Delucia Session17 Acef2008

S3IDF’s Social Merchant Bank Model for Financing Explicitly Pro-poor Small-Scale Clean Energy Projects: Examples and Lessons and an Introduction and Perspectives on PFAN

Presentation/ Talking Points

USAID-ADB Asia Clean Energy Forum June 3-5, 2008

Manila, Philippines

by Russell J. deLucia, President The Small-Scale Sustainable Infrastructure Development Fund, Inc. (S3IDF) Member, Private Financing Advisory Network (PFAN) S3IDFIDF-US – Cambridge, MA, USA – a public charity under Section 501(c)(3) of U.S. tax code S3IDFIDF-India – Bangalore, India – a Section 25 notnot-forfor-profit company with Section 80G tax exemption © Copyright 2008 by Dr. Russell J. deLucia & S3IDF All Rights Reserved

The Need S3IDF is Addressing More than one billion people worldwide lack access to infrastructure services necessary for poverty alleviation: ƒ ƒ ƒ ƒ ƒ ƒ

Tens of millions of these people are in S3IDF’s current market shed in southern India – soon to include Nepal.

modern energy potable water sanitation transport information & communication other infrastructure services

Image Source: http://www.kamat.com/kalranga/deccan/map.htm

S3IDF

The Problem Shortcomings in the paradigms of large development entities ƒ Little focus & support for small projects and small, local, private players. ƒ Limited menu of institutional arrangements and ownership models. ƒ Often ignore capital market linkages and local synergies, especially project co-financing by local banks. ƒ Inadequate focus on diverse financial sustainability, especially the poor’s definition of sustainability. Technology Know-how lacking ƒ Majority lack know-how of available technology and knowledge Access to Finance ƒ Poor do NOT have collateral to access bank finance and bankers conceive poor as non-bankable. Financial Structure and Business Development Services ƒ Financial structuring should be in line with poor’s willingness and ability to pay and business development services to be provided as required. S3IDF

S3IDF’s Solution Locally Owned & Operated Micro/Small/Medium Infrastructure Enterprises (MSMEs) that are: ƒ Financially Sustainable Enterprises’ cash flow must cover all capital and operating costs from implementation onwards.

ƒ Replicable ƒ Environmentally Responsible Environmentally-friendly technologies are a priority.

ƒ

Explicitly pro-poor The poor benefit as: clients, customers, enterprise employees, and investment asset owners when feasible.

A solar powered computer kiosk run by a local entrepreneur in the rural village of Andhra Pradesh.

S3IDF

S3IDF’s Operating Zone The Universe in Which S3IDF Operates

The Connected/Good Access World Universe of Widespread Networks Infrastructure Services – Physical and Organizational Networks. And access to Know-how, technology financing and their supply chains

Overlapping Universe of very unreliable networks and lots of gaps in access and supply chains

The Unconnected/nonAccess World Universe of little or no Infrastructure Services – Physical and Organizational Networks Little or no access to Knowhow, technology financing and their supply chains

Policy and Regulatory Background: May or May Not Be a Level Playing Field

S3IDF

S3IDF’s Social Merchant Bank Approach Elements of the Model: S3IDF’s Social Merchant Bank model brings elements typical of large infrastructure projects to smallscale, pro-poor infrastructure projects.

Innovative financing – Revolving funds with a “gap filling” menu of debt, equity, partial guarantees, etc. – Owner-operator must have some capital or sweat equity at risk. – Facilitates participation of local banks. – Deal structuring that reflects the poor’s financial capabilities.

Business development services Linkages to technology providers Monitoring and Evaluation LPG Cookshop – a common kitchen provides poor women with clean, convenient cooking made affordable by a pay-for-use operation.

– –

Improve our performance Basis for dissemination

S3IDF

Hawker Lighting Project Reliable and better lighting for hawkers

Transportation of batteries

Entrepreneur at solar charging station

For the Light Point projects, S3IDF arranged the business development, technology and financial assistance to help these entrepreneurs increase their income, generate employment and provide cost savings and improved lighting for working-class hawkers.

S3IDF

Enterprise Support for Biogas and Productive End Uses electric generator

battery charging

compressor

milking machine

Biogas plant (gas outlet)

water pump

cooking

S3IDF provided working capital and assistance with business plan development to a local business installing biogas plants and biogas-based generators.

S3IDF

Last Mile Electricity Distribution Franchising Project (Complex Case) Discussions with the Cherlapatelguda Panchayat.

The Ibrahimpatnam substation – 33/11 KV Meter reading at the feeder level.

Franchisee/Entrepreneur Mr Hanumanth Reddy addressing attendees at the inauguration ceremony.

Interactions with the community about the franchisee operations.

In partnership with ASCI, S3IDF is implementing a unique business model using franchisees for providing better electricity services to the villagers in Cherlapatelguda feeder. Over time, the franchisee will provide other valueadded services to the community such as access to finance, potable drinking water, and information services.

