Innovative Climate Change Financing in KenyaLearning... · 2018-07-10 · Innovative Climate Change Financing in Kenya ... future County Climate Change Funds and the planned national

Innovative Climate Change Financing in Kenya

Learning From Financial Instruments Under the StARCK+ Programme

REPORT PREPARED FOR THE DFID STRENGTHENING ADAPTATION AND RESILIENCE TO CLIMATE CHANGE IN KENYA PLUS (STARCK+) PROGRAMME

VIVID ECONOMICS MAY 2018

C O N T E N T S

Executive summary 3 ......................................................

1. Introduction 7 ..........................................................

2. Portfolio of instruments 9 ..........................................

3. Designing financial instruments 13 ............................

3.1. Choosing instruments 13 .....................................................

3.2. Designing instruments 13 .....................................................

4. Financial self-sustainability of instruments 18 ............

4.1. Self-sustainability 18 ............................................................

4.2. Attracting additional investment 20 ....................................

5. Designing a cohesive portfolio of instruments 22 .........

6. Supporting broader development goals 23 ..................

6.1. Poor and vulnerable groups 23 ............................................

6.2. Gender outcomes 24 .............................................................

6.3. Transformational change 24 ................................................

7. Implications 26 .........................................................

7.1. Designing effective instruments 26 ......................................

7.2. Sustainability of instruments 27 ..........................................

7.3. Supporting broader benefits 28 ...........................................

References 30 .................................................................

Annex A: Lessons learned from individual components 31 .

Annex B: Stakeholders engaged 39 ...................................

StARCK+ partners and stakeholders interviewed during the learning review 39................................

E X E C U T I V E S U M M A RY

The Strengthening Adaptation and Resilience to Climate Change in Kenya Plus (StARCK+) programme has used a range of financial instrument to deliver a multi-pronged approach to supporting climate action. Since 2013, the UK-funded programme has supported support climate action in Kenya through a portfolio of complementary components targeting greater private sector innovation and investment in low-carbon and adaptation products and services, financial support to civil society, and technical support to the Government of Kenya.

StARCK+ has included a range of financial instruments, including grant funding, business development support and innovation funding, capitalisation of county-level climate change funds, microfinance, and project development support. A number of instruments have also used ‘supporting instruments’ to enable or boost outcomes, such as insurance and guarantees alongside microfinance lending. In other cases, supported beneficiaries have channelled support form StARCK+ into further ‘sub-instruments’, such as pay-as-you-go (PAYG) financing and insurance products. The key details of the range financial instruments deployed under the StARCK+ programme are summarised in Figure 1 below.

The StARCK+ implementing partners’ and beneficiaries’ experiences from these instruments offer opportunities for learning around designing instruments, ensuring sustainability and supporting broader development outcomes. These lessons have implications for designing and deploying future financial instruments within Kenya; for the design and operations of the emerging Kenya national climate change fund and county-level climate change funds; and more broadly, for development partners operating in Kenya and beyond.

D E S I G N I N G E F F E C T I V E I N S T R U M E N T S

Look below the main instrument when designing financial schemes. Supporting instruments can be critical for ensuring the effectiveness of the primary instruments. For example, insurance and guarantee instruments played a crucial role in de-risking flows of microfinance for CSA under StARCK+. Similarly, technical assistance and capacity development enabled businesses supported by KCIC to develop and take full advantage of incubation funding or to enable recipient community groups to effectively implement projects under the ACT! grants. Conversely, challenges from enabling environments which are not addressed by supporting instruments can limit the success of headline instruments, as with the policy and financing challenges that limited demand for KAM’s project development support.

I M P L I C A T I O N – ‘Stress test’ instruments at the design phase, and fully consider the theory of change around what is needed to ensure or boost an instrument’s success or challenges that it may need to overcome. In Kenya, governments should take a broad view around supported activities under existing and future County Climate Change Funds and the planned national climate change fund, and complement headline instruments with technical services and other supporting instruments.

Take an adaptive and iterative approach to deploying instruments. Flexibility in approach has been crucial under StARCK+, with a number of instruments changing approach in response to challenges during implementation. The CSA microfinance schemes adapted to deal with challenges that intermediaries faced in managing cash flow for repayments by connecting MFIs directly with farmers, and adapting to beneficiaries’ inability to collateralise loans by providing guarantees to MFIs. Similarly, KAM funding initially earmarked for project development support was shifted to support climate policy and institutional development when enabling environment challenges impeded initial plans for project development. A number of funders, including REACT and KCIC, have also adapted timings and approaches to reduce or adjust disbursements to recipients to account for the challenges that beneficiaries faced in absorbing funding.

I M P L I C A T I O N – Build flexibility into implementation approaches for instruments, and allow additional time and resources for managing unexpected developments. In Kenya, CCCFs and the national climate change fund would benefit from building flexibility into planning (both for specific instruments’ design and operations, and for allocating funding across different types of instruments).

Select partners carefully and consider the incentives faced by partners and beneficiaries. Many of the instruments provided by StARCK+ relied on the actions of partners and beneficiaries to be effective, emphasising the importance of designing instruments that align incentives across multiple parties. For example, the continued success of microfinance interventions for CSA relies on the commitment of the MFIs to serve these value chains after the StARCK+ programme ends. This is more likely for more established value chains, notably dairy, but MFIs may be less committed to the other, ‘younger’ value chains (particularly ‘indigenous chicken’). Similarly, StARCK+’s microfinance for ethanol cookstoves intervention relied on the engagement of the partner providing ethanol supplies to service the stoves and when that partner ceased operating in Kenya the effectiveness of the initial plan was impaired and the microfinance instrument had to be adjusted to

StARCK+ Learning Report: Financial Instruments 3


Figure 1. StARCK+ financial instruments targeted a wide range of climate issues and beneficiaries through many different approaches

Source: Vivid Economics

support different energy efficient and low-carbon household goods. Funders can also design instruments to align incentives of recipients, as with KCIC and REACT’s requirements for co-financing to ensure engagement from beneficiaries.

I M P L I C A T I O N – Carefully consider the intentions, incentives and capabilities of partners and recipients at the design phase, and where possible include measures to align incentives with the overall goals of the instrument.

Take contexts and timeframes required for successful implementation into account when designing instruments. Many StARCK+ instruments specifically aim to support actors in the ASALs (arid and semi-arid lands), which are challenging operating environments. This implies that private sector beneficiaries may face challenges that justify high shares of grant funding (instead of loans) especially during their start-up phase, as reflected in the model that REACT adopted for businesses operating in the ASALs. It also implies that organisations administering instruments may need to take account of high operating costs. For example, ACT! found that administering grant funding in the ASALs took longer and was costlier than initially expected. Additionally, all StARCK+ partners emphasised the need for sufficiently long implementation windows to enable success from financial instruments.

I M P L I C A T I O N – Take careful note of contexts and particular challenges facing both beneficiaries and instrument administrators when designing financial instruments, and be patient when designing implementation periods for instruments. This is particularly important for activities in Kenya’s ASALs, and suggests implementation periods for projects under county or national funds should be set flexibly based on local contexts.

There can be unexpected synergies between instruments that appear to address different issues. The multi-pronged approach taken under StARCK+ revealed synergies between instruments that were not initially foreseen. For example, the ACT! community grant scheme provided support to the REACT private sector financing by advertising the REACT call for opportunities in the ASAL regions it which it operated. StARCK+ partners have also noted that in the future, connections between CCCFs and organisations administering private sector-focused instruments may help engage the private sector in climate action at the county level.

I M P L I C A T I O N – For portfolios of instruments, seek to take advantage of synergies between different instruments, even if they primarily focus on different themes or beneficiaries.

S U S TA I N A B I L I T Y O F I N S T R U M E N T S

Developing a self-sustaining private sector climate investment system will take time. Many private sector support instruments have the potential to be self-sustaining in the long run. For example, in StARCK+’s case, the REACT programme is expected to generate capital inflows as recipients repay loans (though further funding would still be required for grant financing), and the mix of grant and loan financing has helped to establish businesses that have achieved or are moving towards commercial self-sustainability, demonstrating the potential of these business models and market segments. The emerging KCIC enterprise financing scheme and Kenya Climate Ventures (KCV) spinoff will provide financial returns from loans to and equity stakes in companies they support in the long term. However, the StARCK+ experience suggests that even when such instruments are ‘successful’ in terms of promoting private sector enterprise in the climate goods and services sector, it will take time for them to generate sufficient returns to be self-sustaining, with many businesses supported by REACT and KCIC requiring more time to become self-sufficient. In the interim, additional public investment may be warranted to support private sector development.

I M P L I C A T I O N – Be patient in designing and expecting self-sufficiency for instruments targeting private sector development, and build on pathfinding activities under REACT, KCV and KCIC funding initiatives.

Support for community and civil society projects can deliver further downstream benefits. Instruments that are not self-sustaining in financial terms – especially grants – can nonetheless deliver long-lasting benefits by supporting (more) sustainable sub-instruments or business models. For example, under ACT!, community and civil society projects used grant funding to support the establishment of a microfinance lending scheme for solar lanterns and to establish new livelihoods for farmers that create a long-term income stream.

I M P L I C A T I O N – Take a wide view of financial sustainability when considering benefits from grant investments. CCCFs and funders focusing public climate goods in Kenya can help support long-term benefits by focusing on opportunities that deliver lasting livelihoods impacts.

Microfinance schemes may require sustained support over time to become sustainable, especially when they focus on new value chains. The StARCK+ CSA microfinance schemes suggest that microfinance schemes can require significant effort in design and administration to ensure they deliver outcomes and establish sustainable, revolving pools of funding. This is particularly true when microfinance schemes focus on immature value chains. In these cases, continued engagement with MFIs, technical assistance for establishing supporting instruments and support for addressing new challenges may be needed to ensure


the commitment of MFIs or to ensure sufficient returns on investments. However, the FICCF CSA experience demonstrates that combining multiple supporting instruments to reduce credit risks can increase the financial inclusion of underserved beneficiaries and help demonstrate a model for commercial sustainability in underserved value chains.

I M P L I C A T I O N – Pay particular attention to the design and administration issues for microfinance and allow for long-term, flexible support of schemes, for example by engaging with MFIs or developing sub-instruments to support the microfinance. This support is especially important when focusing on new value chains.

Schemes that demonstrate value to key stakeholders have the potential to mobilise further public-sector resources. By demonstrating their value and delivering outcomes for key constituencies, for example by increasing agricultural performance or access to water resources, two CCCFs in Wajir and Makueni counties were able to secure the political support of county officials, with county legislation passed to allocate sustainable funding for these funds. Additionally, further county governors not supported through the CCCFs are now looking to learn from the experiences in these counties and replicate the CCCF model.

I M P L I C A T I O N – Engage with key stakeholders and potential champions for public climate change funds to engage their interest in these instruments and generate political commitments to them that can help secure ongoing funding. Actors looking to set up new CCCFs (or operationalise the national fund) can build on previous experiences in setting up funds and engaging communities.

S U P P O RT I N G B R OA D E R B E N E F I T S

While grants for community and civil society organisations are well-suited to supporting poor and vulnerable groups, commercial financial instruments supporting goods and services for these groups can also play a key role. Projects under ACT! and CCCFs have demonstrated clear benefits for poor and vulnerable groups, but instruments supporting private sector action have also demonstrated potential to support these groups. For example, companies supported by REACT have provided insurance products and agricultural services targeted

to farmers, and microfinance interventions for agriculture have supported large numbers of smallholder pastoralists.

I M P L I C A T I O N – Look beyond grants when thinking how to support livelihoods goals and improved outcomes for vulnerable groups. County or national funds in Kenya should consider the co-benefits from private sector support and microfinance when designing portfolios of instruments.

