Lessons Learned- Attracting Investors into Kenyan Municipalities- A Kisii Case Study

Attracting Investors to Municipalities: The Kenyan Context Approach to investment attraction SUED is working with selected municipalities in Kenya to attract investment for climate resilient infrastructure and value chain projects. The general approach being followed entails a series of activities, described below.

Development of urban economic plans: The urban economic plans (UEPs) provide a guide for the municipalities to develop in a planned and coordinated manner. UEPs offer an integrated multidisciplinary 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.

Project screening and selection: SUED applies pre-approved criteria to assess the prioritised value chain and infrastructure projects to determine which ones should progress to the pre-feasibility study phase of the investment attraction process. The criteria include market size/ need for the proposed projects; adequacy of the proposed operating model; enabling environment; economic empowerment; climate change and resilience; gender and social inclusion; project economics; innovation and additionality; investment readiness; and project risk. The project screening and selection phase shortlists the most viable projects for investment, usually up to three projects per municipality, comprising a mix of value chain and infrastructure projects.

Development of pre-feasibility studies: To assess the viability of the prioritised projects in detail, gain a deeper understanding of the operating environment and explore their social and environmental impact, SUED develops comprehensive pre-feasibility studies for each project. The studies assess the following aspects for the value chain and infrastructure projects: local and global landscape; macroeconomic environment, regulatory environment; recommended standards; leading industry players and their competitive advantage; proposed operating model; end-product and the key markets; financial viability; gender and social inclusivity; climate resilience; investment climate and investment readiness; and identified project risks and mitigations.

Investor outreach and identification of preferred investor/operator: Market sounding starts early in the process and informs the project screening and selection and feasibility studies phases. SUED scans for appropriate potential investors, both domestic and international, and engages them to introduce the projects and gauge their appetite for investment in the municipalities. The various potential investors are mapped and continually engaged as the investment attraction process progresses to track their interest in the projects.

In identifying and selecting the preferred investor or operator, SUED assesses those investors that demonstrate a willingness to commit including determining their technical, financial and operational capacity; conducting site visits, where possible; and assessing the alignment of the investors’ proposed operating models with SUED objectives. SUED also facilitates engagements between the potential investors and the municipalities and county governments throughout the investment attraction process.

Seed funding and financial close: SUED is providing seed funding for the selected projects. The funding is demand led and is intended to provide an incentive to investors to catalyse investment and de-risk the projects. Once a preferred investor is identified, SUED works with them to determine the need, amount and use of seed capital for the project as a leverage, in line with the conditions set for the seed fund. SUED is also supporting preferred investors with transaction advisory and sourcing additional funding from commercial players and other sources in order to realise the projects. Once funding has been souced to leverage SUED Seed Fund funding the projects gets to financial close with a binding and formal commitment of capital as confirmed by a signed commitment agreement from funder(s). Due diligence is then undertaken on the proposed operators/and investors focusing on key information requirements such as legal risks, reputation risks, technical and financial capacity risk.

1

Ahead of the commissioning of a project in the municipalities, SUED facilitates meetings between the preferred investor and municipality and county representatives to review and confirm the proposed investment for the project and determine any agreements that need to be developed and signed between the investor and the county.

A number of learnings have emerged so far from SUED’s experience in working with municipalities to attract investment in value chain and infrastructure projects. Key lessons are highlighted in the following section to inform future engagements with the municipalities and investors.

Lessons learned The lessons learned aim to highlight the approach taken and key learnings from county/municipal and investor engagements.

Lesson 1: Navigating the political landscape Understand the dynamics at municipality and county level: The Constitution of Kenya 2010 introduced devolution which created 47 county governments. The Urban Areas and Cities Act (UACA) provides procedures for establishing municipalities and their governance structures, including municipal boards. These are appointed by the county governments and have delegated responsibilities for the management of municipalities. Municipality boards remain accountable to their respective county governments.

To provide the public services that fall under their mandate, the municipalities require adequate levels of financing, either from own revenue collection and/or allocations from county governments. This is currently a challenge for municipalities and this result in municipalities having challenges in executing the functions transferred to them..

The municipalities are therefore constrained in terms of resources (both human and financial) hence lack of autonomy. SUED is aimed at providing support (technical and financial) to selected municipalities, which operate under their respective county governments. However, this requires careful navigation between the municipality and county government stakeholders.

Project implementation is enhanced by the effective engagement of all the stakeholders: Effective and continuous engagement and communication with all the stakeholders is necessary. These include the county government, the municipality board and staff and Project Steering Group members.

While SUED is providing support at municipal level, the municipalities operate under their respective county governments therefore the latter must also be effectively engaged. The Governors political buy-in and goodwill provide direction to the county and municipal teams in engaging with and facilitating the implementation of the programme. As the selected projects relate to sectoral value chains and infrastructure, the CECs and Chief Officers of the relevant ministries must also be involved. The appropriate methods and frequency of communicating with the Governors, County Secretaries, relevant CECMs and other appropriate senior officials should be determined in line with the programme activities and objectives.

