Publications > Environment & Poverty ... > Open for business

Environment & Poverty Times No. 5

Open for business

Energizing entrepreneurs: the Bill Gateses of Africa

People grow out of poverty when they create small businesses that employ their neighbours. Call it passion, enthusiasm or fire in the belly – it’s what energizes successful entrepreneurs. Green entrepreneurs can be the champions of a sustainable economy.


World Poverty Distribution

Do you know?

Q1: Small and Medium Size Enterprises (SMEs) comprise of what per cent of the private sector?
a) 19%
b) 49%
c) 69%
d) 99% Q2: Why are SMEs important?
a) They represent the backbone of global economic activity.
b) They generate significant employment oppor­tunities.
c) They contribute to local community development and capacity building.
d) They have a significant environmental impact.
e) All of the above.

Open for business

By Peter Fries, United Nations Environment Programme

In rural Senegal, a disused wind pump stands as a stark reminder of the challenges of sustainable development. Installed as part of an aid project, the wind pump was clearly seen as an advantage over hauling water by hand. But without spare parts and trained people to service it, the wind pump – along with 90 per cent of similar pumps in the country – fell into disuse, unable to provide water needed for cooking, washing and irrigating the vital fruits and vegetables in the village garden.

Mr Michel Tine, a former manager of the aid project, wasn’t a businessman but he saw the opportunity to create an enterprise repairing and servicing defunct wind pumps. He found that there was demand for the pumps but quickly realized that in order to succeed, his new company – VEV – needed both to learn business skills and secure start-up capital. Such needs were modest by US or European standards – the capital required was roughly equivalent to the amount of an average US corporation spends on its annual report.

In another part of Africa, Mr Bamba Coulibally was also struggling to put into action his business idea. In Mali, a country short on refrigeration but long on hot days, Mr Coulibally was trying to preserve stocks of local foods using a solar drying technology developed under a previous aid project. Like Mr Tine, he was well aware of the opportunities of his business but realized that without being able to put forward a good plan and having collateral, there was little hope of obtaining capital from local banks.

Enter an unlikely trio: the United Nations Foundation, an organisation called E+Co headed by an innovative banker, and the United Nations Environment Programme (UNEP). This group have combined to form the Rural Energy Enterprise Development Initiative – or REED – which aims to help entrepreneurs like Mr Tine and Mr Coulibally, interested in renewable and efficient driven energy projects, to raise small amounts of start-up capital and increase skill levels. Instead of simply throwing more “appropriate technology” into an area which, in the past, has seen several high-tech fiascoes and failures, the trio embarked on a far more ambitious and difficult task – that of creating new types of enterprises capable of delivering clean energy to the people who actually needed it.

It’s an organizational concept that the sustainable development sector has been waiting for.

“Technology is not the problem”, says Mr Phil LaRocco, head of E+CO, known as the ‘banker wearing the development cap.’

“Business models are not the problem. Demand for the product is not the problem. Ability to pay is not the problem. The problem is a shortage of seed finance that allows entrepreneurs the freedom and flexibility to innovate and take risks”, says Mr LaRocco – a man who refuses to be intimidated by the problems associated with ideas of sustainable development.

Mr LaRocco says that though the motives behind the many billions invested in the development of various energy projects and associated water schemes over the past two decades were often well-intentioned, this lavish spending was ultimately unable to break the cycle of poverty. Wind pumps have been left to rust all over Senegal. Mr LaRocco says the poverty cycle has a direct link to the lack of access to modern forms of energy.

“You don’t give away – you invest”, he says. It’s a philosophy Mr LaRocco has applied to investing more than USD 170 million in 173 enterprises operating in 34 developing countries, which in the process has delivered sustainable energy to over four million people.

Mr Mark Radka, the coordinator of UNEP’s energy programme, says development agencies and investors have often ignored the potential capacities of local enterprises to innovate in essential energy services. This is because enterprises such as Mr Tine’s or Mr Coulibally’s were too small; they operated in remote, rural areas and did not practise any formal kind of bookkeeping. Development agencies and governments often clung to the belief that only centralized agencies and programmes could deliver energy services effectively.

