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PROJECT DEVELOPMENT FACILITYREQUEST FOR PIPELINE ENTRY APPROVAL

AGENCY’S PROJECT ID: GEFSEC PROJECT ID: 2950COUNTRY: Regional (Uganda, Tanzania, Kenya, Ghana and/or South Africa)PROJECT TITLE: Lighting the “Bottom of the Pyramid”OTHER EXECUTING AGENCY(IES)DURATION: 36-48 MonthsGEF FOCAL AREA: Climate ChangeGEF OPERATIONAL PROGRAM: OP5, OP6GEF STRATEGIC PRIORITY: ESTIMATED STARTING DATE (PDF): ESTIMATED STARTING DATE (PROJECT): August 2006ESTIMATED WP ENTRY DATE: March 2005PIPELINE ENTRY DATE: October 2005

FINANCING PLAN (US$ MILLION)

GEF ALLOCATION 6,000,000

Project (estimated) 18,000,000-36,000,000

Project Co-financing:

12,000,000-30,000,000

PDF A*PDF B**PDF CSub-Total GEF PDF

PDF CO-FINANCING (details provided in Part II, Section E – Budget)

Multiple sources

Sub-Total PDF Co-financing:Total PDF Project Financing:

* Indicate approval date of PDFA ** If supplemental, indicate amount and date of originally approved PDF

Record of endorsement on behalf of the Government:(Enter Name, Position, Ministry) Date: (Month, day, year)

This proposal has been prepared in accordance with GEF policies and procedures and meets the standards of the GEF Project Review Criteria for approval.

Steve GormanGEF Executive Coordinator, World Bank

Alan MillerGEF Coordinator

Date: December 23, 2005 202 473 [email protected]

Revised Concept Note - Lighting at the Bottom of the Pyramid 12.21.2005

PART I - PROJECT CONCEPT

A – SUMMARY

Overview

This concept paper outlines an IFC initiative (the Project) to accelerate the development of markets for Light Emitting Diode (LED)-based lighting technology in Sub-Saharan Africa. The Project seeks to address the complex of problems which arise from the dependence of large populations in Sub-Saharan Africa without access to modern energy – and specifically modern lighting services. At a global level, this lack of energy access confronts an estimated 1.6 billion people. Within the five African countries from which the IFC project will ultimately focus on one to three countries, an estimated 110 million people rely on fuel burning (e.g. kerosene) as their source of lighting. This practice contributes at a surprising rate to global warming, while contributing to local environmental degradation, and hindering economic and social development. Specifically, fuel-based lighting contributes an estimated 244 million tones/year of CO2 on a global level. This is the equivalent of 58% of the total global emissions from electric lighting household use contributed by the rest of the planet’s population (Mills, 2002). Yet, the quality and quantity of light received by those relying on fuel-based lighting is a very small fraction of the lighting services received by those with access to modern lighting services. This population, those least able to afford it, pay many times more per unit of lighting received than the richer, electrified population, as well as the toll paid in terms of the health effects of breathing indoor smoke and the safety issues associated with fire.

The Project approach is to work with the global lighting industry, specifically the young juggernaut of the solid-state lighting industry which is currently focused on fast-growing electronics and automobile markets largely to the exclusion of the non-traditional market off the electric grid, whose lives their technology is capable of transforming. IFC will leverage its status in the private sector to engage the industry, support supply chain development, and apply the marketing and consumer education lessons from prior GEF market transformation programs (including the IFC/GEF Efficient Lighting Initiative) to enable a sustainable, and commercial solution to increase access to modern lighting services within the target market of Sub-Saharan Africa.

During pre-appraisal, IFC will assess the candidate countries of South Africa, Uganda, Tanzania, Ghana and/or Kenya. These five countries are all signatories of the UNFCCC and have national initiatives fostering energy access. IFC will conduct assessments within these countries and engage local stakeholders and LED industry members to determine which country markets present the best context for the Project as conceived in this note. The Project’s specific target or baseline will be the unelectrified population of these countries, which have collectively 110 million people without access to electricity, representing approximately 20% of the unelectrified population in the African continent. This selection of a few countries with a large unelectrified population allows the Project to be focused and efficiently implemented while having a large-scale impact and an even greater scope of replicability.1

1 The estimate is based on the following statistics respectively on a) total population and b) total population without access to electricity: South Africa 45 Million/ 13.5 Million; Kenya 31 Million/26 Million, Uganda 26 Million/ 25 Million, Tanzania 36 Million/33 Million, Ghana 21 Million/12 Million

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IFC has spent two years in consultation with the emerging LED industry, and with lighting marketers and solar home system providers in several markets, as well as assessing a variety of more mature lighting technologies and complementary power solutions in the preparation of this concept. Because solid-state lighting technology can provide useful light in very low wattage packages which are quite durable and which are highly controllable for variable quality, and because the solid-state technology is on a rapid development curve of efficiency gains and cost reductions, IFC ultimately decided to focus on LED technology. aWhile impressed by the potential for LED-based lighting technologies to substantially “disrupt” the status quo of marginally successful solar home system providers (several of which IFC has directly supported) and provide affordable modern lighting solutions to those who inhabit “the bottom of the income pyramid,” IFC has been very deliberate in developing a concept which stimulates competition rather than impeding development of a sustainable commercial market, and which leverages IFC’s comparative institutional advantage. Thus, in our engagement with the associated solid state lighting and off-grid energy services market players at both the global and local levels, IFC sought a clear understanding of the industry’s capabilities, interests, and needs at each level. Our concept, while focused on LED technology will not restrict or pre-define either technology packages (including multiple power sources) or the business models adopted by the market. The message from the industry in terms of what they would seek from IFC was clear. They seek market information (including access to distribution channels {on the one hand} and access to technology {on the other}, a source of credible information to educate consumers, access to consumer-level finance, a product quality certification system to protect the nascent market against “market spoiling”, and an even-handed facilitator to help organize the industry to share costs and facilitate partnerships. Figure 1 below summarizes how LED technology, early in its development process, currently stacks up against other, competing lighting technology.

Figure 1: Comparison: Selected LED Lighting Solution vs. Fuel-Based Lighting

Technology Candle Simple wick, kerosene lamp

Pressurized mantle,

kerosene lamp

1 W LED lamp, solar rechargeable

battery

Illuminance on work surface (lux) 1.1 1.1 182 320

First cost ($US) 0.10 1 10 25

Annual operating cost ($US) 58.40 8.92 56.73 4.38

Carbon dioxide emissions (kg) … 40 299 0

Total cost per unit of “illuminance service” * 36.65 5.81 0.23 0.03

*($US/1000 lux-hours). Assumes first cost amortized over three years. Data from Jones, et al. 2005 Right Light.

The Project’s insight is to realize that the technical and economic superiority of LEDs to fuel-based lighting offers a unique opportunity to address multiple environmental and development problems through a “consumer market” approach by realizing that the unelectrified people around the world represent in fact an attractive pool of “bottom of the pyramid” consumers to private providers of modern lighting services. Collectively, this 1.6 billion unelectrified population worldwide spends $48 billion/year on lighting services, no less than 20% of the global lighting market (Mills, 2002). In the five pre-selected countries South Africa, Kenya, Uganda, Ghana and Tanzania, which has roughly 110 million

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unelectrified people, spending on fuel-based lighting may be as high as $3.3 billion/year. For the lighting industry - a commoditized industry, dependent on GDP growth, and thus hungry for any high growth opportunities - this is a large, unexplored segment to date with a high growth potential.

