The Small-S cale Sustainable I nfrastruc ture Development Fund, I nc. http://w w w.s3idf.

org

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Emphasizing Financial Leverage and Integrated Support to Create Micro-Enterprises that Provide Basic Infrastructure for Poverty Alleviation
The Challenge
Almost half the people in the world live on less than $2 per day and do not have access to basic infrastructure services such as modern energy types, clean water, sanitation, transportation and telecommunications. It is widely recognized that these services are necessary, but not sufficient for poverty alleviation. The failure of modern states and large private-sector companies to provide infrastructure services to people in developing countries is well known, and NGO and aid organizations recognize that current funding levels are insufficient. While the major development finance institutions support large-scale investments in this area, their paradigms still do not adequately address the challenge. At the same time, while there is increasing attention given to local entrepreneurship in economic development, there is too little attention (intellectual and programmatic) given to enabling the local private sector to provide these services through small-scale enterprises and at an affordable cost.

Solar panels at battery charging station.

Addressing the Challenge: S3IDFs Two Mission Objectives

The founders of S3IDF developed the Social Merchant Bank Approach (SMBA), which addresses the challenge by helping local entrepreneurs create micro-enterprises that provide infrastructure services to the poor. Understanding that there is not enough development, social, or philanthropic capital to finance the poors infrastructure needs, the SMBA operates to bring local commercial co-financing to the table. This is achieved by supporting entrepreneurs with bundled services (know-how, technology and finance) and by leveraging philanthropic and development capital. Designed to be widely applicable, the SMBA applies the innovative financing of large scale infrastructure projects to small-scale deals. S3IDFs mission is two-fold: i) to employ our SMBA in southern India to continue the development of a portfolio of pro-poor, environmentally friendly and financially sustainable small-scale infrastructure and productive-use enterprises; and, ii) to disseminate our SMBA based on experiences in India and elsewhere.

Transporting batteries to local street vendors.

Elements of the Social Merchant Bank Approach

Battery powered lanterns provide safe and efficient lighting for street vendors.

S3IDF is demonstrating that recent advances in technology and changes in regulatory systems are providing opportunities for micro and small businesses to supply infrastructure services with a degree of financial sustainability. Small-scale enterprises are well suited to provide infrastructure services at a standard and cost that meets the needs of poor communities. In the energy sector alone, poor communities represent a significant market for modern services, as they currently spend a large proportion of their income on traditional, inefficient energy sources such as firewood, candles, batteries and kerosene. S3IDF is also demonstrating that financial viability can be increased by linking improved service directly to income-generating end-users, such as shop keepers or street vendors, grain millers, farmers using irrigation, womens groups using sewing machines and other small enterprises. Modern energy services increase productivity, which can lead to higher incomes and an increased ability to pay for these services.

LED lantern provides light for studying.

S3IDF has identified that a major constraint is the shortage of viable business propositions rather than the lack of commercial finance. This is true for many renewable energy projects that are overly promoted and

The Small-Scale Sustainable Infrastructure Development Fund, Inc. The Carriage House, 5 Hastings Square, Cambridge, MA 02139 USA +1 617 - 576 - 0652

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not smartly subsidized. Commercial banks and equipment suppliers have traditionally been unwilling to do business with small-scale utility providers due to a lack of knowledge of these nearly invisible markets. S3IDF is working with banks and suppliers to overcome these constraints and to make viable but non-bankable projects bankable.

S3IDFs Portfolio and Services

S3IDF is producing a stream of sustainable enterprises to supply infrastructure services to the poor by utilizing existing sources of small-scale finance. It is also supporting other enterprises whose roles are critical, such as small-scale suppliers of technology and know-how (e.g. those who convert diesel engines to run on bio-fuels). In seeking enterprises to include in the portfolio, S3IDF looks for enterprises requiring start-up or seed capital with the following characteristics: Small-scale infrastructure and associated productive use investments that are explicitly propoor, where the poor benefit as clients, customers, enterprise employees and/or investment asset owners. Financial viability: enterprises cash flow must cover capital and operating costs from implementation onwards. Environmentally friendly. Highly replicable. Require microfinance: debt, equity, guarantees ranging from US$500 to US$40,000. Skin in the Game: the entrepreneur must have capital (cash and/or sweat equity) at risk.

Entrepreneur in front of his ICT shop.

S3IDF helps rural schools introduce cost-effective computer education for students.

Technical and Business Development Services

S3IDFs team provides or arranges technical and business development services to assist entrepreneurs in establishing viable enterprises. It challenges the business as usual practices of local financial or technical assistance institutions and encourages them to support pro-poor small-scale investments. S3IDF works with entrepreneurs to develop and/or integrate technology options, usually adapting off-the shelf technology. The team also provides entrepreneurs with commercial knowledge and technical know-how to develop viable business strategies and plans. Such assistance is expensive and contributes significantly to the transaction costs of all small-scale enterprises. Although S3IDF presently uses grant funding to cover most of these costs, it continues to innovate ways to recover costs and earn a margin.