If structured well, instruments can deliver effective benefits for women. A range of instruments under StARCK+ have good potential to benefit women by generate time savings and productivity improvements, despite having a nominally gender-neutral focus. For example, the support provided by FICCF microfinance for CSA , by ACT! and the CCCFs’ grants to farmers and by ClimateCare microfinance for cookstoves all either lead to direct time savings or lead to increased productivity in activities. However, the StARCK+ experience shows that instruments can sometimes be explicitly structured to deliver gender benefits. In the case of StARCK+, for instance, training and capacity-development support delivered as a supporting instrument alongside the CCCFs focused particularly on strengthening female leaders in county governments and communities. On other occasions, StARCK+ may have missed out on some of these opportunities by not taking an explicit gender focus; for example, KCIC notes that it predominantly supported male entrepreneurs.

I M P L I C A T I O N – Explicitly consider the need for a gendered approach to delivering financial instruments.

A range of instruments can contribute to transformational change. StARCK+ financial instruments have demonstrated capacity to support transformational change through supporting new livelihoods (for example, microfinance, ACT!, CCCFs, REACT), though supporting long-term institutional change (as with the CCCFs and KAM) and though supporting innovation (under KCIC and REACT). Such instruments are unlikely to deliver transformative change on their own, but can play valuable roles in advancing towards this goal.

I M P L I C A T I O N – Monitor instruments to determine their capacity to deliver transformative change, and note that while not all interventions will be transformative, a range of financial instruments have the capacity to help move towards transformational change.


1. I N T R O D U C T I O N

T H E S T A R C K + P R O G R A M M E ’ S P O R T F O L I O O F D I F F E R E N T F I N A N C I A L I N S T R U M E N T S D E P L O Y E D

B E T W E E N 2 0 1 3 A N D 2 0 1 8 O F F E R S A U N I Q U E

O P P O R T U N I T Y F O R L E A R N I N G .

The Strengthening Adaptation and Resilience to Climate Change in Kenya Plus (StARCK+) programme has delivered a multi-pronged approach to supporting climate action. Since 2013, the UK Department for International Development (DFID) StARCK+ programme, funded under the UK’s International Climate Fund (ICF), has supported support adaptation and resilience to climate change in Kenya through a portfolio of six complementary components, as shown in Figure 2. These components have supported scaling up private sector innovation and invest-ment in low-carbon and adaptation products, services and assets, have provided financial support to civil society, and have offered technical support to the Government of Kenya.

A wide range of financial instruments have been deployed under the StARCK+ programme. The StARCK+ programme has provided a range of different types of financial support under the different programme components, including grant funding for private sector and civil society actors, business development support and innovation funding, capitalisation of county-level public sector climate change funds, supporting microfinance lending for climate smart agriculture and efficient cook stove interventions, and project development support. Additionally, a number of supported entities or beneficiaries have channelled support form StARCK+ into further financial instruments, such as pay-as-you-go (PAYG) financing and re-granting.

These instruments offer a unique opportunity for learning, and to support future financial interventions in Kenya and beyond. The portfolio of financial instruments applied under StARCK+ – across a range of different contexts, supporting different themes and goals and targeted towards different recipients and beneficiaries – offers a unique opportunity for learning lessons around the design and use of different financial instrument to support action on climate change. This learning review therefore offers opportunities to:

• Inform the ongoing application of public and private financial instruments and investment in Kenya;

• Support the design and activities of the emerging Kenya national climate change fund, and of existing and future county-level climate change funds; and

• Support DFID and other development partners in their thinking around how to design effective climate change programmes in Kenya and beyond.


Figure 2. The StARCK+ programme supported resilience and adaptation across the public and private sectors and civil society through six components


This learning review is structured around five key learning themes. This report is structured around these five central learning themes:

1. The portfolio of instruments: What financial instruments have been used within the StARCK+ programme?

2. Designing financial instruments: How relevant and effective are different financial instruments, and could any changes in approach support improved outcomes?

3. Sustainability of financial instruments: How sustainable and efficient are different financial instruments?

4. Designing a cohesive portfolio of instruments: How well do financial instruments work together?

5. Supporting broader development goals: What are the broader impacts of StARCK+ financial instruments?

The learning review is primarily based on interviews with StARCK+ partners, collaborating organisations and beneficiaries. Please see the Annex for a register of StARCK+ partners and stakeholders who engaged in this work.

Throughout this report, conclusions from the learning review are highlighted in blue ‘key lessons’ boxes. These key lessons are based on findings from the StARCK+ financial instrument learning review, but have relevance for the use of financial instruments beyond the immediate context of the StARCK+ programme.

The report concludes with implications from the learning review around using financial instruments to promote climate action in Kenya and beyond. The StARCK+ programme was intentionally designed to offer learning opportunities across the range of instruments used for financing climate action in Kenya and beyond. The lessons from these instruments can help inform activities at the national and county level in Kenya, and also inform others outside Kenya as they consider how they can promote action on climate change.


2. P O RT F O L I O O F I N S T R U M E N T S

S T A R C K + H A S U S E D A B R O A D R A N G E O F I N S T R U M E N T S T O D E L I V E R A M U LT I - P R O N G E D

A P P R O A C H T O F I N A N C I N G C L I M A T E A C T I O N

The StARCK+ programme has deployed a mixture of grants, loans, microfinance, and business and project development support. Financial instruments deployed by the various components include a range of different types of grant financing for civil society, community groups and the private sector, loans and project development support for private enterprise, and microfinance for farmers and community groups. These instruments have supported activities across Kenya, with a particular focus on private sector, communities and governments in Kenya’s ASALs (arid and semi-arid lands).

The ‘headline’ instruments deployed under StARCK+ have been complemented by a range of additional instruments and support. In addition to the range of primary instruments – grants, loans and microfinance – the programme partners have

used or facilitated a range of supporting instruments. These have been designed to ensure or boost the effectiveness of the main instrument, or to provide complimentary support for climate action. Additionally, a number of programmes have also seen recipients or beneficiaries use financing to deploy further ‘sub-instruments’, for example some businesses supported under REACT have deployed pay-as-you-go (PAYG) or lease-to-own funding models for services or goods they offer or provided climate change insurance products, and some recipients of grants under ACT! used funding to establish PAYG financing systems.

The summary boxes below provide key details for each StARCK+ programme component. They provide brief details on the focus and headline instrument(s) used, any supporting instruments, the beneficiaries and thematic areas supported, and any ‘sub-instruments’ where beneficiaries have used StARCK+ support to roll out further financial instruments.

R E N E WA B L E E N E R G Y A N D A DA P TAT I O N TO C L I M AT E T E C H N O L O G I E S

Component REACT

Focus Challenge fund supporting private sector product and enterprise development

Headline instrument(s) Grants, Loans

Supporting instrument(s) Technical assistance

Target beneficiaries Private sector enterprise in ASALs

Themes supported Agriculture, Water, Information and communication, Renewable energy

Geographic coverage Baringo, Busia, Homa Bay, Kakamega, Kiambu, Kilifi, Kitui, Lodwar, Machakos, Makueni, Narok, Siaya, Uasin Gishu, Vihiga, Wajir counties; Mara region

Sub-instrument(s) Index-based livestock insurance, Lease-to-own financing, Microfinance, PAYG financing

K E N YA C L I M AT E I N N OVAT I O N C E N T R E

Component KCIC

Focus Private sector incubation and proof of concept funding

Headline instrument(s) Incubation support services (advisory services, facilities, market information), Proof of concept (POC) funding

Supporting instrument(s) Policy influencing

Target beneficiaries Entrepreneurs, Private sector

Themes supported Renewable energy, Agribusiness, Water management, Cross-cutting themes

Geographic coverage Nationwide; National level

Sub-instrument(s) –


A C T, C H A N G E A N D T R A N S F O R M !

Component ACT!

Focus Grant financing for non-state actors: civil society, communities, private sector

Headline instrument(s) Grants

Supporting instrument(s) Capacity development

Target beneficiaries Civil society organisations (CSOs), Community-based organisations (CBOs), Private sector

Themes supported Agriculture, Livelihoods, Natural resource management, Water, Policy influencing, Information and communication, Community-based adaptation, Gender

Geographic coverage Baringo, Garissa, Isiolo, Kajiado, Kilifi, Kitui, Kwale, Laikiapi, Lamu, Machakos, Mandera, Marsabit, Makueni, Nakuru, Samburu, Taita Taveta, Tana river, Tharaka Nithi, Wajir, West counties; National level

Sub-instrument(s) Microfinance, Seed banking

C O U N T Y C L I M AT E C H A N G E F U N D S

Component CCCFs

Focus County-level investments in public goods to support climate change action

Headline instrument(s) Grants

Supporting instrument(s) Policy influencing, Capacity Development

Target beneficiaries Community-based organisations in Isolo, Garissa, Kitui, Makueni & Wajir counties, County Governments

Themes supported Water, Agriculture/livestock, Renewable energy, Information and communication, Policy influencing

Geographic coverage Garissa, Isiolo, Kitui, Makueni, Wajir counties

Sub-instrument(s) -

K E N YA A S S O C I AT I O N O F M A N U FA C T U R E R S

Component KAM project development support

Focus Support for renewable energy and adaptation project development, implemented by KAM under FICCF

Headline instrument(s) Grant financing for project development support activities, Policy influencing

Supporting instrument(s) Promoting awareness for renewable energy projects

Target beneficiaries Private sector project developers, County governments

Themes supported Renewable energy, Energy Efficiency, Policy influencing

Geographic coverage Kiambu, Kirinyaga, Kisimu, Machakos, Mombasa, Nairobi, Nakuru, Taita-Taveta, Uasin Gishu counties; former Central province, Mara region; National level

Sub-instrument(s) -


C L I M AT E S M A RT A G R I C U LT U R E

Component FICCF-CSA microfinance

Focus Microfinance for dairy, sorghum, cassava and indigenous chicken value chains, implemented under FICCF

Headline instrument(s) Grants (zero-interest, refundable) to MFIs, Microfinance to agri-businesses, farmer co-operatives and farmers

Supporting instrument(s) Technical services (inc. climate information, veterinary services, agronomy services), Hybrid index-peril crop insurance, Guarantees, Insurance premium subsidies

Target beneficiaries Farmers, Aggregators

Themes supported Agriculture

Geographic coverage 18 counties across former Central, Mid-Eastern, Central North Rift, Mid Rift, Western, Nyanza provinces

Sub-instrument(s) -

C L I M AT E C A R E

Component ClimateCare cookstoves microfinance

Focus Microfinance for improved cookstoves (fuel efficient charcoal stoves) and clean-burning (ethanol) cookstoves, implemented by ClimateCare under FICCF

Headline instrument(s) Grants (zero-interest) to farmer associations and community groups, Microfinance

Supporting instrument(s) Product subsidy, Insurance

Target beneficiaries Farmer associations, Community groups

Themes supported Energy efficiency, Renewable energy

Geographic coverage Kiambu, Muranga, Nairobi, Nakuru counties

Sub-instrument(s) -


Similar financial instruments have been used across the StARCK+ programme, but always in different ways and alongside different supporting instruments. The range of instruments used can be seen in Figure 3 below, which represents a simplified, stylised summary how different headline, supporting and sub-instruments have been deployed across the StARCK+ programme components. For some instruments, especially for micro-insurance for CSA and cookstoves, the relationships between the implementing partner and the intermediaries and beneficiaries is more complicated than shown – for example, FICCF has been actively involved in facilitating instruments and services at all levels in the CSA microfinance scheme.


Figure 3. StARCK+ partners have used a wide range of headline and supporting instruments to enable climate action in Kenya


3. D E S I G N I N G F I N A N C I A L I N S T R U M E N T S

Instrument design should be adaptive and respond to contexts, partners, the timeframes needed to achieve outcomes, and the supporting instruments needed to enable success

The rationale for how instruments were designed and partners’ practical experiences of deploying these instruments offer a range of lessons on selecting the right instrument to fit the circumstances and goals, and in designing effective instruments in practice.

3.1. C H O O S I N G I N S T R U M E N T S

Who the target beneficiaries are and what financing or environmental context they are operating in were key determinants when choosing instruments across the StARCK+ programme. Financial instruments were explicitly or implicitly deployed across the programme on the basis of these criteria, though these factors were more or less relevant in different contexts.

