Coda Global Fellows Program

Fellowship Report: For TNC Internal Review

Alejandro Calvache Water Funds Coordinator NASCA Conservation program January 19, 2012

Background Africa conservation program is currently exploring conservation business opportunities in some countries, in which water funds and payment for ecosystem services seem to be an attractive alternative for watershed management. In particular, resources have been invested to scope and promote water funds in Kenya, Zambia and Tanzania --nations with relatively young water management legislation and an adequate context to use the water funds approach.

NASCA and Africa Region conservation program signed a fellowship agreement aiming to assess how the NASCA (Latin American) Water Fund model may need to be modified to fit circumstances in these three counties, assess potential for Water Funds development in Aberdare Mtns/Nairobi and Kafue River/Lusaka, and define next steps and likely partners for development of a Water Fund in any of these locations that is viable

This document is the fellowship report, describing activities related to the Kenya case. It includes tasks stipulated in the fellowship agreement focusing in the Nairobi´s upper Tana River case as a possible area for a water fund implementation. In the first part, the report describes activities carried out during the fellowship. The second part includes a brief background about the political and institutional context related to water management in Kenya, including a set of basic enabling conditions to be considered to design a water fund. General recommendations and next steps are presented in the final part of the report.

2 Part 1: Scoping Activities Report

1) Literature Review:

Documents used as background for the fellowship were provided by Africa program and Global Freshwater Team staff (Kari Vigerstol and Colin Apse). Some other helpful literature was found during the fellowship.This documentation includesa description of previous experiences related to water management and payment for ecosystem services (PES) not only in the Kenya context but also in the African continent (see list of documents revised in Annex 1).

Even if the numbers of ecosystems services projects in the region differ from one source to another, the major general conclusion about watershed payments schemes in Africa point to the fact that there are just a few experiences of these kinds of programs. Thisincludes two programs in South Africa, and at least eight other initiatives in formal planning phases in South Africa, Tanzania, and Kenya. Other initiatives are being considered but have not yet entered a formal planning phasewhich is much less than the Latin America context(Ferraro 2017).

According to some authors, multiple factors explain this:

 First of all, evidence shows long gestation period and lack of assurance on projects moving from design to implementation (KatoombaGroup, 2008) which means a lack of leadership, capacity of facilitation and absence of key stakeholders either, public/cooperation or private able to push a long term processes to the implementation phase.

 Other local conditions appear as obstacles to materialization in ground ecosystems services mechanisms such as the social configuration is space and payment capacity.

o East Africa has large populations in rural areas and high dependence on ecosystem services, but does not have significant capacity in the urban areas to recognize the value of upstream ecosystem services. Less population living in urban areas means less financial capacity to recognize and pay for ecosystem services that extend to the urban population.This can be compared to big urban populations, very common in Latin America, where larger potential markets to pay for ecosystem services are availableand regulated. At the same time, water supply systems are smaller in Africa than in some places of Latin America: access control and adequate water pricing mechanismsare still in early stages, which makes more difficult to include real recognition of nature´s value and environmental costs for the urban water provision systems in Africa.

3  Lack of technical and market information

 Limited institutional experience and legal frameworks

 Limited successful business models

 Lack of final ecosystem services user´s ability to pay (hydropower, drinking water, agricultural)

 Lack of control capacity (for those who don’t pay).

For biodiversity services, clear and focused payment projects have been implemented in Madagascar and Guinea. Other 6 projects in Kenya, even if created, have not clearly been built on the “buyer-seller model” (Ferraro, 2007; Mwangi 2006).

The future of PES in the region will depend upon growing demand from interested “payers.”For payer interest and ongoing engagement with PES in the region, this issue of assurance thatpayers are indeed getting what they are paying for must be addressed (Katoomba Group, 2008). As a lesson learned from the Latin America experience, it seems crucial to show at least a concrete and robust technical analysis in terms of quantitative results (amount of sediments retained, base flows maintenance, improve certain parameters in water quality)making sure key stakeholders involved in a Payment for Ecosystem Services scheme will obtained they need to obtain and how this is translated into the cost structure and social benefit.

In addition, according to the literature is crucial to understand that most of the African initiatives related to environmentmanagement are also related to poverty alleviation. Instead of being an obstacle for payment for Ecosystems services effectiveness (Ferraro, 2007) this is a good opportunity to link social benefits to an adequate watershed management. A water fund could play an important role here -- lessons learned in social impacts and economic benefits in other TNC experiences as in FONAG water fund in Ecuador, could be used in a potential water fund in Kenya to demonstrate positive environment and social outcomes could be obtained from watershed management.

2) Interviews held during the trip to Kenya:

A full agenda of business meetings was prepared by the Africa team. During the visits of the fellow to Kenya (from October 13th to 19th 2011 and from December 6th to 9th2011)the meetings helped to better understand the panorama of Kenya in terms of water issues. In meetings several questions were presented to the different institutional leaders, and the water fund approach used in Latin America was also introduced to participants, emphasizing in how important is to modify the model if necessary, and use a lessons learned approach from these experiences to be adapted to the Kenya particular context.A list of meetings held during the trip to Kenya is presented in Annex 1.

