1

Joint Annual Operational Review of Cooperation

between

The Republic of Kenya

And

The European Community

2009 Draft (15th February 2010)

2

TABLE OF CONTENTS

Abbreviations 3

1.1 Update on the political situation and political governance 6

1.2 Update on the economic situation and economic governance 8

1.3 Update on the poverty and social situation 10

1.3.1 Progress towards reaching MDGs 10

1.4 Update on the environmental situation and climate change 12

1.5 Update on other crosscutting issues 13

1.6 Joint Africa-EU Strategy: ownership and involvement of the partner country 13

2 Overview of past and on-going cooperation 13

2.1 Reporting on financial performance of EDF resources 13

2.2 Reporting on General Budget Support 13

2.3 Project and programmes in the focal and non-focal areas 14

2.3.1 The contribution of projects and programmes in the focal sector 14

2.3.2 The contribution of projects and programmes in the non-focal area 18

2.3.3 Support to Non-State Actors 20

2.4 Other actions 20

2.5 Policy coherence for development 23

2.6 The in-country dialogue 23

2.7 Aid effectiveness and joint programming 24

Annex_I.1 Country at a Glance 25

3

Abbreviations AAP Annual Action Plan ACP African Caribbean and Pacific AFD L'Agence Française de Développement ALRMP Arid Lands Resource Management Project ART Anti Retroviral Therapy ASALs Arid and Semi Arid Lands ASDS Agriculture Sector Development Strategy ASCU Agricultural Sector Coordination Unit ASMEP Assistance to Small and Micro Enterprises Programme AU/IBAR African Union /Inter-African Bureau for Animal Resources BDS Business Development Services CBF Capacity Building Facility CCA Climate Change Adaptation CDEMP Community Development for Environmental Management Programme CDE Centre for Development of Enterprises CDF Community Development Fund CDP Community Development Programme CDTF Community Development Trust Fund CEF Community Environment Fund CEP Country Environmental Profile CET Common External Tariff CIREV Commission of Inquiry into Post Election Violence COMESA Common Market for Eastern and Southern Africa CRF Coffee Restoration Fund CSOs Civil Society Organisations CSP Country Strategy Paper DANIDA Danish International Development Agency DCF Drought Contingency Fund DFID Department for International Development DGSP Democratic Governance Support Programme DMI Drought Management Initiative EAC East African Community EC European Community ECHO European Commission Humanitarian Aid EDF European Development Fund EIB European Investment Bank EPA Economic Partnership Agreement ERS Economic Recovery Strategy EU European Union FAO Food and Agriculture Organisation FIAS Foreign Investment Advisory Services FPE Free Primary Education GAP Governance Action Plan GAVI Global Alliance of Vaccines and Immunisation GBS General Budget Support GDP Gross Domestic Product GER Gross Enrolment Ratio GJLOS Governance, Justice, Law and Order Sector GNI Gross National Income GoK Government of Kenya GTZ Gesellschaft für Technische Zusammenarbeit HAC Harmonization, Alignment and Coordination HDI Human Development Index HIV/AIDS Human Immuno-deficiency Virus /Acquired Immune Deficiency Syndrome HPAI Highly Pathogenic Avian Influenza

4

HQ Headquarters IDP Internal Displaced Persons IFC International Finance Company IGAD Inter Governmental Authority on Development IMF International Monetary Fund IREC Independent Review Commission on the Election Process JRES Joint Review of the Education Sector KACC Kenya Anti Corruption Commission KARI Kenya Agricultural Research Institute KASAL Kenya Arid and Semi-arid Lands KenHA Kenya Highway Authority KEPHIS Kenya Plant Health Inspectorate Service KEPLOTRADE Kenya European Union Post-Lome Trade Programme KeRRA Kenya Rural Roads Authority KES Kenya Shilling KESSP Kenya Education Sector Support Programme KfW Kreditanstalt fūr Wiederaufbau KIHBS Kenya Integrated Household Budget Survey KIPPRA Kenya Institute for Public Policy Research and Analysis KJAS Kenya Joint Assistance Strategy KNCHR Kenya National Commission on Human Rights KNDR Kenya Dialogue and Reconciliation KURA Kenya Urban Roads Authority LA Local Authority MDG Millennium Development Goal MESPT Micro-Enterprise Support Programme Trust MMR Maternal Mortality Rate MoALD Ministry of Agriculture and Livestock Development MoI Ministry of Industrialisation MoLG Ministry of Local Government MoNKAL Ministry of Northern Kenya and Arid Lands MoR Ministry of Roads MoT Ministry of Trade MS Member States (of the EU) MT Metric Ton MTEF Medium Term Expenditure Framework MTR Mid-Term Review NACC National Aids Control Council NAO National Authorising Officer NCRP Northern Corridor Rehabilitation Programme NDF Nordic Development Fund NEMA National Environment Management Authority NER Net Enrolment Ratio NGO Non-governmental organisation NIP National Indicative Programme NSAs Non State Actors ODA Official Development Assistance ODM Orange Democratic Movement PAN-SPSO Participation of African Nations in SPS Organisation PFM Public Financial Management PIP Project Implementation Plan PIU Project Implementation Unit PMT Project Management Team PMU Project Management Unit PNU Party of National Union PPOA Public Procurement Oversight Authority PRSP Poverty Reduction Strategy Paper

5

PS Permanent Secretary PSDS Private Sector Development Strategy RIP Regional Indicative Programme RMLF Road Maintenance Levy Fund RPR&LGSP Rural Poverty Reduction and Local Government Support Programme SERECU Somali Ecosystem Rinderpest Eradication Co-ordination Unit SIDA Swedish International Development Authority SoER State of Environmental Report SPS Sanitary and Phyto Sanitary STABEX Stabilization of Export Earnings TA Technical Assistant /Assistance TB Tuberculosis TCF Technical Cooperation Facility TJRC Truth Justice and Reconciliation Commission UN United Nations UNDP United Nations Development Programme UNEP United Nations Environmental Programme UNICEF United Nations Children Fund USAID United States Agency for International Development USD United States Dollar WB World Bank WHO World Health Organisation WTO World Trade Organisation

6

1. Country analysis 1.1 Update on the political situation and political governance There have been several fundamental changes in the political and governance situation of the Country between the design phase of 10th EDF CSP/ NIP1 in 2006 and the 2009 JAOR. The period leading up to the signature of the CSP witnessed significant political turmoil in the country. The most important events were the breakup of the National Rainbow Alliance Coalition (NARC) with a faction of cabinet ministers leaving the government to form an opposition movement (Orange Democratic Movement), a referendum on the first draft constitution that resulted in a rejection of the draft, and allegations of high level graft in public offices and activities that could have been perceived to limit press freedom. Despite these challenges, the country still managed to record favourable economic growth. These developments were all taken into account in the design of the 2008-2013 CSP and are further elaborated in the 2006/2007 JAORs. The year 2008, which was the first year covered by the new CSP, was marred by the Post Election Violence that followed the disputed Presidential Elections of December 2007. Following the Kenya National Dialogue and Reconciliation (KNDR) agreement brokered by Kofi Annan in February 2008, the two major parties (Party of National Unity – PNU, and Orange Democratic Movement – ODM) agreed to work together in a Grand Coalition government. The main elements of the KNDR process were and continue to be: • an immediate stop to violence (agenda item 1); • addressing the humanitarian crisis and promoting reconciliation (item 2); • resolving the political crisis/ power sharing (item 3) and, • long standing issues (item 4). Agenda item 4 includes the major problems facing Kenya:

constitutional and institutional reforms; land reform; poverty and inequality; youth unemployment; national cohesion; and transparency and accountability.

With regard to the KNDR, political activity in 2009 was anchored mainly on Agenda items 3 and 4, and some steps towards meeting the objectives of KNDR can be underlined: • Constitutional Review Process: The Constitutional Review Committee of Experts established by

Parliament has been in place since March 2009. In April – May 2009, the Committee invited the public to submit their views. On this basis the Committee analysed the submissions and identified three major issues of contention: the system of Government, levels of devolution of power and transitional provisions. The harmonized draft constitution of Kenya written by the Committee of Experts is expected to be released to the public in November.

• Truth Justice and Reconciliation Commission (TJRC): The names of the Commissioners were approved by Parliament in June 2009. Commissioners were appointed by the President in July 2009. Commissioners sworn in August 2009. The commission is not going to handle perpetrators of post-election violence but will deal within its mandate of correcting historical injustices and bringing about national reconciliation. However, Civil Society has been very critical towards the composition of the TJRC.

• Interim Independent Electoral Commission (IIEC): The Commission was appointed in May 2009, and it has successfully organized the registration of voters and the by-elections in Shinyalu and Bamachoge constituencies. In 2010, it will start the process of national voter registration and preparation and organisation of the referendum on the Draft Constitution.