In addition to being a large potential market, the 110 million unelectrified lighting consumers in South Africa, Kenya, Uganda, Ghana and Tanzania offer a substantial “business opportunity”, as they are currently served by a very bad, inefficient product - fuel-based lighting – which is very expensive and polluting, and delivers a poor lighting service. This inefficiency offers an opportunity for LED-based lighting products, which due to recent maturation and technological advances, represent today from a technical, environmental and cost-effectiveness standpoint a far better lighting solution to the end-user than fuel-based lighting.2

These technological developments in LED technology also allow for reliable “independent” or stand-alone lighting systems. This is a key development, as it allows the Project to target one energy need with a direct impact on productivity: lighting. This ability to serve a single and productive energy need reduces the system costs, raises household productivity, and thus increases overall affordability of modern energy products. This represents a direct response to the high first cost issue which limits the commercial success of many solar home systems; the potential of high quality, reliable, solar PV/LED lighting products with a first cost of less than US$40/unit represents a substantial breakthrough for the market of the world’s poorest users of lighting services.

Through this approach, the Project supports GEF’s strategy to promote productive uses of energy, as high quality lighting can support a number of small scale enterprises at the houseldhold level. Moreover, through its focus on a single energy need, the Project also builds on the lessons from other GEF-sponsored projects by avoiding the common challenges of multi-purpose energy systems (such as PV-based home systems) that in seeking to meet at once different energy needs in many circumstances become a) too expensive, and b) harder to maintain, repair or replace, and thus less reliable and appealing to end-users and c) less adaptable to different end-user preferences and existing distribution channels.

Despite this promising market potential, high information and transaction costs limit greatly the number and type of individual companies currently addressing this market (see further discussion on barriers below). Hence, the opportunity for an external intervention from IFC/GEF to engage and mobilize the international lighting industry in breaking into these countries and their unelectrified “consumer market” of up to 110 million consumers, and raise sales volume by offering reliable and affordable modern lighting services that can displace fuel-based lighting. This reasoning and market transformation approach has been already proven successful when applied to the global lighting industry, as evidenced by the results of initiatives such as the Energy Efficient Lighting (ELI). Through ELI, IFC/GEF successfully engaged compact fluorescent lamp (CFL), ballast, and luminaire manufacturers, retailers, and distributors, and other lighting stakeholders across seven countries to promote

2 The market potential and business opportunity for new technologies providing superior solutions to low income areas in Africa is not be underestimated. In other industries experiencing rapid technological developments, such as in mobile phones, Africa has quickly moved from being viewed as a “no-market” to one of the most robust, high growth markets in the world. Nokia, a major global player in this industry, projects 100 million mobile users in Africa in 2005 and 200 million by 2009.

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more efficient lighting technology and displace inefficient incandescent lighting services to electrified populations.

To achieve a similar success in seizing this opportunity now with unelectrified populations, the Project needs to similarly be able to engage the private sector, mobilize it towards market transformation and, thus leverage these technological developments, which make modern lighting more broadly accessible to those lacking access to electricity. These are skills and experiences that IFC is particularly well suited to provide:

Engaging the Private Sector - The Project is, in fact, market-driven. It is a directresponse from IFC to the interest expressed by the global lighting industry for support in overcoming the barriers that exist for modern lighting products to displace fuel-based lighting, despite the appeal of these modern technologies from a technical, environmental and cost-effectiveness standpoint. IFC will leverage this interest of the global lighting industry in entering this market by engaging the private sector from the outset, making global and local private players and stakeholders in the lighting industry an integral part of the project design, implementation, and, importantly, co-financing. IFC dialogue with the global lighting industry on pursuing the opportunity to serve this population started about 2 years ago. During this period IFC has a) spoken with approximate forty industry representatives regarding the market represented by users of fuel-based lighting, b) drawn on experiences and industry contacts from other projects such as Energy Efficient Lighting (ELI), and c) actively participated in global lighting and energy access conferences, developing a solid understanding of the industry needs and motivations and ability to support the Project.

Mobilizing Private Sector to Market Transformation - IFC will build upon its extensive experience in engaging the private sector for large scale market transformation. In particular, IFC will leverage extensively the experience, operational framework, and relationships with many stakeholders in the lighting industry already built during the implementation of the Efficient Lighting Initiative (ELI). The Project is in many ways an extension of ELI, leveraging IFC/GEF experience, and relationships from ELI to address now yet another challenge: the market barriers hindering modern lighting products to reach in an affordable and commercial way this unelectrified population. The Project will continue to leverage ELI – including the self-sustaining ELI Quality Certification Institute – as it evolves.

Exploring alternative LED-based products to deliver lighting services - The Project will leverage IFC’s extensive engagement in the lighting industry, and the strengths of LED technologies. While remaining focused on the LED technology, the Project will explore a number of alternative power sources and delivery systems. This way, the Project will be designed to benefit overtime from further price reductions in LEDs, while being flexible to test and support alternative LED-based off-grid lighting systems that prove competitive against fuel-based lighting.

Figure 2: Initial set of technology options to be considered

LEDPhotovoltaics (integral or modular) Micro hydro generators Fuel cells Pedal-driven, wind-up, other human powered generators

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As noted earlier, this combination of strong industry motivation to be engaged and mobilized to develop a new market, and the maturation and cost reduction of lighting technologies, offers a singular opportunity for a market transformation initiative. The Project will seize that opportunity to go beyond small-scale pilot projects to bring modern lighting to the unelectrified population (the prevailing type of projects to date in this area), and seek a regional, large-scale, and industry driven commercial solution to this environmental and development challenge.

However, seizing this opportunity is possible only if key barriers to the market’s development can be removed. These barriers, which are presented in Figure 3 and were identified both by IFC discussions with the private sector and prior GEF-sponsored field experiments, fall into five broad categories:

high information and transactions costs facing individual modern lighting companies to understand the market, and how to best develop it,

lack of understanding of end-user needs and product requirements to compete against fuel-based lighting,

lack of understanding of alternative value chains or delivery systems which may be adapted to deliver modern lighting products,

lack of functioning business models (the “right” products being delivering through the “right” value chains with “reliability” and at an “affordable price”), and

lack of institutional support for market development (e.g. financing, product quality control and similar institutional functions which cannot be directly provided by individual private companies competing in the market).

Figure 3: Findings from private sector and GEF projects and barriers identified

Given these barriers, what is a superior technology - LED - becomes in practice an inferior solution to fuel-based lighting in meeting the needs of the end-user, and thus fails to displace the expensive and low quality of fuel-based lighting. The Project will remove these barriers by undertaking five main actions, as depicted in Figure 4.

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Lack of successful business model to deliver the“right product” through the “right value chain” at the “right price”

• High first cost and affordability• Lack of consumer financing• Product quality varies substantially

High Transaction Costs to Understand Market• Perceived as complex market • Perceive as market difficult to penetrate

Main BarriersTo Market Development

Findings from Private Sector and GEF Projects

Lack of necessary institutional underpinnings to support market development

• Quality of product delivered varies substantially• Uncertain technological track record• Lack of Business Skills and Financing

Lack of understanding of alternative value chains or delivery systems

• Inability to obtain replacement parts (lamps) locally and in a timely manner

Lack of understanding of end-user needs and product requirements to compete against fuel-based lighting

• End-user needs not understood by supplier• Systems lack required functionality



High Transaction Costs to Understand Market• Lighting companies perceive rural, developing country consumers as complex market and difficult to penetrate











High Transaction Costs to Understand Market• Perceived as complex market • Perceive as market difficult to penetrate











High Transaction Costs to Understand Market• Lighting companies perceive rural, developing country consumers as complex market and difficult to penetrate










Figure 4: Market barriers identified and project actions for removal

These actions will be undertaken under a structured approach, where findings from one task inform the Project in the planning and execution of the following tasks. This structured approach gives the Project the necessary flexibility to quickly adjust to the many lessons that will arise on the market conditions and increase its likelihood of success. This structured approach will be implemented through 6 main steps:

Step 1 - Private Sector Engagement: The Project will engage a wide range of local and international lighting manufactures to participate in the Project by providing their products and technical and marketing expertise to support a) field-tests, and b) “focus groups” exercises with end-users. Industry members would co-finance some of these costs, incentivized by the opportunity to learn about the potential of this market while sharing the development costs with other manufacturers (see further discussion below on the lighting industry structure and the incentives it creates for private sector engagement in the Project). The industry engagement, initiated by IFC in developing this concept, would be sustained through the Project life, punctuated by regular industry participant meetings.

