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Guest post by: Shell Foundation Become an Author

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We took explicit account of this reality in adapting
our model (viability, scaleability, business DNA
and Shell Group assets) to develop a ‘market entry’
strategy into the Ugandan and South African energy
SME sector. This strategy had four components:

to look for local sources of finance and business
know-how (DNA) as partners (because they are
better at delivering on our charitable objectives
than non-profits);

harness the convening power and other assets of
local Shell companies in ways that lowered the
risk to local capital getting involved in SME
financing;

organise the provision of financing and BDA
around the needs of the entrepreneur;

design our initial forays into the sector in ways
that would provide robust evidence, learning
opportunities and a strong demonstration effect
so that local capital would be willing to
undertake subsequent scale-up activities.

The evolution of the Investment Partnership
programme since 2002 first in Uganda and then
in South Africa has robustly tested and validated
the soundness of Shell Foundation’s approach by
delivering close to commercial returns from
investments in the risky SME sector.

Getting a foot in the right doors…

Having decided in Africa not to partner with nonprofits,
Shell Uganda and Shell South Africa’s local
knowledge helped the Foundation identify the
most promising partner candidates from among
the local financial institutions (FIs). But it was the
commercial credibility and convening power of
Shell that subsequently persuaded these FIs to
meet the Foundation to discuss the model.

Having got the banks’ attention, it was the packaging
of the Foundation’s funding and a sound
business plan that helped secure commitments
from local banks to join us at equal risk in
launching our funds.

In Uganda, DFCU Bank agreed to match the
Foundation’s $2m investment capital and agreed
to set up the $4m Uganda Energy Fund (UEF).
In South Africa, ABSA Bank and the Industrial
Development Corporation, each contributed
investment capital of $3.5m alongside $1m by
the Shell Foundation to create the $8m
Empowerment through Energy Fund (ETEF).

Because of the small size of these pilot funds, the
Foundation also provided a limited amount of
grant funding to cover start-up and ongoing
business development costs – a feature that will not
be necessary in the case of larger second-stage funds.

Another feature of the business plan that attracted
both sets of banks was that the funds were to be
commercially managed to achieve, as a prime
objective, financial viability of the funded
enterprises and the funds themselves.

This was starkly different from the developmental
goals the banks had previously been offered (and
rejected) to get involved with other SME funding
opportunities.Moreover, funded enterprises were to
be charged full commercial finance rates while the
banks were offered funds with a familiar seven-year,
closed-end structure but with net returns of 5%.

Such returns were clearly below normal commercial
expectations, but were still attractive to our banking
partners for two reasons. First, they were perceived
as realistic and attainable based on the size of the
market and risk conditions (compared with the
international rates of return some African venture
funds propose). Second, they were acceptable to
banks with a long-term view of investing in the
SME sector in order to grow their own business.

How Shell assets boosted bank
learning, market awareness and
deal flow

Having helped bring about a marriage between the
banks and the Foundation, Shell’s local knowledge
was brought further into play by introducing the
banks to the realities of SME energy sector
financing. This was achieved by providing the
banks with technical assistance relating to both the
supply and demand sides of the small scale and
rural energy sector.

In Uganda, this took the form of advising loan
officers about the financial risks related to various
energy technologies – an input hugely valued by
DFCU. And for ETEF in South Africa, Shell
became a useful source of client referrals – a critical
input to portfolio funds reliant on adequate deal
flow – while in both countries, fund governance
and marketing was strengthened with Shell support.

Another feature of the business model that proved
attractive to the banks and subsequently critical to
the success of the funds was the remit given to loan
officers on how and for what purposes the funds
could be used. Their broad specification was to
support SMEs that require energy-related inputs to
boost production or that sell pro-poor energy
services.

We put very few restrictions on the funds beyond
that, aiming to ensure they were flexible enough to
allow sufficient deal flow to make their portfolio
finance structure work. Hence the deal range was
broad: there were no restrictions on type of energy,
meaning all sources of energy could be financed
rather than just renewables (as was the case with
less successful funds); and non-energy assets could
be funded as well if they facilitated the productive
use of energy.

These criteria thus allowed the funds to support a
very broad range of SME activity. So, for example,
financing was provided that allowed small farmers
in eastern Uganda to acquire solar-powered
agricultural crop driers. And in South Africa, funding covered the capital costs incurred by an
enterprise that wanted to use the waste products
of shelled peanuts to make cheaper and cleaner
alternative briquettes to charcoal. (A full list of
enterprises assisted via our SME funds is available
at www.shellfoundation.org)

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