micro enterprise

The Energy-Micro-enterprise nexusR BhargavaWednesday 23rd May, 2012

Contents

Linkages between Energy and Micro-enterprise 1

Benefits 2

Rationale for Rural Electrification: the evidence 2

Productive uses of Rural Electrification 3

Evidence of impact 4

Gender considerations 4

Lessons from Bangladesh 5

Survey instruments 5

Household energy consumption pattern 5

Rural enterprise 6

Linkages between Energy and Micro-enterprise

The development hypothesis under consideration is that:

“the provision of modern energy is a key element in enabling the poorto improve their standard of living.”

Attributing improvements in quality of life and livelihoods toaccess to modern energy and the potential for income-generationthrough micro-enterprise are common. However, substantial quan-tified data on the benefit of modern energy for micro-enterprise,particularly electrification, is not available.

Modern energy may refer to LPG, kerosene, petroleum or electri-city, on and off the grid, in-turn generated from carbon or renewablesources including solar, biomass, hydro and wind.

Micro-enterprise typically refers to small business operating inthe informal sector, often home-based, producing goods or servicesfor cash income. They are usually unorganized, do not maintainaccounts and are not registered with a Registrar of Companies, norrecorded in official or tax records1. Their informal nature results in 1 Karekezi, S. & Majoro, L. 2002. Im-

proving modern energy services forAfrica’s urban poor. Energy Policy. Vol30, pp. 1015-1028.

them not being tracked by government statistics2.

2 Allerdice, A. & Rogers, J.H. 2000.Renewable Energy for Microenterprise.National Renewable Energy Laboratory(NREL), Colorado, USA.

Surrounding this, in the implementors’ Terms of Reference, thefollowing tasks are outlined,

The Energy-Micro-enterprise nexus

1. Needs assessment (sample of 1000)

2. Capacity building of SHGs (training 500 women SHGs to serve astrainers)

3. Capacity building of women micro-entrepreneurs (10000 women)

4. Monitoring and reporting

Benefits

The benefits of rural energy range from increased time savings andfarm productivity to improved education, communication, andoverall quality of life. For example, electric lights emit more than100 times the amount of lighting provided by a kerosene lantern orcandle, permitting household members – both adults and children –to read and study during evening hours. Electric irrigation pumpsmake it possible to grow and market crops year-round and raiserural incomes. Electric lighting and motive power can increase theproductivity of women owned microenterprises. Availability ofradios and televisions can improve communication and informationsharing. Use of well-designed stoves and efficient cooking fuels canreduce IAP and the number of hours that families, especially womenand children, spend collecting biomass. Taken together, these benefitscan lead to greater rural productivity and a higher quality of life formany of the country’s poorest citizens.

Making the switch to electric lighting and appliances, petroleumfuels, and improved cooking stoves can enable rural families to raisetheir incomes and improve their quality of life. In a hot tropicalclimate such as Bangladesh, the addition of a simple electric fan cansignificantly improve a rural household’s indoor comfort level andward off insects. Electric lighting offers 100 times more light thantraditional kupi or kerosene lamps commonly used in householdswithout electricity. The higher quality of lighting makes it possiblefor families to pursue reading and other educational activities duringevening hours. Cooking with kerosene or LPG, or using improvedbiomass stoves–still a rare occurrence in rural Bangladesh–can resultin fewer hours spent collecting biofuels, less cooking time, andreduced IAP. 3 3 Barnes, D., & W.M. Floor. 1996. Ru-

ral Energy in Developing Countries:A Challenge for Economic Develop-ment. Annual Review of Energy andEnvironment 21: 497–530, cited in,Asaduzzaman, Mohammad (Author).World Bank Working Papers : RestoringBalance : Bangladesh’s Rural EnergyRealities. Herndon, VA, USA: WorldBank Publications, 2010. p 5.