The choice of providing repayable versus non-repayable finance needs to reflect the purpose of the recipient and their ability to repay, and recognise that grants have a key role to play to support both non-commercial projects and early-stage private enterprise development

StARCK+ experiences underscore that different types of beneficiaries are more suited to different types of finance, based on their characteristics, their access to finance and their ability to repay lending. CSOs and NGOs are often best served by grant funding, which recognises their public focus and limited ability to repay funders, as reflected in the grant financing provided under ACT! and through the CCCFs for civil society and public good interventions. In contrast, private sector organisations’ for-profit purpose makes them suitable for repayable financing through loan or equity investments. However, there is also value in providing grant funding (i.e. cost sharing) for private enterprise development to address market failures that limit private sector development – such as lack of access to suitable start-up capital, high start-up costs, or when operating in challenging environments such as the ASALs – or when the goods and services enterprises provide would provide public value, as with climate change products. This balance is reflected in KCIC’s grant funding for business climate innovation and in REACT’s mix of grant and loan financing.

Choosing the right supporting instrument is important for maximising the reach and impact of interventions – technical assistance and capacity building has been valuable for all

instruments, with microfinance benefitting from financial tools (insurance, subsidies, guarantees) to de-risk lending

Across the portfolio of StARCK+ financial instruments, supporting instruments have been key to ensuring effectiveness. This crucial role of supporting instruments has been particularly true for microfinance, where FICCF’s provision of guarantees for aggregators taking loans to one MFI (either while they gather sufficient collateral for loans or in lieu of such collateral) enabled the MFI to provide finance to some recipients, and where the range of supporting insurance products and technical services to boost livestock health and crop productivity helped to increase returns and de-risk investments. Under the cookstoves microfinance scheme, the initial provision of a subsidy for cookstoves was deemed crucial to spurring demand, and representatives for a farmer Fairtrade association implementing a cookstoves microfinance scheme notes that demand for the cookstove has decreased since the subsidy was removed.

A number of StARCK+ partners have identified additional instruments that can boost future effectiveness of similar interventions. KCIC have noted that a supporting or aligned instrument that provided follow-on funding to companies that have progressed through incubation and subsequent ‘accelerator’ support would increase the ultimate impact from the initial support. Other partners have noted additional or alternative instruments that might support the same goals as initial instruments, such as contract farming for CSA as well as grant funding of agriculture initiative, or results-based payments for cookstove distribution instead of microfinance approaches.

3.2. D E S I G N I N G I N S T R U M E N T S

A D A P T I V E A N D I T E R A T I V E P R O C E S S E S I N B O T H D E S I G N I N G A N D D E P L O Y I N G F I N A N C I A L I N S T R U M E N T S

I S K E Y T O S E C U R I N G S U C C E S S F U L O U T C O M E S ,

E S P E C I A L LY W H E N W O R K I N G I N C H A L L E N G I N G

O P E R A T I N G E N V I R O N M E N T S

StARCK+ financial instruments have generally proved successful in achieving or surpassing their intended goals. StARCK+ financial instruments have successfully achieved or surpassed initial goals and targets, as shown in Figure 4, which summarises key targets and outcomes for the StARCK+ financial instruments. StARCK+ programmes have been especially successful in reaching and supporting a large number of people to cope with climate change and in improving access to green energy. It is also important to note that , though for some long-running financial instruments, notably support for businesses


under REACT, it is too early to observe the full impacts of and outcomes from their implementation – which may also explain why some instruments have not yet fully met all targets across all domains.

Challenges to achieving outcomes have arisen primary due to difficult operating environments or unforeseen events during implementation, rather than due to inherent design issues. For example, the deployment of the FICCF microfinance for ethanol cookstoves in Kibera was affected by changes in the


Figure 3. StARCK+ financial instruments have been central supporting the programme components in meeting – and often exceeding – key targets

Note: Targets shown in light blue boxes, results shown in light teal grey boxes. Targets and results are cumulative to the end of the end of 2016/17 UK financial year.


relative prices of ethanol and kerosene (used in traditional cookstoves) during the implementation period, where relatively low kerosene prices dampened demand for cookstoves and led to some abandonment of the ethanol cookstove and repayment issues from some recipients. The FICCF microfinance for CSA instruments also faced a number of challenges, including ensuring intermediaries were passing through payments from farmers back to MFIs, helping recipients access finance by providing guarantees during the collateralisation process, and facilitating the roll-out of an innovative hybrid insurance system for farmers. The KAM project development support instrument also faced challenges that affected the achievement of initial goals. Despite meeting goals for pre-feasibility support, fewer supported organisations than expected opted to move forwards with developing projects further, due to a range of concerns including capital costs of investments and lack of government support for issuing Power Purchase Agreements (PPAs) for new renewable energy projects. These challenges meant that it was not possible to progress as many projects as planned into feasibility support and implementation stages.

Instruments that responded flexibly to challenges were able to help ensure projects still delivered value in the face of external challenges. The FICCF team made iterative adjustments to the CSA microfinance instruments to overcome challenges, including switching from taking payments directly through dairies to working directly with farmers when dairies faced cash flow challenges to making repayments. Additionally, when faced with challenges to achieving initial goals for project development support, the KAM team adjusted their focus to deliver alternative positive outcomes by using remaining resources to instead conduct policy support activities at county levels to help strengthen enabling environments for climate change activities. Similarly, KCIC partners noted that a flexible approach was helpful in ensuring supported organisations incentives were aligned with KCIC goals.

S U S T A I N A B L E P R I V A T E S E C T O R D E V E L O P M E N T A N D D E S I G N I N G A N D I M P L E M E N T I N G H I G H V A L U E P R O J E C T S

T A K E S T I M E – F I N A N C I A L I N S T R U M E N T S N E E D T O B E

D E S I G N E D A R O U N D T H E S E T I M E F R A M E S

In a number of cases, short implementation timeframes limited instruments’ ability to deliver effective outcomes. ACT! team members emphasised that longer timeframes for implementation of supported projects would have supported achieving better outcomes, as it can be challenging to deliver high-value projects in short periods of time. Similarly, the KCIC team noted that more effective incubation support for entrepreneur or business might have been delivered if the instrument had focused on fewer beneficiaries while providing support for longer periods of time. The timing of how instruments are delivered can also affect their effectiveness. For example, the KCIC team noted that applications for incubation support were open year-round, meaning that KCIC was not certain how many recipients it would support with a set level of

funds. An alternative ‘window’ model for applications would enable the KCIC team to better know how many recipients would be supported, which would allow for more effective programming of budgets. Additionally, recipients or intermediaries do not always have sufficient capacity to absorb financing and use it to grow their businesses (as under KCIC) or implement CSA measures (as under FICCF CSA microfinance). Longer timeframes would allow enough times for organisations to build their capacity, benefits from technical services and implement activities effectively.

Allowing time for managing unexpected or confounding external factors can also help deliver successful outcomes. A number of partners – notably ACT! and FICCF – noted that addressing unexpected impacts on programmes, as discussed above, can take non-trivial amount of time, especially when compounded by working in tough operating environments or where there are security challenges. Consciously building in time and/or financial resource to address unexpected impacts can therefore help contribute to achieving successful outcomes from financial instruments.

W O R K I N G W I T H O R G A N I S E D R E C I P I E N T G R O U P S R E D U C E S M I C R O F I N A N C E C R E D I T R I S K S A N D S U P P O R T S

E F F E C T I V E O P E R A T I O N S

Across StARCK+ microfinance schemes, working with organised groups has facilitated successful outcomes. Targeting organised recipient groups was an intentional aspect of the design of StARCK+ microfinance instruments, as with the farmer groups used under the ECLOF dairy scheme to encourage peer pressure for repayments, and working with the farm employee savings and credit cooperatives (SACCOs) under the efficient charcoal cookstoves scheme. Working with such groups reduces credit risks, especially when group members are already in a formalised system as with farm employees, and where repayments can be recovered easily and at low cost such as by taking them directly from farmers employees’ salaries. However, such risks are not eliminated by working with such groups, as demonstrated by experiences working with community groups in Kibera in support of the ethanol cookstoves scheme. Despite working with organised community groups, some groups went into default on repayments – though these groups were not as formal as in other cases.

M I C R O F I N A N C E I N S T R U M E N T S A R E M O R E L I K E LY T O B E

S U C C E S S F U L W H E N T H E I N C E N T I V E S O F F I N A N C E P R O V I D E R S A N D I N T E R M E D I A R I E S A R E A L I G N E D

Microfinance instruments faced challenges due to differing goals of partners in the schemes. The experiences under the StARCK+ programme highlights the importance of selecting scheme intermediaries with care, and that intermediation by microfinance lenders or promoters may be needed to ensure continued effectiveness if there is a mismatch between partners’ incentives. The FICCF cookstoves microfinance faced challenges


due to differing incentives around the promotion of ethanol cookstoves. The scheme’s administering agent experienced a change of management during the scheme’s rollout and decided to cease operation in Kenya during implementation, impeding the continued operation of the scheme. The effectiveness of the FICCF CSA poultry microfinance arrangement with Century MFI was also affected during the implementation of the scheme by the MFI’s desire to expand into new commodities and new geographies, rather than prioritising servicing the identified clients and providing them with technical assistance support as initially planned. The CSA microfinance for dairy scheme with Inuka MFI also faced an obstacle when the dairy intermediaries faced cash flow problems are were not able to send farmer loan repayments on to the MFI, requiring intermediation by the FICCF team and a shift in approach where repayments were made directly from farmers to the MFI rather than through the dairy.

W H E N W O R K I N G I N C H A L L E N G I N G O P E R A T I N G E N V I R O N M E N T S , E N S U R E P R O J E C T D E S I G N T A K E S

A C C O U N T O F B A R R I E R S T O R E C I P I E N T S ’ A B I L I T Y T O

R E PA Y F U N D I N G A N D B U I L D I N R E S O U R C E S T O M A N A G E

H I G H E R O P E R A T I N G E X P E N S E S

StARCK+ experiences across both private sector financing and civil society grants suggest the value of taking difficult operating environments into account when providing financing and designing instruments. Under the REACT challenge fund different shares of repayable loans and non-repayable grants were provided to private sector companies. Companies operating in the ASALs face particular challenges due to insecurity and lower private sector returns, suggesting that a greater share of non-repayable grants would be justified in supporting the goals of private sector development and climate action. Challenging operating environments have also affected partners implementation costs. Under the CCCFs scheme, operating in the ASALs made delivering grants more expensive than in other context, suggesting that the operating environment should be taken into account when considering operating costs at the instrument design phase.

Instruments that involve complex and innovative approaches also need greater resourcing to be effective. The FICCF CSA microfinance scheme proved more challenging to deliver and required greater resources than was initially planned for, due to the need to manage MFI partners, work with aggregators and intermediaries and support the provision of supporting instruments across all four value chains. Adding allowances for the complexity of the instruments and schemes themselves in resourcing plans could support more effective delivery of instruments. – which would also apply to running a complex portfolio of instruments as under the overall StARCK+ programme.

M I C R O F I N A N C E A N D C O M M E R C I A L F I N A N C I N G I N S T R U M E N T S N E E D T O B E F I N E LY T U N E D T O L O C A L

M A R K E T S A N D C R E D I T R I S K S T O S U C C E E D

Management of credit risks has been a central challenge for financing instruments. Sustainability of financing schemes has required multiple measures to manage credit risks, and careful assessments of credit worthiness. For example, under microfinance schemes for both cookstoves and CSA, MFIs or community lending bodies have required borrowers to list guarantors (up to three guarantors in the case of Inuka MFI) who are responsible for paying in the event of defaults, and have required borrowers to take out life insurance products to ensure repayments in the event of death. Similarly, Schutter Energy have noted that the credit check phase is a crucial component of their lease-to-own financing scheme, and they have adjusted repayment periods to be shorter (from three years down to one year) to reduce non-payment risks given high initial default rates on longer loans.

