s3idf - general presentation

8/2/2019 S3IDF - General Presentation

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S3IDF-US Cambridge, MA, USA a public charity under Section 501(c)(3) of U.S. tax code

S3

IDF-India Bangalore, India a Section 25 not-for-profit company with Section 80G tax exemption

Copyright 2011 by Dr. Russell J. deLucia & S3IDF All Rights Reserved

The Small-Scale Sustainable Infrastructure

Development Fund (S3IDF)and its

Social Merchant Bank Approach (SMBA)

March 2012

Using the SMBA to Leverage Philanthropic and

Development Capital to Achieve Energy Access for the

Poor


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S3IDF

Some Background History of S3IDF and

Its Social Merchant Bank Approach

Why & How S3IDFs Founders Came to Proselytize forPro-Poor, Small-Scale, Private Infrastructure Provisionand to Show an Alternative Paradigm Widespread experience: 70+ Countries

Understand most poor are working poor with someATP/WTP for modern lighting and other infrastructureservices

Knowledge of the widespread needs Development paradigm shortcomings (more below).

Couldnt convince Big Boys except for studies

Influenced by diverse US experience, especially NewEngland

Saw the options that technology and materials evolutionsmade possible

Knowledge of small-scale players most in informal sector Understand accessing local financial markets for the deals

is critical

Professional writing to make the case

Designed and Implemented S3IDFs SMB with its TwoMission Objectives

A boy does his homework by light from an

LED lantern supplied by an entrepreneur

S3IDF assisted.


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S3IDF3

Initial Perspectives The development community knows the scale & importance of the problem of infrastructure

services for the poor (modern energy, water & sanitation, connectivity (physical & electronic), etc.) One billion or more are in need (depends on the specific need); most in Asia

Necessary but not sufficient for productivity increase to escape the poverty trap, achieve many MDGs Technology and Material Evolutions Strongly Strengthen Arguments for Small-Scale Solutions; and

Not Just in Energy think plastic gas and water pipe, not just PVs

The Next Decades Pose Greater Requirements for Donors and Governments to Meet the Povertyand Productivity Challenges Across ALL Infrastructure Services (Rural and Urban) The Development Boom has passed by the poorest Often the expansion of infrastructure doesnt reach the poor, and is subsidized for others

The Past Decade-Plus Has Shown Growing Evidence of Local Enterprise-Centric Solutions: solutionsall along the supply chains of technology, know-how and $ (e.g. S3IDF, SELCO Pvt. Ltd.,Yes Bank Ltd.initiatives, SOLUZ, EcoEngenia, GERES) Many of these enterprise examples employ clean energy technologies Development in local capital markets offers strong synergy potential Such solutions are yet to be mainstreamed in the Big Boys development paradigms

Productivity Improvement Requires Energy Supply Investments and Ones on the Demand Side (e.g.irrigation pumps, grain mills, efficient crop dryers, kilns, etc. and associated enterprises)

There Is Simply Not Enough Development & Philanthropic Capital to Meet These Challenges While continuing support for large infrastructure investment (albeit more efficiently), the Big Boys must

support cost-effective explicitly pro-poor ,enterprise-centric, small-scale solutions Experience suggests large (in $ and impact) innovative pro-poor initiatives can be developed by combining

small-scale investments (outside of microfinance space) These Initiatives solutions should make use of innovative experience and use development and/or

philanthropic capital (and carbon finance) to achieve significant leverage, bringing local commercial capitalinto these enterprise solutions


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S3IDF

Shortcomings (Relative) in the Paradigms

of Large Development Entities With some exceptions (e.g. IWM

Program in Nepal), too little focus &support for small projects and small,local, private players

Limited menu of institutionalarrangements and ownership models

Often ignore capital market linkages

and local synergies, especially projectco-financing by local banks

Inadequate focus on diverse financialsustainability, especially the poorsdefinition of sustainability morebelow, time permitting

An improved water mill with processing machinery in Nepal.

Photo Courtesy of Ian Taylor, ADB.