• Land Reforms: For the first time since independence, the Grand Coalition Government has prepared a comprehensive land policy, approved by Cabinet on 25th June 2009. The policy addresses critical issues such as land administration, access to land, land use planning, restitution of historical

1 The CSP was signed on 9th December 2007

7

injustices, environmental degradation, conflicts, unplanned proliferation of informal urban settlements, outdated legal framework, institutional framework and information management. It also addresses constitutional issues, such as the eminent domain and the police power as well as tenure systems. However, the general policy orientations provided by Cabinet still needs to be translated into concrete legislative proposals, which risks being influenced by the vested interests of key land-owners.

• Other Reforms: The Interim Independent Boundaries Review Commission (IIBRC) was formally appointed and sworn in in LMay 2009. The Task Force on Police Reforms established in May 2008 and mandated to augment and accelerate police reforms, presented its interim report to Government inAugust 2009. Some of the recommendations of the task-force have already been implemented, but the key recommendations are still to be acted upon.. The Task Force on Judicial Reforms appointed in May 2009 to look into the ways of accelerating judicial reforms, presented its report in August. The report is to be handed over to Parliament for debate in November 2009. The Kazi Kwa Vijana Programme, aimed at alleviating Youth unemployment was launched by the Government in March 2009

The KNDR process has been subject to an independent monitoring, with quarterly reports prepared in January, May and September 2009; these reports have highlighted the following:. a) the violence has been stopped but the illegal armed groups remain, they have not been disarmed and may be taking on new forms; b) the situation of the Internally Displaced Persons (IDPs) has improved, but is not yet completely resolved. Many IDPs still live in improvised camps, fearing further violence on their return to homelands. They remain a potential source for political mobilization and potential source of future conflict; c) a coalition government has been formed but its performance and the reform implementation process remain problematic. In order to accommodate the two parties in the power-sharing arrangement, more ministries have been established. This has resulted in a considerable increase in the recurrent expenditure with challenging ministerial coordination. Lack of cohesion, of focus and of clear division of responsibilities within the government have been causing constrains to deliver reforms and it has led to the perception of the Coalition Government as “two-governments-in one”. Covering progress between May and July 2009, the conclusion of the latest monitoring of the KNDR process is rather pessimistic about the likely future developments “as the momentum for radical reforms has reduced". Even though, the time frame for reforms remaining before the next general elections is gradually narrowing down, addressing some of the structural causes that led to unprecedented violence in 2008 is on a slow start and not evident. Without undertaking fundamental reforms, another violent conflict is likely to occur. In order to prevent the recurrence of violent conflict, it is imperative that the country addresses the problem and causes of increasing social inequalities, insecurity and impunity, and fast track the constitutional review process. Future challenges The imperative in the governance sector is that as far as possible donor interventions are harmonised, and the Governance sector donor group is currently under pressure to maintain a common approach; the EU should support the KNDR process. The EC may have a funding window to strengthen its support for the implementation of the National Accord. Some of the proposals would require a substantial amount of resources. Given the EC’s comparative advantage, funding such activities would be appropriate and would give the EU a high level of visibility in the sector. The next challenge is to support the potentially positive political forces in Kenya, media, business/private sector, Civil Society Organizations (NSA) and Community Development processes. The EC has appropriately formulated a 10th EDF governance programme supporting the last three.

8

1.2 Update on the economic situation and economic governance Macro environment GDP experienced high growth rates, an average of 6.4% per year during the period of implementation of the Economic Recovery Strategy, 2003-2007. This growth was mainly driven by domestic private consumption influencing positively growth rates of the trade sector and by public development spending resulting in high growth of capital formation. Growth in 2008 fell steeply, reaching a mere 1.7% due mainly to the political unrest that followed December 2007 elections, to adverse conditions in agriculture and to high commodity and fuel prices of the first half of 2008. In 2009 growth is also slow in picking up with an expected GDP growth rate of 2.5 to 3%., This is mainly due to a disappointing agricultural performance resulting from continuing drought, as agriculture contributes to around 25% of GDP and around 60% of the workforce. Other factors contributing to slowing down economic recovery in 2009 include a disappointing export performance and lack of investment resulting from weakening confidence by investors in Kenya's political and economic performance. In spite of the overall sluggishness of Kenya’s economy in 2008, exports of goods increased by 20.5% in US$ terms. Increases were realised in exports to the EU, but especially in exports to the East African region which now account for 50% of Kenya’s exports. Overall, however, the current account has been showing an increasing deficit since 2007 as the growth of imports has exceeded the growth of exports, in spite of increases in travel revenues (tourism) and private current transfers (remittances). The current account deficit as a percentage of GDP increased from 3.8% in 2007 to 6.5% in 2008. However, until 2008/2009, the overall balance of payments was in surplus for 5 consecutive years, with foreign exchange reserves rising to more than 4 months of import, due to positive net inflows on the capital account, mainly borrowing and grants from abroad. However, in 2008 the surplus on the capital account fell by 50%, reducing the net positive flow to below the deficit on the current account. This required a draw down on foreign exchange reserves and contributed to a depreciation of the Kshs. The stock of foreign exchange reserves fell down to 2.9 months of import cover at the end of December 2008. . To avert this trend, Kenya applied for a loan under the IMF's Exogenous Shocks Facility amounting to $209 millions which has recently been disbursed after May 2009. Moreover, the CBK has recently been buying foreign exchange reserves from the market while the trade-weighted exchange rate has been fairly stable. This policy, together with the disbursement of IMF's loan and the recent augmentation of SDRs for all IMF members, has pushed reserves to a level just above 4 months of imports. FDI inflows into Kenya have been negligible over the past years with the only exception in 2007 when there was an inflow of about US$ 700 million, probably as a result of one major project or privatisation initiative. During 2009, export performance has been less favourable, with overall exports stagnating and exports of horticulture declining. Remittances have been increasing since January however their 6 months cumulated amount is declining as compared to 2008. Tourism revenues have continued to fall despite a recovery in the number of tourists coming to Kenya.6 Consequently, current account deficit has been growing. Inflation, which has been around 10% on average in 2007, shot up in 2008 to 26.2% fuelled by international rise in commodity and fuel prices as well as due to internal circumstances such as drought and mismanagement in food supplies in the beginning if 2009. In 2009 consumer prices continued to increase during the first four months, but have fallen since May reflecting an easing in inflationary pressures. Overall the inflation rate in the first half year of 2009 amounted to 20.5% as compared to the same period in 2008. However, core inflation hasn't exceeded 8% if one corrects for the upward bias in the CPI. Core inflation is on target, about 5%. Moreover, the CBK has taken on board the IMF advice to allow more flexibility in interest rates to achieve their monetary and inflation objectives. 6 The number of tourists during the first half of 2009 numbered 419, 000 as compared to 279,000 in the first half of 2008.

9

The growth of money supply has been kept under control. The M2 money supply measure showed a growth rate of 13.4% for the 12 months up to June 2009, as compared to a growth rate of 18.2% over the same period in 2007/08. Net domestic credit growth has been increasing in 2009, mainly as a result of increasing credit to the government. The growth of total credit increased from 16.9 % to 21.7 % over the period 2007/08 (July-June) to 2008/09. However, credit growth to the private sector fell from 29.6 % to 20 % over the same period. The increase in government lending at the domestic market is the result of the government’s inability to float a sovereign bond on the international financial market in early 2009. The increase in credit to the government may well result in the crowding out of the private sector in the credit market and lead to rising interest rates. Credit growth to the private sector indeed decreased in the first five months of 2009, compared to the same period in 2008, while lending to government increased substantially. Over the past few years the budget deficit has shown a deteriorating trend. The budget deficit including grants and foreign loans has been increasing from 4% of GDP in 2007/08 to 4.6% in 2008/09. The budget deficit for the 2009/10 fiscal year is estimated to increase further to 6.6%. The budget 2009/10 is characterised by a fairly optimistic outlook at increasing tax revenues, a tightening of recurrent expenditure and a rise in development expenditure. According to the Budget Speech, infrastructure is a targeted sector in the 2009/10 budget, including spending on roads, rail, ports, ICT infrastructure and energy, but also channelling additional funding at constituency level through the CDF scheme. Currently, budgetary spending is under pressure of increased subsidy requirements for food and fuel in the light of a recent trend towards higher prices and the need to undertake employment creation schemes to supplement the incomes of people in rural areas suffering from reduced agricultural incomes. Up through 2007/08 the overall debt/GDP ratio declined even as development spending was rising relative to GDP. This was accomplished by reducing recurrent spending relative to GDP. The recent increases in the fiscal deficit and the debt/GDP ratios are appropriate given world and domestic economic conditions and should be viewed against the authorities' track record and stated commitment to bring the debt/GDP ratio down to below 40% in the medium term. This has been achieved without any of the debt-reduction initiatives that most other LICs in SSA have benefited from. Economic governance Since 2007, considerable simplification has taken place in the business registration in Kenya, eliminating and simplifying a large number of licenses and permits. Consequently, it was ranked as the 10th most significant reformer in the World Bank’s 2008 Doing Business report. However, since then the reform process seems to have faltered. In the 2009 survey Kenya’s ranking fell by four places to rank 84 and according to the 2010 report, Kenya had fallen further to rank 95. The main reason for this fall have been increasing difficulties in accessing construction permits and replacement of national level licenses and permits by those imposed at the local level. In 2006 following then ERS document, the authorities introduced a comprehensive PFM reform initiative to which several donors have committed substantial financial assistance. Over the last two years there have been few improvements in the PFM reform strategy implementation. A few improvements in some components of the system have been offset by weakening of other. Regional integration Kenya is a member of two regional economic communities: EAC and COMESA. A customs union among EAC members has been operational since 2005, though without a revenue sharing mechanism. EAC common market is due to enter into force in January 2010. As a member of EAC, Further, Kenya is a member of IGAD. In COMESA, a free trade area is in place in which 14 of the 20 member countries (including Kenya) participate. Kenya is presently delaying its participation in the customs union regime of COMESA which was launched in mid 2009, as it is negotiating the introduction of a harmonised CET and rules of origin regimes between EAC and COMESA in order to facilitate being able to comply with both

