Based on what we learned in Uganda through UEF (including the convening power that the Shell brand had with local banks) we established ETEF, our South African fund, with new financial products and an independent intermediary in the form of an independent fund manager with particular expertise in the small-scale energy sector in place from the start.
Based on what we learned in Uganda through UEF (including the convening power that the Shell brand had with local banks) we established ETEF, our South African fund, with new financial products and an independent intermediary in the form of an independent fund manager with particular expertise in the small-scale energy sector in place from the start.
Both the financial products and the contract with the fund manager (who also had an equity stake in the fund) were designed to tackle the incentive/
equity/exit problem that bedevils all SME financing in developing countries.
Offering finance to the SME in return for appropriately geared, performance-related returns – via profit sharing for example – is the key. It allows you to incentivise the entrepreneur (the better he or she does, the lower the cost of finance) and incentivise the fund manager (the betterperforming the portfolio the better it does) so that both invest all their efforts in trying to succeed.
In the process you improve the risk–return profile of the portfolio. Also key is the fact that the fund manager is expert at both BDA for SMEs and investment assessment and thus is much more effective at making this crucial dimension of our model work in comparison to ‘converted’ in-house loan officers.
ETEF progress and impacts At the end of 2004, after less than a year’s operation, ETEF was 45% committed to deals ranging between $50,000 and $600,000. There’s been one write-off and the 5% target rate of return will be easily exceeded. Independently validated developmental returns include 120 new jobs created and 80+ enterprises – all pro-poor SMEs – received BDA. In recognition, ETEF and the Shell Foundation won ‘Best Initiative in Support of the Millennium Development Goals’ at the 2004 Africa Investor Awards.
Comparative performance Though it’s difficult to obtain information from other donor-funded SME energy sector funds operating in sub-Saharan Africa, our best estimate is that for every $10 available to these funds, only $3 reaches the enterprises in the form of investment capital (typically in forex). By contrast, for every $10 made available through our funds, at least $8 in local currency (which is what SMEs need) reaches the enterprise.
First steps to scale-up The most important outcome of our pilots is that later in 2005, a $20m east African regional SME energy fund will be launched alongside a similar petroleum sector SME supply-chain fund in South Africa.53 Local bank contributions to both will exceed $10m and these have been committed because of the success of our pilots. Moreover, based on firm expressions of interest from the international corporate and finance community, more pro-poor, SME investment funds in Africa, Asia and Latin America will follow.
These first scale-ups demonstrate how business thinking has produced an incentivised commercial vehicle that escapes the inherent constraints on scale and effectiveness that is associated with more traditional donor-financed and controlled schemes.
Grounds for optimism The progress of the pilots and scale-up efforts underway in our Energise and Breathing Space programmes is encouraging. But set against the scale of the problems being tackled and allowing for risk and room for error, it’s clear we’ve made only a start. Nevertheless, we think the outcomes emerging from the Shell Foundation’s businessminded approach to tackling poverty are worthy of consideration and, of course, challenge. They also provide the basis for the issues and questions raised in the concluding section.
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environment and equitable social
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