4 As a complement to these meetings, a field trip was prepared by the team seeking to visit water fund area influence and meet different stakeholders and local communities living in the upper Tana watershed. A photo record of the field trip is presented in Annex 2 of this document.

5 Part 2: Water fund feasibility for the Tana River, Kenya

Background:

Kenya is classified as a water scarce country with an annual renewable freshwater per capita of 647 cubic meters against the United Nation’s recommendation as minimum of 1,000 cubic meters. At the same time, the city of Nairobi accounts for about 60 % of GDP with inhabitants from all corners of Kenya and an increasing business population from all over the world (Ferraro, 2008) and a population of over 3 million.

Despite a fairly diversified economy and democratic governance, basic social services such as health care, water supply and sanitation remain sparse, particularly in rural areas and in urban belts. Only 61% of the population has access to clean water sources and merely 43% have access to basic sanitation facilities (USAID, 2010)

The Tana River, the most important and longest river in the country, runs approximately 1000 km and gives the name to the Tana River District. The river is borne in the Aberdare Mountains to the west of Nyeri. Initially it runs east before turning south below the massif of Mount Kenya. The river then runs into a series of 5 dams, includingMasinga Reservoir and Kiambere Reservoirs. Below the dams the river turns north and flows along the north-south boundary between the Meru and North Kitui and Bisanadi, Kora and Rabole National Reserves. In the reserves the river turns east, and then south east. It passes through the towns of Garissa, Hola and Garsen before entering the Indian Ocean at Ungwana Bay.

Within Kenya, the upper Tana, which covers asignificant proportion of Central and EasternProvince, represents an economically importantregion for agricultural production and experienceshigh demand for ecosystem services.The upper Tana region includes the Aberdare Range and Mount Kenya—two of Kenya’s fivemajor mountain ranges, and the headwatersfor many of Kenya’s largest rivers. These riversare an indispensable source of water for crops,livestock, wildlife, and human use, not onlywithin the mountain vicinity, but also fartherdownstream across a large expanse of arid andsemi-arid lands. In fact, the Tana River is theonly major river running year-round throughEastern Province(Kenya Atlas, 2010).

Key water uses in the upper Tana include water used for agricultural production, electricity generation, household drinking supply, and maintenance of wildlife habitat. In many ways, the importance of thearea’s water resources takes on a national significance which transcends the value of the resources to just the Tana region itself. A large share of the nation’s agricultural production occurs here, including crops for export. Hydroelectricity generated by the region’s rivers is the principal electricity source for the country. And drinking water supplies from this basin are essential for Nairobi’s population.

The upper Tana area is home to 3.1 million people (about 11.4 percent of Kenya’s total population), whose livelihoods are closely intertwined with multiple ecosystem services. Most

6 of the area is covered by smallholder agriculture. It includes important areas of cash or export crops such as tea, coffee, vegetables, and rice. The government has set aside a significant portion of the land for biodiversity and watershed protection, including Mount Kenya National Reserve, Aberdare National Park, Aberdare Forest Reserve, Meru National Park, and Mwea Reserve. This area also contains a broad cross-section of very poor and less poor communities. Within the upper Tana are communities with some of Kenya’s lowest poverty rates; however, the area also includes several very poor communities, most of them in the drier plains below the foothills downstream of the Aberdare Range and Mount Kenya (Kenya Atlas, 2010).

Although clear and up to date information is not available, there has been a continuing decline in land cover brought about by desert creep, land and forest degradation, changes in land use and rapid urbanization. These changes in the environment have wrought tremendous pressure on resource dependent communities. Threats such as pollution from agricultural runoff, sewage and industrial discharge into existing water bodies are increasing (Mwangi 2006).

Kenyan Water Sector:

The Government of Kenya started a reform process for the entire water sectorculminating in the Water Act submitted in 2002.According to the act, the Ministry of Water and Irrigation is at the top,followed by the regional authorities and the catchment area advisory authorities. The communitiesform the base of the pyramid. But there is also a differentiation between service delivery and water resources management tasks. The bill defines that water services are delivered throughseven Water Services Boards. Six Catchment Areas Advisory Committees (CAACs) carry out waterresources management tasks. At the national level, the Water Services RegulatoryBoard and the Water Resources Management Authority have regulatory functions – for example, withregard to water services, tariffs, licensing, and similar issues.Services, however, are supplied by non-governmental water services providers (see Figure 1 below). A services providermust go to a Water Services Board and sign a water services agreement. Licenses are given to theWater Services Board by the Water Services Regulatory Board (GIZ, 2007).

Except for waterbodieswholly inside a private landowner’s domain, the water act 2002 vests all water rights in the state. In principle, all water resources in Kenya are state owned and allocation is under the control of Ministry of Water and Irrigation and vested in the Water Resources Management Authority (WRMA) which allocates user rights to individuals. Property rights to groundwater coincide with land rights and any person intending to use underground water is supposed to obtain a permit from WRMA. Related to riparian zones, some minimum width from the stream is supposed to be under natural vegetation to protect the stream but, in practice farmers of adjacent lands to streams clear up to the water´s edge contributing to reduce channel capacity, flooding, bank erosion and siltation (GWC documents, Report 6, 2007)

The water act also creates the Water Services Trust Fund (WSTF). Its mandate is to assist in financing the provision of water services to areas of Kenya withinadequate water services. This fund is the financial muscle to sponsor water related projects, mainly water supply and sanitation solutions selected from proposals prepared by stakeholders from urban and rural

7 areas. The fund prioritizes initiatives to be funded with a set of criteria, in which poverty alleviation is one the major factors.