10

regional integration regimes. A high level meeting in Kampala in October 2008 launched a tripartite process between EAC, SADC and COMESA, where agreement was reached on a road map to unifying the three communities in a free trade bloc with common trade regimes,. As a member of EAC, Kenya has been active in the negotiations with the EC on concluding an EPA. The negotiations with the EAC configuration started in 2007, while until then Kenya was negotiation as part of the ESA grouping. Kenya has played a catalytic role among EAC member countries in the EPA negotiation process. Kenya’s non-state actors and private sector in particular, have participated actively in the negotiation process. An interim agreement has been formulated and has been initialled but the EAC members, but not yet signed. The coverage of this interim agreement is limited, including chapters on trade in goods, principles of development co-operation and fisheries co-operation. It is hoped that the interim agreement can still be signed in 2009, while new momentum will be given to the process of concluding a full EPA. The main challenges are: (i) restoring and maintaining macro economic stability leading to increasing GDP and GDP per capita growth rates, (ii) improving business environment for the private sector, including the regulatory environment, the commercial judicial system, and the provision of competitive infrastructure (electricity), and (iii) finalising the EPA with the EU and deepening of the regional integration process. 1.3 Update on the poverty and social situation

1.3.1 Progress towards reaching MDGs GoK has elaborated its vision for the long term development of Kenya in Vision 2030, a long term development strategy covering the period 2008-2030. The plan was developed using an inclusive and participatory approach. The strategy is implemented through five year plans, of which the first one MTP 2008-2012 is currently under implementation. While as an overall strategy the MTP has serious limitations, it presents however a realistic assessment of the constraints in the social sectors. Even though the programming of plans is ambitious and with limited prioritisation, these plans constitute a reasonable basis for support (e.g. Education SWAP). Several factors have combined to constrain the Government of Kenya’s ability to attain the full range of targets established in the Millennium Development Goals. These factors include a slowing down of economic growth accompanied by a sharp increase in the inflation rate from 9.8 % in 2007 to 26.2 % in 2008, displacement as a result of post election violence and conflict, continued drought, high food prices, unplanned urbanization, limited human resource capacity to deliver health, education and other social services especially in the North East Region and other rural communities and inadequate infrastructure for the provision of social services. Kenya’s progress with regard to the attainment of the MDG targets is described below: Goal 1, Eradicate extreme poverty and hunger: Though the level of absolute poverty in Kenya fell from 56 % in 1997 to 46 % in 2006, post election violence, persistent drought which has negatively impacted food production, and high food prices may have intensified the vulnerability of a significant number of Kenyans. The slowing down of the GDP growth has adversely affected employment creation. It has been estimated that the combined impact of increased food prices and unemployment may have resulted in an increase of absolute poverty by 30 %, bringing back the poverty levels to those prevailing in the early 2000s. Especially the northern and eastern parts of the country were hit hard by the failure of the 2009 long rains and an uneven performance of the short rains. The frequency of the dry episodes is such that pastoralists and agro pastoralists in the arid land are not able to recover between droughts leading to recurrent situations of food insecurity and malnutrition . Goal 2, Achieve Universal Primary Education: The Net Enrolment Rate (NER) at primary level increased to 91.6 % in 2007. There have been steady increases in the NER since the introduction of Free Primary Education in 2003. On the other hand, the NER for Secondary Education was 42.5 %, significantly lower than the 70 % target. Additional resources and programs are needed to address

11

teacher/student ratios particularly in ASALs, quality of education, curricula reform and cultural relevance. Goal 3, Promote Gender Equality and Empower Women: Some improvements have been noted in the number of women in decision-making positions. However, in all categories women representation is less than the 30 % target. In an attempt to intensify the mainstreaming of gender, special Gender Units were established in all ministries and parastatals but they remain generally ineffective with limited capacity and resources. The Ministry of Education continued to implement affirmative action policy to encourage gender equity in education and this has resulted in gender parity at the primary level in some regions. Overall, girls comprised 46 % of students enrolled in secondary schools in 2008. The % age of females in tertiary education has also displayed gains standing at 48.5 percent in 2008. GOK has initiated several programmes to promote gender equity, reduce disparities in access to credit, enhance female access to public sector job opportunities and improve access to and availability of female sexual and reproductive health services. Goal 4 & 5, Reduce Child Mortality and Improve Maternal Health: Limited progress has been made with regard to the child and maternal health. Both Child and Maternal Mortality rates remain high. The Kenya Demographic and Health Survey estimated the Maternal Mortality Ratio (MMR) to be 414 per 100,000 live births in 2003, while WHO has estimated the MMR at 560 per 100,000 live births in 2005. Despite the elaboration of policies to promote improvements in maternal health, only 39 % of births were attended by a skilled attendant in 2006 down from the 42 % level which had been attained in 2003. Wide variations exist between urban and rural areas with 65 % of births in urban areas and 33 % of births in rural areas being attended by a skilled professional. The infant mortality rate declined from 77 in 2003 to 60 per 1,000 live births in 2006. Goal 6, Combat HIV/AIDS, Malaria and Other Diseases: Though HIV/AIDS still remains a threat to Kenya’s development, the decline in the prevalence rate exceeded the established target in the ERS (10 % by 2006), falling from about 13 % in 2000 to 7.4 % in 2007. Noteworthy progress was made in providing access to and providing Anti-retroviral Therapy (ARV) treatment for those who require it. At the end of December 2007 the number of patients on ARV had risen to 120,000 compared to 2,000 in 2003. Treatment of children with ARVs was initiated in 2004 and by 2006, 10,000 children were being treated with ARVs. Regional variations in prevalence rates exist, ranging from 7.9 %, 10 % and 15 % in Coast, Nairobi and Nyanza respectively. Actions combating HIV/AIDS remain heavily donor dependent, such as DFID and USAID. Actions funded from the GATFM have had limited impact due to insufficient absorption capacity. TB prevalence rates stood at 5 % in 2006 down from 6 % in 2000. Malaria is a serious health and development threat. A National Malaria Strategy is being implemented, a key component of which is the distribution of subsidized or free insecticide treated mosquito nets. During 2008, declines were also observed in the prevalence of other water borne diseases such as intestinal worms and diarrhoea. Full Immunization Coverage (FIC) fell by 2.7 % between 2007 and 2008. Limited attention appears to have been paid to addressing nutrition particularly among vulnerable groups in urban slums and ASALs. The result has been the re-emergence of cholera. Donors will need to allocate resources for nutrition programmes, nutritional surveillance and to address micro-nutrient deficiencies. Goal 7, Ensure Environmental Sustainability: Progress towards achieving environmentally sustainable development is discussed in section 1.4 below. The conclusion is that the environmental situation has deteriorated rather than improved, in recent years. Goal 8, Develop a Global Partnership for Development: Though there continues to be significant donor involvement in the financing of development programmes and projects and general development in Kenya, the UN target of 0.7 % of GNI in official development assistance to support the attainment of the MDGs has not been met. GoK has indicated its commitment to implementing the MDGs and has enunciated its policies and strategies in the Vision 2030 and a number of other strategy reports (National Employment Policy and Strategies for Kenya; National policy on Gender and Development; Kenya National HIV/AIDS Strategic Plan (2005/06 - 2009/10); Ministry of State for Development of Kenya and other Arid Lands Strategic Plan 2008 – 2012). The main objectives of the policies and plans are: (i) reduce poverty social and income inequalities through employment, empowerment, and (ii) to improve access to basic social services, inputs and opportunities for all irrespective of gender and religion.

