Unlocking Green Investment and Creating Climate Resilience for Kenya’s Secondary Municipalities

Introduction

Primary cities in Africa cannot accommodate the rapidly increasing population, as such, there is need to strengthen the role that secondary and tertiary cities play in the contribution on nationwide economic growth. This approach has not been favoured in the recent past, but its merits are beginning to show with the unapparelled potential and opportunity that they provide for eradicating poverty, fostering innovation, and including a larger number of the population in inclusive and resilient growth while recognising the uncertainty associated with climate change.

The Sustainable Urban Economic Development (SUED) Programme, funded by the UK Government, was established to support twelve fast-growing secondary towns across Kenya to attract investment for critical climate-smart value chain and infrastructure projects1 Open Capital (OCA), served as an investment attraction advisor for SUED, leading development and support for a range of green investments in two municipalities, Isiolo and Malindi. Over three years, we worked closely with local municipal government, private sector companies and investors, and other experts to identify, structure, and support green investments. We focused on projects identified by local government, private sector, and community stakeholders that could accelerate climate-friendly economic growth and urban development, as identified in the Urban Economic Plans produced under the first phase of the SUED programme. The projects pursued included waste and circular economy, sustainable agriculture, and flood water management

The investment attraction process proved challenging given the smaller size of these municipalities, making opportunities less attractive for larger operators and investors, but we were able to complete five transactions that will have significant, long-term benefits to each local community In Isiolo and Malindi municipalities the programme will result in raising a total of ~GBP 5.3 million and creating an estimation of ~10,000 jobs (direct, induced, and indirect), including significant gains in climate resiliency from improved waste systems to drought-resilient agriculture The below case studies demonstrate three of these transactions as well as lessons learned for future sustainable urban development projects.

Case study 1: Commercialisation of sewage sludge in Malindi

Project highlights:

Project details

Waste-to-Value (W2V) facility to process sludge from Malindi Water and Sanitation Company (MAWASCO’s) upcoming Faecal Sludge Treatment Plant into briquettes

Funding ~GBP 1.8 million from the World Bank

Beneficiaries 140,000 Malindi residents

Expected jobs ~70 direct and indirect jobs

Expected impact Over 600,000 trees saved from deforestation for fuel usage, offsetting 120,000 tonnes of carbon

Urban sanitation has been a significant and growing challenge in Malindi. When we started engaging the municipal water and sanitation provider, MAWASCO, they were under-resourced and the cost of establishing sewer lines in Malindi was prohibitive, meaning that faecal waste was typically dumped untreated in an openair landfill site. To address this, MAWASCO was looking to establish the municipality’s first faecal sludge

1 Kitui, Malindi, Isiolo, Kathwana, Iten, Kisii, Eldoret, Kerugoya, Mandera, Lamu, Bungoma and Wote

treatment plant (FSTP) and had considered adding in a waste-tovalue facility to generate revenue from a recycled product.

Through SUED’s engagement, OCA conducted a pre-feasibility study on the waste-to-value (W2V) concept, and validated the opportunity to establish a plant to convert faecal sludge into fuel briquettes. Thereafter, we conducted more in-depth due diligence on this proposal and once verified, submitted the concept of the W2V facility to the World Bank, which had already agreed to fund the faecal sludge treatment plant. Based on SUED’s work at the prefeasibility and due diligence stages, the World Bank agreed to invest an additional GBP ~1.8 million to construct the briquettes plant Once commissioned, the new FSTP will prevent faecal sludge dumping in the environment, while the W2V facility will then safely commercialise the faecal sludge, to offset the costs of waste treatment The plant is expected to produce 3,000 metric tons (MT) per annum of briquettes for sale to industrial customers and create ~70 direct and indirect jobs. Further, the briquettes will offset the cutting of trees for wood fuels, thereby saving up to 200,000 trees per year and the associated carbon emissions.

Case study 2: Fruit processing in Malindi

Projects highlights:

Projects details Greenfield set-up of a mango drying facility by Milly Fruits Processors Ltd. and expansion of Equator Kenya Limited (EKL)’s chilli processing capacity

Funding ~GBP 1.5 million private investment by Milly Fruits, with ~GBP 500K from a SUED Seed Fund grant & ~GBP 1 million private investment by EKL, with ~GBP 250K in SUED Seed Fund grant

Expected jobs ~4,100 new jobs over three years for Milly Fruits project and ~5,600 new direct and indirect jobs for EKL project with support to ~6,300 farmers

Expected impact

Improved climate change resilience for ~15,000 new and existing farmers through use of renewable energy in production & utilisation of climate-smart technologies

Over the past three years, Malindi has experienced prolonged drought and erratic rainfall due to climate change and this has severely impacted agribusinesses and farmer livelihoods. As such, Malindi’s Urban Economic Plan identified the agri-processing value chain as a priority for enhanced climate resilience.