Figure 1: Water sector structure in Kenya.

Source: GIZ, 2007

A principle of the Kenyan water reform is to separate water resources management from water services delivery. The Water Act 2002 created national and regional institutions to implement management and water services delivery. Government institutions in the water sector operate hierarchically; national institutions provide policy direction and technical support, while those at regional and community level are responsible for implementation.

Figure 2 summarizes all institutions involved in the water sector according to the water act 2002. Note that given the 2011 Kenyan Constitutional changes, these institutions and responsibility likely will change somewhat in 2012.

Figure 2. Institutions related to the water management and services delivery. Institution Responsibilities Comments Ministry of Water Formulation policy and legislation, sectorial Ministry responsible for

8 and Irrigation coordination, monitoring and evaluation water resources; empowers WRMA Water Resources Planning, management, conservation of water Established in 2003 Management resources; coordination of the Integrated water Authority (WRMA) resources management plan allocation, assessment and monitoring resources; Issuance and policing of water use permits; regulation of the construction and abstraction structures Water Service Water supply and sewerage through provision of National board serving seven Regulatory Board water services regional boards, including (WSRB) the Tana Water services board Catchment Area Advising WRMA on water resources issues at Tana CAAC operational Advisory catchment level Committees (CAAC) Water Resources Identify and register water users; participate in WRUAs are in the formative users Associations water allocation and catchment management; stages in the upper Tana, (WRUAs) assist in monitoring, conflict resolution and beginning in sub-catchments cooperative management of water resources where the Mount Kenya East project is operating. Water Appeals Arbitration of disputes Board Tana River Services Provision of water services in Tana Basin Operational, based in Embu Board Water Services Maintain, rehabilitate and develop infrastructure providers and facilities of the Water Services Board National Irrigation Development, control and improvement of large Active in the Tana. E.gMwea Board irrigation schemes rice irrigation scheme, Kiringaya district Tana Athi Rivers Development of activities such as riverine Development protection, re afforestation Authority (TARDA) Kenya Electricity Hydropower generation; construction of water KenGen manages the seven Generation conservation structures dams Company (KenGen) National Monitoring of pollution and environmental Active in the whole Tana Environmental Mgt degradation Basin Authority Nairobi Water and Water supply to Nairobi and some small Water taken from Sasumua, Sewerage municipalities Ndakaini and Ruiri reservoirs, Company(NWSC) as well as ground water Source: Green Water Credits documents. Report 6, 2007

Major Stakeholder Analysis

9 i. Water Resources Management Agency –WRMA-

WRMA is responsible for the formulation of catchments management strategies for the use, development, conservation, protection and control of water resources within each catchment area. The National Water Resources Management Strategy (NWRMS) has been prepared to outline the objectives and strategies that address the major issues and challenges facing the country. The Strategy recognizes that integrated water resources management must be elevated and recognized as a national priority, which underpins Kenya’s social and economic development, and requires substantial investment. WRMA mandates include data collection for water use; introduce economic value of water concept and restoration and recuperation of watersheds. WRMA operates using public funding (mainly coming from a portion of water charges), international cooperation and central budget allocation. It is responsible also for regulation issues, especially those related to water pricing and water permit regulation.

Possible role in water fund: Executive board member. Can provide decision-making support according to national water policy and technical guidelines.They promote WRUAs and prefer to use them to channel resources instead of direct payments. Eventual payer via funds received from water users.

ii. Water Services Trust Fund –WSTF-

The Fund mobilizes resources from both government and development partners. From development organizations, the fund has received financial support from SIDA, DANIDA, African Development Bank, GIZ, World Bank, European Union, UN Habitat, and UNICEF. The Fund has been created as a basket fund ready to support initiatives according to the water act 2002 for community projects (mostly rural projects), but also for urban and peri-urban projects, and for water resource users associations. The Fund has initially been created to spend all resources in water related projects may not be taking into account sustainability and long term vision of the finance.

Fund structure was designed to accomplish with all financial regulatory requirements, including external audits and permanent follow up from different donors. An executive board provides guidelines and approval to strategic plans. Within the board, several committees ensure transparency and adequate investments: the Audit Committee, Technical Committee and Resources and Mobilization Committee. The Fund has no rules related tofinancial sustainability.

WSTF has an ambitious financial goal for a 5 years (2008-2013) strategic plan implementation: US 115 million. The fund counted a total income of US 6.7 million in 2007/2008. The main sources of funds during this period were:  Government of Kenya (Grants): US 0.7 million

 Donors:US 5,9 million (Sida and Danida 2.9 US million each; GTZUS 0.12 million)

 Other incomes (yields): US 0.1 million

10 In the period 2008/2009 the WSTF diversified its sources of income but reduced the total amount, mainly due to the reduction of contributions of big donors (Sida and Danida). By this period the fund reached US 5.2 million:  Government of Kenya: US 1.1 million

 Donors: US 3,9 million (Sida US 1.7 million; Danida US 0.7 million; ADB US 0.6 million; World Bank US 0.5 million, UN Habitat US 0.1 million; Unicef US 0.2 million, GTZ and WRMA US 0.1 million)

 Other incomes: US 0.2million.