12

Main challenges in the social sectors are to a) increase absorption capacity in the health sector and develop a lesser dependence from a highly donor driven HIV/AIDS programme, b) deal with quality and regional inequality of education, and low funding in skills development, c) promote social protection. 1.4 Update on the environmental situation and climate change Based on the Country Environmental Profile (2006), the Country Strategy Paper (2007) identified three main environmental issues affecting Kenya, namely (1) natural resource degradation, (2) loss of biodiversity in the main ecosystems, and (3) the ‘socio-economic environment’ including health issues and access to water and education. While the main environmental issues identified remain relevant, there is a need to update the analysis – and the corresponding response strategy – in view of developments in recent years, both globally and in-country. Key environmental issues Trends in the State of the Environment are reported in the Annual State of the Environment Reports (SoER) by NEMA, produced since 2003 with UNDP support. The 2006/7 Report focuses on Effects of Climate Change, indicating the increasing concern about climate change in Kenya. The SoER 2008 is under preparation, and will cover aspects of environment in relation to development. Population pressures combined with slow productivity gains have impacted on environmental degradation from soil degradation, deforestation, and desertification. The degradation of the Mau forest ecosystem has been severe with negative impacts on stable water availability from its watershed area. A similar degradation of watershed areas has taken place in many areas throughout Kenya. If climate change would result in an increase in extreme weather patterns, the arid and semi arid areas with its pastoralist communities would be affected. The Government policy paper and planned strategy on arid and semi arid lands is directed to increase the coping mechanisms of pastoralist communities. The ‘Kenya Atlas of Our Changing Environment’, produced in February 2009 upon initiative of the GoK and UNEP, highlights the environmental challenges and issues facing Kenya, and depicts the major environmental hotspots in the country. It identifies the following main issues: (1) land use change: The total area under cultivation continues to increase, as crops are introduced in de-gazetted forest lands, and some humid rangelands are converted to farmlands. More conversion of marginal grazing land to cropland is expected. (2) water: There are increasing water deficits in rivers, and there is sedimentation and pollution of lakes; (3) forests: Encroachment into forested areas continues. The results have been especially serious in the Mau forest, where the Government has recently taken a major initiative to reverse the encroachment and work towards its rehabilitation (4) land degradation: In ASALs, access to grazing lands is diminishing as more lands are appropriated for crops for the development of new water sources, and for conservation areas. ASALs are subject to recurrent droughts and ensuing loss of productivity; (5) biodiversity: Habitat loss and fragmentation are the main threats to biodiversity, as a consequence of increasing population, poverty and economic growth. Among the many emerging issues three stand out: (1) how to protect the country’s water sources (called ‘water towers’ in Kenya) that feed hydropower, support wildlife and tourism, irrigate farms and nurture grazing areas, (2) how to prepare for climate change and weather-related disasters and (3) how to mitigate the increasing urban waste and pollution in Nairobi and other urban areas, with fast growing informal settlements, traffic jams, and a lack of city planning. Solid Waste management is a particularly urgent issue. Future challenges: • Conservation of the main water towers (combining livelihoods and law enforcement) • Development of effective (climate change) adaptation strategies for those most directly affected

by climate change; • Tackle fast growing urban environmental problems, in particular waste and pollution;

13

• Strengthen environmental law enforcement (through NEMA and other law enforcing bodies); • Foster the ongoing reform processes in environmental agencies, leading to clearer lines of

responsibilities across agencies with environmental mandates;

Considering EC comparative advantages and current involvement of other DPs in the sector, it would seem appropriate that the EC response strategy would strengthen its involvement in addressing the key issues of watershed protection and climate change adaptation. 1.5 Update on other crosscutting issues HIV/AIDS.: The AIDS epidemic threatens to undermine Kenya’s long-term ability to provide the human capacity and services essential for robust economic growth. Additional investment is therefore needed to expand the response to HIV/AIDS in all sectors. The Kenya National AIDS Strategic Plan 2005/6–2009/10 highlights socio-economic impact as a key area for intervention. Labour losses as a result of illness and time off taken to care for sick family members has resulted in a reduction of agricultural production, changing crop mix according to reports produced by the National AIDS Control Council. The education sector has been significantly impacted by the HIV/AIDS epidemic. Increases in morbidity and mortality among teachers have negatively affected educational quality. Gender disparities have also emerged with girl children expected to remain at home to take care of sick parents or relatives dying from AIDS’ related illnesses. According to NACC reports for 2006, children, from affected households are more likely to drop out of school (36 %) than children from unaffected households (25 %). 1.6 Joint Africa-EU Strategy: ownership and involvement of the partner country Kenya is among the leading member states of the AU for the action plan on Trade, which prepared a draft Roadmap for the Trade, regional integration and Infrastructure partnership. Kenya hosted in September 2009 the Third EU-Africa Business Forum. It concluded its discussions with a consensus on the need for Africa to shift its policy objective from poverty reduction to the more dynamic goal of wealth creation. There was also broad agreement on the need for greater regional integration, increased investment and improved infrastructure. In the context of the African Peace and Security Architecture, Kenya is hosting and very actively supporting the Eastern African Standby Brigade. Its Secretariat is located in the outskirts of Nairobi. Kenya is hosting the Regional Secretariate for RECSA, in the fight against small arms, directly supported under the Instrument for Stability long term budget. However, in spite of these concrete actions directly related to several pillars of the EU-AU strategy, awareness and ownership of the Strategy in the country remain very low. 2 Overview of past and on-going cooperation 2.1 Reporting on financial performance of EDF resources September 2009 Total ongoing global commitments 428,872,640€To be contracted (RAC) 99,310,689€To be paid (RAP) 359,031,912€To be consumed (RAL) 169,151,418€% RAL/total global commitments 39.4%

2.2 Reporting on General Budget Support

14

An assessment of the eligibility criteria for budget support, as set out in Articles 61 and 67 of the Cotonou Agreement revealed the non-compliance of Kenya with two out of three eligibility criteria, namely progress in PFM reform and the implementation of relevant and coherent national development strategy. Due to the non-compliance with two of the eligibility criteria Kenya became ineligible for the disbursement of the 3rd and variable tranche of PRBSII ongoing programme. In order to allow the GoK to address the identified weaknesses it was decided to extend the programme's duration by 18 months. The assessment of the compliance with the eligibility criteria will be carried out during 2010/2011 fiscal year. If Kenya is declared eligible then the 3rd tranche amount to be disbursed will be assessed according to the criteria set in the Financing Agreement and its riders. Support to the PFM reform strategy is ongoing through a Trust fund with the World Bank for an amount of € 4.7 m. So far half of this amount has been disbursed and absorbed and additional amounts are planned to be disbursed in the coming months, according to the new work plans stemming from the Mid Term Review of the PFM Reform Strategy. Under the 10th EDF an amount of € 126.8 m was allocated to GBS. Due to the delays with the implementation of 9th EDF PRBSII programme and the current non-compliance of Kenya with two out of three eligibility criteria it was decided not to commit this GBS envelope at this stage. . 2.3 Project and programmes in the focal and non-focal areas

2.3.1 The contribution of projects and programmes in the focal sector Infrastructure According to the CSP/NIP 2008-2013, the justification for selecting this sector dates back to year 2001 when the PRSP National Stakeholders Forum identified the poor state of the Kenyan road network as a major constraint on economic growth and poverty reduction due to its adverse impact on transaction costs and access to economic and social services. The selection of the focal sector was confirmed by extensive stakeholder consultations held in 2006. But well before 2001, in fact since 1983, the EC has been strongly involved in the road transport (infrastructure) sector. Mainly for that reason, the road sub-sector is considered one of the EC’s areas of comparative advantage in Kenya. EC support has contributed to improved international connectivity through the Northern Corridor Rehabilitation Programme (NCRP), focused on the Mombasa international seaport – Uganda – Rwanda hinterland connection; the EC share in this multi-donor, long term programme totals 380 km, of which 120 km remains to be rehabilitated under NCRP phase III.. The presently ongoing NCRP Phase III project (9th EDF) started up in year 2006 and was subdivided into three ‘lots’; recently Lot 1: Timboroa – Eldoret (73 km) had to be dropped due to high tender prices received as compared to the budget. Contracts for the construction of the other two lots (together 120 km) were recently awarded, and the both road sections are expected to be completed in 2011/12. Significant delays in construction (timing) unavoidably bring along price escalation, and dealing administratively with price escalation commonly inhibits further delays. The associated forecast expenditure for the 2nd half of 2009 is €53 million (out of the €57 million commitment) which could be rather optimistic. STABEX funded Roads 2000 Project Phase II (€10.5 million), expected to be completed in 2010, and the Central Kenya Rural Roads Project (EC contribution €21.25 million) likely to be finalised in 2011, provide a significant contribution to the national Rural Roads programme. Future support to this rural roads sub-sector has been brought under the EDF, because the ‘Special’ (agricultural) roads classification will be abolished (under KeRRA regime) and the selection criterion (for e.g. specific Coffee or Sugar roads) tends to lead to distortions in the larger rural network’s continuity. An important consultancy advice on a modernized Road Design Manual package, including manuals for ‘basic inputs’ collection (traffic and axle load surveys, etc.), for the benefit of KeNHA is ready for 80 % in 2009 and is to be completed in early 2010, also funded from STABEX.