A villiage-scale water purification plant.

Financial Assistance
S3IDFs SMBA leverages its financial assistance by providing a gap filling menu of finance from a revolving fund (RF). How and who operates the RF is a function of the local regulations. In general this will be in conjunction with a partner, such as a bank or other for-profit entity. The RF facilitates entrepreneurs access to banks and other local financing sources. S3IDF adopts a portfolio approach in the provision of financial assistance. Often, the critical financial support is through guarantees or other forms of credit conditioning. But the SMBA also provides other types of financing, e.g. bridge loans and cash equity to complement entrepreneurs sweat and limited cash equity. To reach S3IDFs goals and manage co-variant risk (wherever the SMBA is utilized) financing is arranged to support a wide array of transactions in different geographies that evidence opportunity for financial sustainability while also yielding targeted social and environmental returns.

Enterprising entrepreneur with single-phase flour mill.

The Small-Scale Sustainable Infrastructure Development Fund, Inc. The Carriage House, 5 Hastings Square, Cambridge, MA 02139 USA +1 617 - 576 - 0652

No. 700, 15th Cross, 24th Main, J P Nagar 2nd Phase Bangalore - 560 078, Karnataka, India +91 - 80 - 65902558

The Small-S cale Sustainable I nfrastruc ture Development Fund, I nc. http://w w w.s3idf.org

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Partners
In India, S3IDF and its affiliate, S3IDF=India, have established many local partners essential for project development, financing and technology supply. Amongst its longtime strategic partners are SELCO Solar Pvt. Ltd., the Administrative Staff College of India (ASCI), Bhaaratiya Vikas Trust and Prkruthi Hydro Labs. In 2011, S3IDF took steps to expand its long-standing strategic partnership with the social enterprise SELCO by involving its incubation arm, SELCO Labs Foundation, in plans to undertake more joint projects to increase affordable rural energy and other infrastructure access through effective leverating of technological expertise and unique co-financing investment deals.
Preparing meals in a hospital cookshop, set up by S3IDF with equipment provided by strategic partner HPCL.

In addition to strategic partners, S3IDF also works with many grassroots and special function NGOs on project selection and development, with numerous local financial institutions to facilitate project financing and promote replication of profitable investments, and with a broad range of technology and know-how suppliers. Our partners also bring new projects to our attention. S3IDF also partners for dissemination and transfer of the SMB approach, such as with the Centre for Rural Technology in Nepal.

Social and Economic Impacts

In helping entrepreneurs create small and medium enterprises, S3IDF is taking positive steps towards poverty alleviation. Benefits include increased income or savings, additional employment, more local services and a safer, healthier environment. In India, the enterprises assisted by S3IDF have more than 100,000 direct and indirect beneficiaries (business owners/operators, employees and customers who earn less than $2 per day and their families); and as our portfolio grows, so do the impacts. Every dollar of S3IDF investment typically leverages at least two dollars and sometimes up to four dollars in capital injected by local entrepreneurs and banks (and in some cases government subsidies and equipment suppliers).

One of CRTs watermills in Nepal, soon to be supported by the SMB model.

Validation of the Model and Dissemination

Since 2002, S3IDF has built a portfolio of nearly 190 small investments and associated enterprises in India; is exploring a pipeline of 100+ projects in advanced stages of pre-investment; and has been engaged in numerous dissemination activities. In 2007, S3IDF won the first World Clean Energy Awards in the NGO and Initiatives category for its lighting initiatives in Southern India. Nomination by the Worldwatch Institute and selection by a panel of international jurists represents important validation of the SMBA and recognizes S3IDFs accomplishments in mainstreaming the use of renewable energy technologies. Also in 2007, S3IDF consulted for the Global Village Energy Partnership International (GVEP/I) on an East African energy access initiative, examining organizational and financing models and potential local partners. In 2008, S3IDF received a Top Innovation Award for Clean Energy Finance Solutions at the Asia Clean Energy Forum (ACEF), a joint effort of the Asian Development Bank (ADB), USAID, Asia-Pacific Partnership on Clean Development & Climate, Asia-Pacific Economic Cooperation, and cosponsorship by some OECD countries. Further, USAIDs South Asia Regional Initiative for Energy (SARI/E) commissioned S3IDF to examine the potential for transferring and/or applying the SMBA to Nepal in the context of the countrys pioneer Improved Water Mill Program (IWMP) that targets higher productivity of thousands of rural agroprocessing enterprises to improve incomes and livelihoods at the household and community level. In 2009, S3IDF was selected by the USAID Global Development Alliance (GDA) as a case study for their energy sector guide in their Building Alliances Series. The guide provides advice on building public-private partnerships and profiles of organizations that make power available to communities that are often poor and not served or underserved by the grid. In addition, S3IDF completed a second USAID SARI/E sponsored study on The Small-Scale Sustainable Infrastructure Development Fund, Inc. The Carriage House, 5 Hastings Square, Cambridge, MA 02139 USA +1 617 - 576 - 0652

Inside a long shaft water mill in Nepal. Photo credit: Ian Taylor for the ADB.

