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5.3 Case Study 3: Enterprise solutions to poverty

Written by: Shell Foundation

Article Overview: Nurturing pro-poor small enterprise in southern India via the social merchant bank model

5.3 Case Study 3: Enterprise solutions to poverty

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.

Related Articles
  6.0 Propositions and conclusion: Enterprise solutions to poverty
  6.3 Come Together: Enterprise solutions to poverty
  2.0 Introduction: Enterprise solutions to poverty
  1.15 Building an employment agenda: Working Out of Poverty
  1.9 Building local development through cooperatives: Working Out of Poverty

Article Tags: BDA, business development, business model, business opportunities, Commercial banks, development, development finance, enterprise, experience, India, infrastructure, infrastructure deals, innovative financing, merchant bank, merchant bank, merchant bank, Nurturing pro poor small enterprise, poor customers, renewable energy, Shell Foundation, Small Scale Sustainable Development Infrastructure Fund, southern India



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