Unfortunately no further information was provided by WSTF staff during the meetings.

A negotiation between partners could allow donors put aside some money as a strategy to start a capitalization process. In fact, the WSTF could eventually suggest that donors put a small percent of donations into a Water Fund for conservation purposes as a match of infrastructure and gray infrastructure finance. Contributions for water funds could be either for conservation investments, or for capitalization of water fund.

Possible role in water fund:Water fund finance administrator. Given the experience and relevance as large trust fund, this institution could set up a subaccount (i.e. window) for watershed management conservation projects with two branches: Endowment fund creation (capitalization) and watershed conservation projects finance.

iii. Water Resources Users Associations –WRUAs-

WRMA is responsible of promotingWRUAs: associations of water users, riparian land owners, or other stakeholders who have formally and voluntarily associated for the purposes of cooperatively sharing, managing and conserving a common water resource (definition in WRM Rules 2007). WRUAs main objectives include water catchment conservation, proper management of resources, increase the availability of water resources, increase the usage of the water for economic and social improvements, monitoring water availability and use, resolving conflicts on water use, and development of sustainable and responsive institutions. Membership for WRUAs includes riparian abstractor,non-consumptive (frominformal institutions), and observer members (mainly from formal institutions)

Possible role in water fund:Implementers. It is their responsibility to design and carry out water management at local scale. They could be the link between the water fund and the field since they represent local communities living in the watersheds.

iv. Tana and Athi Rivers Development Authority –TARDA-

11 TARDA is responsible for integrated regional resources planning, for promotion of development within the Tana and Athi Rivers basins, and for sustainable socio-economic wellbeing of the people. TARDAs functions include, among others, to advise the government and Ministries on all matters affecting the development of these watersheds, including:  the allocation of water resources(which conflicts with WRMA)

 to initiate studiesand surveys

 to assess alternative demands within theArea for electric power generation, irrigation, wildlife, land and other resources and to recommend economic priorities; and

 to implement monitoring programs and collect data related to the use of water and other resources.

TARDA showed interest in being part of a water fund for the Tana River. However they emphasized the need of having a business case for the Tana River as a driver to engage private sector. It is not clear the financial capacity of TARDA to provide funds for the water fund, but it could be interesting to engage TARDA in the water fund as responsible for monitoring at Tana River scale.

Possible role in water fund:Board member and Technical partner, responsible for monitoring and data collection for Tana River (along with WRMA).

v. Nairobi Water and Sewerage Company- NWSC-

The 99.9% of the Nairobi´s water is surface water. The city has four sources of water with a design capacity of 525,000m3/day, but currently production is about 500,000m3 /day against current demand of 690,000m3/day. Nairobi Water Company NCWCS is 100% owned subsidiary of City Council of Nairobi, regulated by the private and company law according to the act 486, 2003. The Company’s area of operation covers around 3.6 million people, and 60% of the population lives in the informal settlements occupying 5% of the area which is mostly government land along the rivers/railway/power/oil/water/sewer pipeline reserves. According to meeting held with Nairobi Water, they are interested in increasing declining baseflows (low flows) and improving the quality of water during the rainy season (mainly sedimentation issues), in the watershed in which they have supply. These include the Chania, Ndakaini, and Sasumua sub-catchments among others.

There is a measurable costs to Nairobi Water of the declining quality of raw water, namely that have to use polymers rather than alum for treatment during the rainy season ($20 million Ksh per month for treatment right now).The company has set up prices according to its operation cost structure,mainly treatment and transport costs (around Ksh 26/m3; $0.25 US/m3 on average). The water price does not include any calculated reposition cost or environmental costs related to watershed protection. Nairobi Water agrees that water is “very cheap”.

12 Additionally, NWSC pays an agreed fee to WRMA, put some money in an infrastructure fund and invests around $250 Ksh for “asset renewal” each year without any technical criteria or study case related to specific needs or environmental priorities.

The company pays WRMA for the water it uses according to the Water Act, but does not have any records about the final destination or investments procured by WRMA in the watershed. However the company is currently investing some additional money in watershed conservation by specific projects, not necessarily within a management plan or a specific conservation target, but within their social and environmental responsibility area. These investments are mainly oriented to restore forest around dams located in the Aberdares Mountains, upper Tana watershed.

Possible role in water fund:Payer and technical partner. A business case related to reduction costs can make NCWCS be interested in re orient the current reforestation activities in to a long term water fund and switch social and environmental contributions in to larger financial business green investments related to treatment costs savings.

Figure 2. Nairobi Water and Sewer Company supply system

13 vi. Kenya Electricity Generation Company –KenGen-

KenGen is the leading electric power generation company in Kenya, producing about 80 percent of electricity consumed in the country. The company uses various sources to generate electricity ranging from hydro, geothermal, thermal and wind. Hydro is the leading source, with an installed capacity of 766.88MW, which is 64.9 per cent of the company’s installed capacity. KenGen has a workforce of 1,670 staff located at different power plants in the country. KenGen uses water from Tana River basin. This is one of the most important sources for hydropower generation in Kenya.