Russell deLucia receiving one of the first Worlds Clean Energy Awards in 2007.

No. 700, 15th Cross, 24th Main, J P Nagar 2nd Phase Bangalore - 560 078, Karnataka, India +91 - 80 - 65902558

The Small-S cale Sustainable I nfrastruc ture Development Fund, I nc. http://w w w.s3idf.org

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the potential for implementing an RF to provide gap-filling finance that facilitates financing by commercial banks and others for targeted pro-poor investments associated with Nepals IWMP. S3IDF also conducted dissemination activities under SARI/E in Colombo, Sri Lanka. In 2010, USAID SARI/E recognized their partnership with S3IDF as a critically important regional energy milestone and engaged S3IDF to explore applications of its hallmark SMBA in Bangladesh, Pakistan and Sri Lanka. Building on S3IDFs design and development work under SARI/E in Nepal, in 2010 the ADB engaged S3IDF to integrate the SMBA into the nations IWMP. Over the next few years, working together with key local partners and using capital from the ADB and other donors, S3IDF will guide the creation of a revolving fund and the provision of business and technical assistance services that offer gap-filling finance and know-how to help water mill owners in rural Nepal develop and access local finance for expanded entrepreneurial endeavors. In 2011, S3IDF joined the Nexus for Carbon Development partnership, an alliance of social ventures whose central mission is to reduce climate change while alleviating poverty. This membership expands S3IDFs network of future SMBA dissemination and transfer partners and will help S3IDF access carbon financing.

S3IDF helps rural vendors acquire coin phones enabled by the same platform that supports mobile technology.

Funding
S3IDF has been funded by a unique cash and in-kind capitalization of its founders in addition to support from grants, international competitions, dissemination consulting work, and many generous individual donors. Grant and/or contract funding has been provided by the Asian Development Bank, Blue Moon Fund, Deshpande Foundation, Energy Collaborative, GVEP-International Gap Fund, EDF Energy, KSK Energy Ventures, Marcled Foundation, Renewable Energy and Energy Efficiency Partnership, Shell Foundation, UNOPS, USAID Global Development Alliance, USAID SARI-Energy, and the Yahoo Employee Foundation.

Floating head biogas plant at a residential school.

The Legal Structure and Future Evolution

S3IDF-US is a non-profit corporation registered as a public charity under section 501(c)(3) of the Internal Revenue Service code. S3IDF-India is a non-profit company with charity status registered under Section 25 of Indias Companies Act. However, neither is a typical charity. S3IDF operates using a business-like model and its enterprises must operate in a commercially sustainable manner. S3IDFs structure is dictated by the legal and regulatory requirements in the US and India, and its explicitly pro-poor focus requires grants to underwrite much of the technical and business development services and a portion of monitoring/evaluation and dissemination. S3IDFs gap-filling finance operations also require capital on terms and conditions that permit its use to leverage other financing for pro-poor infrastructure investments and under structures in keeping with local regulatory regimes. For some time, S3IDF has known that to achieve greater sustainability of India operations and scale-up (without sacrificing the pro-poor agenda) would require organizational changes. From a fundraising perspective, S3IDF needs a structure that enables it to tap and effectively use a mix of funding types - grants and Program Related Investments (PRIs) of differing terms. In 2011, S3IDF completed the process of creating an Indian legal and organizational structure necessary for SMB scale-up that allows for additional capital for gap-filling finance as well as for grants and contracts to underwrite the enterprise development for helping local entrepreneurs and that can leverage other local financing to successfully provide pro-poor infrastructure services. This revised organization structure has the S3IDF-India non-profit, two affiliated non-profit trusts that focus on specific project types, a deeper partnership with its strategic partner SELCO, and a special entity for missionrelated consulting work. The Small-Scale Sustainable Infrastructure Development Fund, Inc. The Carriage House, 5 Hastings Square, Cambridge, MA 02139 USA +1 617 - 576 - 0652 No. 700, 15th Cross, 24th Main, J P Nagar 2nd Phase Bangalore - 560 078, Karnataka, India +91 - 80 - 65902558

Biogas units supply a clean source of cooking fuel for households that typically rely on firewood.

Pico-hydro systems provide electricity to families living off the grid.