15

The earlier mentioned post-December 2007 election events have delayed 10th EDF Focal sector 1 Identification and Formulation studies which were eventually carried out in the last quarter of 2008. The proposed programme contains a mix of regional roads, rural roads, urban roads, tourist roads and capacity building support. Capacity building support is envisaged for KenHA, KeRRA, KURA and the MoR. The Road Sub-sector policy document endorsed by Parliament in October 2006 provided the framework for the current 10th EDF program. It is consistent with the thrust of the first Medium Term plan (MTP) 2008-2012 which are to: (i) strengthen the institutional framework to enhance efficiency and effectiveness, (ii) build quality infrastructure that is well integrated, environment-friendly, safe and efficient, (iii) enhance customer satisfaction and (iv) increase private sector participation in provision of infrastructure facilities and services, to complement government efforts. The challenges for the Government and concerns of the Donors lay in the actual (pace of) implementation of the policy, strategies and plans, particularly in regard of: (i) coordination of the activities of four directly involved ministries (Roads, Transport, Nairobi Metropolitan Development and Local Governments), (ii) criteria for choosing and prioritizing projects, (iii) the collective institutional capacity and governance system to implement these, and (iv) a sustained (road) transport sector financing system ensuring cost recovery in the longer term. The Formulation Study7 report of March 2009 concluded that sector budget support (SBS) of the road sector would, at this point in time, be ‘a bridge too far’. The 10th EDF support to Focal sector 1 will therefore still be delivered through the EC’s Project Approach modality. There are, however, several processes underway within GoK/MoR moving the sector wide approach in the right direction and to accelerate these processes a significant Capacity Strengthening support component has been incorporated—and brought forward in the Annual Action Plan (AAP) 2009 for approval by the EDF Committee in October or November 2009. Challenges: There is believed to be ample potential, certainly from the demand side, to extend any of the 10th EDF road investment components (National, Rural, Urban, Tourist), however under the explicit condition that the Road Authorities (RA's) are up and running, and facilitated to exert their mandate. More specifically these are: • Extension of the Nairobi ‘Missing links’ component; maximizing productivity through improved

traffic management in Nairobi city. Nairobi accounts for 50% of Kenya's GDP and 60% of the manufacturing industry.

• Additional Regional road project. Improvement of connectivity and reduction of transport costs and travel time (transaction costs). Contribution to trade integration / facilitation of Kenya as logistics hub for E. Africa. Expansion of labor-intensive rural road rehabilitation project (Roads 2000); Improvement of connectivity and reduction of transport costs and travel time (transaction costs). Supports agricultural and industrial production, trade and tourism. Employment creation particularly the rural youth

• Extending the tourist roads access project Agriculture and Rural Development In Kenya the agricultural sector is still the mainstay of the economy accounting for a quarter of GDP, employing about 60 % of the work force. Agriculture is largely rain-fed and erratic weather conditions have a major impact on the performance of the sector. In 2008 agricultural value added fell by 5.1 % on account of the political unrest and violence that erupted after the December 2007

7 It is also called (Road Transport) Sector Assessment study—and the reader is referred to the report for various other aspects not discussed

here, such as environmental and other cross-cutting issues.

16

elections and resulting in the displacement of about 100,000 farmers. A prolonged drought also had an adverse impact on agriculture in 2008. Government support to agriculture is quite fragmented, being channelled through 10 ministries. To coordinate support to the agricultural sector by the government and donor community, an agricultural sector coordinating unit (ASCU) has been established with EC support, which has been effective in prioritising and coordinating interventions in the agricultural sector. The ongoing EC-funded projects and programmes in the field of agriculture and rural development, funded from the 9th EDF, can be classified under three main headings: (1) community development and environmental management, (2) agricultural productivity and food security, and (3) sector coordination. (1) Community development and environmental management, The Community Development for Environmental Management Programme (CDEMP) is a programme with an essentially environmental focus, with a budget allocation of € 13 million under the 9th EDF. It started in September 2005 to last until 30th June 2010. It aims linking poverty reduction and environmental management in Kenya, and has two independent but related components: (a) the Community Environment Facility (CEF), which finances local environmental management initiatives to increase capacities of communities to integrate environmental concerns in their development process, and (b) the Capacity Building Facility (CBF) aimed at building environmental action planning capacities both in NEMA (National Environmental Management Authority) at the central level and at field level (in District and Provincial Environmental Committees). A mid-term evaluation in October 2008 was positive about results, but it was too early to discern a positive effect on poverty reduction (the overall objective) or to confirm a sustainable impact. Concerning the CBF component, the team assessed delays in implementation and under-spending, but otherwise satisfactory project management. NEMA’s capacity is clearly strengthened by the project, but sustainability of project services and benefits will depend on GoK’s commitment to support NEMA. The Community Development Fund 3 (CDP3) is the third phase of a continuous series of programmes that started in 1997. The programme aims at alleviating poverty at local level, through improved access to social and physical infrastructure, as a key to economic growth and employment generation. It acts as a Social Fund that enables communities to undertake formulation, implementation and maintenance of community driven projects for provision of basic services and infrastructure. A Project Review concluded that the most targeted communities were benefiting and that it had scattered but un-quantified poverty reduction effects. Community capacity building was considered weak. (CDP 4) is the fourth phase of the same programme to be funded under the 10th EDF, but with incorporation of the CEF (part of the 2009 Annual action programme). Under the 9th EDF, Rural Poverty Reduction Programme and Local Government Support Programme became operational in 2006. It aims to improve the accountability and Local Authorities responsiveness in delivering services to the rural poor. This purpose is to be achieved through the empowerment of rural communities in the development process and improving the capacity of Local Government in participatory planning and pro-poor service delivery. Under the programme, 65 projects have been funded in the framework of two Poverty Reduction Funds (PRFs). At this stage 60 projects have been completed. The programme should be extended till 31 December 2010 providing a bridging period with a new supported WB-AFD-SIDA programme (Kenya Municipal Programme) to start in September 2010. The latter is largely designed building upon results and lessons learnt from the 9th EDF programme. The capacity building activities within Kenya Local Government Reform Programme and the PMU of the Rural Poverty Reduction and Local Government Support Programme have had mixed results in terms of impact on policy formulation. Project implementation had been slow. Questions have been raised regarding the extent of poverty orientation of the programme, and its sustainability. (2) Agricultural productivity and food security

17

The second group of projects targets support to Kenya’s current strategy for the Agriculture sector namely ‘Strategy for Revitalising Agriculture’. An important ongoing intervention focusing on the arid and semi arid areas of Northern Kenya is the Drought Management Initiative (DMI) with € 17.7 million allocated out of the 9th EDF B envelope. This programme aims to address the problem of increasing droughts as a result of climate change. The DMI is implemented through the World Bank’s Arid Land Resource Management Project (ALRMP), which has been implemented since 1996 and through grants with Veterinaires Sans Frontiers Belgium and OXFAM UK. The programme amongst other components includes the development of an early warning system and the establishment of a national drought contingency fund. It is planned to convert this fund in a trust fund to make financial resources available in a timely manner at the district level to tackle issues related to drought prevention and preparedness.. Furthermore, preparations are under way for establishing an independent Drought Management Authority, which would be in charge of the trust fund in order to ensure clear and transparent processes. The realisation of the authority is still expected to take some time. A programme aimed at arid and semi-arid areas in Kenya is the Kenya Arid and Semi Arid Lands Project (KASAL) funded from the 9th EDF with an allocation of € 7.9 million. The programme involves support to enhance the ability of KARI to conduct relevant, high quality applied research in arid and semi-arid areas. The project started in the beginning of 2008. Activities include promotion and value addition for improved crop, animal and natural resource based products and new market opportunities, applied research on changes in land-use in pastoralist regions for better livestock production and irrigation practice for mountains/oasis agriculture. In order to improve innovative strategies to increase uptake of research results, agricultural knowledge and technology an increased use of NSA/NGOs on contractual basis have been established addressing the transmission gap. With the overall objective of increasing agricultural and livestock productivity two projects have started during 2009 with funds from the Food Facility. The first (€ 20 million), focuses on smallholders in high potential areas, and will be implemented through the World Bank. The support will leverage additional resources to upscale two ongoing Government programs for increasing access to farm inputs: (a) an input credit scheme for farmers channelled through commercial banks, and; (b) an ongoing voucher scheme for the very poor and vulnerable. The project will also ensure availability of indigenous crops seeds by supporting farmer-led production and marketing in cooperation with Kenya Agricultural Research Institute (KARI). It will also support agro-dealer development to ensure a sustainable, private sector driven approach, and where needed deal with the packaging of seeds and fertilisers into small packs affordable to farmers. The second project (€ 4 million) is implemented by the FAO and aims at increasing the local supply of livestock products. The activities take place in two focus production systems: small scale dairy production systems in higher potential areas in western Kenya and in selected pastoral production systems in the ASAL region in northern Kenya. 1.5M€ from the 9th EDF Regional B envelope has been allocated to a project ‘Support to Agricultural Recovery’ implemented through FAO. Activities started in mid 2009. The project involves support to the development of food security information systems based on assessment of rains, and support to veterinary and vaccination services to small livestock holders A fourth project with the objective to mitigate the effects of the food crisis on vulnerable households is planned to start during 2009. This action will be implemented by the World food program (WFP) with funds (€ 10.3 million) from 10th EDF B envelope and will include: i) support to maternal and child health in selected urban areas of Kenya; ii) establishment of social protection schemes in urban slums of Nairobi; iii) implementation of food for assets activities in marginal agricultural areas affected by drought; and implementation of a specific study on urban dimension of food insecurity. Coffee: Over the past years coffee production has fallen to 42,000 tons in 2007/08, as compared to 53,400 tons in 2007/08. With a recovery in world market prices the prospects for coffee cultivation have improved. € 5 million has been allocated out of STABEX funds to strengthen the competitiveness of the coffee sector. The project became operational in the beginning of 2008 and