To date, no scoping meetings on water fund development have been possible with KenGen due to schedule conflicts. According to TNC Africa staff, previous contacts with high level KenGen staff have been successful in terms of potential participation and commitment toward water funds scheme. However, it will likely be critical to show them a business case related to avoided costs resulting from water funds impacts.

Possible role in water fund: Payer. A business case related to reduction costs can make KenGen be interested in the water fund. There is no information related to current environmental activities carried out by KenGen.

vii. Green Belt Movement –GBM-

GBM is a non-profit grassroots non-governmental organization based in Kenya. This is the most prominent women’s civil society organizations based in Kenya advocating for human rights and supporting good governance and peaceful democratic change through the protection of the environment. Its mission is to empower communities worldwide to protect the environment and to promote good governance and cultures of peace.

The mission of GBM is to mobilize community consciousness- using tree planting as an entry point- for self-determination, equity, improved livelihoods and security, and environmental conservation. Their activities portfolio counts a large variety of programs including GIS analysis, Environmental Education, Capacity building and others. Their local experience and Tana River Basin experience is recognized (TNC is currently supporting some of their program work, including watershed assessment).

Possible role in water fund:Strategic partner, implementer. Experience and high social impacts derived from their activities; GBM a very good Water Fund partner for implementing activities.

viii. The Sasumua treatment plant project

A good reference about associated watershed conservation activities (under a PES scheme) and costs related to water treatment is presented in the Sasumua treatment plan project. According to the documentation received (provided by Colin Apse) the project is still in design phase. It is

14 supported by USAID, The Wildlife Conservation Society, The Earth, ForestTrends and The Land Tenure Center and is being designed to provide water quality services by paying upstream farmers and pastoralists to change their cultivation practices.Unfortunately no meetings or contacts to know more about this project were possible during the trip to Kenya. However, exploring the current status of this project could be a helpful for the water fund (it is suggested to contact one of the projects sponsors or World Bank to have more information). The project could be a reference and pilot case about how the water fund could prioritize interventions and how to engage public facilities such as Nairobi Water and Sewerage Company within a business case of costs structure for Nairobi Water.

Possible role in the water fund: Strategic line of water fund work plan.

ix. ETC East Africa

ETC is an international cooperation agency, with headquarters in the Netherlands,working to promote innovative ways and local solutions for sustainable development. The agency works in several topics such as food security, water and energy supply, health care and education. ETC has a permanent technical staff in several disciplines ready provide consultancy services. ETC’s Nairobi officewas responsible for some of the studies presented by Green Water Credits Program (see next item) to promote sustainable farming and pastoralists activities.

ETC is also developing a study related to the business case of saving treatment costs derived from green investments in upper Tana River with Nairobi Water and Sewerage Company using the Cost Benefit Approach. This study, presented in a conclusive way, could be very important convince not only NWSC but also KenGen to be part of the water fund.

Possible role in the water fund: technical partner, business case developer for private sector engagement

x. The Green Water Credits Program

In2009, the upper Tana catchment was selected to develop a pilot design of Green Water Credits facility. The vision of the Green Water Credits (GWC) is to develop an investment mechanism for small holder’s farmers, livestock keepers and pastoralists. The initiative is presented as a financial mechanism able to allow credits to small farmers looking to promote sustainable activities in the upper Tana River, based in the reduction of impacts caused by intensive agricultural activities by gaining benefits from green water, or water retained in soils. GWC is design phase. It has been elaborated several reports covering Hydrological Modeling, Willingness to Pay Study, Institutional Analysis, Financial Mechanisms Assessment, Carbon Capture Estimation, and Cost benefits Analysis.

However, documents revision and discussions with other stakeholders suggested that the projectis missing long term vision in terms of financial and operational sustainability: there is not a clear vision about the project maintenance costs, permanence over the long run, and avoiding perverse incentives to deforest and switch to farming to have access to GWC program.

15 Another weak point found out about GWC is the fact of being oriented primarily to one type of land use activity (agriculture). This excludes forest management as well as the very important rangeland management, both of which are critical to the health of the watershed. The GWC program counts a very robust technical analysis which could be interesting to use in the water fund model as a guide for possible geographic targets and sustainable land use activities. However, it is necessary to assess the implications of the GWC studies, and make required revisions, for the water fund in terms of objectives, financial capacity and common interests related to watershed conservation.