As SUED is implemented at municipality level, it is vital to keep the municipality boards and staff engaged. The focal point for SUED is the Municipality Manager who helps drive the programme’s implementation, unblocks any impediments, and facilitates engagement with other relevant county government officials and other relevant stakeholders when needed, to progress the investment attraction activities.

SUED has also established Project Steering Groups1 which guide the implementation of the programme in the different municipalities and consist of representatives from the county governments, municipalities, private sector, civil society organisations and special groups Keeping these stakeholders and key decision makers engaged and informed ensures they are updated on the investment attraction progress and can contribute to the process. This also ensures that they, are aligned to the projects selected for investment and are better able to champion the projects.

1

The Programme Steering Group (PSG) is an internal technical unit that supports SUED to improve its programme implementation by strengthening alignment with the county and improving communication to enable enhanced collaboration.

2

Lesson 2: Identifying the right investor for the municipality Begin market sounding of investors early in the investment attraction process: The project screening and selection phase involves the review of the urban economic plans and other county plans which identify the potential and prioritise projects. During this phase, SUED undertakes further desk research and consults a variety of stakeholders to determine the most viable projects for investment.

These are objectively assessed using the pre-determined criteria listed previously. In addition to municipality and county government stakeholders, SUED starts engaging with potential investors for the identified projects. The assessment of the appetite and capability of investors to invest in the projects also helps to inform whether a project should proceed to the pre-feasibility study phase or not.

Investor outreach continues during the pre-feasibility study phase, whether it is identifying new potential investors to introduce the projects to or ongoing engagement with previously identified investors to ‘keep the relationship warm’. At Aim to engage multiple investors for each project: There is merit in having more than one potential investor/operator on the table for a project from the start. The investors may have diverse attributes and provide value to the projects in different ways. They may also have different needs and conditions for investment in the municipalities. Having a number of investors to choose from means that SUED is able to assess their suitability across a variety of criteria, sense check the project and select the investor offering the best outcome for the municipality and county in general.

Investor’s proposed operating model should align with SUED objectives: Demonstrating willingness to commit as well as the required technical, financial and operational capability is not sufficient for selecting a preferred investor or operator. SUED also assesses the potential investor’s proposed operating model and determines if this will deliver the desired outcomes and impact for the municipality and county, and whether it is aligned with SUED objectives. SUED facilitates engagements between the potential investors and the municipalities and county governments to align expectations on both sides.

Lesson 3: Capacity building Build the capacity of the municipalities to enable effective contribution and enhance sustainability: Collaborating with the counties/municipalities in the investment attraction process helps to build institutional memory, cumulative skills and knowledge development. SUED is building capacity through customised training workshops for selected municipality and county representatives, and handholding in the investment attraction process.

The customised training workshops highlighted the importance of each step of the investment attraction process and aspects that investors consider in determining the bankability of a project. 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. Some of the trainings are offered by the programme during investment attraction process are: Pre-feasibility studies and investor readiness.

SUED is closely collaborating with the municipalities in the investment attraction activities to provide hands-on experience. Municipality and county officers contribute to the project screening and selection process and feasibility studies by sharing their technical knowledge on the targeted value chains and infrastructure projects, and providing guidance based on their understanding of the local context and dynamics on the ground. This consultative process is guided by the project screening and selection criteria developed and agreed upon by BHC. SUED also facilitates engagements between potential investors and the municipalities and counties, including investor visits to the municipalities to meet the county and municipality leadership, and municipality team visits to investor facilities.

Municipality teams are also supporting in investor outreach for the selected projects.

Preferred investors need support too: In addition to supporting capacity building of the municipalities, SUED is also handholding and advising potential investors to help realise the investments. SUED is supporting preferred investors in completing the seed fund application and supporting documents for submission to the British High Commission; in developing funding proposals to source funds for the projects and engaging with financial institutions; and in developing company profiles and pitch decks.

SUED is also providing transaction support for the prioritised projects.

3

Case study: Avocado oil processing plant in Kisii Municipality The following case study highlights the successful engagement of an investor for the avocado oil processing project in Kisii Municipality.

Avocado oil processing plant in Kisii Municipality The avocado fruit is a rich and important source in vital nutrients and oil for cosmetics as well as culinary purposes. Avocados are primarily grown for the fresh fruit market, either domestic or export.

Local varieties dominate Kenyan production, whereas fuerte and hass varieties, which are suitable for avocado oil extraction and processing, make up 20% and 10% respectively.

Project selection The avocado oil project was one of the three shortlisted to proceed to the feasibility phase for further investigation during the project screening and selection phase for Kisii Municipality. The feasibility study noted that Kisii County is the third largest producer of avocados in Kenya, which made it an ideal location for the avocado oil project. Hass avocado production is approximately 300 Ha, equivalent to 30,000 trees, or 8,000 tons per annum. The county has supplied over 120,000 Hass avocado seedlings, in addition to those sourced from private nurseries.