Step 2 – Product Testing and End-User Preference Survey: The Project will a) collect and review all the information gathered from field tests on LED-based off-grid lighting systems and b) undertake “focus group” interviews with end-users on their interest and willingness to pay for alternative LED-based products vis-à-vis the option of purchasing fuel-based lighting products. As necessary, the Project may conduct additional field tests on selected products to confirm previous findings or to test additional products or criteria. The combination of the findings of previous tests, and the results of any additional field tests, and of the “focus group” interviews will provide a profile of performance criteria that are required to meet the needs of the end-users, and compete successfully against fuel-based lighting.

Step 3 – Assessment of Alternative Value Chains: The Project will perform an assessment of available value-chains delivering services to these unelectrified communities, to

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• Set parameters for competitive products against fuel-based lighting (price, reliability, functionality) and convey to industry most promising value-chains to adopt and promote products that meet those product parameters

Lack of successful business model to deliver the “right product” through the “right value chain”

• Use IFC role as “honest broker” and ELI experience to engage private manufacturers and distributors in sharing costs of understanding the market

High Transaction Costs to Understand Market

Project ActionsMain BarriersTo Market Development

• Use IFC network, experience and relationships to establish key institutional underpinning to support new business models, including, but not limited to:

– mobilizing consumer, SME, vendor financing– setting parameters for product certification– organize campaigns promoting product

Lack of necessary institutional underpinnings and successful business models

• Identify alternative value chains that can deliver products reliably and at affordable price, and provide post-sales support


• Perform field test with several products and compare against fuel- based lighting• Perform customer surveys to understand end-user preferences and constraints








– mobilizing consumer, SME, vendor financing– setting parameters for product certification– organize campaigns promoting technologies

and educating consumers




• Perform field test with several products and compare against fuel-• Perform customer surveys to understand end-user preferences and constraints








– mobilizing consumer, SME, vendor financing– setting parameters for product certification– organize campaigns promoting product




• Perform field test with several products and compare against fuel- based lighting• Perform customer surveys to understand end-user preferences and constraints








– mobilizing consumer, SME, vendor financing– setting parameters for product certification– organize campaigns promoting technologies

and educating consumers




• Perform field test with several products and compare against fuel-• Perform customer surveys to understand end-user preferences and constraints



understand in depth the key players (distributors, retailers, repair services, etc), their incentives in the distribution of lighting services (e.g. margins, customer traffic to the store), and, importantly, economic, technical and/or behavioral barriers to effectively marketing an alternative product to fuel-based lighting. Many existing channels will be evaluated, including those delivering fuel, as well as alternative ones such as those delivering food/beverages, delivering mobile communication, and delivering consumer products, among others.

Step 4 – Integrating New Lighting Products into the Value Chain(s) – Identifying Effective Business Models: The Project will respond to the lessons of the a) product field tests, b) consumer “focus group” exercises and c) the value chain analysis with appropriate programmatic interventions that enable modern lighting products that can compete effectively with fuel-based lighting to enter the most effective value chain(s) to displace in a sustainable way fuel-based lighting, establishing successful and sustainable business models.

Step 5 – Building of Institutional Underpinnings to Support Market Transformation: Based on consultations with the industry and experiences during the earlier phases, the Project will establish the institutional underpinnings which enable the industry to effectively grow the market. These would include activities which support the market development, but which the industry players cannot undertake themselves. Examples of such actions may include consumer information, product certification, and/or financing mobilization, among others. These institutional initiatives would be designed to be self-sustaining such as to limit dependency on GEF funding to the very short-term.

Step 6 – IFC/GEF Exit as Market Takes Off

Figure 5: Project Structure: Key Steps and Respective Project Actions

The Project’s end goal will be to promote, in Sub-Saharan Africa, greater access on a commercial basis to modern lighting products by unelectrified populations, and gradually displace fuel-based lighting with modern lighting products. Such transformation of the fuel-

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• ExitStep 6

• Set parameters for competitive products against fuel-based lighting (price, reliability, functionality) and convey to industry most promising value-chains to adopt and promote products that fall within those parameters

Step 4

• Use IFC role as “honest broker” and ELI experience to engage private manufacturers and distributors in sharing costs in understanding the market

Phase 1

Project Actions

• Use IFC network, experience and relationships to establish key institutional underpinning to support new business models, including, but no limited to:

– mobilizing local and/ or international financing– setting parameters for product certification– organize national campaigns promoting product

Phase 5

• Identify alternative value chains that can delivery reliably and at affordable price products to end-user and provide post-sales support

Phase 3

• Perform field test with several products and compare against fuel-based lighting• Perform customer surveys to understand end-preferences and constraints

Step 2

• Exit



Step 1

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• Perform field test with several products and compare against fuel-based lighting• Perform customer surveys to understand end user-preferences and constraints

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• Perform field test with several products and compare against fuel-based lighting•preferences and constraints

Step 2

• Exit



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Step 3


• ExitStep 6


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• Perform field test with several products and compare against fuel-based lighting• Perform customer surveys to understand end-preferences and constraints

Step 2

• Exit



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• Perform field test with several products and compare against fuel-based lighting• Perform customer surveys to understand end user-preferences and constraints

• ExitStep 6


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based lighting market would yield substantial and important environmental, health, equity, gender, and overall development benefits. By achieving its goal, the Project would reduce global CO2 emission from fuel burning, it would strengthen national private sectors and foster local entrepreneurship in entering this new market, and it would increase energy access, reducing the costs of lighting and the levels of indoor pollution, and supporting (with better lighting) more productive activities and income generation.

The remainder of this Summary section presents the unique approach of the Project in engaging the private sector from the outset. We will explain why a GEF intervention is required, describe the environmental and developmental impacts of the Project, and discuss IFC comparative advantage in implementing the Project.

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An Innovative Approach –Working with the Private Sector and Leveraging Market Forces

Identifying a Global Market in a Developmental Challenge

The Project’s insight is to identify and mobilize key market forces in the lighting industry to address a market segment presently unserved by modern lighting services. The Project’s premise is that the 1.6 billion people worldwide currently lacking electricity, while mostly living under extreme poverty conditions, are not isolated communities but rather are an integral part of a well developed market and structured value-chain. This market and value chain– while fragmented and mostly informal – functions well enough to deliver fuel-based lighting services that represent no less than 20 percent of the global lighting market, and accounts collectively for a total spending of $48 billion/year (Mills, 2002). In Sub-Sarahan Africa alone, an estimated 500 million people lack access to electricity and may spend as much as $15 billion/year in fuel-based lighting. Amongst the five candidate countries, South Africa, Uganda, Tanzania, Ghana and Kenya, 110 million people lack access to electricity and may spend as much as $3.3 billion/year on fuel-based lighting.