Often dont consider/include bundling services, even critical pro-poorelements (e.g. connection financing, supply of efficient lighting), or where

obvious strong synergies (water and electricity)

Disproportionate focus & support for selected technological options (e.g. PVs)

Inadequate attention to public good aspects of interventions in support of

infrastructure projects


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S3IDF

Shortcomings (relative) in the paradigms of new or

evolving philanthropic players active in the SMEand/or MFI and Related Space (some exceptions) Insufficient beyond micro-finance focus & support

for complementary services for MSME development

Almost no focus on infrastructure MSME developmentdespite the critical needs and opportunities

Only emerging considerations of local capital market

linkage importance Unclear//varied positions on social/economic versus

financial returns

Shortcomings (Relative) in the Paradigms

of Large Development Entities (cont)

First Cost Barrier and Access to FinanceMany poor can NOT buy even a solar lantern without credit

Most poor do NOT have collateral to access bank finance and bankers conceive poor asnon-bankable

Sometimes even lack of formal sector player (bank, MFI) footprint

Financial Structure and Business Development ServicesFinancial structuring should be in line with poors willingness and ability to pay andbusiness development services to be provided as required

Deal financial structuring should be such that poor do not bear any/much of performancerisk of immature lighting or other technologies including risks of undeveloped supply chains

Hawkers selling under our lights in the Davangere

district.


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S3IDF

Addressing the Needs, Problems & Challenges of

Providing Infrastructure Services for the Poor

S3

IDFs Two Mission Objectives1.To employ its results-driven, enterprise-centric SMBA in

southern India to build its portfolio of explicitly pro-poor,

pro-environment small-scale deals - infrastructure and

related productive-use investments (e.g. grain mills).

Current portfolio has 190 deals.

2.To achieve greater and broader impact, based on its

lessons and experience, to proselytize, disseminate and

transfer its approach. Thus others in the developing world

may leverage philanthropic and development capital to

facilitate local commercial capital co-financing for small,explicitly pro-poor investments and use development

capital (local and international) more effectively.

Dissemination work has been undertaken in East Africa

and Sri Lanka with additional SMBA transfer in Nepal

currently underway (with ADB support). A larger, multi-

country application is also under construction (by ADB).

Single-phase flour mills help women generate income

and supply flour to neighbors.


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S3IDF

The Two S3IDFs S3IDF is apartnership between two

institutions: S3IDF-US and S3IDF-India.Both institutions are members of theS3IDF family, share a common vision andpursue a common mission.

Both are registered charities in theirrespective countries; both are

atypical charities operating in a verybusiness-like fashion.

Cooperate on projects and initiatives

S3IDF-US operates from a base inCambridge, MA, USA. It assists S3IDF-

India and disseminates the SMBA inmultiple countries.

S3IDF-India assists entrepreneursfrom offices in Bangalore and

Hyderabad in southern India.

Russell deLucia and T.L. Sankar at an opening ceremony for

a rasoi ghar (common kitchen) using clean energy in rural

India.


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S3IDF

A Proven Alternative, Results-Driven Paradigm:

S3IDFs SMBA, Designed to be Widely Applicable

(strengthening existing & creating others)

Micro-Small Enterprise

Investment Criteria:

Pro-poor Replicable

Pro-environment Entrepreneur has

skin in the game Financially viable

Gap-fillingfinance

TechnologyKnow-how

Commercialstrategy & capacity

building

Bundled Support:Working with partners, a merchant

bankingapproach provides integrated & ongoingbusiness development, technical and financial support to

portfolio enterprises. This helps these businesses evolve

to a point where they are sustainable & independent.

Leverage Local Financing:Drawing on a Revolving Fund

(RF) local financial institutionsare engaged in portfolio

projects with a gap-fillingmenu of debt, equity, partial

guarantees, etc. Our target leverage is 2:1 or better.

Financial Engineering:Brings design and structuring

elements typical of large infrastructure projects to small-

scale, explicitly pro-poor deals.

Technology Innovations: Works with entrepreneurs to

develop and/or integrate technology options that are

appropriate for low income end-users, often adaptingoff the shelf technology and identifying new evolutions in

technology to meet the needs of poor people.

Value Chain: Works all along the technology and know-howchain and includes linked productive-use applications (e.g.

grain mills)


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S3IDF

S3IDFs World View (and Operating Zone)

The Connected/

Good Access WorldZone with Widespread Networks

Infrastructure Services Physical

and Organizational Networks

Access to know-how, technology

financing and their supply chains

The Unconnected/

Non-Access World

Zone with Little or NoInfrastructure Services

neither physical or

organizational networks

Little or no access to

know-how, technology

financing & their supply

chains

Overlapping UniverseVery unreliable

networks

Lots of gaps in access

and supply chains

The Zones in Which S3IDFs Social Merchant Bank

Approach (SMBA) was Designed to Operate

Policy and Regulatory Background:

May or May Not Be a Level Playing Field


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S3IDFS3IDF


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Characteristics of Portfolio Projects Small-scale sustainable infrastructure and

associated productive use investments Diverse in technology utilization for energy

(biogas, PV, hybrids, LPG, biomass) =>implications for carbon financing challenges

Explicitly pro-poor

The poor benefit as: clients, customers,enterprise employees, and/or investmentasset owners.

