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Enhancing Access to Financial Services for Productive Use Projects
Overview
The upfront cost of the equipment needed for productive use of energy is often prohibitive for the income profile of entrepreneurs, especially in rural areas. This is particularly the case when not only the productive use equipment (pump, drill, mill, computer, etc.) has to be financed but also the energy generating equipment.
For finance institutions (FI), financing productive use of energy is usually considered risky. Entrepreneurs have little collateral and the products or services entrepreneurs require financing for are too novel for the FI to evaluate. In other areas there are simply no FI active to provide financial services for productive use equipment.
The article provides a brief overview of different approaches and experiences from GIZ projects.
Available approaches to enhance the access to finance for PUE
Develop dedicated credit lines
In some countries, financial donors support financial intsitutions in developing dedicated credit lines (first-time capitalisation). The financial contribution can be used by FI for certain pre-determined technologies (e.g. renewable energy generation equipment or productive use equipment). The conditions for repayment should be developed according to the profile of the supported technology and the target group (ability to pay). If the credit line is working well, it can function as a revolving fund to finance further appliances.
One examples of a dedicated credit line is the Kafalat in Lebanon.
Technical support for financing institutions (who offer dedicated credit lines)
For Financial Institutions: What GIZ is doing e.g. in Uganda is to carry out technical trainings for financing institutions to become capable of assessing the investment profile of the entrepreneur. Your methodology would especially be useful for this line of activities. We have dedicated trainings planned in Mali, Ghana and India for financing solar powered irrigation systems.
For Entrepreneurs: In Senegal the colleagues from KfW have financed a credit line offered by Micro-Finance Institutions (MFI). The MFI required that the companies who are supported will receive basic training and follow-up to ensure that the MFI will receive the repayment rates agreed between the MFI and the entrepreneur.
Result Based Financing
Our colleagues in Ghana and Benin for example offer result based financing for solar powered water pumps. Companies who will import and install these systems receive up to 40% subsidy. 2/3 of the subsidy are paid after import and the remaining third one year after installation according to a list of set criteria.
Grants
We try to avoid paying grant money but in some cases colleagues consider it necessary to ‘sweeten’ the choice for renewable energy powered productive use system. Our colleagues in Uganda are experimenting with grants that are paid for systems that meet certain energy efficiency standards. This is to circumvent the problem that entrepreneurs usually buy second hand equipment which is highly inefficient and causes problems (or higher costs) to the energy supply system.
Experience from GIZ projects
Rural Infrastructure and Vocational Training, Tibet (LIB I)
The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH programme Rural Infrastructure and Vocational Training in Tibet (in the People’s Republic of China (known as "LIB I", conducted from 2001 to 2006) was aimed at improving the living conditions of the rural population by ensuring them a sustainable electricity supply by rehabilitating existing small hydropower stations in five districts of Tibet.
To allow access to productive use equipment, one approach of LIB I was to distribute selected electrical machines (such as grain mills) on lease to assess the responsiveness of the rural target population to this kind of equipment, and to raise awareness of productivity gains through electricity use in agricultural processing. Furthermore, loan products were offered.
The following lessons emerged from GIZ's LIB project:
- A loan should be handed over to the borrower as soon as possible after the business plan has been approved. Otherwise it could happen that the business idea will be implemented by another villager who had more investment capital and no need for access to credit.
- If borrowers are very young, their families must first guarantee loan repayment.
- Although loans are intended for the agreed purpose, borrowers sometimes used the money to satisfy a variety of needs. Part of the money was used e.g. to improve the workshop and the rest to buy the needed equipment. This is why a GIZ staff member later accompanied borrowers when they purchased their machinery.
- In some cases, loans were used to pay off another loan from the bank (unbeknownst to staff) or to demonstrate creditworthiness and apply at the same time for a second loan from the bank.
- During the three-year repayment period, borrowers saved money already and re-invested it in the business. In rare cases, a totally new business idea was implemented.
- Very often, additional equipment for income generation was purchased: a refrigerator, motorbike, TV, DVD player, or mobile phone.
- Over the course of the programme, the Chinese Government introduced a micro financing system in rural areas. Clients from varying economic backgrounds could open a savings account and then be entitled to apply for a loan. More than 90% of the borrowers participating in the project had such a savings book after the first programme loan was paid back. This process helped link the creditors to the public banking system.
- Although these various steps of the productive use approach seemed very long (entrepreneurship and vocational training, business plan approval, and loan provision in cooperation with a bank), they helped gain the confidence of the population, assured transparency in the selection process, combined training possibilities with the credit scheme, and integrated the community in the overall development process.
Promotion of Renewable Energy and Energy Efficiency Programme, Uganda (PREEEP)
The Promotion of Renewable Energy and Energy Efficiency Programme (PREEEP) and the Financial System Development Programme (FSD) in Uganda were cooperating in 2010 to promote solar-powered small-scale drip irrigation systems financed with small loans. The local partners were Agaru Savings and Credit Cooperative Ltd., Centenary Bank and AgroMax (U) Ltd., a supplier of agricultural equipment and inputs.
After assessing the financial viability of photovoltaic (PV) solar-powered small-scale drip irrigation for vegetable cultivation in Northern Uganda, GIZ approached Agaru SACCO to develop and establish a loan product for solar-powered irrigation systems and improved agricultural inputs. Part of this process is to demonstrate the technology by installing a demonstration system in Kalongo, where the SACCO’s head office is located. The demonstration system was installed on the farm of a local farmer in August 2010 and used to cultivate tomatoes, cabbages and onions. Kalongo is located in the Pader District of Northern Uganda, where climatic conditions do not allow vegetable cultivation under rain-fed conditions. Vegetables are therefore mainly imported from other parts of the country and prices are very high (2 to 3 times higher than in other areas of Uganda). Accordingly, the pay-back period for a small system costing approx. EUR 2,200 (6 million Ugandan shillings), which is sufficient for cultivating a field of ¼ ha, is only about 12 to 18 months, assuming a grace period of 3 months (i.e. the time between planting and first harvest) and an interest rate of 18% per annum (on a declining basis). The planned loan term will be 12 months, with payments to be made every 3 months considering the harvest periods of the planted crops. In addition, a small market study is being conducted among members of Agaru SACCO to assess the potential demand for the new loan product.
GIZ has signed a PPP agreement to develop and establish a similar loan product with Centenary Bank, one of Uganda’s leading commercial banks with a country-wide network of branches. The first major activity within the scope of this PPP is a market study to be conducted in the districts of Mukono (Central Uganda) and Lira (Northern Uganda). The study will also compare the economics of solar- and grid-powered irrigation.
Further Information
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