Establishing the Opportunity – the Superiority of LED

While the distribution system of the market is functional, the final lighting product (fuel-based) delivered is a “very bad product”. Fuel-based lighting can consume as much as 4% percent of total household income and 50% of the total spending on energy, while delivering lighting of such low quality that it cannot be used productively or socially (Van Der Plas, 1997).

LED products offer greater energy efficiency, lower operating costs and more societal benefits compared to fuel-based lighting technologies. Recent studies to quantify the advantages of LED technology identified that LED lighting products have much higher first costs for equipment, but cost far less to operate. An analysis and field study in Tibet compares fuel-based lighting to modern lighting technologies; the results show that light emitting diodes offer advantages in light delivered to the task with low operating costs and can be done with zero carbon dioxide emissions small (<5 watt) using non-emitting electric generating sources which are matched to the light point (Jones et al, 2005).

Leveraging the Interest and Incentives of the Global Lighting Industry

In addition to the identifying a global market and establishing a specific opportunity, the Project will also leverage specific needs and interests of the global lighting industry. The electric lighting industry is a mature and extremely competitive industry. As technologies mature, the products are being increasingly “commoditized”, forcing global and local manufacturers to operate with limited profit margins (as low as 2 percent for incandescent and liner fluorescent for instance), and in that scenario manufacturers fight for market share of a relatively static market. We have seen the recent commoditization of CFL technology for example, with prices going from as high as $23 (retail in Argentina in 1999 at the beginning of the IFC/GEF ELI program) in specific markets to a commodity price of $1 each for high quality products purchased by the container in the GEF-funded Vietnam lighting program last year. Therefore, this is an industry hungry for new areas of high growth. The opportunity to reach, through a first project in South Africa, Kenya, Uganda, Ghana and/or Tanzania, up to 110 new million consumers that may spent as much as $3.3 billion/year on lighting is very attractive. Furthermore, once companies have proven this market in South Africa, Kenya, Uganda, Ghana, and/or Tanzania, they can eye a global US$ 48bn/year

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market. This market opportunity will be a very strong incentive for a serious and lasting engagement from international and local manufacturers in the Project.

The combination of a) identifying a 110 million “consumers” market in South Africa, Kenya, Uganda, Ghana and/or Tanzania, b) establishing the competitiveness of modern lighting products against fuel-based lighting, and c) identifying the need of the global lighting industry for new and high growth markets, creates unique conditions for market transformation if those initial entry barriers can be removed. To realize this potential, however, an external intervention is required.

Why the need for an IFC/GEF intervention?

While the need for modern lighting services is great, and the underpinning of a real market exists, parts of the modern lighting manufactures are unaware of the opportunity, and uncertain how to address a completely different type of market where the marketing channels to which they are accustomed are not practical. Those aware are unable individually to overcome the barriers noted above. Further, given the highly competitive nature of the industry, lighting manufacturers lack the institutional framework and experience to engage in the comprehensive collaboration required to tackle such opportunity.

Therefore, a targeted outside intervention from a party that is perceived as having the experience, resources and global reach of an IFC/GEF program can play a critical role in facilitating the required collaboration and providing the necessary direction in overcoming the barriers discussed and speeding up the market transformation. IFC’s experience in simultaneously organizing a collaborative industry-based market development initiative to tackle barriers while fostering an increased level of competitive fury and interest by the manufacturers, distributors, and retailers (in the ELI program) is of direct relevance here – and a prime opportunity to leverage capacity built by GEF in prior programs.

Impact of Lighting Market Transformation on Environment and Development

Market transformation in lighting – displacing fuel-based sources with modern ones - has several environmental and developmental implications. The extent of its impact is found on the key role lighting play on the energy economics of people with no access to electricity.

Disposable income: Lighting typically accounts at the household level for only 10-15 % of the energy use, behind cooking and heating, but is often the most expensive energy cost. In field research conducted in India (depicted in Figure 1 below), it was found that total energy expenses typically account for 5.3% of income, and lighting expenses alone for 3% of the household income (ESMAP 2002). For the lowest income segments of the sample population, total energy costs would account for 8.1% and lighting alone for 6.1% of the household income. Therefore, any reduction in the cost of lighting can substantially increase the disposable household income.

Figure 6: Share of Lighting Expenses (Kerosene and Electricity) in Total Household Income (in Rupees, ESMAP 2002)

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6%

4% 4%

3% 3% 3%

3%2%

2%1%

< 575 575-791 792-957 958-1165 1166-1415 1416-1740 1741-2349 2350-3249 3250-4999 5000+

Unproductive use of lighting: Due to the poor quality of the lighting provided by fuel-based lighting, the use of lighting can often be targeted only at basic uses such as “to see contours and prevent people from bumping into each other furniture” (van Der Plas, 1997) - very unproductive uses that impairs any socialization or productive activity. Therefore, improving the quality of lighting can offer the basic support for other productive activities at the household level, including reading, education, health clinics, as well as textiles, crafts and any number of small scale enterprises.

CO2 emissions: Fuel-based lighting has a significant impact on CO2 emissions levels. While highly fragmented and individually small at the household level, fuel-based lighting emissions collectively reach 244 million metric tones/year, the equivalent of 58% of the total global emissions from electric lighting household use (Mills, 2002).

Fostering Private Sector Development and Entrepreneurship – The Project will engage the local private sector from the outset, sharing market knowledge with the local players, strengthening the different parts of the value chain and opening new markets, incentivizing entrepreneurship at the local level. Ensuring and maximizing competition will be a principle of all the activities undertaken in the Project.

Development Ladder and Environmental Impact: Field experiments in Kenya and Niger indicate that when households purchased solar lighting products, fuel expenses fell by 60% (Van der Plas 2002). If such cost reduction would be applied to the expenses with kerosene of a typical fuel-dependent Indian household, as depicted in Figure 6, it would mean almost 1% of additional income – a small percentage – but enough to afford for instance a 3-fold increase of LPG and reduce the need for wood, straw or dung for cooking.

In sum, fuel-based lighting not only contributes substantially to global CO2 emissions, but also hinders one’s ability to develop economically and socially, thus promoting a vicious cycle of underdevelopment and environmental degradation. LED-based lighting – by its impact on income and productivity and its promised ability to compete successfully against fuel-based lighting – can contribute to help breaking that cycle and help develop economically and environmentally low income areas.

Figure 7: Energy expenses of typical household in rural area as percentage of household income - kerosene (mostly used for lighting) accounts for 1.6% of income (ESMAP, India 2002)

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LPG, 0.3%

Electricity, 1.4%

Dung, 0.4%

Kerosene ration, 1.3%

Straw, 0.3%

Charcoal, 0.2%

Kerosene market, 0.3%

Wood, 1.2%

IFC Experience and Comparative Advantage

IFC has been engaged in supporting commercial models for delivering modern electricity services to the underserved market for more than 10 years. Working through fund structures, direct investment, and technical assistance, IFC has leveraged its own capital, investor capital, and donor resources to support the development and execution of business models which deliver electric energy services to households in these markets. In parallel, IFC has been an active player in the global lighting market, both as a direct investor, and as implementer of the IFC/GEF Efficient Lighting Initiative, which lives on today as the self-sustaining ELI Quality Certification Institute. It is anticipated that the Quality Certification Institute can play an important role in establishing and administering LED performance specifications and in supporting a certification program to ensure quality product in the target countries. Such an effort is envisioned in stage 5 of the program as a means to protect against early-stage market spoiling associated with poor performing products.

In addition, increasingly IFC has been engaged in promoting energy access to unelectrified population. IFC manages two energy access programs, PVMTI and Fuel Cells Initiative, has increasingly been an active member in the international forums for energy access and has commissioned studies to understand the private sector dimensions of reaching rural, unelectrified populations.