Financial viabilityEnterprises cash flow must cover capital and

operating costs from implementation onwards.

Highly replicable Micro-meso-small finance

Debt, equity, guarantees ranging from US$500 toUS$40,000.

Skin in the GameEntrepreneur has capital (cash and/or sweat equity)

at risk.

A solar powered ICT enterprise run by a local

entrepreneur in a rural village.


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S3IDF

S3IDFs Portfolio Today

Instruments:

Debt (primary and secondary) Partial Guarantees

Equity

Revolving Fund leverage 2:1

Partnership with 12 banks

Partnership with 29 technology suppliers Impacting many tens of thousands of direct

and indirect beneficiaries

Almost all portfolio projects have carbon offsetbenefits of a wide range but small (1-10 tonsCO

2

per annum) except institutional biogas.

Young: in operation since 2001 (US); 2002 (India)

Over 190 projects in the India portfolio; more than 100 MSME created Investments all along the supply chain & productive use applications (EE

technologies/fuels covered: PV, grid, hydro, biogas and other biomass & LPG)

Numerous projects in the pipeline

A village-scale South Indian water purifications enterprise that

S3IDF helped open through financial, business development

and technological services.


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S3IDF

Solar Lighting for Silk Cocoon Rearing Centre

A Straight Forward Project Example

Silkworms placed in the Chandrika where

they form cocoons.

Solar panels atop the cocoon rearing centre.

Solar lights being used to assist in

feeding the worms.

S3IDF provides technology and

financial linkages(partial guarantee with the local bank

for loans taken by the farmers)


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S3IDF

Hawkers Light Points in Hassan:

Modest Complexity

In light point projects such as this one in

Hassan, S3

IDF arranged the businessdevelopment, technology and financial

assistance to help the entrepreneurs

increase their income, generate

employment and provide cost savings

and improved lighting for street hawkers.

Transportation of batteries

Lighting for hawkers

Entrepreneurs with solar

charging station andbatteries for lanterns.

il l i i i ib i


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S3IDF

Last Mile Electricity Distribution

Franchising Project: Quite Complex

In partnership with ASCI, S3IDF is implementing a unique business model using franchisees forproviding better electricity services to the villagers in Cherlapatelguda feeder. Over time, the

franchisee will provide other value-added services to the community such as access to finance,

potable drinking water, & information services.

The Ibrahimpatnam Substation 33/11 KV

Discussions with

Cherlapatelguda

Panchayat.

Franchisee/Entrepreneur Mr Reddy addressing

attendees at the inauguration ceremony.

Interactions with the community

about the franchisee operations.

Meter reading at

the feeder level.


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Osmania General Hospital Rasoi Ghar (kitchen)A Modern Fuels Partnership: A Different Type of Complexity

S3IDF worked with our strategic partners, HPCL, hospital administratorsand other key players to implement this rasoi ghar in the 2000-bedOsmania General Hospital. Families pay an hourly fee for use of the

LPG connections and cooking utensils.

The kitchen provides a clean, safe

environment for poor families visiting patients

to prepare meals. Previously, food was eithercooked on open fires or purchased at

prohibitive costs.

LPG (liquid petroleum gas) is a cleanerburning fuel which makes HPCL a strategic

partner as S3IDF works to provide safetechnologies and clean fuels for the poor.


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Dissemination/Transfer of

S3IDFs SMB Approach Are the Minimum Conditions Present?

Legality of the approach and an organizational implementation possible under the rules of the game Strong local core partners for SMB implementation including FI to host RF

Banks/FIs/MFIs with MSME term lending experience

Other potential partners: know-how and technology suppliers, activist/business-like NGOs, developmententities

Sources of philanthropic or development funding

[preliminary research suggests minimum conditions present]

Reconnaissance Level Study and Analysis Preparatory desk review of available material and communications, then rapid field work of interviews anddocumentation review to confirm minimum conditions, and

Identification of potential local partners (all categories) to implement S3IDFs SMB approach

Preliminary design of organizational structure for implementation, including FI RF host role(s)

Identification of priority energy/infrastructure needs

Indicative pipeline of select deals, including partners (requires additional study budget or in next step)

