Financial Mechanisms for Green Water Credits Davies Onduru Fredrick Muchena Sjef Kauffman

Contents Objective of the Study Approach and Methodology Findings Conclusions

Objective of the Study To document financial mechanisms for the proposed Green Water Credits Investment Fund: Conduct a study on farmers’ preferences on investment mechanism for soil and water conservation; Identify and describe existing models and potential financial mechanisms ; Identify and describe potential sources of funding for soil and water conservation activities

Approach and Methodology Three sub-catchments covered to capture farmers’ preferences (129 smallholders interviewed using HH questionnaire): Key informant interviews for selected institutions in Nairobi and Upper Tana catchment using a checklist

Farmer’s preferences on type of investment support on SWC Technical Assistance: Advice/extension on SWC practices Training and demonstration Investment support Inorganic fertiliser Crop protection material Off-farm available planting materials Tools and equipment Organic fertiliser Labour Locally available planting materials Emerging issues The farmers prime interest is in production and therefore in seasonal short term inputs Farmers interests are also in conservation and improvement of the production resource base

Farmer’s preferences on form of investment support on SWC (a) Training for implementation of SWC practices Terrace layout and construction Soil erosion control Training on conservation measures; maintenance of strucrures On-farm water harvesting Group dynamics Agroforestry Composting Establishment of Structure stabilisers (b) Access to planting materials, fertilisers at subsidised prices, financial support (loans and grants) (c) Physical tools and equipment being given directly as a token/incentive or through credit (low interest loan)

Farmer’s preferred institutional arrangement for investment support Most respondents preferred arrangements involving: Government bodies (43%) Financial institutions/banks (15%) FBOs (14%) CBOs (12%) SACCOs (10%) Majority of farmers (69%) perceived that no one organisation cannot handle investment support alone.

Existing Financial Mechanisms Models based on grants to beneficiaries: Characteristics: Target legally registered community based groups or associations (self-help groups, associations, Public trust etc.) with a group approach seen as an efficient way of carrying out conservation and or livelihood activities. Communities participating in the interventions partly contribute to off-setting project activity costs either in kind (dominant) or in cash. The in-kind contribution range from 10%-30%. Grant based models often have Government of Kenya participation in partnership with donor and or credit lending agencies.

Models based on grants to beneficiaries The Community groups access the grants through a proposal submitted to partner organisations, which screens the proposals through various stages before approval. Grants are given in various forms, including cash grants, vouchers that are redeemed at particular stores, tools for work, food for work, cash for work etc. The communities are trained in the use of funds and project implementation is monitored by partner organisations. Grants given to community groups are not returned to source to establish a revolving fund, but some community groups may set up income generating projects that allows them to set up an internal revolving/credit system at group level.

Models based on grants to beneficiaries Run, often, through Project Management/Coordination Unit with implementation committees at District and Divisional levels when Government bodies are involved; and or stakeholder fora at various administrative levels. Examples Food for Asset Model of the Catholic Diocese of Meru Model of Water fees for conservation through WRMA/WSTF Natural Resources Management Project: Microgrants system through World Bank Credit Facility Smallholder Horticultural Marketing Programme (SHoMaP) Njaa Marufuku Kenya NALEP Stakeholder Fora

Models based on Loans with risk sharing/ Loan guarantee fund system These models recognise that lending to smallholder farmers sector is risky due to vulgaries of weather, pests and diseases and inadequate collateral. They have the following characteristics: Include banks/lending institutions in the Model design to offer loans and administer credit scheme to smallholder farmers targeting selected crop and or livestock enterprise, business entity (e.g. agrovets) etc.; Integrate risk sharing mechanism where some partner organisations in the Model sets up a fund to cater for risks that banks would incur suppose smallholders default or production is negatively affected by vulgaries of weather.

Models based on Loans with risk sharing/ Loan guarantee fund system Loan issuance in-kind for target activities rather than in cash: seeds, fertilisers, tools etc. In some of the models farmers are given vouchers redeemable at agrovet stores or particular shops. Loans issued either at market lending rates or at negotiated interest rates and pay-back period. Loans issued to legally registered community groups, Societies, Public Trust and individual farmers guaranteed by group members (group lending methodology) and or partner organisations upon application or submission of proposals.