T E C H N I C A L S U P P O R T A L I G N E D W I T H H E A D L I N E

I N S T R U M E N T S I S C R U C I A L T O E N S U R I N G S U C C E S S , E S P E C I A L LY W H E N W O R K I N G W I T H L O W - C A PA C I T Y

B E N E F I C I A R I E S

Investing in capacity development for both individuals and organisations has improved the success of a range of different instruments. Technical support and capacity development has been a common element of many instruments, including a range of technical services for farmers under the CSA microfinance, the provision of training workshops and capacity development for CSOs under ACT!. This support has been especially important when working with beneficiaries with low previous capabilities around project and financial management, or where specific training and expertise can help ensure returns to investments, as with agricultural microfinance technical support. However, it is also important to ensure that this technical assistance is additional, in that it provides services that beneficiaries would not have received or paid for themselves, as is a potential concern for some business support under REACT. Nonetheless, StARCK+ partners have emphasised the central role of such technical assistance in enabling instruments, and in some cases have noted that a greater level of technical assistance would improve instruments’ outcomes, such as with providing greater services to farmers on CSA practices to boost the effectiveness of CSA microfinance instruments.

Experiences across the StARCK+ portfolio of instruments suggest the value of structuring assistance such that recipients receive technical support services rather than funding to purchase support themselves. This approach has been tested across the microfinance applications, and has been noted as a sensible approach to take under incubation support from KCIC, as it helps ensure funding for technical services is effectively directed towards providing support to recipients.


B L E N D I N G R E PA Y A B L E A N D N O N - R E PA Y A B L E F U N D I N G T O T H E S A M E B E N E F I C I A R I E S C A N S E N D C O N F U S I N G

S I G N A L S , B U T A L S O H E L P S I N C E N T I V I S E B E T T E R

F I N A N C I A L A N D B U S I N E S S M A N A G E M E N T

REACT’s mixture of repayable loans and non-repayable grant financing created challenges for repayment in some instances. Some private sector companies that received both grants and loans were confused around the need to repay loans given that a portion of their finance was non-repayable. This created challenges for encouraging repayments of loan elements from some supported organisations. This suggests that there could be value in differentiating between providing either fully non-repayable grants or fully repayable loan financing to some organisations, rather than a mixture of the two.

However, including a repayable element supported better financial and business management among some recipients by creating a monitoring relationship between REACT and supported companies. Companies noted that monitoring and reporting requirements encouraged them to undertake better fiscal and business management and contributed to better outcomes for supported businesses.

P R O J E C T D E V E L O P M E N T S U P P O R T I S M O R E E F F E C T I V E W H E N C O N D U C T E D W I T H I N A S U P P O R T I V E C O M M E R C I A L

A N D P O L I C Y E N V I R O N M E N T

KAM’s experiences suggest project development support requires a supportive operating environment, in addition to technical support and access to capital. The Government of Kenya’s reluctance to issue PPAs for new renewable schemes due to a government view that built (or planned) generation capacity is sufficient to meet existing demand reduced economic incentives to invest in renewable energy projects. Similarly, the high costs of capital investments relative project developers’ expectations also hindered companies’ desire to move forward with project development and implementation, despite capital financing being available in principle from SUNREF. Some of these conditions may improve ‘naturally’ over time, such as improving economics for renewables investments as costs come down, while others may only change due to structural shifts in the economy or among policy makers. However, the importance of such constraints highlights the need to be aware of external challenges to project development at the instrument design phase, and suggests that schemes would benefit from including a component encouraging the development of more favourable enabling environments alongside providing project development support itself. For example, KAM note the important of working to inform and improve government policies and support for renewable investment alongside project development.

B U S I N E S S I N C U B A T I O N S U P P O R T I S M O R E E F F E C T I V E W H E N F U N D E R - R E C I P I E N T I N C E N T I V E S A R E A L I G N E D

A N D W H E N B U S I N E S S E S A R E H E L D A C C O U N T A B L E

E F F E C T I V E LY

Incubation support and funding can be structured to improve accountability of recipients. In providing proof of concept funding, KCIC noted that there were a small number of challenges around the accountability of funded organisations. In response to this issue KCIC have changed the way they structure proof of concept funding for some firms, such that proof of concept financing is provided as matched funding, and where some recipients have to demonstrate they have accessed and exhausted the matched funding (either their own funding or from other funders) before KCIC funding is provided. This is intended to help ensure supported organisations have committed to the incubation process. KCIC could also explore REACT’s approach to disbursing matched funding, where finance is disbursed in tranches with each tranche of funding must be accompanied by equivalent matched funding, helping to ensure continued co-investment alongside REACT’s funding.

G R E A T E R T A R G E T I N G O F B U S I N E S S S U P P O R T C A N I N C R E A S E T H E Q U A L I T Y O F S U P P O R T O F F E R E D A N D

R E C I P I E N T S ’ O U T C O M E S

Across both incubation support and project development support, higher selectivity (working with fewer and higher quality companies) can increase effectiveness of funding. KAM noted that, given some private organisations decisions not to move forward with project development after an initial pre-feasibility phase, greater targeting and filtering of organisation towards those that were committed to project development could have increased the impact from this instrument. Similarly, KCIC noted that working with fewer companies when providing incubation support could reduce transaction costs and increase the resources available to and outcome from recipients.


4. F I N A N C I A L S E L F - S U S TA I N A B I L I T Y O F I N S T R U M E N T S

Achieving self-sustainability is likely to require time and patience and may not be desirable for all instruments — but a number of instruments have been able to mobilise additional investments

The range of instruments deployed provide a range of insights into the self-sustainability of different approaches, and instruments’ potential to attract additional investment.

4.1. S E L F - S U S TA I N A B I L I T Y

This learning review focuses primarily on financial inflows, revenue raising and ability to attract additional investment. Broadly, whether financial instruments are considered sustainable is a function of whether (i) they lead to inflows over time (interest payments, dividends etc.) which allow an initial allocation of capital to be recycled/revolved and/or encourage others to commit ongoing resources, and (ii) in terms of whether the outcomes they deliver are sustainable – this learning review focuses primarily on the first aspect. Importantly, many StARCK+ components and instruments would not expect or aim to achieve self-sustainability of financing, especially those focusing on actors working in challenging operating environments, with limited access to traditional finance, or where commercial returns are unlikely in the short term. Self-sustainability may not be a suitable goal in these circumstances, or may be only a secondary goal relative to achieving primary programme outcomes. Nonetheless, experiences under the StARCK+ programme provide a number of insights into instruments that support self-sustainability in the near term.

P R O J E C T D E V E L O P M E N T A N D I N C U B A T I O N S U P P O R T

R E Q U I R E C O N T I N U E D F I N A N C I A L I N P U T S T O D E L I V E R

C O N T I N U E D S U P P O R T — B U T N E W B U S I N E S S M O D E L S M I G H T E N A B L E S E L F - S U S T A I N A B I L I T Y I N T H E L O N G E R

T E R M

Instruments that focus on providing non-repayable support the private sector were not intended to be self-sustaining and are unlikely to achieve this in the short term. The KAM project development support and KCIC incubation support were both not initially intended to be self-sustaining, and are not currently positioned to continue without securing additional funding. However, KCIC is currently implementing a plan to achieve financial sustainability over a four- to five-year period. KCIC is exploring multiple funding options, including through developing an ‘Early Stage Financing Mechanism’ that would enable them to take financial (equity or loan) stakes in supported companies that could ultimately provide returns and

contribute to the long-term sustainability of incubation support instruments.

B U S I N E S S D E V E L O P M E N T A C T I V I T I E S H A V E P O T E N T I A L T O A C H I E V E S U S T A I N A B I L I T Y O V E R T I M E , B U T M A Y

R E Q U I R E A D D I T I O N A L C A P I T A L S U P P O R T A S T H E Y M O V E

T O W A R D S T H I S G O A L

The REACT business model was not intended to be fully self-sustaining due to a focus on fostering longer-term business sustainability, but recent developments should help boost sustainability of repayable capital elements. The React model including both grants and loans was not intended to be fully self-sufficient in terms of funding. In particular, the grant funding components under REACT were not intended to be self-sustaining, given their key role in supporting business operating in adverse operating environments in the ASALs. Repayable loan elements under REACT are likely to more self-sustaining, though this has been provided at zero interest rate terms and so this capital may be reduced by non-repayment and inflation.

Kenya Climate Ventures (KCV), a spinoff from KCIC, aims to provide enterprise development funding and to achieve self-sustainability in the medium term. KCV is a new entity designed to provide enterprise development funding for early-stage companies providing climate goods and services. KCV has been supported by DFID, DANIDA and the world bank, but aims to become self-sustaining through taking convertible loan positions with supported companies, where loans can be converted to equity stakes if companies achieve enterprise development milestones. KCV’s model is built around ‘patient capital’ and so it is not seeking rapid returns from companies and is therefore only looking to achieve sustainability in the medium term, but suggests a potential model for boosting sustainability of instruments targeting enterprise development.

I N S T R U M E N T S T H A T A R E N O T F I N A N C I A L LY S E L F -S U S T A I N I N G C A N N O N E T H E L E S S H E L P E S T A B L I S H O R

D E M O N S T R A T E T H E P O T E N T I A L F O R S U S T A I N A B L E

C O M M E R C I A L B U S I N E S S M O D E L S

A number of StARCK+ approaches have been successful in blending grant instruments with repayable financing to help establish the commercial viability of different business models for climate goods and services. Across the REACT portfolio of companies supported, the mix of grant and loan financing helped to establish businesses that have achieved or are moving towards commercial self-sustainability, demonstrating the potential of these business models and market segments. While different businesses supported by REACT have achieved differing levels of commercial


sustainability at present, all of these firms are still at an early stage and REACT support is expected to continue into the medium-term. This offers good prospects for establishing the commercial viability within different market segments. Similarly, the innovative microfinance business models under the FICCF CSA programme have helped to establish the commercial potential within underserved or ‘young’ value chains, and the viability of innovative microfinance models that combine multiple supporting instruments to reduce credit risks and increase access to underserved beneficiaries (smallholder farmers).

G R A N T F U N D I N G T O C I V I L S O C I E T Y G R O U P S I S N O T S U S T A I N A B L E I N I T S E L F – B U T C A N C A T A LY S E

S U S T A I N A B L E A C T I V I T I E S D O W N S T R E A M

Grant funding under ACT! was not intended to be financially self-sustaining, but has catalysed sustainable activities among supported organisations. Given the financial position of grant recipients as primarily civil society bodies, such actors were not expected or intended to repay finance and great a self-sustaining fund. Additional financing would therefore be required to financing ongoing activities with a similar focus. However, a number of initiatives supported through ACT! funding have used grant funding to establish initiatives that are self-sustaining. These include a cassava seed banking initiative that is still operating two years after the initial grant payment was made, and a solar lantern organisation that aims to use grant funding for setup costs before becoming sustainable through product sales.

M I C R O F I N A N C E L E N D I N G C A N A C H I E V E E X C E L L E N T

S U S T A I N A B I L I T Y W H E N E N G A G I N G W I T H F O R M A L I S E D E M P L O Y E E S O R U N D E R I N N O V A T I V E S Y S T E M S T O

R E D U C E C R E D I T R I S K S , A N D W I T H T E C H N I C A L S U P P O R T

F R O M A C O M M I T T E D PA R T N E R

Microfinance funding has proved sustainable at the MFI level across the StARCK+ portfolio. The four MFIs under the CSA scheme have all achieved good returns over the two-year implementation period, up to doubling the initial grant-supported capitalisation of the fund. The funds have also revolved over the period to serve multiple rounds of beneficiaries, though over different periods of time depending on the products (with shorter-duration loans enabling funds to revolve more quickly and serving more beneficiaries). The capital used in cookstove microfinance has also revolved, though as lenders are not charging interest rates the capital pool has not grown. The funding initially planned to be used for ethanol stoves has not been re-used for further ethanol stove products as a result of Safi International’s ceasing operations in Kenya (of both stove sales and ethanol distribution). The remaining capital has been diverted into and microfinance schemes offering other energy efficient products, as no immediate replacement option for ethanol was available. Additionally, portions of the initial capital for ethanol stove

lending was not recovered due to non-payment, which has not been offset by returns from interest rates given the zero rating, and portions of the initial funding used to subsidise the costs of both ethanol and charcoal stoves in the first wave of funding was not recoverable.

