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Guest post by: Shell Foundation Become an Author

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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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