S3IDF

What is PFAN? Informal Network of Private Sector Companies / Individuals • • •

Under the Climate Technology Initiative (CTI) umbrella in support of UNFCCC Commmon interest / involvement in providing finance & financing services to climate friendly projects Moving from Pilot (end of 2007) to Program Effort

Offers free consulting service to project sponsors & developers to help them raise international private finance. Aims • • • •

Knowledge & Know How transfer Technical Assistance Provide an interface between public sector policy goals and private sector commercial reality Increase the number of bankable renewable energy / climate friendly projects and help get them to financial close

S3IDF

PFAN and its Services Who is Currently Involved in PFAN?

PFAN Services

Partners

Advice & Guidance

•Climate Technology Initiative (CTI) •International Center for Environmental Technology Transfer (ICETT) •United States Agency for International Development (USAID) •United States Department of State (DOS) •Asia Pacific Partnership (APP)

Members •Investors (5) •Consultants/Advisors (6) •Some Members can/will do both

•Overall Project Commercial Structure & Design •Financing Structure •Sourcing & Procurement of Financing •Technical & Engineering Advice (selected)

Technical Assistance (limited and selected) Contacts/Introductions

Further Partners and Members Envisioned

Money/Financing – directly from PFAN Members

S3IDF

More on S3IDF and PFAN if Time/Q&A

1. Using the Social Merchant Bank Approach, We are… 2. Project Cycle Diagram 3. Levels of Financial Sustainability & Subsidy Needs at Project Level 4. Perspectives on New Technology 5. More S3IDF Clean Energy Project Examples 6. More on How PFAN Works 7. PFAN Pilot Phase Sample Projects

S3IDF

Using the Social Merchant Bank Approach, We are… ƒ

Impacting lives - mostly of people living on $2/day or less.

ƒ

Creating employment and reducing poverty.

ƒ

Building a project portfolio (now 120+) and pipeline (now 100+).

ƒ

Investing all along the supply chain through to end-use.

ƒ

Undertaking enterprise support transactions in upstream undercapitalized existing technology and ”know-how” SMEs.

ƒ

Studying with the assistance of LED based lights.

Facilitating market entry of “gap filling” technologies

S3IDF

Using the Social Merchant Bank Approach, We are… ƒ

Promoting environmentally-friendly technologies.

ƒ

Changing “business-as-usual” practices of local financial institutions.

ƒ

Achieving financing leverage (≥2:1).

ƒ

Facilitating the entry of small infrastructure investments into microfinance institutions’ portfolios.

ƒ

Expanding local partnerships for increased transaction efficiencies.

ƒ

Building international partnerships (GVEP/I in East Africa) to bring the S3IDF model to other countries.

S3IDF

Project Cycle The Project Cycle & S3IDF Need for Grant Funds Pre-investment phases (Studies, Surveys, Implementation/Construction Phase Operation Phase - Timelines: few months to year+ depends on - Timelines: M&E for at least 2-3 years. For some Feasibility Analysis & Arranging Co-financing) - Timelines after entry to Category A: generally complexity. projects atleast till the debt/equity are paid minimum 5-8 months; some projects more than 1 year due to complexities and/or partner constraints.

Financial Closure Implementation begins

Implementation ends Operation Starts Project Operates Financially

• Some cost share with partners, cost can not be absorbed by the project (because of small size and pro-poor characteristics). • These costs must be supported by grant funds. • Some of the costs are applicable to broader project replicability. • Current pipeline • 50 projects in Category A (detailed preinvestment studies). • 40 projects in Category B (preliminary concept)

• Project capital (implementation, construction) and operations costs are covered. • Project operates in a financially viable fashion including loan, guarantee fee, etc. payments to S3IDF revolving fund. • Some monitoring done as part of financing procedures by both S3IDF and co–financing bank in both this and operations phase (until debt, etc. repaid). • Technical support, SME capacity building must be covered in part/whole by grant funds. • Revolving fund must initially be capitalized by soft or grant fund, but then it operates on sustainable basis.

• Post-implementation Monitoring & Evaluation and Lessons Dissemination critical to replication by S3IDF (and others) and critical to S3IDF’s broader mission of getting big development entities to do similar projects. • These costs must be supported by grant funds. • Now (May ’08) M&E well underway as 120+ projects including many enterprise support agreements are in place (implementation or operations).

Implementation Monitoring & Evaluation and Support Post Implementation Monitoring & Evaluation Lessons, Dissemination THE SMALL-SCALE SUSTAINABLE INFRASTRUCTURE DEVELOPMENT FUND, INC.