However, MFIs are still currently reliant on development or philanthropic providers of finance for further funding and capacity development support. The CSA MFIs have so far been unable to secure commercial co-financing in addition to the StARCK+ funding, as was initially intended at the instrument design phase. Without further capital support from development partners, such schemes may therefore be unable to expand operations – though three of the CSA MFIs have explored the potential to access funding from other national development partners and philanthropic foundations. Longer time frames may be needed to move the MFIs to the point where they can successfully access commercial credit.

There is also an open question around whether value chain partnership established under StARK+ will continue after the end of the programme. The STARCK+ CSA microfinance instruments all aimed to expand microfinance into underserved value chains. Given the innovative nature of these value chain instruments and the ‘youth’ of some value chains (especially sorghum, cassava and indigenous chicken), there is a concern that MFIs operating in some value chains, may cease operations or focus only on higher value commodities or certain subsets of microfinance loans. For example, MFIs may adapt business models so that they only lend to aggregators rather than also lending directly to farmers.

Restrictions on the design of microfinance instruments, particularly interest rates, limited the self-sustainability of microfinance. Rafiki Bank and Century Bank are both regulated banks, and so face restrictions on the maximum interest rates they can charge. While Inuka and Eclof MFIs are not regulated banks, the StARCK+ programme initially set a limit on the maximum interest rate that could be charged on loans, with the aim of ensuring affordability for loan recipients. However, if interest rate limits are set too low, they can impair the ability of funds to generate capital stocks large enough to weather external shocks, such as repayment issues. Additionally, they may contribute to challenges MFIs face in accessing commercial finance, if they cannot generate sufficient returns to satisfy lenders. All MFIs working with FICCF have grown their fund capitalisation based on repayments, but capital growth has been less strong for Rafiki Bank and Century Bank – though Eclof Bank has also growth its capital base by less than Inuka, due to a focus on longer-term loans (and hence slower repayments and slower capital base growth).

Implementing innovative microfinance approaches has required substantial intermediation and partner management. The resources required for implementing instruments, identifying and contracting with MFIs, working with


partners and flexibly adjusting implementation in response to external shocks should be borne in mind when designing such programmes.

I N I T I A L C A P I T A L I S A T I O N A N D S U P P O R T O F C L I M A T E F U N D S C A N L E A D T O L O N G E R T E R M F I N A N C I A L

S U S T A I N A B I L I T Y B Y C A T A LY S I N G P O L I T I C A L A C T I O N A N D

S E C U R I N G F U N D I N G C O M M I T M E N T S F R O M O F F I C I A L

B U D G E T S

The ADA Consortium implementing the CCCFs has successfully mainstreamed climate change in county-level policies and built sustainable funding for the County Climate Change Funds in Wajir and Makueni. The Adaptation Consortium has supported five counties in completing County Climate Change Information Services Plans and mainstreaming climate change into sector plans and/or County Integrated Development Plans (CIPDs), helping to ensure effective long-term responses to climate change in these counties. Counties are also moving towards ensuring the long-term sustainability of the CCCFs by creating budget lines in official plans to provide recurring capitalisation of the funds. Wajir county has committed 2% of its county development budget to capitalise its CCCF moving forwards, while Makueni has similarly committed 1% of county budgets. These amounts, set to be delivered from 2017/2018 budgets onwards, already represent a great amount annually than was made available for each county under the StARCK+ programme. The CCCFs are also exploring accessing funding through international climate funds, for example by becoming ‘executing entities’ responsible for implementation of projects supported by climate funds such as the GCF.

The initial structure of the CCCFs has supported low-cost implementation of projects. The structure of the funds, where supported projects are then tendered through official procurement systems, with a county-level partner (for example, Christian Aid in Makueni) responsible for tracking expenditures and delivery of projects, has supported the successful delivery of projects at low costs. Adaptation Consortium members believe the costs are likely lower than under more traditional direct government procurement due to the elimination of pricing surcharges by suppliers to cover payment risks faced by suppliers, due to the formalised and audited funding arrangements under the CCCFs.

4.2. AT T R A C T I N G A D D I T I O N A L I N V E S T M E N T

P R O J E C T D E V E L O P M E N T S U P P O R T C A N L E V E R A G E

S I G N I F I C A N T P U B L I C A N D P R I V A T E C O - F I N A N C I N G ,

E S P E C I A L LY I F D E S I G N E D T O L I N K U P W I T H E X I S T I N G F I N A N C I N G O P P O R T U N I T I E S

Project development support under KAM has mobilised USD 12.6 million in public sector finance, and USD 45 million in private sector finance. This suggests that de-risking and

project preparation spending can unlock significant volumes of public and private financing, especially when such support is linked to previously identified sources of project finance (as was available through the KAM-linked SUNREF funding vehicle).

D E M O N S T R A T I N G T H E C L E A R C O M M U N I T Y B E N E F I T S O F P U B L I C F I N A N C E F O R C L I M A T E A C T I O N C A N L E V E R A G E

S I G N I F I C A N T F O L L O W - O N F U N D I N G F R O M P U B L I C

B U D G E T S

The initial capitalisation of the CCCFs has already mobilised substantial additional funding in two of the five countries the programme operated in through demonstrating the benefits of investing in community climate change projects. Wajir and Makueni counties’ budget commitments of 2% and 1%, respectively, for funding projects through the CCCFs represents significant additional finance. This suggests that, where such projects are able to capture the interest and engagement of public officials, initial grant funding can lead to greater long-term financing. This is likely to be especially true where public financing leads to quickly-realised projects supporting a range of different stakeholders, as with the CCCFs, as it can build clear constituency support for such funds.

B U S I N E S S I N C U B A T I O N A N D D E V E L O P M E N T S U P P O R T C A N L E V E R A G E C O - F I N A N C I N G A S W E L L A S P R I V A T E

S E C T O R I N V E S T M E N T I N T H E I R O W N E N T E R P R I S E S

The design of business development support from KCIC and REACT has leveraged co-finance from supported companies and entrepreneurs. Both approaches required co-financing alongside the funding provided through the KCIC proof of concept funding and the REACT business development funding. KCIC also notes that its activities mobilised USD 11 million in equity, debt and grant funding from other sources, against an initial target of USD 1.1 million, drawn from a range of public and private lenders and granting organisations (KCIC 2017). In addition to securing additional investments in climate change action, the co-financing approach helps to ensure helps ensure public funding through StARCK+ is being channelled towards companies that are committed to the long-term sustainability of their operations.

S T A N D A R D G R A N T P R O C E S S E S A R E U N L I K E LY T O A T T R A C T A D D I T I O N A L I N V E S T M E N T, T H O U G H S O M E

S U P P O R T E D P R O J E C T S C A N G R O W A N D A T T R A C T

F U R T H E R F I N A N C I N G

Grants provided through the ACT! programme were targeted towards civil society groups, and so were not designed to leverage additional funding. Limited additional financing has been secured by projects funded under the ACT! grant support, which primarily targeted CSOs.

However, some supported projects have grown beyond their initial funding. For example, a project providing microfinance


for solar lantern purchases has established a revolving fund and has expanded into ‘table-top banking’ to bring in additional crowd-sourced funding for renewable energy investments. Similarly, a cassava ‘seed banking’ project funded by ACT! has used initial repayments from beneficiaries to purchase further seed and grow the seed banking initiative. While these levels of additional activity may be smaller than the levels of private and public finance attracted under other schemes, they nonetheless represent a valuable scaling up of climate action from projects that were not selected on the basis of attracting further investment.


5. D E S I G N I N G A C O H E S I V E P O RT F O L I O O F I N S T R U M E N T S

A M U LT I - P R O N G E D P R O G R A M M E W I T H A R A N G E O F I N S T R U M E N T S C A N O F F E R U N E X P E C T E D S Y N E R G I E S

B E T W E E N I N S T R U M E N T S

The StARCK+ portfolio of interests was designed to harness a diversity of approaches and gain experience of what works to deliver climate resilience. Most StARCK+ instruments were not explicitly designed to provide synergies, but partners’ experiences suggest a number of ways that instruments can complement each other or be designed to avoid and overlaps or conflicts between instruments.

I N S T R U M E N T S O P E R A T I N G I N T H E S A M E G E O G R A P H I E S

O R T H E M A T I C S E C T O R S C A N W O R K T O G E T H E R T O S U P P O R T E F F E C T I V E N E S S A C R O S S I N S T R U M E N T S , E V E N

I F T H E Y F O C U S O N D I F F E R E N T G R O U P S O F

B E N E F I C I A R I E S

StARCK+ partners identified both realised and potential opportunities where partners operating in the same geographies can work together to support common goals. The Adaptation Consortium operating in the ASALs supported REACT challenge fund in advertising its call for applications, enabling REACT to market the opportunity to a broad audience and mobilise a broad range of potential recipients to apply for funding. Similarly, StARCK+ partners noted the potential for organisations such as ACT! to draw on their network in counties they are operating in to identify potential partners who could help support microfinance schemes for energy efficient or solar home products, such as cookstoves, similar to the role that the Flamingo Farms Fairtrade Association played in supporting the cookstoves scheme.

P O T E N T I A L O V E R L A P P I N G A C T I V I T I E S C A N B E M A N A G E D

B Y C O N S I D E R I N G H O W I N S T R U M E N T S W I L L B E

D E P L O Y E D

KAM’s evolution towards providing policy development support was designed to dovetail with similar policy support provided by the Adaptation Consortium. By focusing on different geographies – counties outside the ASALs – KAM was able to minimise the risk of overlapping or duplicative efforts, and helped to increase the total number of counties supported from 5 to 12.

Potential overlaps in private enterprise funding was monitoring and evaluated to ensure additionality and value for money from investments. Three business were jointly supported by both KCIC and REACT, where they received both proof of concept funding from KCIC and funding through REACT. However, in all three cases, an assessment indicated additionality and justification for such funding.

T H E R E I S S C O P E F O R A L I G N I N G A N D B R O A D E N I N G D I F F E R E N T P R I V A T E S E C T O R F I N A N C E I N S T R U M E N T S T O

B U I L D A N E F F E C T I V E C O N V E Y O R B E LT F O R E A R LY- T O -

M I D - S T A G E B U S I N E S S E S

There is scope for even greater complementarities between the StARCK+ partners supporting private sector development. There are already complementarities between KCIC incubation support and REACT, where businesses initially supported by KCIC might also or subsequently access funding through REACT. However, there remains a need for further incubation and enterprise development funding, particularly for companies in the valley of death between innovation and commercialisation of products or services. The StARCK+ partners are already iterating towards providing support along this financing chain, through KCIC’s development of an ‘Early Stage Financing Mechanism’ to provide further financing for companies that have passed through its incubator and accelerator schemes and through the development of the KCV funding for enterprise development. However, there remains scope for aligning such activities to increase the scope and effectiveness of such support.


6. S U P P O RT I N G B R OA D E R D E V E L O P M E N T G OA L S

A wide range of financial instruments can support broader development goals as a co-benefit to primary climate action goals – but specific design choices may be needed to deliver these outcomes

There are a number of ways in which StARCK+ financial instruments have contributed towards positive outcomes for vulnerable groups and for women, and have contributed towards transformative change in Kenya. Such outcomes have not been explicit goals for many instruments, but experiences in Kenya suggest they can nonetheless deliver positive outcomes in these areas.