Possible role in the water fund:Even if some key points from GWC are still missing, the general idea of this program could be interesting for the water fund approach. In particular, committed funds to implement GWC and feasibility studies carried out in the design phase, suggest some common points related to watershed management that could be internalized in the water fund work plan: promote sustainable practices in agriculture activities and pastoralists in priority areas and provide solutions to reduce water use, prevent deforestation and reduce impacts in sedimentation are concepts aligned to the water fund general goal. However, these are not the only activities that should be funded by a water fund since there are also other set of problems in the watershed (deforestation for wood and new crops, unsustainable cattle activities, lack of capacity building) that need to be addressed by the water fund. According to this, GWC program, after revision and adaptation to the water fund philosophy, could perfectly fit into to one of the interest areas of the water fund and then included as a part of the water fund workplan.

xi. Pro-poor Rewards For Environmental Services in Africa (PRESA)

This organization works in several sites in Africa (Kenya, Tranzania, Guinea and Uganda) to facilitate fair and effective agreement between stewards and beneficiaries of environmental services. Voluntary, conditional and negotiatedagreements can reward poor farmers for adequate land use practices, while ensuring a clean and sustainable supply of ecosystem services for local communities. In Kenya, PRESA is promoting mainly three types of projects: E- flows, Ecosystem services projects and capacity building. Atthe same time, they work closely to provide technical support (mapping) for GWC program.

With a very strong technical capacity, PRESA has two main suggestions for a water fund approach in Nairobi: Private sector involvement and integrated vision of watershed management rather than sub catchment approach.

Possible role in water fund:technical partner, business case developer for private sector engagement

16 xii. International cooperation (GIZ and AFD)

Deutsche GesellschaftfürInternationaleZusammenarbeit –GIZ- and AgenceFrancaised ´Developpement –AFD- were interested in the water fund model presented during the scope trip. They both work closely with Kenyan Government in several areas and different programs. In the case of GIZ, they are strongly supporting institutional capacity of Kenyan water management. GIZ also is promoting local planning programs related to WRUA´s pilot cases. On other hand, AFD is working on water and sanitation programs for urban areas and in the midterm also environmental and natural resources conservation activities. AFD takes a regional approach for funding projects, which could be very important. GIZ does not provide direct funding but could collaborate on proposals to funders and provide staff capacity.

Possible role in water fund: GIZ: strategic partner to conduct/fund business case or preliminary studies about land use change analysis at local scale (working with WRUAs). Collaborator on fundraising proposals (for example, a Water Fund pre-proposal has already gone in from GIZ and TNC for to the German ICI funds)

AFD: Further collaboration if the relationship between water and sanitation sector and the environment and natural resources management sector can be demonstrated with the business case.

Part 3: Recommendations and Next Steps

Evidence from lessons learned in the Latin America region about water funds, literature reviewedfor PES schemes,and meetings held with key stakeholders in Nairobi during the scoping trip suggest the feasibility for the implementation of a water fund in the upper Tana River.

Kenyan legal framework related to the water sector, the importance of Tana basin in the country, initial acceptance and receptivity from stakeholders, and an increasing interest in protecting water resources in the country open the way for an innovative scheme in which TNC could play a key role.

17 Using the Latin America experience, modified based on the results of the scoping, the figure below presents a possible water fund structure.

According to this structure, the main body for decision making and permanent guidance to the water fund would be the Executive Board (EB), composed ideally by public and private entities. Main water fund funders have a sit in EB, and EB itself set up conditions for new partner’s engagement (amount of money needed for new partners acceptance, right to vote, etc). Even if sometimes public entities have not financial muscle to support the water fund, it is crucial to have at least environmental authorities or water regulators agencies siting in EB. In this case, WRMA, as national authority is essential in watershed management guidelines and national priorities, as well as TARDA in terms of real needs of Tana River and technical support (according to TARDA´s mandate, monitoring is one of its tasks, which is an important contribution to the water fund that can be made in conjunction with WRMA). A public-private balanced in EB ensure not only transparency and accuracy, but also common vision and interest sharing in watershed management.

EB appoints a Technical Secretary (TS), a project manager responsible for work plan elaboration and fundraising activities. One of the immediate tasks to carry out once the water fund is created, is the work plan elaboration. This document is the main guideline that water fund will follow. It reflects common interests about watershed management and consensual activities proposed for watershed conservation. The main components of water fund work plan are:

 Business case and outputs related to benefits (savings in current costs and avoiding future costs) for water users  Water fund goals in terms of ecosystem (s) services provided and expected results  Priority areas in which water fund will focus  Financial goals  Other conservation benefits (biodiversity impacts, social benefits and local communities participation)

18 Water Fund Executive Board: Approval of work plan as key function -WRMA, -TARDA - Support donors- -Utility- NWSC, KENGEN, Corporates: Coca Cola, SAB Miller, Diageo, Bulk wáter consumers, other privates (Sab Miller, bottled water)

Technical Secretary: project Technical Advisory manager, work plan implementation Committee: TARDA, ETC implementation

Payers: Work plan funders -Nairobi Water and Sewer -KenGen -OTHERS Private (Sab Miller, WSTF Coca Cola, bottled water) WSTF -International Cooperation (e.g., AFD) Water Fund Account - Government of Kenya, Manager (window): others Project Endowment $ $ Work plan: Field activities Implementers -GWC line -GBM -PES Sasumua project line -WRUAs -Reforestation -Kenya Forest -Conservation Service, Kenya -Parkrangers Wildlife Service -OTHERS (in kind), others

Monitoring -TARDA -WRMA- Tana office -Academics (KENWEB)

In terms of a water fund financial mechanism, the water fund could use existing financial structure to manage the resources. Specifically, WSTF as a fund could host in a sub-account the water fund resources. This is a good opportunity to have a strong partner administrating the