Rationale for Rural Electrification: the evidence

Early analysis [by the World Bank, in 1975,] of [Rural Electrification]recognized that investments in Rural Electrification would be lossmaking, at least initially. The up-front costs were very high and rural

2


demand lower than in urban areas resulting in low load factors andhigh unit costs. It suggested that marginal cost would drop rapidlyas connections expanded.4 4 World Bank (Author). Welfare Impact

of Rural Electrification : A Reassess-ment of the Costs and Benefits. Hern-don, VA, USA: World Bank Publications,2008. p 3.

However, ex post Economic Rates of Return (ERR), according toan Independent Evaluation Group (IEG) report in 1994, were muchlower than those at appraisal and many indirect and external benefitshad not materialized. Cost recovery was low, between 10 and 50

percent, thus imposing a financial burden on electricity utilities orgovernments. The direct benefits went to the non-poor and even withlow tariffs, the poor could not afford connection costs.

In a direct response to the IEG report the World Bank’s EnergySector Management Assistance Program (ESMAP) brought out areport, “Rural Electrification and Development in the Philippines:Measuring the Social and Economic Benefits,” published in 2003.While Rural Electrification had long been claimed to have manydiverse benefits for health, education, nutrition, security, and so on– one study provided a list of more than 50 discrete benefits5, there 5 Saunier, G. ed. 1992. Rural Electrifica-

tion Guidebook for Asia and the Pacific.Bangkok: Asian Institute of Technology

was little rigorous evidence regarding these benefits and no attemptat all to quantify them.6

6 World Bank (Author). Welfare Impactof Rural Electrification : A Reassess-ment of the Costs and Benefits. Hern-don, VA, USA: World Bank Publications,2008. p 4.

This report developed techniques for measuring the main benefitsfrom improved lighting and access to television, which have sincebeen used in a number of appraisal documents. Application of thesemethods has resulted in very respectable rates of return, reachinglevels as high as 95.3 percent for the Bangladesh Third Rural Elec-trification Project and 60.5 percent for the Lao People’s DemocraticRepublic Southern Provinces Rural Electrification Project.

Productive uses of Rural Electrification

According to the World Bank7, the vast majority of rural connections 7 Productive Uses. World Bank (Author).Welfare Impact of Rural Electrification: A Reassessment of the Costs andBenefits. Herndon, VA, USA: WorldBank Publications, 2008. p 34.

are residential. Certain rural electrification programs are stronglyproductive, such as those in India where a strong link in foundbetween the adoption of high-yield varieties of crops and the spreadof irrigated agriculture from electric water pumps run on subsidizedor free energy. According to the same report, small-scale enterprises,including those run from home, are more plausibly influenced bythe availability of electricity. There is evidence that the availability ofelectricity increases the number of businesses and the hours that theyare open.

There is also evidence of how electrification reduces absenteeismin the Social Sector. More accurately, it acts as an incentive for publicsector employees to remain in the region.

3


Evidence of impact

A general conclusion from analysis of RE programs is that the im-pact on productive activities is limited. There are caveats to thisconclusion. The first is that some irrigation programs (and Bankprojects) have focused on RE for irrigation programs, and–in India, atleast–were linked to the spread of Green Revolution technologies 8 8 Barnes, D. F. & H. Binswanger. 1986.

Impact of Rural Electrification andInfrastructure on Agricultural Changes,1966–1980. Economic and PoliticalWeekly (India) 21:26–34. and Bins-wanger, H., and Shahidur Khandker.1993. How Infrastructure and FinancialInstitutions Affect Agricultural Outputand Investment in India. Journal ofDevelopment Economics 41: 337–366.

Second, in cases where there has been a complementary programto assist productive uses of electricity, there has been more success.

Finally, considering home enterprises, the effects are greater thanthose from medium and large firms, although these enterprises maybe small indeed, such as renting out refrigerator space. In Ghana,the woman of the household prepares snacks to be sold to peoplewho come to her house to watch television in the evenings. In SouthAfrica, households sell cold drinks and rent out refrigerator space.