Under the SUED programme, OCA evaluated the fruit processing landscape in Malindi and developed prefeasibility findings that validated that the fruit value chain was attractive across specific investment and impact assessment parameters. After engaging with over 40 industry stakeholders including investors, private operators, and government and non-government agencies, OCA identified two strong operator for support from the SUED Seed Fund. Milly Fruit Processors, a fruit processor located in Mtwapa, Kilifi County, was looking to set up and operate a new climate-friendly fruit drying facility. Secondly, Equator Kenya Ltd., a chilli processor based in Malindi since 2010, was looking to expand their processing capacity to support chilli farmers with climate resilience and drive financial sustainability.

Through the SUED programme, we attracted Milly Fruits to set up this greenfield facility in Malindi, 100 km north of their existing plant in Mtwapa, thereby diversifying Malindi’s economy. This was achieved by holding a series of consultations with the Milly Fruits’ management to align on their growth strategy and the fruit drying facility project costs, reviewing their business strategy and project documents and developing an application for the SUED Seed Fund support. In June 2022, the British High Commission approved a grant commitment of ~GBP 478K, with private investment of GBP ~1.5M committed by Milly Fruits.

Figure 1: Previous means of faecal sludge disposal

For Equator Kenya Ltd. (EKL), OCA supported in structuring a project to expand their chili processing capacity and diversify into new products (flakes, powder, oil) to source more chilis from local smallholder farmers and reduce postharvest losses, while incorporating climate-smart technologies. OCA supported EKL to refine its growth strategy and articulate the structural and operational improvements to the existing facility to apply for catalytic funding. OCA developed a project concept note and budget, investment application form, investment committee memo and climate impact assessment for grant funding under the SUED program, and conducted risk-based due diligence to ascertain the operator’s credibility. This resulted in a grant commitment of ~GBP 250K from the British High Commission, accompanied by ~1M of an equity injection from the EKL shareholders.

Both investments are expected to have significant impact to the fruit processing sector in Malindi. The new Milly Fruitsmango drying facility and EKL diversification into chili oil, flakes, and powder will reduce post-harvest losses for farmers, which today reach up to 40% of harvest volumes in Kilifi County, due to lack of preservation technologies.i Both projects will utilise solar power for parts of the production, further reducing greenhouse gas emissions. Overall, the two projects will reach ~15,000 local farmers, enhancing their livelihoods and climate resilience.

Case study 3: Sustainable Urban Drainage Systems (SuDS) in Isiolo Project

Expected

Seasonal floods in Isiolo municipality contribute to the frequent destruction of property with recurrent floods destroying property worth over KES 800 million in 2015 alone, due to the municipality’s location in a basin which receives water runoff from the hills around Mount Kenya.ii For this reason, floodwater management was identified as a priority project by the municipality under the Isiolo Urban Economic Plan

Under the SUED programme, OCA conducted a detailed pre-feasibility study detailing the key issues contributing to flooding in Isiolo’s urban core. Thereafter, Isiolo Municipal Manager submitted this prefeasibility study as one of the municipality’s priority projects to the World Bank’s Horn of Africa Gateway Development project, (HoAGDP), through its implementation agency, the Kenya National Highways Authority (KeNHA). Following this submission, the HoAGDP requested for further details, so OCA and our engineering subcontractor drafted a concept note, preliminary engineering designs, and a high-level environmental analysis

After over a year of follow-up support and sensitisation within the implementing agency, the project was included in the HoAGDP budget, with a preliminary figure of ~GBP 1 million. Once construction is completed (in 2024-2025), the stormwater drainage improvements are expected to improve the climate resilience for the town’s 80,000+ residents by reducing the damage caused by floods to trade premises and residential properties.

Figure 2: EKL farmers sorting dried chilli

Lessons learned

From OCA’s three years supporting project structuring, investment attraction, and financial close for these transactions, some of the key learnings include:

• Engage the public sector early and closely, helping to them to understand how to attract private sector players through PPP frameworks. It is important to help municipal and county stakeholders to understand which projects may be able to generate a financial return and attract investment, and that a private investment attraction approach may not be viable for all of the county and municipal leadership’s priorities; for example, the county leadership pushed to prioritise a project to upgrade Malindi waterfront, but from an investment attraction perspective, it was unclear how it would generate a commercial return.

• A streamlined stakeholder process could be conducted to help the municipality identify their economic opportunities and priorities, which will form the basis for targeted projects While Urban Economic Plans (UEP) were created to identify projects in the SUED approach, a more efficient process could be to just conduct a series of stakeholder workshops and scoping exercises to identify key value chains in which to build climate resilience (e.g., fruit processing in Malindi or meat processing in Isiolo) and priority infrastructure projects which require adaptation to climate change (e.g., sanitation in Malindi or drainage in Isiolo).

• Consider the investment-readiness of operators within a sector before prioritising projects. While a project may sound viable given a municipality’s natural resources, it is important to evaluate the local and regional players who could be potential operators before committing to attract investment. For example, through the SUED process, a blue economy project was prioritised in Malindi, given the high prevalence of artisanal fishing and the under-exploited sustainable catch off the Malindi coastline. OCA engaged dozens of potential operators under SUED to assess the viability of helping them raise money for a Malindi-based project, but unfortunately, this project was later deprioritised because all potential operators were too early-stage for the programme criteria.

