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5.8 So far so good in Uganda: Enterprise solutions to poverty

 
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5.8 So far so good in Uganda: Enterprise solutions to poverty
   

While both SME energy funds are still young, the pace of capitalisation in Uganda has been very rapid, indicating interest in the market and an encouraging depth of demand. UEF will be fully committed before the end of 2005 – well before the original close-out date.

For UEF, out of more than 160 deals closed, nonperforming investments are running at 2% and no write-offs have yet been made. The expected net return on investment of 20% on a portfolio of deals ranging from $10,000 to $400,000 (in Ugandan shillings) is, of course, well above the original 5% return first anticipated.

The financial viability of the fund in Uganda has led to direct and indirect developmental returns. For example, 80 enterprises have received some form of BDA in addition to the more than 160 receiving finance so far. And an independent audit of nine sample enterprises revealed these alone have created 386 jobs. And interestingly, despite deliberately not having a renewables-only criteria, a majority of UEF deals involve renewable energy sources.

Real time adaptation of the model While the UEF’s performance is pretty solid for a pilot, operational experience revealed aspects that could be improved to lower costs and risk. For example, UEF mainly offered lease finance as it was a product that ‘worked’ for both Ugandan entrepreneurs and our banking partner.52 But we found that on its own, lease finance did not provide sufficient capital or flexibility to meet the needs of SMEs.

Second, it soon became clear it was not cost effective for the bank operating the fund to make large numbers of small lease deals. But increasing the deal size was not an option because SMEs were the target market. So we experimented in using an intermediary to carry out business development and part of the credit assessment role. This was feasible where we found SMEs operating in the same sector – dried fruit, mushrooms and honey – since all had similar finance and BDA requirements.

So in one case, a fair trade purchaser of dried fruits – a company called Fruits of the Nile – took on part of the bank’s role because it already had commercial relationships with hundreds of the farmers our SME fund wanted to reach. This innovation significantly lowered unit costs and in effect greatly increased the portfolio size less than a year after launching the fund.

Third, though our local bank partner adapted well to the aspects of our model, the bank’s asset-lending culture and incentive structure combined to reduce the potential value of the BDA component and constrain the growth potential of the funds.

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Shell Foundation
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The Shell Foundation is established to support efforts to achieve a balance between economic growth, care for the environment and equitable social development - the goal of sustainable development. The Foundation's focus on sustainable development is based upon the Shell Group's belief that the long-term health and prosperity of societies of which it is part, and its own future, depends on the ability of all stakeholders, worldwide, to attain such balance. However, as one of the most significant international oil and energy groups, Shell recognises the global dimension of many sustainability issues related to its activities. It believes it has a responsibility and an opportunity to play its part in addressing these issues.
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