19 fund, with capacity of bring new donors, transparency and accountability to the public. Some negotiations and basic changes in WSTF bylaws could allow managing this subaccount only according to EB guidelines, meaning focused on conservation purposes with a social benefit (or as determined by the EB).WSTF could propose to donors a new strategic line of investment according to the water fund needs and goals: it could be named a “window” within WSTF called a water fund in which two sub-accounts could be managed according to the water fund needs: The first one for conservation projects proposed and funded according to EB approval (basically a basket sub account) and the second one for the endowment subaccount, in which donors or any other organization could put the money and start the capitalization process of the water fund. For example, a perfect complement of water and sanitation investments funded by WSTF currently, could have a % of investment in the water fund window for the endowment, or a specific conservation project in the watershed (e.g. if $10 USD are invested in water and sanitation solutions, 2 USD are available for the water fund window, either endowment or conservation project). In any case, legal feasibility for this operations need to be clarify with WSTF and rules should be clear from the beginning: conflict resolution mechanisms, risk assessment and liquidation of water fund need to be specified, agreed and stipulated in contracts.

The fund could explore different possibilities of financial resources:

Payers:  Nairobi Water and Sewerage Company  KenGen  Local Corporations: Coca Cola, National brewery, bottled water, food companies  Government of Kenya (via WRMA or other agency)

Donors:  DANIDA  SIDA  French Cooperation (AFD)  GIZ  African Development Bank  World Bank

The implementation of field activities could be done by local partners. In particular, The Green Belt Movement (GBM) could play a portion of this role (TNC already has a partnership with GBM). Their experience and grassroots base could fit in to the water fund outreach. Local capacity and knowledge about Tana River watershed position GBM as a strategic partner in implementation.

Additionally, in function of experience and advance of some of the current projects proposed in Tana River such as Green Water Credits or Sasumua Treatment plan project, the water fund could enhance this activities only of they respond to the goal (related to one or two ecosystem services) of the water fund. For example, if the Sasumua project is proposing reforestation

20 activities in a sensitive spot of the water fund portfolio, then it could be aligned and funded (and paid by the project developers) as one of the water fund activities. This is a process that needs to be negotiated with different projects implementers, but certainly means avoid efforts duplication and work jointly with different organizations sharing goals.

The cycle is completed with a monitoring plan that needs to be designed and implemented if the water fund wants to be able measure its effectiveness and present to investors and the public the progress in results obtained from activities carried out. Not only biophysical aspects need to be monitored, also biodiversity and socioeconomic aspects derived from water fund activities need to be measured. It is crucial to start the monitoring design in water fund early stage. For the Tana river, good partners to engage early for monitoring include TARDA and WRMA: both of their mandates and vision on Tana River information collection could be positive for the water fund if their respective roles can be determined.

Finally, even if the pieces are on the table, it requires time, financial resources and leadership to accomplish putting them in the right order and complete the process to create a water fund. Some recommendations are presented in this part of the report seeking to clarify shortand midterm next steps to advance in the process:

1) The upper Tana River area is large and includes several stakeholders. It is suggested to define a priority area (for example a river segment or sub-catchment) upon which the water fund will initially be focused. The experience in stakeholder engagement shows that is easier to start working with key strategic partners (just a couple) rather than all potential partners. Progressive engagement seems to be more strategic in terms of decision making, agreements, meeting agendas, and feasibility studies rather than ambitious areas with several actors. The selection of starting partners, and thus the initial project area, could be done building upon:  Ongoing activities related to Payment for Ecosystem Services (PES) such as Green Water Credits or Sasumua Water Treatment Plant private payments, which could eventually be allied in the water fund. Current projects could be complemented/improved by the water fund long term vision.  Overlapping interests, which commonly is the case for hydropower facilities and drinking water that are looking to reduce the sediments loads to reduce treatment costs for adequate turbines operation or purification water respectively.  Data availability to carry out analysis, such as hydrological and climate data, previous studies and researches, and technical institution enrollment.

2) TNC is a new actor in the environment, particularly water, sector in Kenya. It is important to gain credibility and confidence, so our role is crucial in the water fund creation process. Two immediate activities are proposed to bring to table concrete results and generate an added value:  Conduct a business case study (by hiring a consultant) with one of the key stakeholders, preferably Nairobi Water and Sewerage Company (but also could be KenGen) The case study would allowwater fund goals to be set set up and

21 economic and financial benefits from conservation activities to be clearly presented. (Prior to this it may be necessary to revise the study currently underway by ETC-- revising the goals, work area, methodology, conclusions).  Hydrological modeling and future scenarios in a sensitive part of the watershed linked to a cost benefit analysis could be a relatively simple to move forward and attract additional stakeholders to the water fund.  TNC can play a facilitator role in the process. This requires TNC to implement an agenda of workshops, meetings and presentation about water funds to several institutions, including public and private sector. This requires high level profile in public relationships skills and a full dedication time of at least 4 months—via a contractor or new TNC staff member. Consistency is important to maintain parties aligned with the water fund initiative.