Models based on Loans with risk sharing/ Loan guarantee fund system Loans issued quite often focus on income generating enterprises (high value crops under irrigation and or rainfed farming, livestock with high returns etc.) that would allow farmers to pay back. Both loans and grant facilities are included in this model to enhance the impacts of the Model. The latter is used for capacity building and training in the value chain, community group, proposal development, subsidizing costs of inputs to reach the vulnerable etc. Examples Kilimo Biashara (AGRA, IFAD, Equity Bank, GoK, Amiran) Rural Outreach of Financial Innovations and Technologies (PROFIT): Rural finance and outreach component has a risk sharing facility for levering commercial loans [GoK, USAID, IFAD, AGRA, BRAC Dev. Institute, Consultative Group to Assist the Poor etc.)

Other Models based on Agri-business Value Chain Development and Market Linkages These models are clustered around selected commodities, which are for food security and income generation Examples Proposed 2SCALE (Towards Strategic Clusters in Agribusiness thro’ Learning and Entrepreneurship) of IFDC Commercial Village Model promoted by Farm Concern International

Other Models based on Agri-business Value Chain Development and Market Linkages These models are clustered around selected commodities, which are for food security and income generation Examples Proposed 2SCALE (Towards Strategic Clusters in Agribusiness thro’ Learning and Entrepreneurship) of IFDC Commercial Village Model promoted by Farm Concern International

Views of Respondents on Investment arrangements  Mix responses with some preferring grants, others credit and yet others a mix of grants and credits  Farmers: 61% of households preferred partly grants; and own farmer contribution; 39% soft loans  Few experiences exist on commercial loans directly targeting soil and water conservation activities  A mix of grants and suitable credit facility appears feasible from respondents perspectives with the following elements: (i) Grants: For  Capacity building (sensitisation/farmer training), coordination and management of activities;  Enhancing farmers access to inputs e.g. through a voucher system  Setting up risk-sharing and guarantee mechanism ( ii) Farmer contribution: Farmers own labour and tools etc

Views of Respondents on Investment arrangements (iii) Credit facility Linked to income generating enterprises that directly/indirectly target conservation activities: high value crops on terraces, raising tree seedlings, bee keeping in riverine areas etc. Credit facility that has:  Risk sharing mechanisms and guarantee funds  Initial investment fund set to kick-start the process; fund “multiplied” over time  Issuance of input loans in-kind for target enterprises; soft loans

Potential sources of funding A) National sources 1.Farmer local contribution (contribute in kind in form of labour, and partly tools and equipment) %total costs 2.Water Resources Management Authority water fee; and Water Services Trust Fund (through WRUAs Development Cycle) 3. Downstream Fees paid by large water users KenGen (fees to Regional Development Authorities, Kenya Energy Sector Environmental Programme, KEEP) Nairobi City Water and Sewerage Company (Nairobi Water)-currently pays water fee to WRMA. Irrigators (water fee paid to WRMA) 5.Carbon Credit  Potential source but is not fully developed yet in Kenya  KenGen, Lake Turkana Wind Power, Greenbelt Movement involved in carbon trade 6.Public funding: Potential public benefits include regulated river flows, ground water recharge, reduced flood risk etc.

Potential sources of funding B) International Sources IFAD and other International Funds for TaNRMP to kick-start the GWC Investment Fund

Conclusions C1. Smallholder farmers are able to access locally available inputs for soil and water conservation; however inputs obtained off-farm require purchases C2. Smallholders preferred technical assistance and investment support on soil and water conservation are in the form of short-term production investments, thus a feasible investment mechanism need to take cognisance of both short-term and long-term investments required for SWC activities C3. Smallholders prefer technical support (training and extension) to be given directly by service providers (grants), but had varying opinions on which form other areas of investment support should take. C4. Majority of the respondents (69%) believed that no single organization can handle the investment support alone. The majority of respondents (43% of total) who selected Government organisations as their first choice also said that Government bodies should not work alone but with Financial Institutions, FBOs, CBOs, SACCOs and NGOs.

Conclusions C5. Grant-based models, credit based models with risk sharing mechanisms and models that emphasise value chain development and market linkages can be combined in various shades to design a Sustainable Commercial Investment Package (grant and credit/loan)

Discussion Points Issues for the discussion groups a)What are the follow-up actions to further develop innovative financial mechanisms/How to operationalize?: Tana NRMP to include GWC approach/component (investment facility, developing & strengthening institutional framework at field level etc.) Link up with existing Agribusiness value chain development initiatives e.g. 2SCALE Project of IFDC having the same target farmers group as IFAD supported Tana NRM Project Support GoK to develop a Carbon Credit proposal for Upper Tana catchment (maintenance to be quaranteed for a 20 years period) b) Kick start the process now: What are the follow-up actions to make existing financial mechanisms to support communities to start SWC work along GWC approach? Water fees Water Services Trust Fund to start in 2 or 3 subcatchments Conservation fee (KenGen pays to TARDA)

Thank you for your attention