18

during the first year of operation, the bulk of expenditure involved procurement to acquire research laboratory and ICT equipment for the Coffee Research Foundation (CRF). Study tours were undertaken to Colombia and Costa Rica. Various training and capacity strengthening programmes have been conducted. (3) Sector coordination Coordination in the sector has considerably improved over recent years, since donors organised a successful joint sector conference. They signed up to a ‘Code of Conduct’ to jointly support the GoK’s agricultural policy – previously the SRA and now the Agricultural Sector Development Strategy (ASDS). Coordination and leadership remain challenging, as on GoK side 10 ministries are involved in the Agriculture sector, plus around 15 donors. For this reason, in 2004 ASCU was created (Agricultural Sector Coordination Unit), and DFID, Danida and SIDA decided to jointly support the Unit through basket funding. EC could not join this initiative for financial-administrative reasons, but provided parallel funding to ASCU supporting the common purpose of improved sector coordination, as did USAID. WB provided support for a Coordinator. It is generally felt that support to ASCU helps prepare the sector for a Sector Wide Support, but coordination with ‘higher-level’ ministries still remains a challenge. At field implementation level, though, coordination seems less problematic. Conclusions The EC-funded programmes in the field of agriculture and rural development have contributed to (i) coordination in the formulation and implementation of support programmes, (ii) policy and regulatory reform, channelling funding to communities, (iii) capacity building, (iv) support to agricultural research and productivity, although there is still a certain level of disconnection between research and extension services, which has made the implementation of improved agricultural practices in the field more difficult, (v) support to competitiveness improvement of selected agricultural products. Problems have been faced in terms of: (i) ensuring impact on poverty, (ii) lack of capacity at community level (iii) some irregularities in accounting and delays in implementation and spending.

Considering the performance of ongoing programmes, and the developments in the country, the MTR team proposes to maintain and strengthen the Agriculture and Rural Development as a focal sector. But in order to enhance its effectiveness, the assistance to the sector would need to: • Increase its focus on food security and climate change as central themes, which would imply: a

stronger focus on the ASAL areas; continued attention for disaster preparedness (not only focusing on droughts, but also on floods etc); more attention for climate change adaptation and coping strategies; a stronger focus on water conservation techniques; more attention for pastoralism, enabling its adaptive capacity;

• Complement the agricultural productivity measures with a more integrated livelihoods approach; • Strengthen engagement with the Government (especially MoNKAL) for coordination of projects

and programmes in the ASAL areas In addition the identification of a new programme for watershed conservation and management is proposed. Under this programme, it is proposed to support the Rehabilitation of the major watersheds specifically that of the Mau Forest Ecosystem. Regarding implementation modalities, there is scope for more harmonisation, and the exploring of opportunities for delegated management and/or pooling funding. EC, WB and GTZ and SIDA are the main players, and share to a large extent objectives and programme. In particular, the Food security/ASAL component seems to offer good opportunities for harmonisation with the WB-supported Arid Lands Resource Management Project (ALRMP). This programme has been running since 1997, and has already built capacities and implementation systems. It is expected to enter a third phase in late 2010, and WB indicates they intend to scale up the current programme through a multi-donor initiative, in order to enhance impact. Similarly, harmonisation and coordination should be pursued in the identification and formulation of a Watershed Conservation and Management programme.

2.3.2 The contribution of projects and programmes in the non-focal area

19

Private sector development and trade The main constraints to private sector development in Kenya are the high costs of doing business, which recently has been deteriorating as reflected by a declining ranking according to the World Bank’s doing business indicator, where restrictions with respect to trade across borders (trade facilitation), high costs of energy and an ineffective judicial system stand out. Other key issues in private sector development are the need to improve quality, standard and conformity assessment systems to meet the product and food safety requirements at its main markets, and the lack of a competition policy. A large part of the private sector consists of micro and small enterprises, which are constrained in access to finance and lack of skills of its workers. Private sector development in Kenya is directed by the Private Sector Development Strategy (PSDS), 2006-2010 and its subsequent project implementation plan (PIP) for the period 2007 - 2012. It generally fits within the broader Vision 2030 strategy. The overall objective of the PSDS is to enhance private sector growth and competitiveness that will contribute to the country’s medium term objectives. . KEPLOTRADE II supports Kenya’s trade policy development and implementation, including the EPA and other trade negotiations. The analytical work undertaken under the programme has been instrumental in establishing Kenya’s negotiation positions; the training of negotiators has been effective; it has promoted and facilitated the involvement of the private sector in the negotiation process; and it has assisted in trade policy support to the Ministry of Trade. In the course of its implementation the scope of Keplotrade II has been aligned closer to the Private Sector Development Strategy (PSDS) and widened to include competitiveness in collaboration with the Ministry of Industrialisation and in the context of the PSDS goal four. A micro enterprises support programme has been operational since the 6th and 7th EDFs, involving grants to micro and enterprises and micro support institutions, as well as business development services to small and medium enterprises. Under EDF 9, the ASMEP was approved in 2007 with an allocation of € 7 million. It targets small and micro enterprises with capacity building of business representative organisations, information dissemination and business development services to two specific sectors, fisheries and horticulture based on a value chain approach. In 2008 there was no progress in implementation because of bureaucratic hurdles caused by the attempt to align the ASMEP project closet to the PSDS. It is planned to channel the capacity building component through UNDP and to channel the BDS component through MESPTrust. The Ministry of Trade will deal with the trade information component. A rider is in EC headquarters for approval to instigate these changes into the Financing Agreement. Another intervention in the area of trade is support to Horticap, a trade facilitation project involving health inspectorate and phytosanitary services in support of KEPHIS. It has been implemented since 2008. The main activity has been purchasing equipment and construction of facilities. The project also involved training of staff and improving the outreach to farmers. The programme is effectively implemented by the own staff of KEPHIS through an internal PMU. Under the 10th EDF € 4.7 million has been allocated for additional support to the implementation of the PSDS complementing inputs from other donors. The two main components of EC support include: (i) regulatory reform through an existing multi-donor trust fund for “Kenya Investment Climate Facility” managed by IFC/FIAS, and co-ordinated by the Kenya Ministry of Finance (Business Regulatory Reform Unit), (ii) support to co-ordination mechanisms of PSDS via the PSDS Secretariat. In addition, programme and financial management capacity in key institutions involved in implementation of PSDS will be strengthened. The programme is part of the AAP 2009 approval process. A separate commitment to be made in 2010 is being considered for interventions in the area of trade and competitiveness in order to utilise the uncommitted balance of € 11 million in the envelope for non-focal sectors. Such interventions would fit well with the current priorities of the PSDS to address