• Cast a wide net for private operators including regional players and potential sectors of focus

Considering the challenging circumstances of operating in smaller municipalities, it is important to consider a wider pool of potential projects to increase chances of attracting private sector operators with the necessary skills and expertise to operate effectively. Under the SUED programme, we had success with local and regional players (i.e. incentivising Milly Fruits to move from Mtwapa to Malindi

Figure 3:Seasonal flooding in Isiolo Town

within Kilifi County), but the national players we engaged for value chain projects felt the smaller size of the opportunity in secondary municipalities did not present a viable business case.

• Create preliminary project structures and concept notes with the target funder's requirements in mind. Funder requirements differ with private sector funders often assessing a project based on financial return and innovativeness, while public sector funders look at community and political support and minimizing negative externalities. Determining the target funder(s) at the start can help design a project to meet their needs. For example, with the SUDS project, the initial concept note included both hard infrastructure (i.e., culverts, piping) and programmatic soft costs (i.e. farmer training and distributed grassroots systems like water pans); none of thefunders engaged were willing to fund the entire scope, so we ultimately split up the funding proposal into different packages which were then shared with relevant funders based on whether they prefer hard or soft costs.

• Recognise that greenfield projects take time and come with additional risks, but also have high impact potential. Greenfield projects, particularly where there are dependencies on other works being completed, may not be able to be completed within a tight project timeline. For example, one of the prioritised projects under SUED was a meat processing facility to be constructed adjacent to the county-owned Isiolo export-grade abattoir, which was scheduled to be operationalised in 2022; however, the operationalisation of the abattoir has been continually delayed, and with the change in administration with the 2022 general elections, the operator identified for the adjacent meat processing facility decided to postpone the project. All this considered, such greenfield projects are worth pursuing, given the substantial impact a new production facility can have on the local economy.

• Plan for significant technical assistance to municipalities to package projects, particularly for innovative approaches. Whereas it is important for the prioritisation and push for such public infrastructure projects to come from the municipality itself, public entities especially at smaller municipal level will still require technical support including legal, environmental, and engineering expertise to ensure project conceptualisation is done in a feasible manner and to develop detailed project budgets and impact projections in order to secure funding; this was the case with the Sustainable Urban Drainage Systems (SUDS) project in Isiolo, where the initial project submission was done by the Municipal Manager, with a more detailed concept note drafted through SUED support

• Expect that the investment attraction process will be lengthy and often require blended finance. The project structuring process to match funder requirements and expectations particularly for climate resilient projects in intermediary cities takes time. In the fruit processing sector, projects took about 2 years from operator identification to financial close, including a lengthy familiarisation process among many stakeholders prior to drafting project documentation. Offering a grant through the SUED Seed Fund with a substantial co-financing requirement (debt, equity) was critical to successfully attract commercial operators and investors to these smaller municipalities, where risks are often larger than in major cities.

Conclusion

The SUED Programme demonstrated the critical need for sustainable, climate-resilient urban development at the municipal level in Africa. The investment attraction work OCA was able to lead as part of SUED will result in a total of ~GBP 5.3 million raised and an estimation of ~10,000 jobs created, in addition to significant climate gains. Most investors now consider climate resilience as a key part of their investment criteria, so the SUED focus on climate-smart projects was very timely. SUED also resulted in many important learnings that can improve future investments in similar areas in Kenya and across Africa. For programmes such as this where the ultimate objective is to attract private

investment, a streamlined approach can be adopted to identify and prioritize projects in coordination with the public sector and thereafter engage with potential private-sector operators more quickly.

We recommend that the investment attraction firm, such as OCA, takes the lead on scoping a long-list of potential investable projects in consultation with the municipality, and thereafter engages the municipality to shortlist the priority projects to take forward; an urban economic planning process is not necessary for this exercise. This streamlined process will ensure that all priority projects are investor-ready and will help set realistic expectations with the municipal and county stakeholders about potential outcomes. Given that there is a limited pool of qualified operators in secondary municipalities, it is advisable to “cast a wide net” for regional players and avoid being too prescriptive about the exact project structure; this is the ultimately the approach which contributed to OCA’s success.

There is a growing need for these interventions as climate change threatens Africa and especially large population inflows strain urban infrastructure. We believe development partners and governments have an opportunity to achieve important outcomes and leverage substantial commercial capital if blended finance programmes such as SUED are leveraged in future.

i Kilifi County, County Integrated Development Plan 2018 -2022, p21, Link; Fruit post-harvest losses generate up to 0.5 MTCO2e/metric ton of emissions. (40% PHLs rate * 270,000 MT of Kilifi annual fruit produce * 0.5 MTCO2e/metric ton)

ii The Standard. Isiolo’s Sh800m project damaged by floods, 2015. Link