Nurturing pro-poor small enterprise in southern India via the social merchant bank model The Small Scale Sustainable Development Infrastructure Fund (S3IDF)43 is another innovative financing initiative operating in south India in which the Shell Foundation is involved – and which demonstrates the value of applying business thinking and business principles to tackling even more extreme poverty contexts. S3IDF targets very small enterprises that require access to small amounts of capital ($1000 to $10,000) so they can offer energy, water and other basic infrastructure services to very poor customers. Typical projects are small community electrification schemes using renewable energy (solar, hydro, biomass).
The context in which S3IDF is operating is generic across developing countries and there is not an absence of technology, business ideas, or the willingness of even very poor customers to pay (energy expenditure of poor households can be between 15% and 30% of total income). The key problems are the lack of availability of finance and appropriate business development assistance (BDA) to support the growth of these enterprises, and the lack of experienced intermediary agents who can help bring these projects and their lead entrepreneurs to market.
Commercial banks and equipment suppliers won’t lend to what are inevitably inexperienced entrepreneurs without collateral and little business experience (including experience in how to access start-up finance). The banks have no experience of these nearly invisible markets or of the particular needs of these enterprises. So all in all, it’s just too risky. There are better, safer ways to earn a return.
For similar and other reasons, these types of deals are simply off the radar screen of most pro-poor development agencies and development finance institutions.
So S3IDF brings to small scale, pro-poor infrastructure business opportunities, the innovative financial, institutional and technical engineering that is common in large infrastructure deals. To do this, S3IDF operates as a ‘social merchant bank’ targeting very small enterprises.
S3IDF applies business criteria and best practice financial engineering skills45 in assessing, selecting and structuring its deals, and delivers the flexible mix of finance and specialised BDA its ‘clients’
need but which is not available elsewhere. And S3IDF works closely with select partners from the for-profit and not-for-profit sectors who can provide skills and assets to the deal engineering process that it cannot.
S3IDF addresses its scale-up aspirations by always ensuring the involvement of local capital sources in its deals on a learning-by-doing basis. This is so commercial banks will see there is a return to be made and thus make more of their own capital available in future to finance very small pro-poor enterprises.
S3IDF now has a portfolio and pipeline of 80+
projects. Almost 20 are in operation;4930+ are under detailed pre-investment analysis and/or at the final deal-structuring stage. All but one live project is producing returns as expected (albeit still below market rates). The evolving S3IDF portfolio/pipeline is in effect verifying its business model and this process is helping it to line up the ingredients needed for a partially self-financing scale up over the course of the next 12–18 months.
Of course, it’s early days for S3IDF as its portfolio includes some high-risk projects and very considerable subsidy for project preparation. This raises questions as to whether such a fund could (or indeed should) ever be fully commercial.
But S3IDF, operating like a merchant bank in an extremely impoverished market yet successfully catalysing enterprise-based solutions to poverty and doing it in a scalable fashion, deserves commendation and attention.
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