As part of its engagement in developing new ways to promote energy access, IFC commissioned in 2004 an independent study on how to promote new lighting technologies to unelectrified populations. An IFC consultant conducted a field trip in India to understand the different lighting products offered to the local communities, the distribution channels for reaching this community and the pattern of development of other lighting technologies such as flashlights into rural, unelectrified communities. Lessons derived from this study were included in IFC’s planning of this Project.

With this combination of experience, industry access, and institutional competency IFC began the process of developing this concept more than two years ago. IFC began to engage the academic community, NGOs, the private sector and research institutions to explore the potential, the limitations, and the delivery vehicles for expanding access of the rural poor to modern lighting services. Specific activities undertaken include:

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IFC staff served as advisors for a special seminar jointly administered by the Stanford University Engineering and Business Schools which focused on refining the technology and delivery models LED -based system which provides task lighting for reading and focused work in a one-watt package supported by a rechargeable battery.

IFC consultants produced a series of documents which assessed the global market, and reviewed the state of the technology and the end-user market product distribution infrastructure which might be adapted for modern lighting services in India.

IFC directly engaged the lighting industry, working through the Efficient Lighting Initiative and participating in industry conferences, such as the solid state lighting industry’s annual meeting, Light Emitting Diodes 2004. This effort received a strong response from the lighting industry, and IFC has consequently interacted with over 50 companies interested in pursuing unelectrified markets.

IFC participated in key international events on energy access in 2005, such as the Global Village Energy Partnership Asia Regional Workshop and the Global Village Energy Partnership First Partner Assembly.

For more details on IFC efforts to identify, and assess this opportunity, including the private sector interest, please refer to ANNEX A.

B - COUNTRY OWNERSHIP

1. COUNTRY ELIGIBILITY

The Project will be implemented in up to 3 out of 5 pre-selected countries in Sub-Saharan Africa, namely South Africa, Kenya, Uganda. Ghana and Tanzania. IFC is currently further evaluating which country or countries to focus on and will provide a final list in the Project Brief. The pre-selection of these 5 countries aims to offer some focus while allowing IFC some flexibility to perform further due diligence. South African is the most developed country and offer a solid economic infrastructure, Uganda, Tanzania and Kenya are geographically close, collectively have a 93 million population, of which about 84 million lack access to electricity (17% of the unelectrified population in Africa), and may offer the market scale, geographic proximity and infrastructure that the Project requires. In addition, the three countries are part of the East African Community (EAC), which aims to foster regional collaboration on a number of policy issues. Ghana has a number of local entrepreneurs seeking to promote modern lighting products to its unelectrified population. All countries are signatories of the UNFCCC, and are designing and implementing national policies that promote energy access.

Figure 8: Criteria for country selection

Criteria Rationale

Number of households relying on fuel-based lighting

Set the ‘market’ size from the private sector stand point, and will be one of the key factors in attracting private sector participation

Level of economic/market development

Basic market institutions need to exist, even if functioning with varying degrees of efficiency, such as value-chains, local financing institutions, and some level of local entrepreneurship.

Availability and quality of local stakeholders promoting energy access

Project will require across its different actions a number of partnerships and working relations with local players, therefore local participation is a key success factor

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Investment climateTo engage the private sector and be a sustainable project, country needs to offer overall a conducive environment for private sector development

Energy Access Policies The overall policy environment needs to be supportive of solutions or initiatives to increase energy access.

2. COUNTRY DRIVENNESS

The specific elements of the final countries’ driveness will be detailed in the Project Brief. All countries currently have significant national initiatives fostering improvements in energy access. For instance, all 5 countries have currently “Country Actions” being developed and/or implemented in collaboration with the Global Village Energy Partnership.

C – PROGRAM AND POLICY CONFORMITY

1. PROGRAM DESIGNATION AND CONFORMITY

This project is consistent with GEF OP5, and GEF OP6. Specifically:

GEF OP5 Removal of Barriers to Energy Efficiency and Energy Conservation – the Project will target the removal of specific barriers that hinder more energy efficient lighting products from reaching the 1.6 billion people still relying on energy inefficient fuel-based lighting.

GEF OP6 Promoting the Adoption of Renewable Energy by Removing Barriers and Reducing Implementation Costs – It is expected that the most likely products to displace fuel-based lighting will involve renewable technologies. In addition, the Project goal of seeking a large-scale market transformation should provide additional scale to the sales of modern lighting products and help reduce its costs, fostering overall greater adoption of such products across markets.

2. PROJECT DESIGN

Project Rationale and Strategy

The Project rationale is to promote market transformation by leveraging the promise of LED technologies and an existing, functioning economic value-chain(s) and its profit-seeking incentives to provide a better product (modern lighting) into a market served by a very inadequate, inefficient product (fuel-based lighting) and encourage existing market forces to naturally play-out. This approach is unique in seeking a market solution to this challenge in 5 main ways:

The Project identified that despite the low income of the unelectrified population, this end-user group in Sub-Saharan Africa represents collectively a large market served by an inferior product to those already available in advanced economies. The Project also identified that this “market” is sufficiently large to attract the real interest of a significant number of private lighting manufactures and vendors. This insight of the Project will enable it to engage the private sector from the very start of the Project, leveraging not only its technical and financial resources but also its marketing and sales acumen to help overcome the challenges of developing this market.

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The Project is designed to address in an integrated manner all the key barriers for the development of this market - such as matching products to end-user needs, establishing effective delivery systems, mobilizing financing, and creating the necessary institutional infrastructure to support the development of the market.

The Project will incorporate existing value-chains already delivering services for the poor. This approach leverages from the start the strengths and profit-seeking incentives of the market (a functioning value-chain with private, profit-seeking players) to address the weakness of that same market (a bad, expensive product to the end-user). This increases the Project’s ability to develop a realistic and sustainable commercial solution, and lasting market transformation.

The Project will be promote the promising LED technology, yet will foster competition between different lighting products using LED (e.g. solar versus manually powered) to define the parameters required to meet consumer needs and market conditions, and compete successfully against fuel-based lighting products, rather than selecting technology or product winners on behalf of the market. This approach is critical, as market conditions, consumer preferences, and value-chain incentives are too complex to be understood ex-ante in the Project, and therefore, it is not possible to successfully select the most promising products from test labs or economic analysis. This approach will also foster competition amongst providers of modern lighting technologies to adopt the key features of the most promising ones in their product offerings. The Project will allow the profit-seeking goals of the private sector to adapt or create new lighting products to meet market needs, as identified through the Project.

The Project focuses on one energy need – lighting – rather than a comprehensive solution to the energy needs. This strategy of targeting only one energy need can reduce the cost of the product, increasing affordability and enhancing the likelihood of commercial success. Second, focusing on lighting directly impacts productivity as modern lighting product can reduce living costs – freeing disposal income –and will also be of a quality that supports productive activities. These two effects on income are expected to have a substantial impact in fostering development and the move to cleaner energy sources. It also builds on the principles adopted by consumer product companies to serve the “bottom of the pyramid” by reducing the product size to best meet consumer income constraints. These companies have reduced the package size (and thus price) of shampoo, food and other products to make them more affordable to consumers at the “bottom of the pyramid”, achieving substantial commercial successes.