6.1. P O O R A N D V U L N E R A B L E G R O U P S

G R A N T F U N D I N G I N S T R U M E N T S O F F E R E X C E L L E N T

O P P O R T U N I T I E S T O T A R G E T P O O R A N D V U L N E R A B L E

G R O U P S

Grant funding through ACT! and the CCCFs have supported substantial benefits for livelihoods and for poor groups, and livelihoods impacts was an official selection criteria for CCCFs projects. ACT! projects have explicitly targeted agricultural productivity, climate resilience and increased yields, and through explicitly aiming to develop alternative livelihoods in the face of climate impacts. Similarly, the CCCFs have supported a range of livelihoods projects, and the CCCFs’ funding criteria require that such projects must support the economy, livelihoods or important services on which people depend (ADA Consortium 2017). For example, project beneficiaries in Makueni county have noted that such projects have support livelihoods by increasing agricultural productivity and enabling expansion of production, and through increasing access to water and thereby increasing both time and water resources available to support entrepreneurial activities such as kitchen gardens.

B U S I N E S S D E V E L O P M E N T A N D I N C U B A T I O N S E R V I C E S

C A N S U P P O R T V U L N E R A B L E G R O U P S T H R O U G H

P R O V I D I N G C L I M A T E P R O D U C T S A N D S E R V I C E S – I F T H E Y A R E T A R G E T E D T O W A R D S T H E S E G O A L S

Business development services do not typically provide direct support to vulnerable groups or the bottom-of-the-pyramid poor. Private sector services and funding provided through KAM, KCIC and REACT are inherently designed to support entrepreneurs, private sector businesses and project developers.

However, these enterprises can have substantial indirect or benefits for vulnerable groups through the provision of climate services and goods. A range of REACT-supported businesses have developed products or services that are aimed at or deliver livelihoods benefits for poor, smallholder farmers, including Liquid Lever drip irrigation kits, RAE Ltd’s grass seed enterprise, Bell Industries crop storage bag enabling greater returns on crops by supporting selling harvests when prices are higher, Mara Beef livestock opportunities for Masai Mara pastoralists, and Schutter Energy’s biogas system targeting smallholder dairy farmers. Overall, REACT has identified supporting over 300,000 people in accessing goods and services to help cope with climate change and over 140,000 people benefit from low-cost clean energy products.

In principle, other private sector support services could also target activities towards businesses serving poor and vulnerable groups. KCIC and KCV’s supported enterprises were not selected based on the support provided to vulnerable groups, but such incubation and enterprise development support could also be targeted towards this goal.

T R A D I T I O N A L M I C R O F I N A N C E I S O N LY A V A I L A B L E T O T H O S E W I T H T H E A B I L I T Y T O R E PA Y L O A N S , B U T C A N

N O N E T H E L E S S S U P P O R T L I V E L I H O O D S A N D L O W W A G E

E A R N E R S – A N D I N N O V A T I V E A P P R O A C H E S C A N

I M P R O V E T H E R E A C H A N D I N C L U S I V I T Y O F M I C R O F I N A N C E

While microfinance initiatives can only support people with an income or asset who are able to repay loans, the sectors and themes supported through StARCK+ support improved livelihoods. The need to ensure microfinance loan recipients can repay loans limited direct beneficiaries to those who have sufficient incomes – and sufficiently stable incomes – to support repayments and reduce credit risks. This implies that these services are not able to directly support bottom-of-the-pyramid poor such as subsistence farmers. However, the structure of the CSA microfinance instruments enables the microfinance to support a broad range of farmers including smallholders, for example by working through aggregators as the direct recipients of loans, even in the absence of a formalised income. Additionally, while the efficient cookstoves microfinance scheme targeted employed people rather than the poor, the beneficiaries supported were on low wages.


6.2. G E N D E R O U T C O M E S

F I N A N C I A L I N T E R V E N T I O N S T A R G E T I N G A G R I C U LT U R E A N D H O U S E H O L D E F F I C I E N C Y C A N Y I E L D S I G N I F I C A N T

B E N E F I T S F O R W O M E N

Instruments targeting activities traditionally conducted by women can support positive gender outcomes ACT! grant funding for agricultural projects and CSA microfinance interventions across different value chains have delivered substantial benefits for women given the large shares of women engaged in agriculture. Similarly, interventions that support greater household efficiency can boost outcomes for women. While cookstoves purchased through the ClimateCare microfinance scheme were split relatively evenly across genders, users of cookstoves are predominantly women, leading to time savings and improved air quality benefits for this group. Similarly, interventions to improve access to water, for example through water catchment projects under ACT!, can substantially decrease the time taken fetching water, improving quality of life for women and opening up new opportunities for female entrepreneurship.

T A R G E T E D T E C H N I C A L A S S I S T A N C E C A N B O O S T F E M A L E

PA R T I C I PA T I O N I N L E A D E R S H I P R O L E S

Technical assistance provided through the Adaptation Consortium has boosted the number of women in leadership roles. The structure of technical assistance provided to county governments supported women’s training and their ability to assume leadership positions. Additionally, the structure and operations of ward-level planning committees and associated training lead to increased participation of women, especially within government, and increased receptiveness of female representation in power structures.

B U S I N E S S D E V E L O P M E N T S U P P O R T C A N P R O M O T E

P O S I T I V E G E N D E R O U T C O M E S – T H O U G H T H I S I S

D E P E N D E N T O N T H E B U S I N E S S E S S U P P O R T E D A N D H O W T H E Y O P E R A T E

Business development support activities can deliver improved outcomes for women stemming from both the products and services they offer, and how they operate. For example, REACT has supported the provision of insurance products through Takaful, which reports that women are predominantly taking advantage of its index-based livestock insurance products. Additionally, some businesses are specifically targeting female customers, as with Liquid Lever’s irrigation kits, or are actively recruiting female sales agents, as with Newlight Africa.

However, without a specific strategy, business incubation may only offer limited support for positive gender outcomes. KCIC’s review of its own activities suggests that most KCIC clean energy technology supported through the incubation scheme

are male led, and the organisation notes a need to develop a specific strategy to engage and support female entrepreneurs (KCIC 2017).

6.3. T R A N S F O R M AT I O N A L C H A N G E

The concept of transformational change is focused on supporting long-lasting changes that last beyond the initial activities. In the context of the StARCK+ programme, activities that deliver transformational change can therefore be understood as either:

• Supporting livelihood transformation among beneficiaries;

• Supporting improvements in policy and institutional architectures; or

• Supporting innovation in climate-related products or in how finance is delivered.

A W I D E R A N G E O F F I N A N C I A L I N S T R U M E N T S S U P P O R T T R A N S F O R M A T I O N A L C H A N G E T H R O U G H I M P R O V I N G

L I V E L I H O O D S

As noted above, a wide range of instruments have supported improved livelihoods, contributing to long-term transformational change. Such instruments include microfinance for CSA, grants for livelihoods, water and agriculture projects through ACT! and the CCCFs, and private sector support for business providing services supporting improved livelihoods through REACT.

Additionally, by promoting new value chains, instruments support the broader establishment of livelihoods in the longer term. Microfinance interventions for CSA are promoting the establishment or strengthening of new value chains for commodities, including for sorghum, cassava and indigenous chicken. Additionally, microfinance for more efficient and for ethanol cookstoves are supporting the establishment of new and larger markets for these products. Such activities have the potential to establish long-term livelihoods improvements through new business and agricultural opportunities. For example, a standalone company focusing on energy efficient and solar home products, Pamoja Life, has spun out from ClimateCare, providing livelihoods opportunities for new employees.

S U P P O R T I N G I N S T R U M E N T S T H A T F O C U S O N P O L I C Y

D E V E L O P M E N T A N D I N S T I T U T I O N A L C H A N G E C A N H E L P T R A N S F O R M E N A B L I N G E N V I R O N M E N T S

A number of instruments supporting climate change policy development have facilitated the creation of a supportive environment for climate action. Climate policy design and mainstreaming under the Adaptation Consortium and KAM have supported policy change and the establishment of climate policies at the county level. StARCK+ partners have also


supported the creation of a more supportive business environment, through KAM, KCIC and ClimateCare’s lobbying and engagement on climate-business issues, such as relative taxation rates on traditional and clean fuels. REACT also aims to supports changes in business regulatory environments, including laws, regulation and implementation, to create a more welcoming legal and regulatory environment for climate-focused businesses.

B U S I N E S S I N C U B A T I O N A N D D E V E L O P M E N T S U P P O R T C A N D I R E C T LY B O O S T T R A N S F O R M A T I V E C H A N G E

T H R O U G H E N C O U R A G I N G I N N O V A T I O N

KCIC and REACT’s activities are directly supporting innovation in climate technologies and services. KCIC’s role in supporting innovation through incubation and proof of concept funding has been recognised internationally by the international Climate Launchpad group, with a KCIC-supported entrepreneur winning a global innovation award in 2017. Similarly, REACT aims to support both innovation among businesses, and replication of that innovation through copying of business models and crowding-in of other businesses into space created by REACT projects. While it is challenging to assign responsibility to the REACT programme, a number of similar enterprises have started offering products and services similar to those offered by REACT-supported companies since REACT started providing funding and support in Kenya.


7. I M P L I C AT I O N S

Future financial instruments and programmes – both in Kenya and beyond – can benefit from StARCK+’s experiences with financial instruments

The StARCK+ programme’s experience in designing and implementing these financial instruments offers a unique opportunity for learning, and to support future financial interventions in Kenya and beyond. The implications of these lessons are, in most cases, equally applicable to actors designing and using financial instruments in Kenya, to stakeholders involved in designing the shape and scope of the Kenya national climate change fund and county-level funds, and to development partners looking to support climate action in Kenya and other countries. This section highlights these key implications, drawing together the many lessons discussed above according to three key themes.

7.1. D E S I G N I N G E F F E C T I V E I N S T R U M E N T S

TA K E A N A DA P T I V E A N D I T E R AT I V E A P P R OA C H TO D E P L OY I N G I N S T R U M E N T S

L E S S O N S

1 – Adaptive and iterative processes in both designing and deploying financial instruments is key to securing successful outcomes, especially when working in challenging operating environments.

I M P L I C A T I O N S

1 – Build flexibility into implementation approaches for instruments, and allow additional time and resources for managing unexpected developments.

2 – In Kenya, CCCFs and the national climate change fund would benefit from building flexibility into planning (both for specific instruments’ design and operations, and for allocating funding across different types of instruments).

L O O K B E L OW T H E M A I N I N S T R U M E N T W H E N D E S I G N I N G I N S T R U M E N T S

L E S S O N S

1 – The choice of providing repayable versus non-repayable finance needs to reflect the purpose of the recipient and their ability to repay, and recognise that grants have a key role to play to support both non-commercial projects and early-stage private enterprise development.

2 – Choosing the right supporting instrument is important for maximising the reach and impact of interventions – technical assistance and capacity building has been valuable for all instruments, with microfinance benefitting from financial tools (insurance, subsidies, guarantees) to de-risk lending.

3 – Technical support aligned with headline instruments is crucial to ensuring success, especially when working with low-capacity beneficiaries.

4 – Blending repayable and non-repayable funding to the same beneficiaries can send confusing signals, but also helps incentivise better financial and business management.

5 – Project development support is more effective when conducted within a supportive commercial and policy environment.


1 – ‘Stress test’ instruments at the design phase, and fully consider the theory of change around what is needed to ensure or boost an instrument’s success or challenges that it may need to overcome.

2 – In Kenya, governments should take a broad view around activities to be supported under existing and future CCCFs and the planned national climate change fund, and complement headline instruments with technical services and other supporting instruments.


7.2. S U S TA I N A B I L I T Y O F I N S T R U M E N T S

S E L E C T PA RT N E R S C A R E F U L LY A N D C O N S I D E R T H E I N C E N T I V E S FA C E D B Y PA RT N E R S A N D B E N E F I C I A R I E S

L E S S O N S

1 – Working with organised recipient groups reduces microfinance credit risks and supports effective operations.

2 – Microfinance instruments are more likely to be successful when the incentives of finance providers and intermediaries are aligned.

3 – Business incubation support is more effective when funder-recipient incentives are aligned and when businesses are held accountable effectively.

4 – Greater targeting of business support can increase the quality of support offered and recipients’ outcomes.


1 – Carefully consider the intentions, incentives and capabilities of partners and recipients at the design phase, and where possible include measures to align incentives with the overall goals of the instrument.

