Only an in-depth, integrated approach to energy access ensures a sustained income rise.

Putting Down Roots

Binu Parthan | REEEP (The Renewable Energy and Energy Efficiency Partnership)

Only an in-depth
Only an in-depth, integrated approach to energy access ensures a sustained income rise.
Putting Down Roots
by Binu Parthan for
REEEP (The Renewable Energy and Energy Efficiency Partnership)

Shaffiudin is an entrepreneur who wants to make more money but also help other inhabitants of Chintapally, a town 150km from Hyderabad in the Indian state of Andhra Pradesh. He ran a telephone kiosk and photocopying service for months, but found it difficult to expand due to lack of capital. On top of that, the power connection would sometimes fail due to grid problems, leading to loss of income. It was a situation he could have been stuck with indefinitely, because of the conservative approach of most Indian banks to businesses in poor communities.

But in 2006 he was spotted by S3IDF. Russell deLucia, S3IDF's founder, calls his organisation a social merchant bank. It is a fund that helps develop small-scale environmentally-friendly enterprises which help the poor to increase their earnings and well-being either as providers or users of infrastructure services - energy, water, communications, and transport. Funding ranges from $100-5000 transactions, in an organisation with over 60 investments and 130 in the pipeline.

"In a lot of our deals, poor people end up owning the assets," says deLucia, and this too may distinguish the projects from the few alternatives in existence. His organisation differs from microfinance providers, who tend not to handle infrastructure investment.

"For most of our projects, either we find a local entrepreneur who wants to help solve an infrastructure problem or we actually invent a new business," he explains. The micro-entrepreneur will act as the lynchpin of a project that can flourish locally and help make more money for people in poor communities. In this case, Shaffiudin's entrepreneurial skills were already developed, and his business was already in place.

What he needed was reliable power (used for his billing service) and sympathetic bankers, in the end S3IDF 's expertise helped to overcome many of the financial obstructions. The organisation made a full loan of $1300 to install new printers and computers for digital imagery and email access from which both the local community and students can benefit.

Shaffiudin is gradually repaying the loan through income derived from charging customers who may, in turn, increase their own income through the services available. This spider web effect arising from one initial outlay is the hallmark of the social merchant banking pioneered by deLucia and his colleagues.

The new Information and Communications Technology (ICT) centre uses computers powered by rooftop solar panels, a typical feature of S3IDF's projects, which often use clean energy. They may be more reliable than traditional power sources, and can benefit from special funding structures to become viable. Funding from the Renewable Energy and Energy Efficiency Partnership (REEEP) was included in the transactions.

"In general, S3IDF prefers to use credit guarantees rather than full loans as this encourages local banks to participate in projects from the start, but in Shaffiudin's case the bankers' ignorance of the business model obstructed this route. "Our mission is to try and change the mindset of local banks; we continue the dialogue with them afterwards to convince them to complete full loans to such enterprises," says deLucia.

Now that the project is finished it can act as a model to demonstrate the viability of the project. In the future, it will be replicable in other parts of the town and further afield, and funded by local institutions such as the rural network of smaller Grameen banks.

The work is typical of the approach of both S3IDF and the Solar Electric Light Company (SELCO) - with whom it sometimes collaborates. Both are working on dozens of pro-poor projects in India that also benefit from REEEP backing and focus on improving access to and thereby generating incomes from different kinds of infrastructure - from ICT to electricity, heating, cooking and lighting. ICT is just one aspect of their overall portfolio. For instance, REEEP is funding an S3IDF project to substitute kerosene with LPG stoves fitted with pressure cookers.

S3IDF provides a single comprehensive source of funding as well as technical and financial expertise to poor people ignored by conventional banks. Given the success of the Chintapally project, it is difficult in hindsight to see why banks are so reluctant to get involved in the first place.

But deLucia believes that most mainstream Indian banks would not understand nor even have contact with this type of customer nor have an awareness of the technology involved, and would nearly always demand collateral unavailable to poor people in return for a loan. Only small loans of below $100 do not require collateral. Their loans do not reach into the parts of society below the poverty line as they deal mainly with middle-class and wealthy people. In many cases the poor often don't have the knowledge to go through the loan process.