Expected Outcomes and Metrics of Success

The core objective of the Project is to move – under a commercial and sustainable solution - a significant part of the population with no or unreliable access to electricity away from the polluting fuel-based lighting to the less polluting and higher quality modern lighting sources, thus reducing CO2 emissions, increasing household productivity and fostering economic and social development. The expected outcomes of the Project are:

Figure 9: Expected outcomes and Metrics of SuccessOutcome Results Metrics of Success

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1

Identification – across a number of technical and consumer preference-based criteria – key parameters (e.g. functionality, size, reliability, need for post-sale services, price) that LED products must possess to replace fuel-based lighting under competitive market conditions. The Project will not be selecting specific products, but rather defining parameters and will work with the lighting industry in identifying which of the many alternative products fulfill those parameters.

List of parameters that modern lighting products seeking to compete against fuel-based lighting must meet to offer superior lighting solution

2

Identification – across a number of criteria – of value-chains that can deliver modern lighting products to the poor in a reliable and cost-effective manner to ensure it can compete successfully against fuel-based lighting

Identification of 2-5 value-chains that can serve manufacturers in delivering modern lighting products to unelectrified population

3Growing sales of LED-based lighting products technologies – in lieu of fuel-based lighting – to low income areas with no access to electricity.

Number of participating companies in the Project Number of units of modern lighting products sold

due to the Project Sales of modern lighting products in US Dollars

due to the Project Reduction in sales of fuel for lighting due to the

Project Number of new products developed to meet

product parameters defined for products seeking to compete against fuel-based lighting

1. Planned Activities to Achieve Outcome

The following activities are planned to reach the outcomes above:

Figure 10: Planned Activities to Achieve Expected Outcomes

Outcome Activities

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a) Engagement – through conferences, meetings and seminars - of a large number of manufacturers of modern lighting products to participate in the Project by contributing its products, technical knowledge, marketing and distribution expertise to perform the field tests, focus groups exercises and evaluate the results

b) Identification, through competitive process, of 8-10 LED-based products that represent a large variety of lighting solutions to be field tested in the target markets

c) Design and performance of technology field-tests – location, resources, test criteria, documentation of results. This field tests will yield technology and functionality parameters for LED products that will be necessary to successfully compete against and displace fuel-based lighting.

d) Design and performance of end-user preference survey – location, survey structure, test criteria, documentation of results. This end-user performance survey will yield an understanding of end-users’ a) interest and willingness to pay for LED products, and b) motivations or resistance to replace fuel-based lighting with LED products

e) Analysis of findings from product field-test and customer survey will lead to an identification of key parameters required from LED products to compete successfully against fuel-based lighting and offer a framework to engage in a next phase manufacturers able to meet those parameters.

2 f) Assessment and testing of the structure of alternative value-chains currently delivering services for the poor– the study would encompass a combination of market research and interview with the players to identify a) nodes of the value-chain, b) profile and role of different nodes (e.g. oligopoly, kind of products, sales and margins), and c) incentives and barriers to adopt and promote modern lighting products in lieu of fuel-based lighting. It will look into a number of value chains, not only those delivering energy services, but alternative ones that may include

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food distribution, beverages distributions, and/or mobile communication services, among others. The objective is to identify which value-chain can effectively deliver the modern lighting products and provide after-sales support in a sustainable way.

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g) Design initiatives to remove barriers to the integration of modern lighting products to the value-chain currently delivering fuel-based lighting services. Specific actions will depend on barriers identified, but could include training, marketing support, engage in negotiation with manufacturers to increase scale and reduce price, arrange for financing with lighting manufacturers/vendors and/or local financing institutions, consumer education and product certification.

h) These interventions will be limited to those which fill a void which the industry itself cannot fulfill and which enhance and encourage competition and maximize market access for multiple private sector actors.

3. SUSTAINABILITY (INCLUDING FINANCIAL SUSTAINABILITY)

The Project will be inherently sustainable as it will engage from the outset local and international lighting companies incentivized to pursue a significant new and large -market and yet is not served by the lighting manufacturers. Further to that, the Project will be in all its steps building on existing market forces and financial incentives. By enhancing these conditions the Project will meet its outcomes, and IFC/GEF can exit as the private sector would have been fully engaged in pushing the market transformation forward. The market-supporting institutions under the Project will ultimately be grounded in an institutional home and supported by industry players who benefit. ELI Quality Certification Institute is an example of this approach.

4. REPLICABILITY

The Project is highly replicable, as the opportunity it identified is global in nature and the Project rationale and approach is not market-specific. This approach can be effective under any market, as long as basic conditions are in place. In this case, reliance on fuel-based lighting is significant, alternative value-chains exist and can be tapped into, and the general investment climate does not deter interest and engagement of the private sector.

The Project’s costs and timeframe for replication in multiple markets should fall over time. First, as the Project expands into more countries, it will be able to substantially leverage the body of knowledge it developed on products, value-chains and end-user preferences, and will have only marginal costs in building and managing the relationships established with the global lighting industry. Second, once the Project removes the barriers for market entry and demonstrates the market opportunity for lighting manufacturers, one should expect the private manufactures to take a lead in seeking additional countries, and the Project intervention, if necessary at all as this process takes hold, would be no longer extensive to drive the process.

5. STAKEHOLDER INVOLVEMENT/INTENDED BENEFICIARIES

The Project has engaged a number of stakeholders in the concept development and will continue to do so throughout its different phases. Stakeholders will be involved in the Project through many different channels, including formal and informal consultations, participation in advisory or implementation committees that may be created to support the design and execution of the Project, and in accessing and having a chance to react to the findings and conclusions of the different phases of the Project through industry workshops. Stakeholders that will be involved in the Project include:

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Manufacturers- For the context of this project, a manufacturer will be defined as the various private sector players involved through the project design, manufacturing and assembly process. The final number of participants will be determined by the:

o number of different products introducedo manufacturer’s expertise and skill seto resources made available by manufacturers in support of the Projecto amount of capital manufacturers are willing to co-fundo interest of manufacturers

Spurred by interest generated in the market through execution of the Project, it is expected that more manufacturers and products will enter the marketplace globally through the focused work of the Project in a pilot country.

Distribution partners- For the context of this project, a distributor will be defined as a party which sells the finished product to retail sales organizations or end users. Distributors may be:

o For-profit organizations (including manufacturers) which sell products to retailers or end users;

o Cooperatives and consumer associations;o Non-profit organizations which sell or provide products to end users or other

organizations;o Government organizations which sell or provide products to end users or other

organizations.

The final number of distributors will be determined by the:o number and variety of different products being introduced;o potential consumer base a distributor operates in;o distributor’s skill set, expertise, and track record;o fit in terms of Program goals;o amount of capital distributors are willing to co-fund;o distributor interest in the Project.

Outside the scope of the Pilot Project, it is expected that more distributors and products will enter the marketplace as interest builds across the market.

Service Partners- For the purpose of this document, service partners will be defined as organizations which perform repair and maintenance of the products manufacturers create during the Project. Service partners may be:

o Manufacturerso Distributorso other organizations that have the ability to perform repair and maintenance

The final number of service partners will be determined by:o number and variety of different products being introduced;o potential consumer base a distributor operates in;o service skill set, expertise, and track record;o fit in terms of Program goals;o amount of capital service organizations are willing to co-fund;o service organization interest in the Project.

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Outside the scope of the Pilot Project, it is expected that more service organizations will enter the marketplace as interest builds across the market.

Financial institutions- For the purpose of this document, financial institutions will be defined as public as well as privately operated banks, microfinance corporations, and venture capital organizations. The project will attempt to utilize financial institutions, as necessary, in order to provide funding throughout the supply chain. Where useful and necessary, IFC will seek to support these local financial institutions through a variety of TA and financial product offerings (credit lines, guarantees) to support the availability of microcredit and other financial products in the local market.

o Manufacturers will need capital in order to invest in the purchase of components and equipment necessary to manufacture the product and to train personnel in the use of this equipment.

o Distributors will need capital in order to purchase orders of the product, train personnel on the use and sales of these products, and to develop warranty & servicing programs.

o Consumers will need capital in order to purchase the product.