TA K E C O N T E X T S A N D T I M E F R A M E S R E Q U I R E D F O R S U C C E S S F U L I M P L E M E N TAT I O N I N TO A C C O U N T W H E N D E S I G N I N G I N S T R U M E N T S

L E S S O N S

1 – Sustainable private sector development and designing and implementing high value projects takes time – financial instruments need to be designed around these timeframes

2 – When working in challenging operating environments, ensure that project design takes account of barriers to recipients’ ability to repay funding and builds in resources to manage higher operating expenses.

3 – Microfinance and commercial financing instruments need to be finely tuned to local markets and credit risks to succeed.


1 – Take careful note of contexts and particular challenges facing both beneficiaries and instrument administrators when designing financial instruments, and be patient when designing implementation periods for instruments.

2 – This is particularly important for activities in Kenya’s ASALs, and suggests implementation periods for projects under county or national funds should be set flexibly based on local contexts.

T H E R E M AY B E S Y N E R G I E S B E T W E E N I N S T R U M E N T S T H AT A P P E A R TO A D D R E S S D I F F E R E N T I S S U E S

L E S S O N S

1 – Instruments operating in the same geographies or thematic sectors can work together to support effectiveness across instruments, even if they focus on different groups of beneficiaries.

2 – Potential overlapping activities can be managed by considering how instruments will be deployed.


1 – For portfolios of instruments, seek to take advantage of synergies between different instruments, even if they primarily focus on different themes or beneficiaries.

D E V E L O P I N G A S E L F - S U S TA I N I N G P R I VAT E S E C TO R C L I M AT E I N V E S T M E N T S Y S T E M W I L L TA K E T I M E

L E S S O N S

1 – Project development and incubation support require continued financial inputs to deliver continued support – but new business models might enable self-sustainability in the longer term.

2 – Business development activities have potential to achieve sustainability over time, but may require additional capital support as they move towards this goal.

3 – Project development support can leverage significant public and private co-financing, especially if designed to link up with existing financing opportunities.

4 – Business incubation and development support can leverage co-financing as well as private sector investment in their own enterprises.

5 – There is scope for aligning and broadening different private sector finance instruments to build an effective conveyor belt for early- to -mid-stage businesses.


1 – Be patient in designing and expecting self-sufficiency for instruments targeting private sector development.

2 – In Kenya, there are specific opportunities for funders to build on pathfinding activities under REACT, KCV and KCIC funding initiatives.


7.3. S U P P O RT I N G B R OA D E R B E N E F I T S

S U P P O RT F O R C O M M U N I T Y A N D C I V I L S O C I E T Y P R O J E C T S C A N D E L I V E R F U RT H E R D OW N S T R E A M B E N E F I T S

L E S S O N S

1 – Instruments that are not financially self-sustaining can nonetheless help establish or demonstrate the potential for sustainable commercial business models.

2 – Grant funding to civil society groups is not sustainable in itself – but can catalyse sustainable activities downstream.

3 – Standard grant processes are unlikely to attract additional investment, though some supported projects can grow and attract further financing.


1 – Take a wide view of financial sustainability when considering benefits from grant investments.

2 – CCCFs and funders focusing public climate goods in Kenya can help support long-term benefits by focusing on opportunities that deliver lasting livelihoods impacts.

M I C R O F I N A N C E S C H E M E S R E Q U I R E S U S TA I N E D S U P P O RT OV E R T I M E TO B E C O M E S U S TA I N A B L E , E S P E C I A L LY W H E N T H E Y F O C U S O N N E W VA L U E C H A I N S

L E S S O N S

1 – Microfinance lending can achieve excellent sustainability when engaging with formalised employees or under innovative systems to reduce credit risks, and with technical support from a committed partner.


1 – Pay particular attention to the design and administration issues for microfinance and allow for long-term, flexible support of schemes, for example by engaging with MFIs, developing sub-instruments to support the microfinance or addressing new challenges that arise. This support is especially important when focusing on new value chains.

S C H E M E S T H AT D E M O N S T R AT E VA L U E TO K E Y S TA K E H O L D E R S H AV E T H E P OT E N T I A L TO M O B I L I S E F U RT H E R P U B L I C S E C TO R R E S O U R C E S

L E S S O N S

1 – Initial capitalisation and support of climate funds can lead to longer term financial sustainability by catalysing political action and securing funding commitments from official budgets.

2 – Demonstrating the clear community benefits of public finance for climate action can leverage significant follow-on funding from public budgets.


1 – Engage with key stakeholders and potential champions for public climate change funds to engage their interest in these instruments and generate political commitments to them that can help secure ongoing funding.

2 – Development partners in Kenya should look to work closely with county governments to promote and support county funds. Actors looking to set up new CCCFs (or operationalise the national fund) can build on previous experiences in setting up funds and engaging communities.

W H I L E G R A N T S F O R C O M M U N I T Y A N D C I V I L S O C I E T Y O R G A N I S AT I O N S A R E W E L L - S U I T E D TO S U P P O RT I N G P O O R A N D V U L N E R A B L E G R O U P S , C O M M E R C I A L F I N A N C I A L I N S T R U M E N T S S U P P O RT I N G G O O D S A N D S E R V I C E S F O R T H E S E G R O U P S C A N A L S O P L AY A K E Y R O L E .

L E S S O N S

1 – Grant funding instruments offer excellent opportunities to target poor and vulnerable groups.

2 – Business development and incubation services can support vulnerable groups through providing climate products and services – if they are targeted towards these goals.

3 – Traditional microfinance is only available to those with the ability to repay loans, but can nonetheless support livelihoods and low wage earners – and innovative approaches can improve the reach and inclusivity of microfinance.


1 – Look beyond grants when thinking how to support livelihoods goals and improved outcomes for vulnerable groups.

2 – County or national funds in Kenya should consider including private sector support and microfinance in their portfolios as a means of delivering livelihoods benefits.


I F S T R U C T U R E D W E L L , I N S T R U M E N T S C A N D E L I V E R E F F E C T I V E B E N E F I T S F O R WO M E N

L E S S O N S

1 – Financial interventions targeting agriculture and household efficiency can yield significant benefits for women.

2 – Targeted technical assistance can boost female participation in leadership roles.

3 – Business development support can promote positive gender outcomes – though this is dependent on the businesses supported and how they operate.


1 – Explicitly consider the need for a gendered approach to delivering financial instruments.

A R A N G E O F I N S T R U M E N T S C A N C O N T R I B U T E TO T R A N S F O R M AT I O N A L C H A N G E

L E S S O N S

1 – A wide range of financial instruments support transformational change through improving livelihoods.

2 – Supporting instruments that focus on policy development and institutional change can help transform enabling environments.

3 – Business incubation and development support can directly boost transformative change through encouraging innovation.


1 – Monitor instruments to determine their capacity to deliver transformative change. While not all interventions will be transformative, a range of financial instruments have the capacity to help move towards transformational change.


R E F E R E N C E S

ADA Consortium. 2017. “Mainstreaming Climate Change into County Budgeting & Planning: Final Report.”

KCIC. 2017. “Kenya Climate Innovation Centre: End of Project Evaluation End of Project Evaluation.” Development.


A N N E X A : L E S S O N S L E A R N E D F R O M I N D I V I D UA L C O M P O N E N T S

This Annex provides one-page summaries of lessons learned from instruments used under each individual StARCK+ component. For each component, the summaries set out:

• the focus of each component;

• the instruments used, including headline instruments, and supporting instruments that enabled the headline instrument, and any sub-instruments deployed by beneficiaries (such as organisations using grant funding to capitalise a micro-finance scheme);

• the different actors and themes supported by the instruments;

• key challenges and successes associated with each instrument;

• as assessment of the self-sustainability of instruments, focusing on the particular instruments themselves rather than overall programmes;

• how well instruments work with other instruments to support climate action; and,

• if and how instruments provide support for broader development goals in the areas of gender, poverty and transformational change (focusing particularly on livelihood development, innovation and creating a more supportive enabling environment).

These summaries are not exhaustive. Given the scope of the instruments used under the StARCK+ programme and the activities and beneficiaries supported, these summaries can only provide an overview of key findings from the learning review. Additional detail is available in the main report.


R E A C T ( R E N E WA B L E E N E R G Y A N D A DA P TAT I O N TO C L I M AT E T E C H N O L O G I E S )

Focus Challenge fund supporting private sector product and enterprise development.

Instruments used Headline instrument(s)

Mixture of grants and loans provided to each supported company, delivered through a challenge fund (competition with call for applications) format. Loans provided at zero interest rate.

Supporting instrument(s)

Technical assistance provided to companies receiving funds.

Supported companies required to provide 50:50 co-financing (from their own funds or other funders).

Sub-instrument(s): Index-based livestock insurance, Lease-to-own financing for biogas energy systems, Microfinance for energy efficient goods, PAYG financing for electricity.

Actors and themes supported

Target beneficiaries Private sector enterprises providing climate goods in services in ASALs.

Themes supported Agriculture, Water, Information and communication, Renewable energy.

Instrument challenges and successes

Providing mixture of loans and grants to companies led to confusion or reduced incentives for repayments among some companies, but created mandate for monitoring, leading to better compliance and better risk awareness and management of risk from companies

ASALs have proved to be challenging operating environments for companies, suggesting higher share of grants (relative to loans) may have been appropriate.

Self-sustainability of instruments

Focus for REACT is on sustainability of supported businesses rather than self-sustainability of financing instruments. Funding for new investments expected to come from new inputs rather than repaid capital from supported companies.

Some sub-instruments and business models show potential for sustainability, though others may require more time to achieve sustainability (insurance products, solar SP asset financing).

50:50 co-financing model has brought in additional finance beyond REACT loans and grants.

Working with other instruments

Potential for very good overlap with business incubation services. Overlap with KCIC on supporting three companies in practice.

Links with StARCK+ partners operating in ASALs enabled marketing of opportunities and engaging potential supported businesses.

Support for broader development goals

Gender REACT companies at an early stage so difficult to assess impacts, but some support for female beneficiaries (especially farmers) and female employment (as agents of supported companies).

Poverty REACT companies at an early stage so difficult to assess impacts, but some support through products targeted towards bottom-of-pyramid poor, including agricultural and energy goods.

Transformational change

REACT is supporting livelihoods, and aims to explicitly lead to sustainable outcomes through replication of business models and activities beyond supported companies.


K C I C ( K E N YA C L I M AT E I N N OVAT I O N C E N T R E )

Focus Private sector incubation and proof of concept funding for business offering climate goods and services.


Incubation support services for over 100 companies, including advisory services (marketing strategies and guidance, testing services, financing, HR, branding, product development), access to facilities, access to market information.

Proof of concept (POC) grant funding provided to around 30 companies.


Policy influencing, focusing on private sector development and climate-business issues (for example, ethanol taxation rates).

Sub-instrument(s): None

Supporting different actors and themes

Target beneficiaries Entrepreneurs and private sector companies.

Themes supported Renewable energy, Agribusiness, Water management, Cross-cutting climate sectors.


Given focus on entrepreneurs, some supported companies have ceased operating. However, KCIC incubation exceeded initial targets for numbers of businesses supported, jobs created.

Longer periods of implementation time is needed for effective incubation, and to get supported companies to a point where they can access financing.

Challenges around accountability of funding for some POC funding, leading to institution of stricter matched co-funding requirements for some supported companies.

Supporting fewer companies and providing more resources to them could improve outcomes - and working with higher capacity clients to reduce transaction costs for KCIC.


KCIC grant financing and incubation support was not designed to be sustainable.

Spin-off activities (KCIC Early Stage Financing Mechanism, Kenya Climate Ventures (KCV) enterprise financing) may offer more sustainable financing in the long term.

KCIC support has mobilised USD 11 million in funding from other public and private sources.


Some KCIC companies also supported by REACT.

Potential for good connections with REACT and KCV enterprise financing to create a pipeline of support.