Feasibility/Pilot Investment Activities

Pre-investment analysis of select deals

Testing of partnerships including FI RF host via: Implementation of pilot portfolio of deals

Design of potential scale-up application of S3IDFs SMB approach[all of the above can be done in stages, all contingent on program funding]

Implementation of Major Scale-up Application of S3IDFs SMB Approach


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More on S3IDF, SMBA & Related Issues

1. Suggestions for Shifts in the Paradigms

2. Technologies and Supply Chains

3. Levels of Financial Sustainability

4. Awards and Donor Success Story


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Some Suggestions for Shifts in the Paradigms:

Focus on Big Boys Like ADB, WB, IDB, AfDB Increase Focus (intellectual and programmatic) and

support for small projects and small, local, private players Need to change the staffing coefficients so more attention =>more $, more innovation

Some Important Issues to Be Integrated into ThisIncreased Focus: Consider wide menus of institutional arrangements and

investment ownership models, reflections

Local rules of the game (regulations) and how to circumvent

and/or capitalize on them (e.g. priority lending requirements) Pay special attention to capital market linkages and local

synergies, achieve leverage: deal co-financing by local banks Consider employment & other synergies that can flow from small-scale clean energy deals

Examine closely the issue of diverse financial sustainability, especially the poors definition ofsustainability and understand well their ATP and WTP

Corollary: Look closely at the Rules of the Game that are implicitly or explicitly anti-poor & oftenanti-democratic

Consider/include bundling services, especially critical pro-poor elements (e.g. connection financing inconventional projects), and pay increased attention where obvious synergies (water and electricity)

Change the current disproportionate focus and support for selected needs and technological options(e.g. PVs), lack of consideration of heat energy needs (except stoves) and implications for project due tovarious technology/material evolution

Pay greater attention to public good aspects of interventions in support of infrastructure projects (bigand small)

Re-examine Carbon calculus; consider black carbon, removing an implicitly anti-poor bias Corollary: Carbon finance can be used aggressively for financial leverage

Single-phase flour mills help women generate

income and supply flour to neighbors.


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S3IDF20

Augmenting the Increased Focus Suggestions

Above: More Paradigm/Action Changes

Find ways to increase implementation of hybrid operations combining public (sovereign debt) and private(non-sovereign) operations

Corollary: Need to bring private sector into explicitly pro-poor local deals; need to overcome constraints ofprivate sector operations to access soft/grant funds

Create collaborations with other sources of soft funds beyond member country programs including selectedfoundations, CSR and Social Investing players who have programmatic interests in issues of focus here and/orrelated matters (e.g. sustainable rural development)

Avoid ordinary plain vanilla (primary debt) intermediation approaches

View (and use) carbon financing as a special development finance source to help achieve the suggestions here Use soft/grant funds to complement hard (albeit possibly low return) funds for intermediation approaches that

will leverage local commercial funds providing the debt (or even equity/quasi equity) and local development funds

International development capital providing (through intermediation) partial guarantees and other riskmitigation, equity and other deal making support so debt comes from the local financial market

All this means using soft/grant funds in more innovative and aggressive manners to pave the way for pro-poor,pro-environment small-scale energy and linked investments that can be financially sustainable and utilize localcommercial funds

The soft funds cover, for example, Selected transaction costs, especially ones involving the poor Aspects of pioneering (new to particular market ecosystems) pro-poor, pro-environment projects Front end deal investment (or program of deals) development Underwrite very smart subsidies when appropriate (not just administratively easy), e.g. OBA in new and

more innovative ways


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Augmenting the Increased Focus Suggestions

Above More Paradigm/Actions Changes (II)

i. leverages other funding (commercial and/ordevelopment);

ii. Has significant replication/scale up potential that could

lead to a program of pro-poor deals that can be

financially sustainable (such could be the case for very

well defined JFPR projects

Use soft/grant funds to support single country and/or

regional Technical Assistance to disseminate and

transfer experience and know-how for innovative and

good practices (there are no best practices yet) for

fostering pro-poor, pro-environment deals, which

achieve leverage and are financially sustainable after

pre-investment preparations

If possible, couple pilot programs of pro-poor deals,leading to

Major Initiative

[More in next slides]

A village-scale South Indian water purifications enterprise that

S3IDF helped open through financial, business development

and technological services.

Avoid all grant/soft cost projects unless testing/piloting a concept that, for example

Adopt a mantra of FIRST pro-poor, pro-environment, cost-effective energy access with

leverage, leverage, leverage; not clean energy first. Clean energy will emerge due to

consideration of criteria and synergies!


