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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 institutions (FI) 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.
Technical Support for Financing Institutions
- For Financing Institutions: As many FI are unfamiliar with novel technologies (renewable energy and / or productive use equipment) development co-operation actors can offer technical trainings for FI so that they become capable of assessing the profile of the investment.
- For Entrepreneurs: One condition for FI agreeing to give out a loan may be that an external actor guarantees repayment of the loan. Development co-operation actors can provide entrepreneurship trainings and carry out the follow-up to ensure that entrepreneurs are capable and carry out the repayments rates as agreed with the FI.
Result Based Financing
Result based financing can ease the financial burden for high cost equipment e.g. solar powered water pumps. One model that is being applied is that companies who import and install solar powered water pumps receive up to 40% subsidy of the Freight on Board (FOB) price of the system. Modalities can differ. One option is that 2/3 of the subsidy are paid after import and the remaining 1/3 is paid after one year of installation according to set criteria (quality of installation, user satisfaction, etc.).
Subsidies / Grants
Paying grants should be the last resort due to the difficulty of making a grant-based deployment system sustainable. However in some cases, well-structured grants can facilitate or speed up the market uptake of a certain technology. One option for financing PUE equipment is to link a grant to the energy efficiency rating of a device. This could circumvent the problem that entrepreneurs tend to buy second hand (and old) equipment which is highly inefficient and causes problems (and higher costs) to the energy supply system.
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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.
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