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)
S3IDF-
IDF-US – Cambridge, MA, USA – a public charity under Section 501(c)(3) of U.S. tax code
S3IDF-
IDF-India – Bangalore, India – a Section 25 not-
not-for-
for-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 Tens of millions of these
people worldwide lack people are in S3IDF’s current
market shed in southern India
access to infrastructure – soon to include Nepal.
services necessary for
poverty alleviation:
ƒ modern energy
ƒ potable water
ƒ sanitation
ƒ transport
ƒ information & communication
ƒ other infrastructure services
S3IDF
Image Source: http://www.kamat.com/kalranga/deccan/map.htm
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 Overlapping
The Unconnected/non-
Universe of
Universe of Widespread very Access World
Networks unreliable
Infrastructure Services – networks Universe of little or no
Physical and Organizational and lots of Infrastructure Services –
Networks. gaps in Physical and Organizational
And access to Know-how, access and Networks
technology financing and their supply Little or no access to Know-
supply chains chains how, 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 small-
scale, pro-poor infrastructure
projects.
LPG Cookshop – a common kitchen provides
poor women with clean, convenient cooking
made affordable by a pay-for-use operation.
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
– 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
Interactions with the community about
ceremony.
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 value-
added 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 PFAN Services
in PFAN?
Partners Advice & Guidance
•Climate Technology Initiative (CTI) •Overall Project Commercial
•International Center for Environmental Structure & Design
Technology Transfer (ICETT)
•Financing Structure
•United States Agency for International
Development (USAID) •Sourcing & Procurement of
•United States Department of State (DOS) Financing
•Asia Pacific Partnership (APP) •Technical & Engineering Advice
(selected)
Members
•Investors (5) Technical Assistance (limited
•Consultants/Advisors (6) and selected)
•Some Members can/will do both
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 Studying with the assistance of LED based lights.
technology and ”know-how” SMEs.

ƒ 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
Feasibility Analysis & Arranging Co-financing) - Timelines: few months to year+ depends on - Timelines: M&E for at least 2-3 years. For some
- 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 ends

Implementation begins 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 pre-
investment 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. LED lighting for poor households in the
absence of grid electricity.

S3IDF’s assistance with

alternative lighting
solutions and financial
structuring allowed poor
households to access
better and safer lighting.
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: s3idf@yahoo.com

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 info@s3idf.org

S3IDF