IEG’s analysis of household survey data does find evidence of apositive impact of RE on home businesses. The finding is strongestfor the 15-year panel data from 1988 to 2003: the number of homebusinesses grew significantly more in communities that becameelectrified than in either those communities that did not or those thatwere already electrified in 1988

9. Similar evidence was not found 9 The Living Standard MeasurementSurvey (LSMS) for Peru in 1994 covered112 conglomerates, with the sampledrawn from all three rural regions–mountains, coast, and forest–of thecountry. The 1991 LSMS for Perucovered 43 conglomerates restrictedto the rural mountain regions of thecountry. These data are used to analyzethe short-term growth and developmentimpact of Rural Electrification onmicro-enterprises. In chapter, AppendixF: Impact of Rural Electrification onMicro-enterprise. Welfare Impact ofRural Electrification : A Reassessmentof the Costs and Benefits World Bank(Author). World Bank Publications.2008.

in the other panel data set (Peru), but the year between surveysoccurred at a time when rural areas were experiencing considerableunrest. In addition, the presence of electricity extends the work hoursof home businesses, and this increases the net income from theseactivities.

Gender considerations

“Women often become stakeholders in private sector developmentthrough involvement in micro and small enterprises (MSEs) – eitheras owners or employees. This is especially true in situations whereemployment opportunities are limited by geography, socio-culturalnorms, and underdeveloped public and private sectors. Once womenhave gained experience in a microenterprise, they have expanded po-tential to contribute to the advancement of commerce and trade. Theobstacles lie, not in understanding this concept, but in designing andimplementing programs that overcome the challenges confrontingdisadvantaged women who are attempting to build businesses andparticipate in viable industries.”10 10 Palakurthi, Puneetha (Editor). Micro-

enterprise Development in EmergingMarkets. Bradford, GBR: EmeraldGroup Publishing Ltd, (date). p 3.

4


Lessons from Bangladesh

Today, people in rural Bangladesh use a mosaic of energy sourcesto meet their various domestic and productivity needs. Biomass isstill used extensively for cooking, while kerosene is the main lightingsource. Electrified households prefer electricity for both lightingand appliance use. Many small businesses, including home-basedenterprises, use electricity for lighting, agricultural processing, andother productive activities.

Gradually, the types of energy used in rural areas are improving.Diesel-powered irrigation pumps and agricultural tillers are morecommon than in the past, when manual and animal powers were thetraditional energy sources for cultivation. Grid-based electrificationis reaching more rural households at a faster pace. Recent projects inrenewable technologies, including Solar Home Systems (SHS), reflectslow, yet significant, progress.

Survey instruments

Household survey. To determine socioeconomic characteristics, energydemand and availability, consumer ability and willingness to pay,attitudes toward various energy sources, and perceived benefits ofenergy.

Growth center and microenterprise survey. The study developed village-level profiles, including characteristics and potential energy de-mand, and assessed the energy used by small- and medium-sizedbusinesses located in village marketplaces, known as growthcenters.

Historical data Because 25 years had passed since Bangladesh hadconducted such a major rural energy survey, the present oneused representative samples of rural households and commercialbusinesses

Household energy consumption pattern

Nearly all households use both biomass and non-biomass energy. Avast majority use biomass sources, including fuelwood, tree leaves,and crop residue. While kerosene is the predominant non-biomassenergy source, many households also use grid electricity and dry-cellbatteries. Biomass is used almost exclusively for cooking. Keroseneis used primarily for lighting; grid electricity is another importantlighting source.

5


Rural enterprise

Bangladesh’s rural enterprises can be grouped into three location-based categories: growth center, village, and home. The surveyfindings reveal, perhaps surprisingly, that most home-based busi-nesses center on manufacturing, while village and growth centerindustries are involved more in trading. On closer examination, thereasons are clear. Many home businesses are run by women involvedin such production activities as basket weaving and sewing. Outsidethe home, village enterprises, run mostly by men, are involved instore operations selling goods and services.

Nearly all firms use some form of electricity, mainly for lighting.If owners cannot access electricity from the cooperatives or nationalgrid, they generate their own or purchase it from small firms. Be-cause electricity is used more efficiently than other energy sources, itsconsumption appears lower (9 percent). Kerosene and diesel are ma-jor sources of backup lighting during power outages, while candlesare also used.