REED’s first investment stop was Africa – the programme is called “AREED”, www.areed.org – where they enlisted the help of a number of local development organizations who were attuned to commercial practices. These ‘country partners’ are a key part of the AREED programme, delivering enterprise development services in the field to help entrepreneurs create and expand their clean energy businesses.

Dr Abeeku Brew-Hammond, director of Ghana’s Kumasi Institute of Technology and Environment (KITE) – AREED’s local partner organization in the country – says the term “rural” can have a very different meaning in countries like Ghana. “There are no telecoms, no email and a typical rural person may not have the education to even write a business plan”, says Dr Abeeku. But he says people often do have the money to pay for improved energy services, especially if the cost of systems can be financed over extended periods.

To get the message out in Africa, local country partners such as KITE together with E+Co literally take the concept to the streets, putting AREED’s ideas directly to entrepreneurs through seminars in Ghana, Mali, Senegal, Tanzania and Zambia. Both Mr Coulibally and Mr Tine attended the seminars and subsequently were among the first entrepreneurs to emerge from the AREED “pipeline” – through a process of one-on-one mentoring, refining their business ideas into solid business plans. Only then, when viable business plans had been finalized, were Mr Coulibally and Mr Tine given start-up capital.

For Mr Tine, a USD 17,000 loan from AREED means he can create and expand an inventory of spare parts to provide a better service to more communities. Mr Coulibally is investing his USD 8,000 loan in additional solar dryers in order to expand his business.

A key factor in the REED approach to development is that it treats risk and risk-taking as an integral element in the entrepreneurial approach to projects and sees risk as a tool for leveraging greater returns in the long-term. In a traditional development programme, the same money would be used to buy and install equipment – amounting to a few wind pumps and some solar dryers. By contrast, a REED programme uses funds to launch a business which might eventually be capable of installing and maintaining hundreds of pumps or solar dryers.

“Assisting entrepreneurs to take risks, to innovate in the way they deliver goods and services, and to continuously refine their business models, is an effective way to gain public trust while attracting commercial investment into the sustainable energy sector”, says Mr Radka.

REED financial support is typically in the range of USD 20,000–120,000 and sometimes might be used to take up an equity position – in essence, buying part of the company. However, a REED programme usually does not provide all of the finance an enterprise may require and the terms of the financing package are usually designed with a ‘second stage’ investor in mind – a person or group that will invest once the business model is proven. Once other partners financially commit to a new company, REED’s role diminishes.

REED is also not just concerned with seeking financial returns on its investment. The potential benefits of each investment include not just direct financial returns but also indirect returns such as job creation, lower pollution levels and improved rural livelihoods. The VEV investment is a good example. In one village where a wind pump has been repaired, the extra water is now irrigating a village garden which supports 20 families with both extra income and better nutrition.

REED has branched out into Brazil (B-REED, www.b-reed.org) and China (C-REED, www.c-reed.org). The programme has now successfully funded more than 45 enterprises that deliver clean energy to more than 300,000 people.

All the REED partners agree that small energy enterprises – and the enterprise-centered development model – are not a quick fix or a panacea capable of delivering all the sustainable energy that is required to the rural poor. It is, says REED “one more approach that, in many circumstances, can cost effectively deliver energy services – often in ways that complement the more traditional centralized utility model”.

For the rural village in Senegal and those associated with Mr Tine’s business project, that approach simply means water in the fields and food on the table. And that, says REED, is the right combination for sustainable development.

Answers:
Q1: d)
Bangladesh: 99% of companies have less than 100 employees accounting for 58% of national employment.
Ecuador: 99% of companies have less than 50 employees accounting for 55% of national employment.

Q2: e)
The key to poverty alleviation is economic growth that is inclusive and reaches the majority of people .

Source: WBCSD. 2008. Promoting SMEs for sustainable development.