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
To learn more about this author, visit Shell Foundation's Website.
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