By putting up the funds, often using innovative financial structures to make the projects pay, S3IDF and SELCO create the first infrastructure link in a value chain which generates new incomes. SELCO works mainly on the technology side, providing solar lighting and electricity, clean water and wireless communications and has sold, serviced and financed over 70,000 solar electric units to its customers. It works with a number of different financial partners, in addition to S3IDF.

S3IDF aspires to a somewhat different approach than organisations focusing on macro goals to improve energy and computer access, such as the visionary initiative spearheaded by Prof. M.S. Prof. Swaminathan over ten years ago and formalized in 2003 as a consortium of NGOs, academics and corporations in the National Alliance for Mission 2007 with the goal to make "Every Village a Knowledge Centre" by bringing the benefits of Internet connectivity to the India's rural population living in over 600,000 villages.

This Government of India has funded and placed this vision in the framework of the National e Governance Plan (NeGP), with the aim to provide government and other services, in an integrated manner, at the doorstep of the citizen and establish a network of 100,000+ Common Services Centres (CSCs) as internet-enabled front-end delivery systems or access points for various government and private services to the citizens, primarily in rural areas of the country on an entrepreneur-based Public Private Partnership (PPP) model, with an equitable geographical spread. The rollout of the CSCs is proposed by the end of 2007.

deLucia and Harish Hande, SELCO's director, applaud the government's intentions, yet have chosen a more hands-on entry point. They bring their concern to focus on market linkages. Such linkages can be overlooked by governments who concentrate on the Big Picture yet do not necessarily have the resources to steward along the interconnected factors that can facilitate success at a micro-economic level and contribute to greater success at macro levels.

The linkage approach means ensuring that the new technology, be it telephony, heating, lighting or computers, is not just physically installed but meshed with both income generation strategies and human networks in the wage-earning and financial community. This social penetration strategy is more likely to generate sustained development in markets and earnings. It is possible, suggests Hande, that 80% of the government's computer centres will not be working in two years' time because of the lack of consideration of these factors.

"Poverty is a complex issue. If you don't create a linkage [between technology, markets and people], the technology is of no use," states Hande. In another project supported by REEEP, SELCO and its partners funded dozens of new solar-powered sewing machines operated by self-employed seamstresses living in Ahmedabad, within the state of Gujarat. The women were previously using manual sewing machines, so the unit output from each sewing machine leapt from two to eight shirts per day, hence massively increasing productivity.

But financial institutions were neither convinced that this was viable, nor that the women would be able to produce the work on a regular basis or that there would be a market for the extra shirts. The REEEP funding in this case was specifically used on convincing the financial institutions as well as on purchasing some of the equipment.

It was SELCO's job to make them understand that this project was feasible by creating this market linkage. "I have always wanted to disprove the myth that you cannot run a commercial venture while trying to reach social objectives," states Hande. He currently has REEEP funding to establish income generating activities in connection with solar installations, including a project to install 30 new solar-powered telephone booths in Mangalore and 40 home solar lighting systems in Udupi, pioneered by a local entrepreneur as in the Chintapally case. "Transaction costs are high and the REEEP cash buffers the costs," he says.

deLucia uses renewable energy wherever possible, both for environmental reasons and also because "it can be quite cost-effective when the grid is unreliable," he explains. In some areas, peak use of the grid is so expensive that clean energy may be viable, especially if innovative finance is used. Clean energy is also suitable in rural areas where no grid exists in the first place, or where there are serious voltage fluctuations.

Many of the projects can get extra funding from carbon credits sold to Western carbon offset companies, since a 40 Watt solar panel used instead of a diesel generator, for instance, saves about 250 kg of CO2 per year. More clean energy projects might go ahead if the government removed a new uniform tax which affects clean energy and introduced tax incentives instead, says Hande. If state governments worked with local banks, Hande thinks more progress could be made too. Banks have a specific portfolio on, for instance, agricultural businesses, but renewable energy is not considered separately.

SELCO was deliberately created as a for-profit company rather than an NGO in order to encourage transparency and accountability in the organisation's work, hence forcing good business sense into all its programmes, so that they are tuned into local economic conditions. "It's a massive challenge. Governments may sometimes provide the finance, but who takes up the task of creating a supply chain?" he asks.


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