S3IDF

A Most Critical Issue – Levels of Financial Sustainability and Subsidy Needs at Project Level A. Infrastructure Service Provider Types have Different Financial Criteria i. WB Survey a few years back suggest multinationals 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 Return on Equity targets B. Sustainability, Problems and Levels of Cost Recovery Hard investment cost: includes: costs of all the 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 cost: includes, investment or enterprise specific pre-investment costs (a special challenge) [in larger infrastructure projects these costs are normally capitalized into the investment costs, effectively becoming part of the “hard” costs in the financial structure of the project] Other soft cost: more programmatic costs - helping developing players including upstream players, government/ regulators, organizing community groups, etc. The Challenge: Small pro-poor projects don’t allow full capitalization of soft costs into the financial cost of the project. Also it will require considerable time & experience to learn the range of possible soft cost recovery/capitalization (next slide) • Maximum Sustainability – covers all hard and soft cost • Conventional Sustainability - All hard & soft investment costs • Partial Sustainability – All OM & R and some of capital costs (financing and RoE) • OM & R sustainability – no capital costs covered • Non-sustainable Meeting the Challenge: S3IDF aims for Conventional Sustainability less soft investment costs (sometime partial 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 support programs that may lessen revolving fund requirements. We are innovating with fees and deal structuring to capture some producer surplus while keeping deal viable and pro-poor.

S3IDF

Perspectives on “New” Technology ƒ Incremental vs. Transformational Technology • Incremental: improved efficiency/low cost pumps (modern power or human/animal) • Transformational: submersible electric pumps Night soil biogas in residential school.

ƒ Supply Chain Issues – How “Know-how” intensive from choice through operations

• What are the sales, service and continuing inputs’ requirements (e.g. diesel, lubricants)? • How easily can/will existing supply chains work? or, • Will new chains be required? S3IDF

S3IDF Clean Energy Project Examples Solar lighting for silk cocoon rearing centre

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)

Silk being reeled at a reeling center from the cocoons in the basket at extreme right (from another project)

S3IDF Clean Energy Project Examples

Reliable and cost effective lighting services for poor households

Different types of CFL and LED lanterns and lights.

S3IDF’s assistance with alternative lighting solutions and financial structuring allowed poor households to access better and safer lighting.

LED lighting for poor households in the absence of grid electricity.

Bank Manager visiting households that were financed for CFL lanterns because of unreliable grid

More on How PFAN Works (Phased Framework /Process) Initial Review/Program Induction •

Rigourous vetting of Project Proposal / Economic Feasibility

•

Selection / Rejection

•

PFAN Member assigned to project as dedicated adviser / mentor

Further Reviews to guide project to bankability •

Follow up to Initial Review: Commercial & Financing Structure

•

Engineering / Technical Studies / Certification / Equipment Supply

•

Fine Tuning: Cash Flows & Achievement of Conditions ¾ Financial Close

PFAN Members have Right of First Offer to make financing offers •

Offered terms should be fully competitive / Not binding

PFAN support can be terminated if financing thought unachievable. S3IDF

PFAN Pilot Phase Sample Projects 8 Projects currently (50+ reviewed) • •

10–15 (of the rejections) would have been suitable for support 1st Project reached financial close in July 07 (funding in Aug/Sep) ¾ Small Hydroelectric Power Station in Mexico (8,5 MW / USD 17 mio)

Later Phase/ Review Phase •

Bio Diesel Refinery in Brazil (66.000 tpa / USD 18 mio)

Earlier Phase/Review under way • • • •

Small Hydro in Chile (5,6 MW / USD 5 mio) Biomass in Chile (8 MW / USD 14 mio) Wind Farm in Chile (20 MW / USD 30 mio) Small Hydro in Chile (6,3 MW / USD 10 mio)

Initial Review / Pipeline Induction Pending • • •

Photovoltaic Power Station, South Africa (10 – 20 MW) Clean Coal Powerstation, Botswana (400 MW / USD 600 mio) Geo-Thermal Project, Georgia (9,3 MW / USD 4,3 mio)

S3IDF

S3IDF’s Social Merchant Bank WINNER OF THE INAUGURAL 2007

WORLD CLEAN ENERGY AWARD (NGO and Initiatives Category) Nominated by Worldwatch Institute Selected by a prestigious international Jury •Chris Flavin, Director General, Worldwatch Institute •Nicky Gavron, Deputy Mayor of London, ICLEI Local Governments for Sustainability •Ashok Kholsa, CEO, TARAhaat •James Leape, Director General, WWF International •Amory B. Lovins, President, Rocky Mountain Institute •Andre Schneider, Managing Director/Chief Operating Officer, World Economic Forum •Klaus Topfer, former UNEP Secretary General •Ernst U. von Weizsacker, Professor, Bren School of Environmental Science and Management

S3IDF

Contact us S3IDF – US: The Small-Scale Sustainable Infrastructure Development Fund, Inc. The Carriage House, 5 Hastings Square Cambridge, MA 02139 USA Tel: +1-617-576-0652 Email: [email protected] S3IDF – India: The Small-Scale Sustainable Infrastructure Development Fund No. 813, 12th 'B' Cross 23rd Main J P Nagar 2nd Phase Bangalore - 560 078 Karnataka, India Tel: +91 80-65902558 For more information about S3IDF visit www.s3idf.org or email us at [email protected]

S3IDF