Government Agencies- The Pilot Project will utilize the target country’s local and national government in an Advisory role. Collaborative opportunities with government will be developed to integrate the Project into the various government programs supporting rural electrification and solar technology dissemination during implementation of the full-sized project.

End users- Consumers using kerosene (and other lighting fuel sources) seeking a better source of lighting.

Technical assistance and other implementing partners– These will include bilateral and multilateral development agencies interested in economic development, NGOs, industry associations, consulting organizations, and industry experts. These partner vendors will be involved in much of the research, product design, and Pre- and Post- Market evaluation which will take place. IFC’s own TA presence in the African region is strong and local IFC TA staff is anticipated to play an important administrative role in executing the project.

D – FINANCING

1. FINANCING PLAN

The Project financing plan will vary considerably depending on the selected market for the pilot. Therefore, the Project will develop a detailed financing plan after such country has been selected and will present the Financing Plan in the Project Brief. Based on IFC experience in other market transformation initiatives of similar nature, such as ELI, we expect the pilot phase to require a budget ranging from $18-36 million, to be financed under the structure presented in Figure 11 below.

Figure 11: Indicative Financing Plan

Total Estimated Project Cost US$ 18-36 MillionGEF Funding US$ 6 Million

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Co-Financing US$ 12-30 Million

Incremental Costs

The Project involves two distinct types of incremental costs to be met by GEF funds:

The Project administrative expenses that are not met by IFC, and The Project expenses to support IFC’s role in executing the steps listed above, and which

can not be met other funding sources, including the activities to engage the private sector, the preparation and performance of field tests and customer surveys, the research and assessment of alternative value-chains, the hosting of industry events throughout the Project, and the design and management of targeted actions to create the institutional foundations to support the market development.

These incremental costs will be detailed in the Project Brief, but they are expected to be substantially leveraged by private sector co-financing of the market development effort, and 3 rd party financing for the product sales financing.

2. CO-FINANCING

The Project will seek co-financing from different sources, including:

Private Lighting Manufacturers: Given the expected motivation and participation of private lighting manufacturers in the different phases and the benefits they will yield from the Project, the Project will seek contributions from participating manufacturers. To avoid any conflict of interest, industry participation will be invited without restrictions. Participants will be allocated based on competitive process including company willingness to contribute financial resources to the Project.

Donor governments: the Project will seek contributions from donor agencies interested in fostering greater energy access. Given the developmental and environmental impact of the Project, it is expected that the Project should attract enough interest for co-financing from a number of governments.

Based on earlier IFC experiences in market transformation projects, IFC believes that much of the leverage will come from private sector participants, followed by other donors. GEF resources would be used across the entire project, providing the core support to the implementation of the project, while other donor contributions may vary more substantially across different phases of the Project. The table below illustrates the possible use of funds, with the caveat that it is meant to be only indicative and is subject to changes. A detailed presentation of the use of funds will be developed once the country (ies) is selected and will be presented with the Project Brief.

Figure 12: Illustrative Source and Use of Funds

Phase Tasks GEF PrivateSector Donors Total

1 Engagement and Managementof Private Sector Participation

- Meetings, events, and attendance toconferences to formally invite industry- Launching event at IFC- Detailed assessment of market in

150,000 2,500,000(1)

150,000 2,800,000

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selected countries to present to privatefirms- Field trips for preparatory work for further phases

2Product Testing and End-User Preference Survey

- Preparation and issuance of RFP for products- Design of field tests- Design of end-user interviews- Ground work to support field tests and interviews- Performance of field tests and surveys- Compilation of results- Engagement with the industry to reporton results

500,000 2,500,000(1) 500,000 3,500,000

3Assessment of Alternative Value Chains

- Design of assessment format- Conduction of research - Compilation of results- Engagement with industry to report onResults

500,000 2,500,000(1) 500,000 3,500,000

4

Integrating New Lighting Products into the Value Chain(s) – Identifying Effective Business Models

- Technical Assistance (as necessary)- Customer campaigns (as necessary)- Further market research (as necessary)- Industry meetings (as necessary)- Business Development (private sector only)

1,350,000 10,500,000(2) 1,350,000 13,200,000

5 Building of Institutional Underpinnings to Support Market Transformation:

- Mobilizing Financing (as necessary)- Certification Process (as necessary)- Customer Awareness Campaigns- Other Actions as required by the market

3,500,000 2,500,000(3) 1,000,000 7,000,000

Total 6,000,000 20,500,000 3,500,000 30,000,000(1)Assumes 50 companies/consortiums providing during the duration of the project US$ 50,000 in contribution in cash or in-kind(2)Assumes 25 companies/consortiums that will remain interested and willing to provide, in average, US$500,000 for market development in cash or in-kind(3) Assumes 25 companies/consortiums contributing about US$ 100,000 for development of these institutions (e.g. certification process) in cash or in-kind

E – INSTITUTIONAL COORDINATION AND SUPPORT

1. CORE COMMITMENTS AND LINKAGESThe link between energy access and development is well established, and therefore, there are a number of initiatives at the international and national level that seek to promote greater access to modern energy. The Project, once it has selected the 1 to 3 countries, will seek to benefit of any existing government programs fostering energy access. At the international level, the regional focus of the Project in Sub-Saharan Africa will contribute to a number of efforts seeking to expand energy access, such as The Global Village Energy Partnership (GVEP), the Renewable Energy and Energy Efficiency Partnership (REEEP), and ESMAP activities.

2. CONSULTATION, COORDINATION AND COLLABORATION BETWEEN AND AMONG IMPLEMENTING AGENCIES, EXECUTING AGENCIES, AND THE GEF SECRETARIAT, IF APPROPRIATE

The Project will during the appraisal process determine how to best access and leverage from the body of knowledge developed to date on the topic of energy access by a number of different agencies, and will set up working relationships as necessary.

3. IMPLEMENTATION/EXECUTION ARRANGEMENTS

The Project will during the appraisal process determine the country, its market conditions and the required resources for implementation. At that point the Project will identify if and which external parties need to be formally involved in the implementation and will establish and communicate in the Project Brief these arrangements.

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4. RISKS AND MITIGATION

The Project carries a number of risks, which can be managed effectively. These risks and the mitigation strategies include:

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Figure 13: Project risks and mitigation strategies

Risks Mitigation Strategies

Private Sector May Not Respond with Interest

For over 2 years IFC has been engaged in a number of consultations with the private sector and has gauged a serious interest and strong motivation across a number of different manufacturers around the world

IFC has assessed in depth over the last 2 years the conditions of the lighting industry, and its need to pursue additional markets to expand sales, given low profit margins and saturated markets in advanced countries and urban areas in the developing world

IFC experience with other projects involving the private sector, including projects such as ELI which call for market transformation in lighting, allows us to properly design and present the Project to the private sector so as to increase the changes of a positive response and engagement

The Project first phase (Phase 1) is to engage the private sector, and all other efforts are conditional on the success of this effort. Should it not happen, the Project can be shut down without any relevant termination costs

Field tests and Consumer Surveys may indicate that LED products cannot compete successfully with fuel-based lighting

Many LED field studies to date have indicated that technically and economically some of the modern lighting products available in the market offer a superior solution to fuel-based lighting, thus the chances of none of the LED products meet the identified parameters to compete against fuel-based lighting is very small

The early engagement of motivated manufacturers covering a broad range of products enables the Project to respond to this risk by having some flexibility to adjust or innovate on existing products to meet the required parameters to compete against fuel-based lighting

Value-Chains structure and incentives create strong barriers for new lighting product

IFC will “hedge” against that by exploring a number of alternative value-chains and delivery channels to diversify the risk.