3) According to PES initiatives reviewed via literature and scoping meeting results, the long term vision and self-sustainability of the existing Upper Tana PES projects is missing. One of the strengths of the water fund model is the long term vision and commitment it generates, which means a high demandfor startup funds to capitalize the water fund. It requires progressively less funds over the mid long term which allows the fund to operate and maintain itself to accomplish conservation goals without permanent contributions. This potential model needs to be presented in the Kenyan context in order to convince stakeholders to be part of the water fund. A basic projections exercise could be elaborated according to conservation goals obtained in the business case, and a clear message in terms of realistic financial needs could help to make the water fund attractive for new partners. The structure and expertise of WSTF could facilitate this. Even if this fund is fed by revolving funds provided mainly by international cooperation (bilateral) to solve immediate problems related to water provision in the country, an additional window for a long term conservation endowmentexclusive for the water fund and governed only by the water fund executive board is a good way to ensure transparency and take advantage from experience and fundraising capacity of WSTF.

4) The Kenyan financial system was not explored during the scoping. It is necessary to revise financial legislation in order to make sure the system offers the adequate standards for transparency and funding protection for the resources management.

5) Monitoring is a crucial activity that needs to be taken into account from the early stages of the water fund creation. Accountability systems showing impacts in several topics are suggested to be included in budgets and proposals from the start point. In Latin America, particularly the NASCA conservation program and Brazil water producers programs, TNC and partners are developing monitoring protocols to measure water funds impacts in different topics such as water quality (sediments, physical characteristics) hydrology (water flows), biodiversity (fresh water and terrestrial) and socioeconomic impacts. This is a way to demonstrate accuracy and compliance, in order to guarantee credibility, especially when public sector is involved.

22 6) Finally, Latin America has been working from more than 10 years in water funds development and a lot of information and visible results have been produced during this time. TNC Africa should seek to avoid duplicating efforts and make sure to obtain lessons learned and best practices from this experience. It is very important to support information exchange channels and it is recommended to do this in two ways:  To promote an organized flow of information with key members related to the water funds strategies all over the Latin America region that is available to the Africa Region, creating a database of crucial documents that can be consulted permanently.  To carry out one or more visits from key stakeholders from Kenya (e.g., KenGen, Nairobi Water and Sewerage Company, TARDA) to one of the water funds in Latin America in order to meet peer actors, see on-the-ground activities, and learn benefits from the water fund from external agencies (and not only from TNC).

ANNEX 1

List of documents revised

 A Summary of Key Points from the Roundtable Discussion on the Payments for Ecosystem Services in South Africa. USAID, 2008

 Daniel G Wanyumu. WRMA. Process of forming WRUAS in Kenya, 2009.

 Green water credits documents

 ICRAF Working Paper no. 35. Nairobi, Kenya: World Agroforestry Centre. 2010  Kenya Atlas. Upper Tana River. Chapter 8: The Upper Tana: Patterns of Ecosystem Services and Poverty, 2010.  Ochieng B, Otiende B and Rumley R. African Regional Workshop on Compensation for Ecosystem Services (CES). May 22 – 24, 2006, Nairobi, Kenya. 2007.  Paul J. Ferraro. Regional Review of Payments for Watershed Services: Sub-Saharan Africa. 2007  Paul J. Ferraro. Regional Review of Payments for Watershed Services: Sub-Saharan Africa. 2009  Samuel Mwangi. The East &Southern Africa Katoomba Group Payment for Ecosystem Services (PES) in East and Southern Africa: Assessing prospects & pathways forward. A brief summary of the findings. 2007  Susanne Wymann von Dach. Water sector reform in Kenya: First experiences are positive. Interview with Engineer Mahboub Maalim, Permanent Secretary of the Kenyan Ministry of Water and Irrigation. by, InfoResources, Berne, Autumn 2007

23  Theo Dillaha, Paul Ferraro, Marjorie Huang, Douglas Southgate, Shyam Upadhyaya, and Sven Wunder. USAID. Payment for watershed services. Regional Synthesis.

List of Interviews held in Kenya, scooping trip fellowship October 13th to 19th 2011 and from December 6th to 9th 2011

 Joseph Kinyua, Technical Manager, Water Resources Management Authority WRMA([email protected])

 Peter Bwogero, Managing Director Tana and Athi Regional Development Authority TARDA( [email protected] )

 Aregash Asfaw and Anne Marie Ran, GIZ( [email protected] )

 Philip Gichuki, Managing Director and Engineer, Nairobi Water and Sewer Company, ( [email protected] )

 Edward Wageni, Francesca de Gasparis, Benjamin Kamari, Green Belt Movement GBM

 Nyokabi Gitahi French Development Agency FDA

 Sara Namarembe, Godfrey Kimega, PRESA, World Agroforestry Centre

 Fredrick Muchena, Davies Onduru, East Africa Foundation ETC

 Rosaita Ome, Water Services Trust Fund –WSTF-

ANNEX 2

Photo record. Field trip in upper Tana River

24 1. Small Scale Tea Farm in Lari-Matimbei forest. Site supported by Green Belt Movement.

2. 1)

25 2. Women members of Nursery´s group in Kianuga. Project Funded by Green Belt Movement.

3. Children in Kianuga nursery group.

26 4. Landscape in Aberdare Mountains.

27 5. Reforestation activities in Geta forest. Implemented by green Belt Movement.

28 29