of the UEP, Kisii Municipality utilised the recommendations from the UEP and directly engaged a private firm to develop the Integrated Strategic Urban Development Plan (ISUDP) to guide its growth and development in the next 20 years (20222042). The ISUDP will provide a basis for public and private investments, coordinate sector programmes and projects, and guide land development and management. The plan will position Kisii Municipality as a preferred investment destination, propelling it towards the achievement of city status.8
In its current CIDP (2023-2027), Elgeyo Marakwet County provides the sub-sector programmes and flagship projects to be implemented by national and county government, and development partners. The SUED-supported value chain projects in Irish and sweet potato processing, and groundnuts processing (sports nutrition bars) are included as flagship projects.9 This provides a strong signal to potential investors that the county has prioritised these sectors and will facilitate investment in the value chains.
Value chains and their role in regional economic clusters
Rural-urban linkages have been enhanced by the emergence of intermediary towns and cities. According to Africa’s Urbanisation Dynamics 2022 report, the closest city for 68% of the rural population in Africa has fewer than 50,000 inhabitants.10 Urbanisation benefits the surrounding rural population through facilitating access to services, infrastructure, and markets
Agricultural value chains link rural and urban areas, with urban centres providing a market for rural producers, as well as access to relevant services; and rural areas providing raw material for agro-industries. Counties should identify their competitive advantage and focus
7 Ibid.
8 The Star (22 December 2021). 'Kisii to develop urban growth plan'. https://www.the-star.co.ke/counties/nyanza/2021-12-22kisii-to-develop-urban-growth-plan/
9 Elgeyo Marakwet County. County Integrated Development Plan 2023-2027.
10 OECD/UN ECA/AfDB. 2022. Africa’s Urbanisation Dynamics 2022: The Economic Power of Africa’s Cities.
3
on developing those value chains, including increasing productive capacity and market promotion.
Intermediary cities and towns that may be unable to attract multiple sizeable industries in different sectors can benefit from specialisation to generate economies of scale and increase productivity, for example, through encouraging innovation and enhancing value addition in a sector or value chain.11 This also encourages the development of clusters – geographic concentration of businesses in related activities that creates synergies among them and maximises agglomeration economies, which are the benefits that result from the proximity. Applying a regional outlook, for example, a cluster of counties collaborating based on their competitive advantage, can help to promote regional economic development through leveraging economies of scale and development of regional value chains. Counties in Kenya have organised themselves into 6 regional blocs; Frontier Counties Development Council; North Rift Economic Bloc; Lake Region Economic Bloc; Jumuia ya Kaunti za Pwani; South Eastern Kenya Economic Bloc; and Mt. Kenya and Aberdares Region Economic Bloc
SUED is supporting investment in agricultural value chain projects in Kisii and Iten municipalities that have the potential to promote regional value chain development and expand economic growth across counties.
The Irish and sweet potato processing plant will be located in Iten Municipality and the operator will source raw materials from the local Irish and sweet potato farmers based in Elgeyo Marakwet County, as well as the wider North Rift Economic Bloc counties including Baringo, Nandi and Trans Nzoia, and counties in Western Kenya. Select Fresh Limited will initially contract approximately 2,000 Irish and sweet potato farmers. Additional farmers will be onboarded over time, with the number expected to grow to more than 5,000 farmers.
The avocado oil processing facility is in Kisii Municipality and is sourcing avocados from farmers in Kisii County and neighbouring counties in the Lake Region, Rift Valley and Western Kenya including Nakuru, Migori, Homa Bay, Siaya, Kisumu, Nandi, Kericho, Bomet, Vihiga and Kakamega. Avofresh Limited is also setting up aggregation centres around Kisii County and in the neighbouring locations. Through this project, approximately 1,000 farmers will benefit from a ready market for their products, with this number expected to increase to 3,000 in the medium to long term.
Sustainability beyond Technical Assistance and Initial Seed Funding
SUED is providing technical assistance and seed funding to incentivise potential investors to invest in the selected value chain and infrastructure projects in the SUED supported municipalities. The investor outreach exercises have revealed that the provision of seed funding can help to attract investors and catalyse investment. SUED is also handholding and advising potential investors to help realise the investments, including providing transaction and fundraising support for the projects and this has made SUED supported Municipalities and attractive destination for Investors
The avocado oil and Irish and sweet potato projects both received seed funding from the programme through the British High Commission
A seed funding grant of £469,805 was provided for the avocado oil project to assist in building the logistics framework to maximise fruit collection from Kisii and nearby surrounding counties. The funding was used to purchase a fleet of trucks for collection of avocados and to facilitate the setup of simple aggregation/collection sites across the target counties. 11
4
Ibid.
For the Irish and sweet potato project, seed funding of £735,000 was approved. The seed funding is provided for procuring equipment for a tissue culture lab that seeks to increase farmer yields, as well as a curing facility which will increase the shelf life of farm produce by at least one year.
In both cases, the seed fund grant and accompanying technical assistance catalysed the investment in the municipalities through persuading the investors to invest in Iten and Kisii by demonstrating the projects’ viability, accelerating the investment process, and contributing to de-risking the investments.
The sustainability of the projects beyond SUED’s technical support and seed funding is enhanced by the following factors:
• The seed funding support is demand driven and the investors provided justification for the need and use of the funds. They presented a business case for the seed funding, for example, to enhance the supply chain and logistics or to increase farmers’ yields to provide more raw materials. The applications were reviewed and approved by the British High Commission Investment Committee and due diligence conducted to assess technical and financial capacity, legal and reputational risks.
• Avofresh Processors Limited and Select Fresh Produce Kenya Limited are private investors that are already in operation in other locations in the country and, therefore, have the technical knowledge and experience on the value chains. The companies were looking to expand their operations and the seed funding and technical support helped to catalyse their investment in Kisii and Iten municipalities and support their growth.
• The seed funding is provided for investments that are commercially robust and strategically targeted to incentivise the private sector to invest. To determine the viability of the projects, pre-feasibility studies are conducted to gain a deeper understanding of the operating models, business environment, social and environmental impact, and project risks and mitigations. In addition, the projects have received buy-in and political goodwill from the counties, suggesting they will facilitate the investments and support their sustainability.
5
Disclaimer
The information in this report is provided for the sole use of Tetra Tech International Development in the delivery of the Sustainable Urban Economic Development Programme supported by the British Government through the Foreign, Commonwealth and Development Office (FCDO). The details included in this report shall not be disclosed to any other party, or be duplicated, used, or disclosed in whole or in part. This confidentiality clause applies to all pages and information included in this report.
A report of this kind is dependent on the completeness, accuracy and reliability of data received from a variety of sources. KPMG makes no warranty or claim as to the accuracy of the information on which this report is based and cannot be held responsible for any inaccuracies so arising.
No representation or warranty, expressed or implied, is or will be given by KPMG, or its respective directors, partners, employees, or consultants or any other person, as to the accuracy or completeness of this report and, as far as permitted by law and except in the case of fraud by the party concerned, no responsibility or liability is accepted for the accuracy or sufficiency thereof, or for any errors, omissions, or misstatements, negligent or otherwise, relating thereto. In particular, but without limitation, (subject as aforesaid), no representation or warranty is given as to the achievement of intended outcomes as a result of the implementation of recommendations, and nothing in this report is or should be relied on as a promise or representation as to the future.
Accordingly, KPMG, nor any of the respective directors, partners, employees, or advisors, nor any other person, shall be liable for any direct, indirect, or consequential loss or damage suffered by any person as a result of relying on any statement in or omission from this report and any such liability is expressly disclaimed.
6