One surprising finding is that only 6 percent of firms–111 out of1,801 enterprises– use biomass energy, mainly for heat and steam.Charcoal is used by only 4 percent of firms to meet similar needs.

Modern energy sources are used mainly for lighting and heating(including the preparation of food for sale). Non-lighting uses in-clude manufacturing and catering services and powering of smallappliances. Use in drive-shaft power for productive purposes is notyet widespread.

Business entrepreneurs consider electricity the best source oflighting, but also perceive that reliability of supply is a significantproblem. Few respondents consider kerosene superior to electricityfor lighting. Most agree that electricity provides better illuminationthan kerosene and makes reading easier. They also perceive that gridelectricity is superior to batteries for powering television

Entrepreneurs perceive irregular electricity supply and voltagefluctuations as a negative use factor.

Nearly all respondents agree that the advantages of using electri-city far outweigh the disadvantages.

Enterprises without electricity were asked several questions relatedto the costs and benefits of electricity use. There was no consensus onthe cost of obtaining a business connection: About 50 percent did notconsider prevailing rates exorbitant, 30 percent thought they were toohigh, and about 19 percent were indifferent. This finding is consistentwith respondents’ reactions to a similar statement on affordability ofconnection.

With regard to fuelwood, the opinions expressed varied markedly,

6


reflecting the widespread problem of deforestation and thus unevenresource availability. Because of scarcity and moderate shortages,about 50 percent considered fuelwood expensive. At the same time,many rural entrepreneurs perceived fuelwood as a readily availableresource. More than 90 percent expressed concern with regard todeforestation. Rural entrepreneurs preferred fuelwood to straw, dung,and other biofuels, which were used sparingly. But about 85 percentof respondents were aware that the smoke emitted from fuelwoodcould cause respiratory problems, and some 50 percent agreed that itmay cause other health problems.

Respondents’ opinions differed on the use of kerosene and li-quefied petroleum gas (LPG). Kerosene, although readily available,was viewed as a health hazard. Rural entrepreneurs perceived itsprice as relatively high, but were unclear why. More than 55 percentconsidered LPG a good source of cooking energy.

The picture that emerges from this survey is that most growth-center microenterprises in rural Bangladesh are not energy intensive.They consist mainly of small retail stores and shops, with somemanufacturing. The main energy use is lighting, for which virtuallyall businesses use electricity. If a particular growth center does notyet have electricity, business owners organize their supplies, eitherby buying their own generator or purchasing small amounts from alocal firm. Small agricultural industries and restaurants that requireenergy for heat rely mainly on biomass or kerosene.

The survey findings show that more than 70 percent of home en-terprises and virtually all village enterprises–most of which operateduring extended evening hours–use energy for lighting. Beyond ligh-ting, however, these small handicraft and retail firms use little energy.About 67 percent of home enterprises and 64 percent of village onesuse no energy for non-lighting purposes. Some report using noenergy types for either lighting or non lighting purposes, implyingthat their businesses involve manual labor and operate mainly duringthe daytime.

Compared to village enterprises, home-based businesses usesignificantly less energy; on average, home enterprises consume332 kgoe per year, compared to 608 kgoe for village based ones(including non-users). Predictably, home businesses depend moreon biomass than do village enterprises. But surprisingly, within thebiomass portion of the energy basket, home enterprises depend moreon fuelwood, while village enterprises use non-fuelwood biomass;cow dung accounts for 8 percent of village enterprises’ energy basket,compared to only 1 percent for home enterprises. Similarly, villageenterprises derive 49 percent of their energy from crop residue,compared to only 26 percent for home enterprises.

7


The price of energy per kilograms of oil equivalent varies mar-kedly by fuel source. For non-lighting uses, biomass is by far theleast expensive source, which accounts for its dominance as a heatingfuel. Because village enterprises are larger than home-based ones,they use significantly more biomass energy for non-lighting uses.

8