Engagement of private sector in the process will create strong forces and innovation resources to open alternative value chains to the products

Fuel-based Lighting Suppliers and Distributors will react to remain competitive and hold its market position

IFC will seek to work from the outset with stakeholders involved in the distribution of fuel-based lighting to address their needs and incentives and actually engage them in the effort to replace fuel-based lighting with modern lighting products, so they see it as an opportunity and not a treat

Given the involvement of the international and private sector, the Project will be able to respond to any change in the competitive landscape and adjust to new conditions in the market.

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ANNEX A – IFC’s Preparation for the Project: Lessons from Other Experience, Lighting Industry Due Diligence and Dialogue with the Private Sector

IFC has been engaged in supporting commercial models for delivering modern electricity services to the underserved market for more than 10 years. Working through fund structures, direct investment, and technical assistance, IFC has leveraged its own capital, investor capital, and donor resources to support the development and execution of business models which deliver electric energy services to households in these markets. In parallel, IFC has been an active player in the global lighting market, both as a direct investor, and as implementer of the IFC/GEF Efficient Lighting Initiative, which lives on today as the self-sustaining ELI Quality Certification Institute.

Understanding the technology advancements, players and market opportunity

With this combination of experience, industry access, and institutional competency IFC began the process of developing this concept more than two years ago. Struck by the potential represented by the rapid development of efficient lighting technologies and the specific opportunity in the emergence of solid state lighting (light emitting diodes, or LEDs), IFC began to engage the academic community, NGOs, the private sector and research institutions to explore the potential, the limitations, and the delivery vehicles for expanding access of the rural poor to modern lighting services.

In 2003, IFC staff served as advisors for a special seminar jointly administered by the Stanford University Engineering and Business Schools which focused on refining the technology and delivery models pioneered by the non-governmental organization the Light Up The World Foundation (LUTW). The LUTW product is an LED-based system which provides task lighting for reading and focused work in a one-watt package supported by a rechargeable battery. LUTW was operating on a charity-based model, relying on donations to deliver small lots of products, coupled with centralized/village-based recharging stations (often human pedal-generated). The Stanford team sought to help LUTW refine this model to expand LUTW’s reach and take its technology (developed by students and faculty at the University of Calgary) to a new level, based on careful analyses of user-needs and preferences. In addition to working with the Stanford students – including a group which spun off a new company to deliver a similar product on commercial terms in the Indian market – IFC began work with LUTW on a project concept for ramping up LUTW’s efforts through a commercial model.

Consultations with the Private Sector – Establishing the Appropriate Intervention

Not convinced that a direct GEF engagement in the LUTW enterprise was indicated, but struck by the large-scale potential of a commercial market, IFC stepped back from the initiative and undertook a more deliberate effort to understand the technology, the market, and define how best to leverage IFC’s capabilities and reach to support development of a competitive, self-sustaining market able to deliver modern lighting to the world’s poor. IFC consultants produced a series of documents which assessed the global market, and reviewed the state of the technology and the end-user market product distribution infrastructure which might be adapted for modern lighting services in India. IFC then directly engaged the lighting industry, working through the Efficient Lighting Initiative with regard to off-grid applications of the established grid-connected technologies, and participating in the solid state lighting industry’s annual meeting, Light Emitting Diodes 2004. During this two-day conference, the IFC presentation was the only one

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which addressed the yet-undeveloped market represented by the estimated 1.6 million people who currently rely on fuel for lighting. Yet the reaction of the industry from this engagement has been overwhelming. In addition to the 25 companies and consortia of companies who sought out IFC after the presentation with strong indications of interest and willingness to make substantial commitments of personal and company resources to an IFC-led initiative, IFC has fielded a continuous wave of follow-up inquiries stimulated by word-of-mouth within the industry, as well as extensive follow-up coverage of the IFC presentation in the trade press. IFC has used these follow-up meetings with industry players to better develop its understanding of the industry dynamics and what type of intervention in the market can be effective in enabling the industry to focus effectively on delivering modern lighting services to what is presently a difficult market to develop from the industry’s perspective.

Lastly, IFC has been an active member of recent activities of the Global Village Energy Partnership, assisting in the organization and participating in the GVEP Session in Cambodia (May 2005), and attending the First GVEP Partners Assembly in Brazil (October 2005)

Transforming findings from consultations with private sector into a project

In directly engaging the private sector at each node of the value chain – including researchers, manufacturers, system integrators, and retail providers, among others – IFC recognized that a vibrant market was already innovating. While the manufacturers of the lighting technology itself remain largely focused on the immediate and well-established markets in more developed and easily accessible markets, IFC encountered in the edges of the unelectrified markets any number of micro-scale entrepreneurial efforts to adapt modern lighting technology for use in these more difficult markets. Although inadequate at this stage to build a substantial market, and potentially ruinous to the development of a sustainable market due to a lack of quality standards, these organic and informal enterprises provide important experiences and attest to the capacity for uptake of new technology in these markets.

The focal point of IFC’s conceptualization has been a careful assessment of the market dynamics. Specifically, IFC’s approach is to engage the industry directly in order to fully understand what it is capable of doing itself, and then to identify what the market development barriers are which must be addressed in order to generate the environmental, social, and developmental benefits which these technologies can potentially provide. In this analysis, IFC is careful to delineate which of these barriers are best addressed by what type of entity – and then engage at the level which best fits IFC’s comparative advantage and core competency. Any intervention in the market is a distortion which yields a range of impacts. Thus, IFC’s analysis (and continued program development) will be guided by core principals which are derived from its experience in the Efficient Lighting Initiative:

Competitive forces are essential for leveraging the full thrust of the private sector; all program activities must reinforce and enhance the competitive process.

Don’t pick winners on behalf of the market – whether choosing technology, products, or manufacturers.

Any support which benefits one company over another must be allocated through a competitive process which is open to all.

Any support which benefits one company or companies should yield also benefits which support the market (and therefore other companies) in the longer term.

Information generated in the program is to be shared equally with all.

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ANNEX B: Technology Approach – Illustrative Range of Technology Options

The project will aim to develop a large-scale solution to lighting by exploring the potential of solid state lighting technology -- represented by light-emitting diodes. LEDs are fast climbing a steep development curve in which improvements in efficiency and lumen output at geometrically increasing rates are matched by concurrent reductions in price at a similar pace.

This lighting technology can be matched with a broad range of power solutions in both integral and modular configurations to respond to consumer demand and local resource availability. The Project is structured to encourage field-based experimentation to cost-effectively identify a broad set of data on performance and experience which can inform commercial development and marketing based on performance criteria established through the program. The market, and the product aggregators will develop their own technology packages to respond to these parameters and their perception of the market data developed under the Project. The power systems utilized (based on examples identified by IFC and various companies engaged during the process of developing this Project concept) might include, among others:

Photovoltaics (integral or modular) Micro hydro generators Fuel cells Pedal-driven, wind-up, and other human powered manual generators Others may be considered based on end-user responses and private sector suggestions or

interests

Similarly, a variety battery and power storage technologies would be anticipated to be used, with an anticipated Project restriction that any storage devices would be re-usable/ rechargeable.

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ANNEX C: References

1. Barnes, D.F, and Halpern, J. – Subsidies and sustainable rural energy services: can we create incentives without distorting markets?, ESMAP 2000

2. Davidson, O, and Mwakasonda, S.A. – “Electricity access for the poor: a study of South African and Zimbabwe”, Energy for Sustainable Development, December 2004

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