Gender KCIC did not screen companies on gender issues. Most supported businesses are male led, and KCIC evaluation report recognises a need for a strategy to encourage female entrepreneurs to participate.

Poverty KCIC did not screen companies on gender issues.


KCIC supporting innovation in climate technologies and supports enabling environment changes through policy influencing.


A C T ! ( A C T C H A N G E T R A N S F O R M )

Focus Grant financing for non-state actors, across a range of climate projects, including climate public goods projects, climate information and awareness raising, climate goods and services, policy influencing and climate legislation.


Grants (accounting for 70% of budget).


Capacity development for supported organisations, demand-driven but delivered by ACT!

Sub-instrument(s): Microfinance for solar lantern sales. Seed banking for cassava.


Target beneficiaries Civil society organisations (CSOs), Community-based organisations (CBOs), NGOs, Private sector

Themes supported Agriculture, Livelihoods, Natural resource management, Water, Gender, Policy influencing, Information and communication, Community-based adaptation


23 organisations supported to deliver projects.

Grants used to enable support for vulnerable, low-income groups or those otherwise unable to access traditional or commercial credit – a particular issue in the ASALs.

Grant financing associated with risks of creating dependencies on non-commercial finance among supported groups.

External factors in counties hindered projects in some areas: devolution processes delaying project roll-out, insecure operating locations, limited community support. Including resources to address potential external issues could improve outcomes from similar future instruments.

Short time frame for implementing and reporting on activities limited time for effective project implementation, longer implementation time frames would support more effective outcomes.


ACT! grant financing not intended to be self-sustainable.

However, grant financing intended to jump start moves to more sustainable business models among supported groups: CSA interventions leading to value addition and income generation; solar lantern sales intended to achieve company sustainability; cassava seed banking still active two years after grant payment.


Grant projects could be aligned with county-level policies to take advantage of existing opportunities and matching funds.


Gender Agriculture interventions have potential to support women in particular due to women’s primary responsibility for agriculture.

Poverty Many projects supported pool and vulnerable groups through improving livelihoods, improving citizen participation.


Support for sustainable livelihoods. Policy influencing projects can contribute to improved enabling environment for climate action.


C C C F S ( C O U N T Y C L I M AT E C H A N G E F U N D S )

Focus County-level investments in public goods to support climate change action in disadvantaged counties, supported by the Adaptation Consortium.


Grants.


Capacity development, including planning structures, climate information services and M&E.

Policy influencing and support for five country governments.

Sub-instrument(s): None.


Target beneficiaries Community-based organisations in Isiolo, Garissa, Kitui, Makueni & Wajir counties and county governments in the same counties.

Themes supported Water, Agriculture/livestock, Renewable energy, Information and communication, Policy influencing


All counties have mainstreamed climate change into county development plans and sectoral plans. CCCFs supported 82 investments across five counties.

Establishing CCCFs was a resource and time intensive process, highly dependent on relationships with key actors in counties.

Funding mechanisms under first round CCCFs required counties to procure suppliers for projects, with a country-level development partner serving as an agent and verifying projects to unlock funding. This was necessary to provide support to development partners, but a mechanism without these agents would be more straightforward.

Costly to deliver projects over large geographic areas that are challenging to operate in.


Counties have committed to contributing funding to CCCFs from county development budgets (policies in Wajir and Makueni setting official targets of 2% and 1%, respectively).

These sums are greater than StARCK+ initial budgets, indicating good potential for these activities to leverage further, sustainable financing.

Additional funding may be required to support establishing new CCCFs in further counties.

Potential for CCCFs to become executing entities of international climate funds to support access to further public finance.

Costs of projects procured through CCCFs lower than traditional costs through county procurement due to development partner role.


CCCFs worked with AECF to promote the REACT call for applicants.


Gender Technical assistance under CCCFs has supported women in assuming leadership positions in county governments.

Poverty CCCF project criteria explicitly require projects support livelihoods as one of their seven funding criteria.


Supported institutionalisation of responses to climate change and funding for climate action, creating a more supportive enabling environment.


K A M ( K E N YA A S S O C I AT I O N O F M A N U FA C T U R E R S ) P R O J E C T D E V E L O P M E N T S U P P O RT

Focus Support for early-stage renewable energy and adaptation project development, implemented by KAM under FICCF


Grant financing for project development support activities: pre-feasibility studies and full feasibility studies.

Policy influencing in seven countries to develop improved policy and regulatory frameworks.


Promoting awareness for renewable energy projects among potential financiers/banks.



Target beneficiaries Private sector project developers (for project development support) and county governments (for policy support).

Themes supported Renewable energy, Energy Efficiency, Policy influencing.


KAM activities intended to de-risk projects as finance already identified and available in principle for developed projects.

Initial plans for supporting full feasibility studies and implementation stages of project were adjusted after fewer projects moved forward after pre-feasibility stage.

Progress hindered by structural challenges (especially government reluctance to issue Power Purchase Agreements for new projects, water and land rights issues), capital costs and low interest form project developers.

Greater targeting in selection of project might have led to more projects reaching feasibility and implementation stages.

Bank requirements for project funding can chill financing opportunities by placing strict requirements (for example, requiring companies meet both corporate financing requirements for projects).

Shift of goals to include support for county governments effectively supported inclusion of energy policies and plans in five county development plans.


KAM support was not intended to be sustainable.

Activities we intended to support additional investment by unlocking further financing, though challenges to offering more advanced project development support means less support was secured than initially intended.


Project development support was explicitly designed to work alongside and leverage other (non-StARCK+) finance, but no explicit interactions with StARCK+ instruments.

KAM country-level policy support complemented Adaptation Consortium efforts by targeting other counties.


Gender KAM did not consider gender issues in targeting activities.

Poverty KAM did not consider poverty issues in targeting activities.


Support for county policy development supported transformational change through stronger enabling environments for future activities.


C L I M AT E S M A RT A G R I C U LT U R E ( C S A ) M I C R O F I N A N C E

Focus Microfinance for dairy, sorghum, cassava and indigenous chicken value chains, implemented under FICCF


Grants (zero-interest, repayable) to microfinance institutions (MFIs) to capitalise microfinance schemes. Microfinance payments to farmers and commodity aggregators (to provide inputs to farmers).


Technical services for farmers, including climate information services, veterinary services, and agronomy services. Insurance (for dairy, sorghum). Guarantees to MFIs to support aggregator collateralisation.

Sub-instrument(s): None


Target beneficiaries Farmers, Commodity aggregators

Themes supported Agriculture


Challenges with intermediaries (dairies, aggregators) passing through repayments from farmers to MFIs, for example due to cash flow issues.

Perceptions of high interest rates can chill interest in products among farmers.

Lack of formalised markets for young value chains (cassava, sorghum, indigenous chicken) required particular support for establishing systems to support the scheme.

Guarantees are especially useful in such young value chains and for new aggregators.

National restrictions on regulated MFIs restricted the scope of innovation, due to permissible interest rates for loans and requirements for collateral.

Important to select partners carefully, as schemes rely on their capacity and incentives.

Longer timeframes are needed to establish and stabilise new systems, to allow for uptake of farmer training and to support innovation in new value chains.


All microfinance schemes are offering substantial returns, with all MFIs increasing their capital base from repayments – less so among regulated (lower interest) MFIs, commodities with longer returns period, longer duration loans.

MFIs facing challenges in securing additional cheap capital similar to FICCF grant financing, potentially limiting longer-term growth prospects.

Costs of administering the scheme were higher than initially expected, reflecting the complex, multi-faceted nature of the instruments.


Potential overlap with organisations working with SMEs in ASALs. Potential for CSA microfinance approaches to be replicated by partners (e.g. AECF) in other locations.


Gender No specific gender targets, but support for women provided through their central role in farming.

Poverty Focus on smallholder farmers and pro-poor crops delivers livelihoods impacts. Focus on financial inclusion serves excluded groups.


Innovation around business models and focus on commercialising ‘young’ value chains promotes sustainable livelihoods impacts.


C O O K S TOV E S M I C R O F I N A N C E

Focus Microfinance for improved cookstoves (fuel efficient charcoal stoves) and clean-burning (ethanol) cookstoves, implemented by ClimateCare under FICCF


Grants (zero-interest) to farmer associations and community groups to capitalise microfinance schemes.

Microfinance loans.


Product subsidies for cookstoves.

Insurance against default (due to death).



Target beneficiaries Farmer associations, including Fairtrade associations and savings and credit co-operatives (SACCOs). Community groups.

Themes supported Energy efficiency, Renewable energy.


Initial goal of 8,000 cookstove sales surpassed. Initial goal of 8,000 ethanol stove sales not reached due to demand and supply issues. Initial subsidies of cookstoves supported high initial demand, which has decreased since their removal.

Ethanol stove sales relied on partnership with stove and ethanol supplier. Issues with interruption to ethanol supply during scheme reduced demand (alongside high unit cost of stove), and the supplier ceased operations in Kenya during scheme.

Important to forge strong partnerships with organisations that have aligned incentives, especially when the organiser is a step removed from managing sales or cost recovery.

External factors can dampen success of scheme: drop in kerosene price during scheme led to reduced demand; difficult operating environment for the ethanol cookstove scheme.

More formalised systems among farmer groups supported successful scheme by enabling easier recovery of payments, compared to community groups for ethanol stoves.


Funds for charcoal cookstoves have revolved several times, continue to provide financing for efficient stoves and solar products.

Funds for ethanol stoves have been transferred into fund for solar energy products.

Initial plan to use Certified Emissions Reductions (CERs) sales to replenish fund capital (for both types of cookstoves) have not yet been realised.


No explicit linkages between cookstove microfinance and other schemes.

Potential for linkages with ACT! to promote schemes among additional groups.


Gender Stove purchasers both male and female, but beneficiaries were predominantly female given their primary role in cooking, leading to time and resource savings, air pollution benefits for women.

Poverty Schemes explicitly targeted poor groups – but in practice worked with employed (low wage) beneficiaries (for credit risk management).


Schemes promoted long term changes to value chains.

Concurrent lobbying of government helped contribute to enabling environment improvement through changes to ethanol taxation.


A N N E X B : S TA K E H O L D E R S E N G A G E D

S TA R C K + PA RT N E R S A N D S TA K E H O L D E R S I N T E R V I E W E D D U R I N G T H E L E A R N I N G R E V I E W


Person Organisation

Noelle O’Brien FICCF

Jacob Agoch FICCF

Moses Ochang FICCF

Joab Osumba FICCF

Julius Wairoma ACT!

Nicholas Abuga ACT!

David Njugi KAM

Elijah Isabu SUNREF

Tom Morton ClimateCare

Tom Owino ClimateCare

Stephen Musyoka KCIC

Felix Magaju KCIC

Paul Ohaga KCV

Joan Gatuhi KCV

Elija Odolo KCV

Victori Orindi ADA Consortium

Yazan Elhadi ADA Consortium

Mumina Bonaya ADA Consortium

Francesco Bisleti AECF REACT

Mat Hague AECF REACT

Noel Amoit AECF REACT

Robert Kisyula Government of Makueni County


Person Organisation

Mary Mbake Government of Makueni County

Faith Mutua Government of Makueni County

Sharon Kibor Christian Aid

Lydia Muithya Anglican Development Services

Obadiah MuyribiMakueni Ward Climate Change Planning Committee

Obadiah KyungutiMakueni Ward Climate Change Planning Committee

James MuemaMakueni Ward Climate Change Planning Committee

Justus KataMakueni Ward Climate Change Planning Committee

Fidel MuemaMakueni Ward Climate Change Planning Committee

Dana Mutua CDMS

Alice Munya NDMA

Benson Kimdte ADSE

Harrison Ikunda Takamoto Biogas

Kelvin Gitata Ndung’u Takamoto Biogas

Susan AkelloFlamingo Farmer Fairtrade Association

Lucy Inuka MFI, Mdunyu Njeru ofice

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Innovative Climate Change Financing in KenyaLearning... · 2018-07-10 · Innovative Climate Change Financing in Kenya ... future County Climate Change Funds and the planned national