Investor outreach Investor outreach was carried out in parallel with the feasibility study. SUED identified six potential investors and engaged them to assess their willingness to invest in the project. Following further consultations, the list of probable investors was narrowed down to three, and these were all avocado oil processors based in Kenya. SUED conducted visits to the three companies’ facilities and held discussions with their directors. A lack of alignment of the investor’s proposed operating model with the SUED programme objectives, concerns about availability of adequate raw materials in Kisii County and lack of a policy framework on avocado harvesting and handling led to two of the investors dropping off.

Selecting Plan Fresh as the preferred investor Plan Fresh Limited2, an avocado oil processor based in Murang’a that processes all avocado varieties into avocado oil for export, was identified as the preferred investor for the avocado oil project. Plan Fresh indicated their willingness to establish a facility in Kisii Municipality to process avocado oil using the available avocados from Kisii and neighbouring counties. Their proposed model aligned with SUED’s objectives and the desired outcomes for the municipality and county, including their willingness to embark on value addition in Kisii, using the locally available avocado varieties for processing, and commitment to contribute machinery, technical expertise and working capital towards project implementation. Plan Fresh planned to set up at the existing godown at the Agricultural Training Centre that was operated as an avocado processing plant by a previous investor.

SUED facilitated Plan Fresh’s visits to Kisii Municipality where they engaged with the county and municipality leadership as well as the Kisii Municipality team’s visit to the Plan Fresh facility in Kabati, Muranga. These engagements helped to enhance the understanding of the proposed project and align the expectations and responsibilities of all the parties.

Plan Fresh Limited’s interest in the investment is to expand their capacity, increase exports by producing crude oil for the export market and increase their access to raw materials. Most avocado processors in Kenya are based in Central Kenya. There are about 13 operators spread across Kiambu, Nairobi, Embu and Murang’a, all sourcing raw material from the Mt Kenya region as the primary catchment area. They continue to face challenges around availability of adequate volumes of Hass and Fuerte varieties, with some resorting to processing local varieties to supplement. Plan Fresh will locate the facility in Kisii but will source the avocados from Kisii as well as the larger lake region bloc and Rift Valley region.

The seed fund as a catalyst for investment Plan Fresh had been looking to enter the Kisii market for some time but was concerned about a sustainable supply of avocados from the county. To address this challenge and accelerate the 2

Plan Fresh Limited is operating in Kisii Municipality under the entity, Avofresh Limited.

4

investment in Kisii, Plan Fresh requested for seed fund support to purchase a fleet of trucks to help with collection of avocados from Kisii and the neighbouring counties, where the supplementary raw materials will be sourced from. A smaller portion was meant to facilitate the setup of simple aggregation/collection sites across the target counties. SUED supported Plan Fresh Limited in its successful application for seed fund support from the British High Commission. Plan Fresh will contribute 82% of the total proposed investment and the seed fund provides 18%.

Championing of the project by Kisii Municipality and County Government The alignment of the Kisii municipality and county government leadership in supporting the project, taking ownership of it, and facilitating its implementation contributed to Plan Fresh Limited’s successful engagement. The Kisii avocado oil project was formally launched on 21 June 2022 by the Governor and Deputy British High Commissioner. The ceremony also included the signing of the MoU and lease agreement between Plan Fresh Limited and the Kisii County Government. The county government has facilitated the investment through providing 1.3 acres of land at the Agricultural Training Centre and a godown for leasing.

Anticipated impact of the project Job creation: The project is expected to generate 1,195 jobs, comprising 95 direct full time equivalent jobs for the day-to-day operations, 100 induced jobs are expected to be generated as a result of the project being implemented, and approximately 1,000 farmers will benefit through a ready market for their products, with this number expected to increase in the medium to long term.

Climate resilience: Avocado trees present multiple benefits to the environment, 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.

Farmers will deliver their avocados to the nearest aggregation centre for collection in bulk by trucks operated by Plan Fresh. The aggregation centres will be set up across the wards where avocado growing is undertaken and will therefore remove the need for movement of vehicles by farmers to the avocado processing facility in Kisii town. Reduced vehicular mobility will contribute to the reduction of greenhouse gas (GHG) emissions in the value chain. Prompt delivery of the harvest to the aggregation centres by farmers will also reduce the risk of avocado damage and post-harvest losses.

Plan Fresh is sensitising farmers on good agricultural practices which will enhance productivity and better response to climate-induced risks such as crop failure due to weather hazards.

Gender and social inclusion: Women are the main avocado producers in Kisii, growing the Jumbo indigenous variety which is predominantly sold in local markets to other retailers and to brokers. The Plan Fresh plant provides an additional avenue for income generation for these women. Of the 3,200 members in the Kisii Avocado Cooperative, 60% are women.

Plan Fresh is setting up aggregation centres around Kisii County and in neighbouring counties. The aggregation centres will mainly offer job opportunities for youth. It is estimated that there will be 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 and could be engaged by farmers, in particular women farmers, to transport their produce to the aggregation centres.

5

6

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.

7