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Technology, Supply Chains & Complementary

Institutional and Regulatory Developments

Polyethylene pipe; reinforced rubberhose/tubes

Submersible lower cost pumps

Water, energy end-use equipment (e.g. lowcost carbon filters, compact fluorescent)

Micro-turbines (hydro e.g. Peltrics)PV's

Low cost "customized" solid state controls,Smart & pre-paid meter (manage demand,lower commercial costs)

Small LPG cylinders

Condominial Sewer Systems

Packaged co-generationMicro-turbines (gas)Gas system hot taps

Small-scale ultraviolet & other water

treatmentHigh performance biogas plantsVarious on site waste water treatmentLED Based Lighting

Various new biogas design & materials

Technology and materials evolutions along with know-how require

commercial supply chains. Some examples:

Complementary institutional and regulatory developmentsEasing of licensing and sub-franchise constraints; tolerance of illegal/unlicensed providers

Creation and active work by trade associations

Organizational: Leasing, management contracts, sales or other off-loading of small/ruralsystems to local players

Various creative collaborations between the big boys (local or international) and local smallplayers


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Perspectives on New Technology

Incremental vs.Transformational Technology

Incremental: improved efficiencylighting, ovens, pumps, etc

Transformational: submersibleelectric pumps

Supply Chain Issues How know-how intensive from

choice through operations What are the sales, service and continuing input requirements

(e.g. diesel, lubricants)?

How easily can/will existing supply chains work?

Or will new chains be required?

LED lighting for poor households in the absence of grid

electricity.


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S3IDF

A Most Critical Issue Levels of Financial

Sustainability and Subsidy Needs at Project LevelA. Infrastructure Service Provider Types have Different Financial Criteria

i. WB Survey a few years back suggest multinationals Return on Equity (RoE) targets low 8-12%, high 25%(some above), most in middle; Regional corporates targets likely high end except if for self supply

ii. NGOs, CBOs, GP municipalities may accept very low RoE targets

B. Sustainability, Problems and Levels of Cost RecoveryHard Investment Costs: includes costs of all equipment, construction, etc to put project into implementation

and on an operating basis, all the capital financing costs (e.g. debt and equity charges) and OM&R.

Soft Investment Costs: includes investment or enterprise-specific pre-investment costs (a special challenge). In

larger infrastructure projects these costs are normally capitalized into the investment costs, effectivelybecoming part of the hard costs in the financial structure of the project.

Other Soft Costs: More programmatic helping develop players including upstream players, government/regulators, organizing community groups, etc.

The Challenge: Small pro-poor projects dont allow full capitalization of soft costs into the financial cost of theproject. Also, it requires considerable time and experience to learn the range of possible soft costrecover/capitalization (next slide)

Maximum sustainability covers all hard and soft cost

Conventional sustainability all hard and soft investment costs Partial sustainability All OM & R and some capital costs (financing and RoE)

OM & R sustainability no capital costs covered

Non-sustainable

Meeting the Challenge: S3IDFs SMBA aims for conventional sustainability less soft investment costs (sometimespartial coverage) and raises grant monies to cover other costs. We address trade-off of increasing efforts(and therefore soft costs) for certain partner collaborations and for accessing government/other supportprograms that may lessen revolving fund requirements. We are innovating with fees and deal structuringto capture some producer surplus while keeping deal viable and pro-poor.


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S3IDF

Awards and Donor Success Story

2010

USAID SARI/Energy recognized S3IDFs SMB model asa Success Story after collaborative work onimplementing the model in Nepal.

2009

USAID GDA includes S3IDF as a case study in its Energysector guide (Building Alliances Series).

2008

ACEF Top Innovation Award for Clean Energy FinanceSolutions

2007

World Clean Energy Award in the NGO andInitiatives category for S3IDFs lighting projects inSouth India
http://www.cleanenergyawards.com/uploads/pics/026_f4f_150607_P6158692.JPG


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S3IDF

Contact USRussell J. deLucia

S3IDF US

The Small-Scale Sustainable Infrastructure Development Fund, Inc.

5 Hastings Square, The Carriage House

Cambridge, MA 02139 USA

Tel: +1-617-576-0652 [email protected]

For more information about S3IDF visit

www.s3idf.org

(currently under restructuring)
mailto:[email protected]://www.s3idf.org/http://www.s3idf.org/mailto:[email protected]

s3idf - general presentation

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