20

trade facilitation challenges in order to take advantage of new market access opportunities created by the EPA and other trade agreements. Tourism. The EC is the only Development Partner supporting the Tourism sector in Kenya. This supported has started at the end of last century to reverse the negative trends and allow tourism markets to recover. This was notably achieved through the € 12 m 8th EDF Tourism Diversification and Support Programme and the € 10 m Stabex TISMPP programme in support to Kenya Tourist Board (KTB) promotion and marketing Activities. The post election crisis has hardly affected the tourism sector with a sharp drop in the tourists arrival (-40% in 2008). Therefore, in close consultation with the Kenyan authorities, the EC provided two support programmes under Stabex funds to KTB: (i) support to global media campaigns (€ 3.1 m) and (ii) Kenya Tourism Recovery Programme (€ 3.0 m). A CNN TV spot campaign is currently under implementation which will last till 31/12/2009 and a comprehensive tourism advertising strategy is under development and will be launched in November 2009 in 7 key source markets. A key lesson learned from the past and ongoing interventions is that routing support to the private sector via public institutions has been highly problematic and efforts to strengthen the public institutions involved have been largely ineffective. An increasing focus in involving private sector bodies in the delivery of the support services is desirable. Regarding MSE development, there is further scope of in terms of improving access of finance, for example through credit guarantee schemes. 2.3.3 Support to Non-State Actors Under EDF 9, the NSA-NET programme was developed to support NSAs. This programme was signed in September 2007 with an allocation of € 6 million. The purpose of the programme was to promote networking among NSAs and to strengthen their capacity to contribute to the dialogue on development issues. This programme is implemented through the Ministry of Justice. As the government was very reluctant to support NSAs, no activity took place for more than a year. Currently it is attempted to break the stalemate and to advertise a first call for proposals from NSAs. The lesson of this programme is that it is difficult to implement an NSA support programme through the government. For Governance and support to NSAs under the 10th EDF a new approach has been elaborated which aims at breaching the support to GoK with support to NSAs in two specific areas (Access to Justice and Local Governance). A flexible fund has been recommended to support the KNDR implementation. As concerns the support to NSAs a new disbursement mechanism has been determined through UNDP’s civil society support programme (CSDG), which aims at capacity building of civil society groups. An agreement with UNDP is still being negotiated. 2.4 Other actions 2.4.1 EDF RSP/RIP Regional projects on animal health: EC financed regional projects which are impacting strongly on animal health issues in Kenya are being implemented through African Union – IBAR with EC Kenya as the lead delegation. They include the following. SERECU: Somalia Ecosystem Rinderpest Eradication Coordination Unit. This is the final phase funded by EC under the 9th EDF by €4 million dealing with the eradication of Rinderpest in the Somalia Ecosystem (Ethiopia, Kenya and Somalia). This is a crucial project as it will confirm the final eradication of rinderpest from the world after more than 20 years of donor investments in controlling the disease. Kenya was accredited free of Rinderpest during 2009. This is a milestone for control of cross border diseases since the lessons learnt can be utilized by other animal epidemics like avian flu and rift valley fever. PAN-SPSO (Participation of African Nations in Sanitary and Phyto-sanitary Standard -setting Organisations. The project with a total EC funding of € 3.35 million started in May, 2008. It will strengthen the effectiveness of African participation in formulation of international standards on food

21

safety, animal and plant health. This will improve the efficiency of the participation of African countries in standard setting and can tribute to greater compliance with international SPS standards. It will in the longer run impact positively on trade within Africa and with the EU. Kenya has benefited in 2009 from activities funded by the Regional programme on coastal management, implemented by the Commission for the Indian Ocean: 10 projects resulting from a call for proposal (total amount: 1.2M€), as well as support to KWS, NEMA and KMFRI. 2.4.2 EDF Intra ACP programmes/DCI/Sugar Due to ACP-EU Water Facility, the EU has become one of the larger donors in the Water (supply services) sector. The EC contribution to Kenya from the ACP-EU Facility totals about €32 million (out of the total contract sum of €59 million for 15 projects). Projects partners are government institutions, as well as NGOs, research institutions and international organizations. The most significant ‘project’ is the support to the Water Services Trust Fund (WSTF), the driving (financing) mechanism of the ‘Water and Sanitation Service’ reforms. The ECD provides 50 % of the €20.5 million fund and Germany (KfW+GTZ) the other half. The current, first phase of this undertaking targets the urban poor. A major challenge will be to link this fund with the GoK funds, notably the Community Development Fund (CDF managed by GoK) and the Community Development Trust Fund (CDTF managed by a PIU). The ACP-EU Energy Facility is currently the only instrument applied to support the energy sector in Kenya. The total amount of ECD support is about €6 million distributed over 4 projects. One of these four—developing energy enterprises in East Africa—is shared with Tanzania and Uganda. One of the three other projects in Kenya has yet to start (Community-based mini-hydropower development for poverty alleviation, in the Upper Tana River basin, under the Tana/Athi Rivers Development Authority). The remaining two are dealing with (i) the up scaling of small biogas plants (household level) for agricultural producers and processors, and (ii) the promotion of sustainable energy systems in Wajir District (‘pilots’ with solar- and wind driven water pumping, some heating- and lighting solar packages, and cooking stoves with associated Neem/trees planting). From a ‘development’ perspective, it seems relevant to consider extension of the EDF activities in the Water and Energy fields, instead of just consolidation in the ongoing ACP-EU Water and Energy Facilities. Areas of intervention could be Peri-urban water supply and sanitation infrastructure. Slum upgrading transport access and watsan should be seen as one of the most important interventions to enhance sense of social equity and justice. Further large scale waste water collection and treatment (Nairobi, Mombasa) are an option. Sugar: Kenya is benefiting from EC support of € 6.23 million from the EC Sugar Reforms Protocol. Sugar is produced at high costs in Kenya. Kenya is committed to phase out the protection it provides to the industry by 2012. The industry needs, however, to improve its competitiveness. The EU programme is focussing on rural roads construction in sugar producing areas, as it has been found that transportation costs constitute a major cost factor in the production of sugar. The EU support is also assisting in a change over from a weight based system of cane purchases by factories to one based on sucrose content. Support is also provided to the capacity building of the Kenya Sugar Board. The progress in programme implementation has been slow, as the programme was caught in the post election violence. There was no expenditure in 2008. However, activities are expected to catch up considerably during 2009 and the beginning of 2010. Further EC support to NSAs is provided through the budget line NSA-LA with a total grant of € 3.3 million for NSAs active in social sectors and in governance is operational since 2008. In 2008 the NSA call for proposals resulted in the approval of nine grants. In 2009 an additional € 3.5 million was made available under this budget line with possibility of doubling the budget through a top up derived from 2009 budget allocation to Kenya. It is expected that under the 2009 new call for proposals 14 grants could be supported.

22

Health. Kenya is benefitting from two regional health projects valued at €4.7 million. Twelve programmes in the health sector focus on some of the key areas of the MDGs, such as improving the health status of mothers and young children, sexual and reproductive health and reducing the incidence and spread of HIV/AIDS. One of the completed projects, Support to Essential Obstetric Care and New Born Care in Northern Kenya which was implemented by UNICEF has enhanced the quality of obstetric care services in the northern region and significantly increased the number of women in the targeted districts who accessed ante-natal (52.5 % of the targeted women attended 4 antenatal visits in 2007), delivery (some 75,144 or 25 % of deliveries were conducted with skilled attendants in 2007) and post-natal services. 2.4.3 EIB interventions The EIB supports economic growth in Kenya mainly in two areas: private enterprise promotion including assistance to SMEs, and public infrastructure development mainly in the energy sector. In private enterprise development, the Bank adopts different approaches depending on the size of the operation. For larger projects, financing can be direct, frequently co-financing with other lenders. To support SMEs, funding can either be through private equity funds or lines of credit under which financial intermediaries can draw funds in foreign currencies or in Shillings, for on-lending to the private sector. However the last global loan in Kenya expired in 2009 without being utilized, in view of the strong liquidity among the leading local banks. Notwithstanding the higher cash flow risks, businesses are prompted to enter into three to five-year loans financed from the banks’ own liquidity at attractive floating rates.

In the energy sector, the EIB’s activities centre around the implementation of two loan agreements signed in 2005 for a total of EUR 75 m, one for the expansion of geothermal power production and one for upgrading the distribution network. In addition, the Bank will provide EUR 60m for the financing of the Mombasa-Nairobi electricity transmission line. Further projects are anticipated, such as a regional interconnection with Ethiopia, and in generation, particularly using renewable resources such as geothermal and wind.

In the transport sector, the Bank will be provide EUR 64m for the rehabilitation and upgrading of Jomo Kenyatta International Airport. Additional EUR 5m funding through the EU Infrastructure Trust Fund, will support capacity building, environmental training and monitoring activities associated with the project. In addition, the Bank will examine the possibility of co-financing a proposed toll road in Nairobi. 2.4.4 unforeseen needs: Humanitarian situation

• Drought-affected population The crisis in the Northern and Eastern part of the country is the result of a nearly total failure of the 2009 long rains and very mixed and uneven performance of the short rains, added to the accumulated impact of five consecutive failed seasons since 2006. It has not only an immediate effect but also a cumulative downwards spiral, in terms of animal body conditions, conflicts over resources, deteriorating terms of trade eroded livelihoods. The frequency of the dry episodes is such that pastoralists and agro pastoralists are not able to recover between droughts. Food insecurity and malnutrition have to be seen in the wider frame of poor development of marginalized arid and semi arid lands, weak health system, conflict over resources, lack of governance at central and district levels and poor management of the grain market. Malnutrition of children under 5 years of age peaks above WHO emergency levels.

