United Nations Environment Programme Division of Technology, Industry & Economics (DTIE)

Eric UsherDeputy Coordinator, Energy Branch

eric.usher@unep.fr

SME Enterprise DevelopmentA small agency’s perspective

Energy Week 2006March 6th, 2006, Washington

Example Enterprises

Usiss, Mali• Business: Solar Crop Drying• Stage of Sector Dev.: Very Early proof of concept phase • AREED Support: $18,000, 4 yr loan and enterprise

development support from MFC, E+Co• Status: Operating. Repayments current.

BETL, Tanzania• Business: Logistics company coordinating ag. wastes for fuel

substitution• Stage of Sector Development: Early commercialization phase • AREED Support: $50,000 3-yr loan and Enterprise Dev.

Support from Tatedo, E+Co• Status: Increased sales from 500 Mt to 1200 Mt per month

Repayments current.

Example Enterprises

Anasset, Ghana• Business: LPG distribution• Stage of Sector Dev.: replication phase • AREED Support: $38,000, 4 yr loan and enterprise

development support from KITE, E+Co• Status: Repayments current, expanding with bank financing.

KPBS, Zambia• Business: Charcoal production from sawmill waste• Stage of Sector Dev.: Proof of concept phase • AREED Support: $73,000, 4 yr loan and enterprise

development support from CEEEZ, E+Co• Status: Construction of 15 kilns completed. Production,

distribution and sales of charcoal started Feb 2003. Enterprise folded in 2004

AREED

African Rural Energy Enterprise Development

EntrepreneurEntrepreneurEntrepreneurEntrepreneur CustomersCustomersCustomersCustomers

SeedFinancing

EnterpriseDevelopmentServices

EnergyServices

Demonstrating that needed energy services can be delivered on a sustainable commercial basis by clean energy SMEs.

AREED

African Rural Energy Enterprise Development

What defines Seed Finance

• Typically 3-5 year loans in local or US currency.• Concessionality

– Elevated risk appetite– Provision of enterprise development services

=> Terms/conditions are not standardised, but rather are flexibly matched to what the enterprise can handle

AREED Portfolio

Distribution of Enterprises by Technology Type

Biofuels 12%

Energy Eff. 26%

LPG Dist. 21%LPG Stove mfc 3%

Solar PV 18%

Solar Thermal 15%Wind 6%

AREED

African Rural Energy Enterprise Development

AREED Investments 2000 - 2006

- 50,000 100,000 150,000 200,000

RCI

Energie R II

Ubw ato

Rasmas

Chavuma

VEV

BETL

Energie R

AME

Kalola Farms

Aprocer

M38

Anasset

Seeco

Lambark

Gladym

Eco'Home

En

terp

rises

Size (US$)

Type 1 Investment: Proof of Concept• e.g., Jotropha, crop drying, solar grinders. • Very low risk-adjusted returns.• High Innovation impact on sector dev.• Typical Loan Size: $25,000• Ave defaults: 30%• Ave returns: -5%

Type 3 REED Investment: Replication• e.g., Urban LPG, efficient lighting• Moderate risk-adjusted returns• High direct impacts• Low Innovation impact• Ave Loan Size: $130,000• Ave defaults: 10% • Ave returns: 5% - 8%

Type 2 REED Investment: Commercialization• e.g., Waste to energy, rural LPG• Low risk-adjusted returns•Ave Loan Size: $70,000• Ave defaults: 15% • Ave returns: 3%-5%

AREED PortfolioAREED

African Rural Energy Enterprise Development

Portfolio Observations

• 3% to 5% Financial returns are achievable• Non financial returns can also be significant• Enterprise development costs are high

• 20 to 50 cents on each dollar invested

• Public Perspective • After costs, we still see a positive cash flow model

• Private Perspective• Enterprise development can be a less costly means of generating

project pipeline

Supporters: UN Foundation, GEF, German BMZ, SIDA, Dutch, Domini, FMO, US AID

Barriers to Scale-Up

• Enterprise Level: Gap still exists between seed finance and follow-on investment

• Sector Level: Seed finance needs to break its reliance on the donor/foundation community

• Why aren’t mainstream energy investors providing seed financing today ?

Enterprise development costs Insufficient risk adjusted returns

• But, can we move this model to the middle of the road ?

ReturnsEnhancement

Seed Capital Window

Transaction Cost Sharing

Sustainable Energy Fund

Enterprise Development

Support

SeedCapital

Seed Capital Access Facility(SCAF)

Closing the Gaps -Seed Capital Access Facility (SCAF)

Commercial Energy Fund

Development Finance

Commercial Investors

Local Banks

InvestmentCapital

Clean Energy Enterprise - Timeline

Concept

Project devmt,pilotBusiness

planning Aggregate Investment

Growth

Roll out

Seed Fund

In markets where small scale clean energy is economically viable,....why aren’t banks lending ?

.… and, what can be done about it ?

• Example 1 – Indian Solar Loan Programme – State of Karnataka, Solar Home Systems, 2003 - 2006

• Before: many SHS vendors, small total sales, no bank lending• During: consumer finance programme offered through Canara

bank and Syndicate bank, interest rate subsidy, 16,000+ systems financed, other banks starting to lend

• After: subsidy phased out, banks continuing to lend, although lose market share in an increasingly competitive credit market

• Real Driver -> access to financing provided through 2076 bank branches

Indian Solar Loan Programme

Progress as of March 2005

0

2000

4000

6000

8000

10000

12000

14000

16000

0 6 12 18 24Programme time (months)

Nu

mb

er

of

loan

sGrameenCanaraSyndicateTotal Loans

Financing the Customers of SMEs

Financing the Customers of SMEs

Solar Water Heaters Market Growth in Tunisia1985-2003

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

m²

of

ins

tall

ed

SW

H

GEF Project

• Example 2: MEDREP -Tunisia ProSOL Programme– Domestic Solar Hot Water, 2005 - 2006

• Before: solar thermal market small although near tipping point as shown by previous WB GEF programme, 35% energy subsidy for LPG, no bank lending

2005

29,000 m2

• During: SWH financing offered through 3 Tunisian banks, interest subsidy + energy subsidy extended to SHW + utility billing, 9,000 systems in 2005.

• After: ??• The real driver ->

policy change + utility billing.

Loan Programme Observations

• Various soft barriers exist that prevent banks from lending• Bank engagement is not gradual, but rather follows somewhat

of a step function (ie herd instinct)• Multi-stakeholder engagement is key to successful

interventions.• Credit engagement can provide a strong feedback loop to

policy makers.

www.unep.fr/energy/finance www.areed.org

The challenge of supplying small scale energy services• is NOT a lack of technology, business models, capital or the ability to pay; • it is the MISMATCH between the needs of the enterprise and the types of financing currently available.

Phil Larocco, E+Co

Eric Usher Eric.Usher@unep.fr

THANK YOU!