• Refugee population Daadab refugee camps hosted 270.000 refugees at the end of 2009 and are seriously congested as it is supposed to accommodate 90.000 people. More than 12.000 refugees have been relocated to Kakuma, the former refugee camps during the South Sudan crisis. Existing refugee camps are operating far above their capacity, increasing stress on refugees and agencies providing assistance. Given the

23

deteriorating security conditions in Somalia over the last two years, the inlfux of refugees in to Kenya is steady (about 5.000 arrivals per months since the beginning of 2008). DG ECHO interventions have followed two main objectives. On the one hand, as far as the refugee situation is concerned, DG ECHO supported interventions in vital sectors such as food, water and sanitation and health. On the other hand, DG ECHO intended to alleviate the impact of recurrent drought cycles on targeted vulnerable local communities through improved response and scale-up emergency capacity, providing appropriate and adequate humanitarian food aid and other forms of emergency food assistance (including nutritional support and short-term food security and livelihood support). The entry point is treatment and prevention of malnutrition through experienced NGOs. All these operations, except one, are in the arid lands of Kenya. From 2005 to 2009, DG ECHO has allocated some €100 M. There was a peak in 2008 to address the needs of the population affected by the post-election violence: 2008 allocation was 32 M€. 2009 was another bad year, with a severe drought and the continuous influx of refugees. Total allocation in 2009 is € 40 M, out of which € 10 M for interventions in the refugee camps. 2.4.5 Other community instruments Kenyan NSAs have been successful to attract support from the EC global and thematic budget lines under EIDHR, investing in people or the Instrument for stability. 2.5 Policy coherence for development Kenya Horticultural sector (flowers, vegetables, fruits) is an important source of employment and exports, while its bearing on environment is a source of concern. DG SANCO is monitoring the Kenya Plant inspection services (visits in 2007), as well as the Competent Authority for Fisheries Products. KPHIS has been supported by the HORTICAP Project (see above) and Kenya is benefiting from DG SANCO organised trainings in the SPS fields. No fisheries agreement is signed between the EU and Kenya. Kenya is granted with recognised universities and institutions for higher education. It benefits from Erasmus Mundus and several EDULINK programmes from the EU, and in particular from a project which is addressing the lack of qualified staff responsible for the management of integrated quality units and the establishment of an internal quality culture in higher education. The “Sustainable Quality Culture in East African Institutions through Centralised Units” project will increase regional cooperation in academic quality assurance, support the development of a coherent quality assurance policy and strengthen the implementation of integrated quality units within three East African universities. 2.6 The in-country dialogue In country dialogue in respect of the mid term review process has been limited. Despite repeated EU solicitations, only a small number of NSA/LA have responded, and GoK formal dialogue has mostly been taking place with the NAO, without the presence of key ministries concerned by EU development assistance. The MTR process has been largely shared with EU Member States present in Kenya, and there has been some exchange of views with the World Bank which is undertaking a review of its Country Assistance Strategy during the same period. Several donor organisations are asking the Government of Kenya to involve more substantially NSAs in both policy making and implementation, with a common understanding that success in implementation of policies requires joint participation of NSAs and government. However, an important part of Kenyan NSAs suffer from institutional and capacity deficiencies.

24

2.7 Aid effectiveness and joint programming The EC is an important member of the Harmonisation Alignment and Coordination (HAC) Group. The process of donor harmonization is well advanced with the existence of a Kenya Joint Assistance Strategy (KJAS) 2007-2012 that has been jointly prepared by GoK and 17 donors in 2006 (including most Member States and the Commission) It was agreed to measure progress towards Harmonisation Alignment and Coordination in three different ways: a) using the KJAS results matrix to assess outcomes of donor supported interventions, b) conduct annual reviews linked to the government strategy reviews and c) undertake a mid term review of KJAS (planned for early 2010). The second mechanism has taken place on an on-going basis, as development partners have linked up with regular reviews at sectoral level. KJAS has been severely affected by the events of 2007-2008 with the donors all agreeing that a “business as usual” position was not tenable. It is also worth noting that two key GoK guidance documents, the Vision 2030 and its Medium term Plan, were completed and launched after the KJAS 2007-2012 was drafted, leading to the agreement KJAS might be reviewed to ensure better alignment. A 2009 review of the HAC noted that the structures and relevant process (websites and surveys) were in place. It highlighted the actions of the donors post 2007/2008 with a perceived emphasis on political issues and a withdrawal from budget support; weak government leadership; good participation by the donors (EC included); a low level of trust between the Gok and the donor community. The HAC review led to a redefinition of aid architecture in Kenya, with an enhanced focus on aid effectiveness and anchoring the process in Treasury external Resources Department, as well as new mechanisms for development related political dialogue (Development partnership Forum) KJAS has defined a series of sector groups, and division of labour is assessed on that basis. The process of harmonisation varies between sectors with some sectors (like) education having effective programming while for other sectors the relevant committees are little more than forum for information sharing. For the EC focus sectors: the Roads and Transport sector is guided by a sector strategy but with implementation being primarily project based and without joint programming. Agriculture and Rural Development is subject to a sector policy and with some joint programming. Furthermore it suffers from a multiplicity of donors and government stakeholders. Joint programming has been considered for the private sector with DFID, Danida and RNE, while for the Governance support to NSA a joint fund with SIDA, Norway and RNE is under consideration.

25

Annex_I.1 Country at a Glance A-I.1-A Table of macro-economic and trade capacity indicators 2005 2006 2007

(e) 2008 (p)

2009 (p) First 6 months

2010(p)

Basic data 1 Population (in 1000) 35.1 36.1 37.2 38.3 - annual change in % 2.5 2.9 2.6 2.7 2a Nominal GDP (in millions € ) 1504

5 17,908

19,804 20,749

2b Nominal GDP per capita (in € ) 429 496 532 542 2c - annual change in % 13.3 15.7 7.3 1.8 3 Real GDP (annual change in %) 5.9 6.3 7.1 1.7 3.0 4 Gross fixed capital formation (in % of

GDP) 18.7 19.3 19.4 19.4

International transactions 5 Exports of goods and services (in % of

GDP) 27.9 27.0 26.5 26.3

- of which the most important: … (in % of GDP)

5a Trade balance (in % of GDP) -15.6 -21.6 -24.7 -31.3 6 Export of services (in % of GDP) 6a Current account balance (in % of

GDP) -1.6 -2.9 -5.2 -10.1

7 Net inflow of remittances (in % of GDP) 2.3 2.0 2.4 2.3

8 Net inflows of foreign direct investment (in % of GDP) 0.1 0.2 3.5 0.3

9 External debt (in % of GDP) 32.2 27.9 23.1 23.3 22.4 10 Service of external debt (in % of

exports of goods and non-factor services)

3.9 4.0 3.8 4.0

11 Foreign exchange reserves (in months of imports of goods and non-factor services)

3.2 3.5 4.0 2.7

12 Average cost to export ($ per container) 2,190 2,055

13 Global competitiveness index (rank) 88 99 93 98 Government 14 Revenues (in % of GDP) 23.3 23.9 25.7 22.3 - of which: grants (in % of GDP) 5.4 7.1 4.4 6.6 - of which external tariff income (in

% of GDP) 10.2 11.8 10.5 10.3

15 Expenditure (in % of GDP) 30.4 31.2 35.9 31.2 - of which: capital expenditure (in %

of GDP) 4.4 4.4 6 6

16a Deficit (in % of GDP) including grants -3.3 -1.7 -4.4 -4.3 16b Deficit (in % of GDP) excluding

grants -8.7 -8.8 -8.8 -10.9

17 Total domestic plus external debt (in % of GDP) 55.6 51.1 46.7 43.9 42.7

- of which: external (in % GDP) 32.2 27.9 23.1 23.3 22.4 Other 18 Consumer price inflation (annual 10.3 14.5 9.8 26.2 22.6

26

average change in %) 19 Interest rate (for money, annual rate in

%) 8.1 5.8 6.9 8.6

20 Exchange rate (annual average of national currency per 1 $) 75.6 72.1 67.3 69.2 79.2

A-I.1-B. KEY MDG AND DEVELOPMENT INDICATORS

Key Indicators 1990 2000 2005 2006 2007 Inter-mediate target

2008 2015

1. % population below 1$/day in PPP 43% 50% 56% 46% 22% 2. Prevalence of underweight children

(under 5 years of age) 32.5%

33.1%

28% 16.2%

3. Under 5 mortality rate (out of 1,000 live births)

112 110 92 100 33

4. % HIV prevalence in population aged 15-24

5.1% 13.4%

9.2% 8.4% 8% ≤

5. % births attended by skilled health personnel

51% 45% 51% 100%

6. % 1 year old children immunized against measles

100%

7. Net enrollment ratio in primary education

83.2 86.5 91.6 100%

8. Ratio girls/boys • in primary education • in secondary education • in tertiary education

1:1.01

1:1

1:1.05 1:1.18 1:1.25

1:1.04 1:1.17 1:1.27

1:1

9. Primary school completion rate 77.6 76.3 81.0 10. % population with sustainable access

to improved water source 48% 55% 74%

11. Fixed lines and mobile telephone per 1000 inhabitants

12.5 25.4 34.5

12. Formal cost required for business start up (% of GNI per capita)

39.7

13. Time required for business start up (days)

34 30

14. Real GDP per capita (in purchasing power parity, in USD)

15. Access of rural population to an all season road

16. Household electrification rate 17. Unemployment (in % of labour force

ILO def.)

18. Employment in agriculture (in % of total employment)